Maldives Islamic Bank: Annual Report 2017

Transcription

2. Content Corporate Information 2 Directors ' Report 3-11 Shari’ah Board’s Report 12 Audit Report and Financial Statements Independent Auditors' Report 13-14 Statements of Financial Position 15 Statements of Comprehensive Income 16 Statements of Changes in Equity 17 Statements of Cash Flows 18 Notes to the Financial Statements 19-56
3. DIRECTORS ' REPORT for the financial year ended 31 December 2017 MALDIVES ISLAMIC BANK PVT LTD (Incorporated in the Republic of Maldives) Maldives Islamic Bank Pvt Ltd (Incorporated in Republic of Maldives) Company No: C-0255/2010 CORPORATE INFORMATION BOARD OF DIRECTORS Mr. Najmul Hassan (Chairman) Mr. Mohamed Azad Mr. Osman Kassim Mr. Mohammed Ataur Rahman Chowdhury Mrs.Fathimath Shafeega Mr. Harith Bin Harun (Managing Director & CEO) COMPANY SECRETARY Mr. Hussain Ali Habeeb REGISTERED ADDRESS H. Coconut Villa Ameer Ahmed Magu, Male’ 20030 Republic of Maldives BUSINESS ADDRESS (same as the registered address) AUDITORS Ernst & Young 2
4. DIRECTORS ' REPORT for the financial year ended 31 December 2017 MALDIVES ISLAMIC BANK PVT LTD (Incorporated in the Republic of Maldives) The Directors hereby submit their report together with the audited financial statements of the Bank for the financial year ended 31 December 2017. PRINCIPAL ACTIVITIES The principal activities of the Bank are Islamic banking business and the provision of related financial services. There were no significant changes in these activities during the financial year. FINANCIAL RESULTS MVR'000 Profit before Tax Income Tax Net profit after Tax 2017 2016 53,990 60,036 (13,936) (15,422) 40,054 44,614 DIVIDENDS The issued and paid up share capital as at 31 December 2017 amounted to MVR 180,000,000 divided into 180,000 shares of MVR 1,000 each. The board has recommended a dividend of MVR 14,400,000 for 2017 which equates to MVR 80 per share. RESERVES AND PROVISIONS There were no material transfers to or from reserves or provisions during the financial year other than those disclosed in the financial statements. BAD AND DOUBTFUL FINANCING ASSETS Before the financial statements of the Bank were made out, the Directors took reasonable steps to ascertain that actions had been taken in relation to the writing off of bad financing assets and the making of allowances for doubtful financing assets if any, and have satisfied themselves that there is no known bad financing to be written off and that adequate allowances had been made for any bad and doubtful financing assets that may occur. 3
5. DIRECTORS ' REPORT for the financial year ended 31 December 2017 MALDIVES ISLAMIC BANK PVT LTD (Incorporated in the Republic of Maldives) At the date of this report, the Directors are not aware of any circumstances which would render the amount of the allowance for doubtful financing assets in the financial statements of the Bank, inadequate to any substantial extent. CURRENT ASSETS Before the financial statements of the Bank were made out, the Directors took reasonable steps to ascertain that any current assets, other than financing assets, which were unlikely to be realised in the ordinary course of business, their values as shown in the accounting records of the Bank have been written down to their estimated realisable value. At the date of this report, the Directors are not aware of any circumstances which would render the values attributed to the current assets in the financial statements of the Bank misleading. VALUATION METHODS At the date of this report, the Directors are not aware of any circumstances which have arisen which render adherence to the existing methods of valuation of assets or liabilities in the Bank's accounts misleading or inappropriate. CONTINGENT AND OTHER LIABILITIES At the date of this report there does not exist: (a) any charge on the assets of the Bank which has arisen since the end of the financial year which secures the liabilities of any other person; or (b) any contingent liability in respect of the Bank that has arisen since the end of the financial year. No contingent or other liability of the Bank has become enforceable or is likely to become enforceable within the period of twelve months after the end of the financial period which, in the opinion of the Directors, will or may substantially affect the ability of the Bank to meet its obligations as and when they fall due. 4
6. DIRECTORS ' REPORT for the financial year ended 31 December 2017 MALDIVES ISLAMIC BANK PVT LTD (Incorporated in the Republic of Maldives) CHANGE OF CIRCUMSTANCES At the date of this report, the Directors are not aware of any circumstances, not otherwise dealt with in this report or the financial statements of the Bank that would render any amount stated in the financial statements misleading. ITEMS OF AN UNUSUAL NATURE The results of the operations of the Bank during the financial year were not, in the opinion of the Directors, substantially affected by any item, transaction or event of a material and unusual nature. There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors, to affect substantially the results of the operations of the Bank for the current financial year in which this report is made. SUBSEQUENT EVENTS There were no material events subsequent to the reporting date that require disclosure or adjustments to the financial statements. DIRECTORS The Directors of the Bank who have held office during the period since the date of the last report are: - Mr. Najmul Hassan (Chairman) - Mr. Shimad Ibrahim (term ended on 22nd February 2017) - Mr. Mohamed Azad (appointed w.e.f. 13th April 2017) - Mr. Ahmed Khizer Khan (term ended on 7th February 2017) - Mr. Osman Kassim (appointed w.e.f. 23rd April 2017) - Mr. Mohammed Ataur Rahman Chowdhury - Ms. Fathimath Shafeega - Mr. Harith Bin Harun (Managing Director & CEO) RESPONSIBILITY STATEMENT BY BOARD OF DIRECTORS In the course of preparing the annual financial statements of the Bank, the Directors are collectively responsible in ensuring that these financial statements are drawn up in accordance with International Financial Reporting Standards. 5
7. DIRECTORS ' REPORT for the financial year ended 31 December 2017 MALDIVES ISLAMIC BANK PVT LTD (Incorporated in the Republic of Maldives) It is the responsibility of the Directors to ensure that the financial reporting of the Bank present a true and fair view of the state of affairs of the Bank as at 31 December 2017 and of the financial results and cash flows of the Bank for the financial year then ended. The financial statements are prepared on the going concern basis and the Directors have ensured that proper accounting records are kept, applied the appropriate accounting policies on a consistent basis and made accounting estimates that are reasonable and fair so as to enable the preparation of the financial statements of the Bank with reasonable accuracy. The Directors have also taken the necessary steps to ensure that appropriate systems are in place for the assets of the Bank to be properly safeguarded for the prevention and detection of fraud and other irregularities. The systems, by their nature, can only provide reasonable and not absolute assurance against material misstatements, whether due to fraud or error. DIRECTORS' BENEFITS Neither at the end of the financial period, nor at any time during the financial year, did there subsist any arrangement to which the Bank is a party with the object or objects of enabling Directors of the Bank to acquire benefits by means of the acquisition of shares in the Bank or any other corporate body. Since the date of incorporation, no Director of the Bank has received or become entitled to receive a benefit (other than the fees and other emoluments) by reason of a contract made by the Bank or a related corporation with the Director or with a firm of which he or she is a member or with a company in which he or she has a substantial financial interest. CORPORATE GOVERNANCE The Board of Directors is committed to ensure the highest standards of corporate governance throughout the organisation with the objectives of safeguarding the interests of all stakeholders and enhancing the shareholders' value and financial performance of the Bank. The Board considers that it has applied the best practices throughout the financial year. 6
8. DIRECTORS ' REPORT for the financial year ended 31 December 2017 MALDIVES ISLAMIC BANK PVT LTD (Incorporated in the Republic of Maldives) Board of Directors Responsibility and Oversight The Board of Directors The direction and control of the Bank rest firmly with the Board as it effectively assumes the overall responsibility for corporate governance, strategic direction, formulation of policies and overseeing the investments and operations of the Bank. The Board exercises independent oversight on the management and bears the overall accountability for the performance of the Bank and compliance with the principle of good governance. There is a clear division of responsibility between the Chairman and the Chief Executive Officer to ensure that there is a balance of power and authority. The Board is responsible for reviewing and approving the longer-term strategic plans of the Bank as well as the business strategies. It is also responsible for identifying the principal risks and implementation of appropriate systems to manage those risks as well as reviewing the adequacy and integrity of the Bank's internal control systems, management information systems, including systems for compliance with applicable laws, regulations and guidelines. Board Meetings Throughout the financial year, six (06) Board meetings were held. All Directors reviewed Board papers or reports providing updates on operational, financial and corporate developments prior to the Board meetings. These papers and reports are circulated prior to the meeting to enable the Directors to obtain further explanations and having sufficient time to deliberate on the issues and make decisions during the meeting. Board Balance As at the reporting date, the Board has six members, comprising four Non-Independent Non-Executive Directors (including the Chairman), one Independent Non-Executive Director and one Non-Independent Executive Director/Chief Executive Officer. The Board of Directors’ meetings are presided by Non-Independent Non-Executive Chairman whose role is clearly separated from the role of Chief Executive Officer. The composition of the Board and the number of meetings attended by each Director are as follows: 7
9. DIRECTORS ' REPORT for the financial year ended 31 December 2017 MALDIVES ISLAMIC BANK PVT LTD (Incorporated in the Republic of Maldives) Directors Total meetings attended Mr. Najmul Hassan 6/6 Chairman/ Non- Independent Non-Executive Director Mr. Shimad Ibrahim (term ended on 22nd February 2017) 1/6 Non- Independent Non-Executive Director Mr. Mohamed Azad (appointed w.e.f. 13th April 2017) 5/6 Non- Independent Non-Executive Director Mr. Ahmed Khizer Khan (term ended on 7th February 2017) 0/6 Non- Independent Non-Executive Director Mr. Osman Kassim (appointed w.e.f. 23rd April 2017) 5/6 Non- Independent Non-Executive Director Mr. Mohammed Ataur Rahman Chowdhury 6/6 Non- Independent Non-Executive Director Mrs. Fathimath Shafeega 6/6 Independent Non-Executive Director Mr. Harith Bin Harun (Managing Director & CEO) 6/6 Non- Independent Executive Director Mr. Hussain Ali Habeeb is the Secretary of the Board. Board Risk Management Committee Board Risk Management Committee (“BRMC”) carries the function of ensuring continuous oversight of the risks embedded in the Bank’s operations and assists the Board in determining the strategic direction of the Bank by providing them the risk perspective. The BRMC is composed of minimum of two directors appointed by the Board from amongst its members. The current members of BRMC are: 1. Mr. Osman Kassim (Chairman) 2. Mr. Najmul Hassan The Head of Risk Management Unit is the Secretary of the BRMC. Board Audit Committee The main function of the Board Audit Committee (“BAC”) is to assist the Board in its supervisory role in the management of internal controls in the Bank. It has responsibility for reviewing internal controls and policies of the Bank. The BAC also ensures that the procedures and framework in relation to identifying, measuring, monitoring and controlling internal controls are operating effectively. 8
10. DIRECTORS ' REPORT for the financial year ended 31 December 2017 MALDIVES ISLAMIC BANK PVT LTD (Incorporated in the Republic of Maldives) The BAC comprises not less than three (3) members appointed by the Board from among the members of the Board, but excluding the Chairman of the Board and the Managing Director who shall not be members of the BAC. The current members of the BAC are: 1. Mrs. Fathimath Shafeega (Chairperson) 2. Mr. Mohammed Ataur Rahman Chowdhury 3. Mr. Shimad Ibrahim (term ended on 22nd February 2017) 4. Mr. Mohamed Azad (appointed w.e.f. 13th April 2017) The Head of Internal Audit is the Secretary of the BAC. Relationship with the Auditors The Bank has established appropriate relationship with external auditors in conducting the audit function of the Bank. Internal Controls The Board acknowledges its overall responsibility for maintaining a sound system of internal control to safeguard shareholders' investments, Bank's assets, and the need to review the adequacy and integrity of those systems regularly. Management Reports Before each Board meeting, Directors are provided with a complete set of Board papers itemised in the agenda for Board's review/approval and/or notation. The Board monitors the Bank's performance by reviewing the monthly Management Report, which provides a comprehensive review and analysis of the Bank's operations and financial issues. Procedures are in place for Directors to seek independent professional advice at the Bank's expense in order to fulfil their duties and specific responsibilities. Management Committee The Management Committee (“MC”) is responsible for the implementation of the strategies and internal control as well as monitoring the Bank’s performance. The MC, headed by the Managing Director & Chief Executive Officer is comprised, Chief Operating Officer, Chief Financial Officer, Head of Business, Head of Operations Department, Head of Technology Department, Head of Human Resources Department and Head of Business Support department. The committee meets on a weekly basis to discuss and resolve issues related to day-to-day 9
11. DIRECTORS ' REPORT for the financial year ended 31 December 2017 MALDIVES ISLAMIC BANK PVT LTD (Incorporated in the Republic of Maldives) operations, and to develop, execute and monitor the progress of strategies and action plans to achieve the set targets. Mr. Hussain Ali Habeeb is the secretary of the MC. Financing and Investment Committee The Financing and Investment Committee (“FIC”) is made up of six members, namely, the Managing Director & CEO who is also the chairman, Chief Operating Officer, Chief Financial Officer, Head of Business, Head of Business Support and Head of Risk Management & Compliance Unit. The FIC is vested by the Board with the authority to approve financing proposals up to a certain limit, beyond which the proposals are to be referred to the Board for consideration through Board Risk Management Committee. The FIC also monitors the status of non-performing financing assets and reviews financing policy in response to developments in the market. Ms. Mariyam Latheef is the secretary of the FIC. Shari’ah Board The Shari’ah Board (“SB”) was formed in compliance with Section 13 of the Islamic Banking Regulation, 2011 issued by the Maldives Monetary Authority. The principal duties and responsibility of the Shari’ah Board are as follows: · To advise the Board of Directors on Shari’ah matters in order to ensure that the business operations of the Bank comply with the Shari’ah principles at all times; · To endorse and validate relevant documentations of the Bank's products to ensure that the products comply with Shari’ah principles During the financial year ended 31 December 2017, a total of four (04) meetings were held. The Shari’ah Board comprises the following members and the details of attendance of each member at the Shari’ah Board meetings held during the financial year are as follows: Member Total Meetings Attended Dr. Ejaz Ahmed Samadani (Chairman) 4/4 Mufti Mohammed Rizwe Bin Ibrahim 4/4 Dr. Ibrahim Zakariyya Moosa 4/4 The Head of Sharia Unit is the secretary of the SB. 10
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17. Maldives Islamic Bank Private Limited STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2017 Note 2017 MVR 2016 MVR Income from financing activities Profit paid on customer accounts Net profit earned from financing activities 18 19 111 ,375,422 (21,314,584) 90,060,838 75,921,177 (16,371,100) 59,550,077 Commission and fee income Commission and fee expense Net commission and fee income 20 20 18,806,488 (581,783) 18,224,705 17,859,873 (659,422) 17,200,451 Foreign exchange gain Income from available for sale investments Income from held to maturity investments Total operating income 21 22 23 149,001 1,441,000 37,462,191 147,337,735 538,350 1,061,000 55,115,323 133,465,201 Personnel costs General and administrative expenses Depreciation and amortisation Total operating expenses excluding impairment provision 24 25 26 (46,304,568) (30,125,520) (7,727,871) (84,157,959) (36,400,127) (28,660,011) (7,223,544) (72,283,682) 63,179,776 61,181,519 (9,189,044) (1,145,121) 53,990,732 60,036,398 (13,936,433) (15,421,995) 40,054,299 44,614,403 Profit before provisions and tax Net provision for impairment losses 9,10 Profit before tax Income tax 27 Profit for the year Other comprehensive income Change in fair value of available for sale investment Income tax effect 8 5,100,000 (100,000) 27.3 (1,250,000) 25,000 3,850,000 (75,000) Other comprehensive income to be reclassified to profit or loss in subsequent periods, net of tax Total comprehensive income for the year Basic and Diluted Earnings Per Share 28.1 43,904,299 44,539,403 222.52 247.86 The accounting policies and notes on pages 19 to 56 form an integral part of the financial statements. 16
18. Maldives Islamic Bank Private Limited STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2017 Share capital MVR Statutory reserve MVR 180 ,000,000 24,317,796 150,000 4,933,997 209,401,793 Profit for the year - - - 44,614,403 44,614,403 Other comprehensive income - - Transferred to statutory reserve (Note 17) - 22,307,202 - 180,000,000 46,624,998 75,000 27,241,198 253,941,196 Profit for the year - - - 40,054,299 40,054,299 Other comprehensive income - - 3,850,000 - 3,850,000 Transferred to statutory reserve (Note 17) - 20,027,150 - 180,000,000 66,652,148 3,925,000 As at 01 January 2016 As at 31 December 2016 As at 30 December 2017 The accounting policies and notes on pages 19 to 56 form an integral part of the financial statements. 17 Fair value reserve MVR Retained earnings/ (losses) MVR (75,000) (22,307,202) (20,027,150) 47,268,347 Total MVR (75,000) - 297,845,495
19. Maldives Islamic Bank Private Limited STATEMENT OF CASH FLOWS Year ended 31 December 2017 Note Cash flows from operating activities Profit before tax 2017 MVR 2016 MVR 53 ,990,732 60,036,398 26 9, 10 7,727,871 9,189,044 70,907,647 7,223,544 1,145,121 68,405,063 Change in customers' accounts Change in other assets Change in other liabilities Change in receivables from financing activities Cash generated from operating activities 14 13 15 10 100,413,298 25,614,887 (4,614,602) (364,824,088) (172,502,858) 776,230,072 (31,373,528) 12,016,163 (332,256,079) 493,021,691 Tax paid Net cash generated from operating activities 27.2 (15,322,498) (187,825,356) (8,170,314) 484,851,377 11 12 (10,404,223) (393,994) (221,528,460) 472,980,327 (39,000,000) 201,653,650 (6,511,687) (438,559) (438,145,323) 81,286,563 (363,809,006) Adjustments for: Depreciation and amortisation Net provision for impairment losses Operating loss before changes in operating activities Cash flows from investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Investment in held to maturity investments Proceeds from held to maturity investments Investement In Shares Net cash used in investing activities 8 Cash flows from financing activities Proceeds from issuance of shares Net cash from financing activities Net increase in cash and cash equivalents 6, 7 Cash and cash equivalents at 31 December - - 13,828,294 121,042,371 858,536,630 844,708,336 The accounting policies and notes on pages 19 to 56 form an integral part of the financial statements. 18
20. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 1 . REPORTING ENTITY Maldives Islamic Bank Private Limited (the “Bank”) is incorporated and domiciled in the Republic of Maldives since 1st April 2010 as a private limited liability Company and presently governed under the Companies’ Act No.10 of 1996 and Maldives Banking Act No 24 of 2010. The Bank received the banking license under the Maldives Monetary Authority Act No. 6 of 1981 on 2nd August 2010 to conduct Islamic banking business in the Maldives and obtained certificate of approval to commence operations on 6 March 2011. The registered office of the Bank is at Coconut Villa, Ameer Ahmed Magu, Male’ 20030, Republic of Maldives. The Bank provides full range of banking services based on Shari’a principles including accepting deposits, granting of financing facilities and other ancillary services. 2. BASIS OF PREPARATION i. Statement of compliance The financial statement of the Bank, which comprise the Statement of Financial Position, Consolidated Statement of Comprehensive Income, Statement of Other Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flow and Notes to the Financial Statements have been prepared and presented in accordance with International Financial Reporting Standards (IFRS) and interpretations of International Financial Reporting Interpretations Committee (IFRIC), with the exceptions of the requirements of IAS 39 - Financial Instruments : Recognition and Measurement with regard to the loan (financing) loss provisioning as modified by Prudential Regulation No.168 – 2015R on “Asset classification, provisioning and suspension of interest” issued by Maldives Monetary Authority. ii. Approval of financial statements by directors The Financial Statements of the Bank for the year ended 31 December 2017 were authorized for issue by the Board of Directors (together referred to as the “Board”) in accordance with the resolution of the Board on 21 March 2018. iii. Basis of measurements The financial statements have been prepared on the historical cost basis except for financial instruments that are measured at fair value. iv. Functional and presentation currency These financial statements are presented in Maldivian Rufiyaa, which is the Bank's functional currency, except as otherwise indicated, financial information are presented in Maldivian Rufiyaa. All financial information presented in Maldivian Rufiyaa has been rounded to the nearest Rufiyaa. v. Comparative information The comparative information is re-classified wherever necessary to conform to the current presentation. 19 year’s
21. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 vi . Significant accounting judgments, estimates and assumptions The preparation of the financial statements in conformity with IFRSs adopted by MMA requires the management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any past/future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amount recognized in the financial statement are described wherever necessary. a) Going concern The Board made an assessment of the Bank’s ability to continue as a going concern and are satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, the Board is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern and it does not intend either to liquidate or to cease operations of the Bank. Therefore, the Financial Statements continue to be prepared on the Going Concern basis. b) Useful life time of property, plant and equipment and intangible assets The Bank reviews the residual values, useful lives and methods of depreciation/amortisation of property, plant and equipment/ intangible assets at each reporting date. Judgment of the management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty. c) Commitments and contingencies All discernible risks are accounted for in determining the amount of all known liabilities. Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured. Contingent liabilities are not recognized in the Statement of Financial Position but are disclosed unless they are remote. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these financial statements by the Bank. a) Foreign currency transactions Transactions in currencies other than Maldivian Rufiyaa are translated to Maldivian Rufiyaa at the exchange rate ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated to Maldivian Rufiyaa at the exchange rate ruling at the reporting date. For financial reporting, the bank uses the mid-rate between the selling and buying rate for foreign currencies prevailing at the reporting date. Foreign exchange differences arising on translation are recognized in the Statement of Comprehensive Income. 20
22. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 Non-monetary assets and liabilities , which are measured at historical cost, denominated in foreign currencies are translated to Maldivian Rufiyaa at the exchange rates ruling at the dates of transactions. Non-monetary assets and liabilities, which are stated at fair value, denominated in foreign currencies are translated to Maldivian Rufiyaa at the exchange rates ruling at the dates the values were determined. b) Income from financing and investment activities · · · · · · · · Income on financing contracts of Murabaha is recognized on time apportionment basis using the decline installment method. Income on Istisna’a financing is recognized on time apportioned basis over the period and the profit rate is determined in advance upon agreement of all parties. Income from Diminishing Musharaka is recognized on Bank’s Share of Investment over the period based on the profit rate determined in advance upon agreement of all parties. Income on Mudaraba financing is recognized when the right to receive payment is established or distribution by the Mudarib. In case of losses in Mudaraba, the Bank’s share of losses are deducted from its share of Mudarib capital. The Bank’s share as a Mudarib is accrued based on the terms and conditions of the related Mudaraba agreements. When receivables from financing assets become non-performing and where collectability is doubtful, income is suspended as per the guidelines of Maldives Monetary Authority. Income from short-term placements is recognized on a time-apportioned basis over the period of the contract using the effective profit rate method. The effective profit is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of a financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective profit rate is established on initial recognition of the financial asset and liability and is not revised subsequently. Placement fees income for arranging a financing between a financier and investor and other investment income are recognized on an accrual basis. Income from dividends is recognized when the right to receive the dividend is established. c) Fees and commission Fees and commission income and expense that are integral to the profit rate on a financial asset or liability are included in the measurement of the profit rate. Other fees and commission income, including account servicing fees, LC commission and placement fees are recognized as the related services are performed. When a financing commitment is not expected to result in the draw-down of a financing facility, the related financing fees are recognized on a straight-line basis over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. d) Income tax Tax expense comprises current and deferred tax. Current tax and deferred tax is recognized in Statement of Comprehensive Income. Current tax Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted at the reporting date. 21
23. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 Deferred tax Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes . Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the tax rate enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. e) Financial instruments (i) Recognition and initial measurement The Bank initially recognizes receivables from financing activities, Mudaraba, issued and subordinated liabilities on the date at which they are originated. Regular purchases and sales of financial assets are recognized on the trade date at which the Bank commits to purchase or sell the asset. All other financial assets and liabilities are initially recognized on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, (For an item not subsequently measured at fair value through Statement of Comprehensive Income) transaction costs that are directly attributable to its acquisition or issue. (ii) De-recognition The Bank de-recognizes a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any installment in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognized as a separate asset or liability in the statement of financial position. In case if the Bank enters into transactions whereby it transfers assets recognized on its statement of financial position, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not de-recognized. In transactions in which the Bank neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. The Bank de-recognizes a financial liability when its contractual obligations are discharged or cancelled or expired. 22
24. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 (iii) Offsetting Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the recognized amounts and it intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRSs, or for gains and losses arising from similar transactions such as in the Bank's trading activity. (iv) Amortized cost measurement The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective profit rate method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment. (v) Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction on the measurement date. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis. (vi) Cash and cash equivalents Cash and cash equivalents comprise cash in hand and balances with MMA and other banks. (vii) Receivables Receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition receivables are measured at amortized cost using the effective profit rate, less any impairment losses. Receivables comprise receivables from Murabaha, Istisna’a, Diminishing Musharaka, Investment in Placements and other Receivables. Receivables and balances from financing activities Receivables and balances from financing activities are stated at their gross principle amounts less amounts received on account of these transactions, provision for impairment and deferred profit relating to future years. Murabahah Financing Murabahah Financing consists of the cost and the profit margin of the Bank which resulted from Murabahah (Sale) transactions and are stated net of deferred profit and provision for impairment. Murabahah is a cost plus Sale Contract where the Bank purchases the subject matter requested by the Customer and sell it to the Customer with a profit. Under the Murabahah Contract, Bank is liable 23
25. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 to disclose the details of the cost including the direct expenses to the Customer at the time of sale . The sale price may be paid in lump sum or in installments over the agreed period. Istisna’a Financing Istisna'a is a sale contract between the ultimate buyer (Customer) and the seller (Bank), whereby the Bank, based on an order of the Customer, undertakes to construct/produce/ manufacture or otherwise acquire the subject matter of the contract, according to the agreed specification and deliver it to the Customer for an agreed price on an agreed date. The method of settlement may be agreed in advance, by installments or deferred to a specific future time. Istisna’a Contracts represent the disbursements made either in advance, progressive as agreed in the contract against the subject matter constructed/produced/ manufactured/acquired for istisna’a project, plus income (Profit) recognized, less payment received from the Customer as installments. Diminishing musharaka Financing Diminishing musharakah is a form of partnership where both parties enter into a Musharah (partnership) contract to jointly acquire an Asset. Subsequently, under a separate sale contract, which may be secured under a unilateral undertaking to purchase by the Customer, one party (Customer) buys the equity share (ownership units) of the other party (Bank) gradually at cost price until the title to the asset is completely transferred to the Customer. During the tenure of the facility, the ownership units of the Bank will be leased out to the Customer and the income of the Bank will be collected in the form of rentals. Education Financing Education Financing is a facility provided by the Bank, under the concept of Ijarat-ul-Askhas (Service Ijarah). It is a type of Ijarah (Leasing) contract in which the underlying usufruct (manfa’ah) could be in a form of work, effort, expertise, etc. The Bank will provide the educational service (service Ijarah) to the customer after the Bank purchases the educational placement from the educational institutions. The service payment by the Customer is made on monthly basis on an agreed tenure. (viii) Available-for-sale Financial Assets The Bank’s investments in equity securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses on available-for sale equity instruments is recognized in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognized, the cumulative gain or loss in other comprehensive income is transferred to profit or loss. (ix) Held to maturity investments If the Bank has the positive intent and ability to hold debt securities (financing arrangements) to maturity, then such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition held-to-maturity financial assets are measured at amortized cost using the effective Profit rate method, less any impairment losses. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would 24
26. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 result in the reclassification of all held-to-maturity investments as available-for-sale , and prevent the Bank from classifying investment securities as held-to-maturity for the current and the following two financial year. (x) Identification and measurement of impairment The Bank measures and recognizes the provision for loan and advances (financing) based on guidelines given by Maldives Monetary Authority. Specific loan (financing) loss provision requirement Specific provision for impairment of loans (financing) is recognized in accordance with Prudential Regulations No. 05 – 2009 promulgated by Maldives Monetary Authority and provisions shall be made against all classified loans and advances (financing) exposure as per the requirements established by Maldives Monetary Authority as follows; Period outstanding Classification Provision Made More than 90 days and up to 179 days Substandard 25% More than 180 days and up to 359 days Doubtful 50% More than 360 days Loss 100% Provisions above are calculated against the gross loan (financing) balance (less profit in suspense) without issuing any allowance for collateral value. However, As per MMA circular Ref: 98 – CBSS/2012/39, effective from 6 June 2012 and expiring on 5 June 2015, a temporary leeway is applicable for the requirements of specific provisioning as follows; Period outstanding Classification Unsecured Secured portion portion of debt of debt More than 180 days and up to 359 days Doubtful 50% 25% More than 360 days and up to 719 days Loss 100% 50% More than 720 days and up to 1079 days Loss 100% 75% More than 1080 days Loss 100% 100% With effect from 25 August 2015, specific loan (financing) loss provision is made on the basis of continuous review of all advances to customers, in accordance with the Prudential Regulation No. 168-2015R on Asset Classification, Provisioning and Suspension of Interest issued by MMA on aged classification of advances as follows: Minimum provision as per MMA regulation Period outstanding More than 90 days and up to 179 days More than 180 days and up to 359 days Provision made for unsecured portion of debt Provision made for secured portion of debt Substandard 20% 20% Doubtful 50% 25% Classification 25
27. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 More than 360 days and up to 719 days Loss 100 % 50% More than 720 days Loss 100% 100% General loan (financing) loss provision requirement A general provision on the total unimpaired loan (financing) portfolio is established to conservatively cover any unforeseen losses in the lending (financing) portfolio at the reporting date, but which have not been specifically identified as such. As per Prudential Regulations No. 05 – 2009 promulgated by the Maldives Monetary Authority, a general loan (financing) loss provision not less than 1% based on performing advances and 5% on advances classified as “special mention” is established. With effect from 25 August 2015, as per Prudential Regulations No. 168-2015R promulgated by the Maldives Monetary Authority, a general loan (financing) loss provision not less than 0.5% based on performing advances and 3% on advances classified as “special mention” is established. De-recognition of impairment provision If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as the debtor regularizing loan (financing) repayment), the previously recognized impairment loss is reversed by adjusting the allowance account. Amounts recovered from fully impaired loans and advances (financing) are recognized as income on a cash basis. Impairment of available-for-sale investment At each reporting date an assessment is made whether there is any objective evidence of impairment in the value of Available-for-sale Financial Assets. Impairment losses are recognized if and only if there is objective evidence of impairment as a result of one or more events that occurred after initial recognition of financial asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset that can be reliably measured. The Bank treats available for sale investments as impaired when there has been a significant and prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires considerable judgment. The Bank determines “significant” generally as 20% or more and ‘prolonged” greater than six months. In addition, the Bank evaluates other features, including normal volatility in share price and volume of share trading. If the available-for-sale financial asset is impaired, the difference between the financial asset’s acquisition cost (net of any principle repayment and amortization) and the current fair value, less any previous impairment loss recognized in Statement of Comprehensive Income is removed from other comprehensive income and recognized in the Statement of Comprehensive Income. The Bank initially recognizes subordinated liabilities on the date that they are originated. All other financial liabilities are recognized initially on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. The Bank de-recognizes a financial liability when its contractual obligations are discharged or cancelled or expired. The Bank has non-derivative financial liabilities such as customers’ Accounts and other payables. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost. 26
28. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 (xi) Financial Liabilities (Non- derivative) Customer Accounts comprise following products. a) Current accounts Current Account is a deposit account which offers customers a flexible way to manage their everyday banking needs. This type of account is based on the Sharia’a concept of Qard and does not earn any profit. Salient features: · · · · Non- profit sharing Flexible banking and personal services No Minimum deposit amount Cheque book is provided b) Savings accounts Savings Account is a profit earning account which offers customer a way to share in MIB profit distributions by investing their savings in a Sharia’a compliant manner. The Bank invests deposited funds and shares the profits between the bank and the customer based on the bank’s declared profit ratio at the end of each month following the concept of Mudaraba. Salient features: · · · Profit sharing Minimum deposit amount for individuals MVR. 200 or USD 20 Profit distributions every six months c) General investment accounts General Investment Account is a profit earning account which offers customer a way to share in Bank’s profit distributions by investing their money in a Sharia’a compliant manner based on Mudaraba concept. The Bank invests deposited funds and calculates the profits between the bank and the customer based on the bank’s declared profit sharing ratio at the end of each month and paid on maturity date. Salient features: · Profit sharing · Profit distribution at maturity · Flexible investment periods from 3, 6, 9 & 12 months to 2, 3 and up to 5 years · Minimum deposit amount for customers MVR. 5,000 or USD 500 d) Margin accounts Margin accounts are usually security deposit accounts held by the bank on Wakalah, Kafalah and trade Murabahah based financing arrangements provided by the bank. These accounts are currently structured as non- profit sharing accounts. 27
29. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 The Bank maintains margin accounts for the following services : · · · · · Trade Murabahah Wakalah LC Shipping Guarantees Performance Guarantees Bid Guarantees financing e) Share Capital Ordinary Shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity. f) Property, Plant and Equipment (i) Recognition and Measurement Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of selfconstructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located and capitalized borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment, if any. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and are recognized net within other income in Statement of Comprehensive Income. (ii) Subsequent Costs The cost of replacing a part of an item of property or equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The carrying amount of the replaced part is de-recognized. The costs of the day-to-day servicing of property and equipment are recognized in Statement of Comprehensive Income as incurred. (iii) De-recognition The carrying amount of an item of property, plant and equipment is derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from de recognition of an item of property, plant and equipment is included in the Statement of Comprehensive Income when the item is derecognized. When replacement costs are recognized in the carrying amount of an item of property, plant and equipment, the remaining carrying amount of the replaced part is de recognized. Major inspection costs 28
30. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 are capitalized . At each such capitalization, the remaining carrying amount of the previous cost of inspections is de recognized. (iv) Depreciation Depreciation is recognized in Statement of Comprehensive Income on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this reflects most closely the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives for the property and equipment are as follows: Office Equipment Computer Equipment Furniture Leasehold Building Motor Vehicles Vault door 5 Years 4 Years 5 Years Over lease period 5 Years 10 Years Depreciation methods, useful lives and residual values are reassessed at the reporting date. A full month’s depreciation is provided in the month of intended use while, no depreciation is provided in the month of disposal. g) Intangible Assets (i) Recognition and Measurement Intangible assets that are acquired by the Bank are stated at cost less accumulated amortization and impairment losses. (ii) Subsequent Expenditure Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognized in Statement of Comprehensive Income when incurred. (iii) De-recognition of intangible assets The carrying amount of an item of intangible asset is derecognized on disposal or when no future economic benefits are expected from its use. The gain or loss arising from de-recognition of an item of intangible asset is included in the Statement of Comprehensive Income when the item is derecognized. (iv) Amortization Amortization is charged to the Statement of Comprehensive Income on a straight line basis over the estimated useful lives of assets unless such lives are indefinite. The estimated useful lives estimated by the Bank are as follows: Computer Software Core Banking and Database software 5 Years 7 Years 29
31. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 h ) Impairment of Non-Financial Assets The carrying amounts of the Bank's non-financial assets other than deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset's recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognized if the carrying amount of an asset or a cash generating unit exceeds its recoverable amount. Impairment losses, if any, are recognized in Statement of Comprehensive Income. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. i) Provisions A provision is recognized if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for onerous contracts is recognized when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognizes any impairment loss on the assets associated with that contract. j) Employee Benefits (i) Short-Term Benefits Short-term employee benefit obligations of the Bank are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash benefits if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (ii) Retirement Pension Scheme The Bank has enrolled its employees in the Retirement Pension Scheme with effect from 1 May 2011 based on the Regulation on Maldives Retirement Pension Scheme published by the Government of Maldives. The Bank deducts 7% from each employee’s pensionable wages on behalf of the employees between 16 and 65 years and makes payment to Maldives Pension Administration Office (MPAO). The Bank contributes to the Retirement Pension Scheme at the rate of 7% on pensionable wages. 30
32. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 Obligations for contributions to retirement pension scheme are recognized in the Statement of Comprehensive Income . k) Operating Expenses All operating expenses incurred in the running of the Bank and in maintaining the capital assets in a state of efficiency has been charged to the income in arriving at profits or loss for the period. Expenses incurred for the purpose of acquiring, expanding or improving assets of a permanent nature by means of which to carry on the business or for the purpose of increasing the earning capacity of the Bank have been treated as capital expenses. l) Earnings per share Basic and diluted earnings per share has been calculated and presented by the Bank voluntarily in accordance with the International Accounting Standard 33 “Earning Per Share”. 4. DETERMINATION OF FAIR VALUES A number of the Bank’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (i) Receivables The fair value of receivable from financing activities and other receivables is estimated as the present value of future cash flows. (ii) Asset Available for Sale The fair value of investment in equity is determined with reference to their quoted closing bid price at the measurement date. (iii) Financial liabilities (Non-derivative) Fair value, which is determined for disclosure purposes, is calculated based on the present value of cash flows. (iv) Held to Maturity Investments The fair value of held to maturity investment is estimated as the present value of future cash flows, discounted at the market rate of Profit rate at the reporting date. This fair value is determined for disclosure purposes. 5. NEW STANDARDS, AMENDMENTS AND INTERPRETATIONS New accounting standards became effective during the year The following International Accounting Standards have been issued by the International Accounting Setting Board (IASB) which is not yet effective as at 31 December 2017. 31
33. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 IFRS 13 - Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements . IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The Bank did not have any material impact from the implementation of IFRS 13. Necessary disclosures required by the new Standard have been included in the Notes to the Financial Statements. Standards Issued but not yet Effective at the Reporting Date The following International Accounting Standards have been issued by the International Accounting Setting Board (IASB) which is not yet effective as at 31 December 2017. IFRS 15 - Revenue from Contracts with Customers The objective of this Standard is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. IFRS 15 will become effective on 01 January 2018. The impact of the implementation of the above Standard has not been quantified yet. IFRS 9 - Financial Instruments This standard will replace IAS 39 - Financial Instruments, Recognition and Measurement. The improvements introduced by IFRS 9 include a logical model for classification and measurement, a single, forward-looking ‘Expected Loss’ impairment model and a substantially-reformed approach to hedge accounting. IFRS 9 will become effective on 01 January 2018 and contains the following phases. Phase 1: Classification and Measurement Classification determines how financial assets and financial liabilities are accounted for in the financial statements and, in particular, how they are measured on an ongoing basis. IFRS 9 introduces a logical approach for the classification of financial assets driven by cash flow characteristics and the business model in which an asset is held. This single, principle-based approach replaces existing rule-based requirements that are complex and difficult to apply. Phase 2: Impairment IFRS 9 introduces a new, expected loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from when financial instruments are first recognized and it lowers the threshold for recognition of full lifetime expected losses. Phase 3: Hedge Accounting IFRS 9 introduces a substantially-reformed model for hedge accounting with enhanced disclosures about risk management activity. The new model represents a substantial overhaul of hedge accounting that aligns the accounting treatment with risk management activities, enabling entities to better reflect these activities in their financial statements. In addition, as a result of these changes, users of the financial statements will be provided with better information about risk management and the effect of hedge accounting on the financial statements. The impact on the implementation of the above Standard has not been quantified yet. 32
34. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 6 CASH AND BALANCES WITH OTHER BANKS 2017 MVR 106 ,790,283 102,875,368 209,665,651 Cash in hand (Note 6.1) Balances with other banks (Note 6.2) 6.1 Cash in hand 2016 MVR As at 31 December 2017 Foreign Exchange Carrying Currency Rate Amount Foreign Currency 64,905,830 116,724,593 181,630,423 As at 31 December 2016 Exchange Carrying Rate Amount USD 1,570,557 15.395 24,178,725 946,129 15.395 14,565,656 MVR Total - - 82,611,558 106,790,283 - - 50,340,174 64,905,830 6.2 Balances with other banks As at 31 December 2017 Foreign Exchange Carrying Currency Rate Amount Foreign Currency As at 31 December 2016 Exchange Carrying Rate Amount HAB (USD) 4,033,837 15.395 62,100,917 6,471,986 15.395 99,636,220 BML (USD) 622,662 15.395 9,585,876 336,307 15.395 5,177,440 11,374,774 BML (MVR) - - 30,006,164 - - SBI (USD) 211 15.395 3,248 5,861 15.395 90,230 SBI (MVR) Total - - 1,179,163 102,875,368 - - 445,929 116,724,593 The Bank has its nostro account at Habib American Bank - New York (HAB). This account is operated to facilitate its foreign remittance activities and trade finance activities. 7 BALANCES WITH MALDIVES MONETARY AUTHORITY Minimum reserve requirement (MRR) (Note 7.1) Balance in excess of MRR with MMA (Note 7.2) Total 2017 MVR 235,404,200 413,466,779 648,870,979 2016 MVR 225,817,865 437,260,048 663,077,913 7.1 Minimum reserve requirement ("MRR") As per the regulations of the Maldives Monetary Authority (the "MMA"), the Bank is required to maintain a reserve deposit based on 10% of 14 days average of the Customers' deposits with the Bank excluding interbank deposits of other banks in Maldives and letter of credit margin deposits. Accordingly, the Bank has to maintain 10% of customers deposit as Minimum Reserve Requirement. The Bank has maintained the minimum reserve requirement according to the regulations issued by the MMA. These deposits are not available for the Bank’s day-to-day operations. 7.2 Balance in excess to minimum reserve requirement The balance in excess of MRR does not carry any return and those funds will be utilised for operational, future financing and investment activities of the Bank. 33
35. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 8 AVAILABLE FOR SALE INVESTMENT 2017 MVR At the beginning of the year Additions during the year Change in the fair value during the year At the end of the year 8 ,100,000 39,000,000 5,100,000 52,200,000 2016 MVR 8,200,000 (100,000) 8,100,000 Available for sale investment represents the investment in the quoted shares of Dhivehi Rajjeyge Gulhun Plc (DHIRAAGU) and Ooredoo Maldives Plc (OOREDOO). The investment at DHIRAAGU comprised of 100,000 shares with nominal value of MVR 2.5/- which were purchased at MVR 80/- per share. As at the reporting date, the shares were valued at MVR 80/- each (2016: MVR 81/-). The investment at OOREDOO comprised of 1,300,000 shares with nominal value of MVR 1/- which were purchased at MVR 30/- per share. As at the reporting date, the shares were valued at MVR 34/- each (2016: Nil). 8.1 Fair value reserve At the beginning of the year Other comprehensive income 75,000 3,850,000 3,925,000 At the end of the year 9 9.1 10 INVESTMENTS HELD TO MATURITY Contract Country type Maturity HDFC, Maldives Wakalah ICD Money Market Musharakah Treasury bills Mudharabah/Murabaha 1 year 7% - 8.5% On demand 4.54% p.a. 91 Days 5.5% - 8% p.a. Maldives Malaysia Maldives Indicative Rate 150,000 (75,000) 75,000 2017 MVR 2016 MVR 30,283,497 27,758,217 544,236,945 602,278,659 30,604,932 26,812,276 796,313,318 853,730,526 Less : General provision on placement with HDFC as per MMA requirement (150,000) (150,000) Net Investment in Placements 602,128,659 853,580,526 The placement with HDFC Amna (Islamic window) consists of a principal amounting MVR 30,000,000 and profits accrued as at reporting date NET RECEIVABLES FROM FINANCING ACTIVITIES 2017 MVR Education Financing Murabaha Istisna'a Diminishing Musharaka Total gross receivables from financing activities Less : Specific financing loss provision (Note 10.1) General financing loss provision (Note 10.2) Profit in suspense Net receivables from financing activities 2016 MVR 1,236,238 588,894,823 327,122,016 273,041,658 1,190,294,735 241,452 418,461,357 250,930,629 155,207,806 824,841,244 (11,353,625) (5,815,995) (1,115,523) (18,285,143) 1,172,009,592 (3,919,578) (4,060,998) (486,120) (8,466,696) 816,374,548 3,919,578 12,995,715 (5,561,668) 11,353,625 4,319,609 6,767,840 (7,167,871) 3,919,578 4,060,998 4,631,350 (2,876,353) 5,815,995 2,515,846 3,067,885 (1,522,733) 4,060,998 10.1 Movement in specific financing loss provision At the beginning of the year Add: Provision made during the year Less: Provision reversed during the year At the end of the year (Note 30.1 - c) 10.2 Movement in General Provision At the beginning of the year Add: Provision made during the year Less: Provision reversed during the year At the end of the year (Note 30.1 - c) 10.3 Profit in suspense In accordance with Prudential Regulation No. 2015/R-168, Regulation on Asset Classification, Provisioning and Suspension of Interest(Profit), Banks have to place financing facilities under the non-accrual status once a facility become non-performing unless the facility is well-secured and in the process of collection. 34
36. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 11 PROPERTY , PLANT AND EQUIPMENT As at 11.1 Gross carrying amount 01 Jan 2017 MVR Leasehold building Computer equipment Furniture Office equipment Total gross carrying amount 11.2 Capital work in progress Leasehold building Computer equipment Furniture Office equipment 11.3 Accumulated Depreciation Leasehold building Computer equipment Furniture Office equipment Total accumulated depreciation Net book value Additions MVR 7,565,071 15,137,430 2,412,929 8,285,545 33,400,975 As at 01 Jan 2017 MVR As at 31 Dec 2017 MVR Disposals MVR - 4,310,408 3,322,523 1,032,592 1,908,364 10,573,887 Incurred Transfers during the year during the year MVR MVR 57,876 774,791 635,268 1,467,935 169,944 165,685 42,164 377,793 Acc. Dep As at 01 Jan 2017 MVR Charged for the year MVR 3,971,586 9,595,429 1,321,031 5,342,921 20,230,967 14,637,943 864,481 2,776,014 475,233 1,043,505 5,159,233 (378,098) (169,359) (547,457) Released for the year MVR 11,875,479 18,459,953 3,445,521 10,193,909 43,974,862 As at 31 Dec 2017 MVR 227,820 562,378 508,073 1,298,271 Acc. Dep As at 31 Dec 2017 MVR - 4,836,067 12,371,443 1,796,264 6,386,426 25,390,200 19,882,933 11.4 During the financial year, the Bank acquired property, plant and equipment to the aggregate value of MVR 10,404,223/- (2016 - MVR 6,511,687/-). Cash payments amounting to MVR 10,404,223/-(2016 - MVR 6,511,687/-) were made during the year for the acquisition of property, plant and equipment. 11.5 Property, plant and equipment include fully depreciated assets having a gross carrying amounts of MVR 14,565,867/- (2016 – MVR 10,031,665/-) 11.6 Gross carrying amount Leasehold building Computer equipment Furniture Office equipment Total gross carrying amount As at 01 Jan 2016 MVR Additions MVR 6,005,086 11,921,003 1,739,703 6,220,928 25,886,720 35 1,559,985 3,216,427 673,226 2,064,617 7,514,255 As at 31 Dec 2016 MVR Disposals MVR - 7,565,071 15,137,430 2,412,929 8,285,545 33,400,975
37. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 11 PROPERTY , PLANT AND EQUIPMENT (CONTINUED) 11.7 Capital work in progress Leasehold building Computer equipment Furniture Office equipment 11.8 Accumulated Depreciation Leasehold building Computer equipment Furniture Office equipment Total accumulated depreciation Net book value As at 01 Jan 2016 MVR 197,228 829,479 96,136 1,347,660 2,470,503 Acc. Dep As at 01 Jan 2016 MVR 3,132,025 7,414,376 956,904 4,192,223 15,695,528 12,661,695 Incurred Transfers during the year during the year MVR MVR 1,137,339 1,491,041 55,889 819,684 3,503,953 Charged for the year MVR (1,276,691) (1,545,729) (152,025) (1,532,076) (4,506,521) Released for the year MVR 839,561 2,181,053 364,127 1,150,698 4,535,439 As at 31 Dec 2016 MVR 57,876 774,791 635,268 1,467,935 Acc. Dep As at 31 Dec 2016 MVR - 3,971,586 9,595,429 1,321,031 5,342,921 20,230,967 14,637,943 11.9 During the financial year, the Bank acquired property, plant and equipment to the aggregate value of MVR 6,511,687/- (2015 - MVR 4,268,935/-). Cash payments amounting to MVR 6,511,687/-(2015 - MVR 4,268,935/) were made during the year for the acquisition of property, plant and equipment. 11.10 Property, plant and equipment include fully depreciated assets having a gross carrying amounts of MVR 10,031,665/- (2015 – MVR 6,941,336/-) 12 INTANGIBLE ASSETS 12.1 12.2 12.3 Gross carrying amount At cost Core banking and database software Other computer software Total gross carrying amount Software work in progress At cost Core banking and database software Other computer software Total gross carrying amount Accumulated amortisation Core banking and database software Other computer software Total Accumulated amortisation Net book value As at 01 Jan 2017 MVR 15,139,162 3,243,022 18,382,184 As at 01 Jan 2017 MVR 531,646 531,646 Additions MVR As at 31 Dec 2017 MVR Disposals MVR 733,740 138,897 872,637 - Incurred Transfers during the year during the year MVR MVR 71,236 71,236 Acc. Amort. As at Additions for the year 01 Jan 2017 MVR MVR 9,302,442 2,300,634 2,651,599 268,004 11,954,041 2,568,638 6,959,789 (602,882) (602,882) Disposals for the year MVR 15,872,902 3,434,922 19,307,824 As at 31 Dec 2017 MVR - Acc. Amort. As at 31 Dec 2017 MVR 11,603,076 2,919,603 14,522,679 4,785,145
38. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 12 INTANGIBLE ASSETS (CONTINUED) 12.4 During the financial year, the Bank acquired intangible assets to the aggregate value of MVR 393,994/- (2016 MVR 438,559/-). Cash payments amounting to MVR 393,994/- (2016 - MVR 438,559/-) were made during the year for the acquisition of intangible assets. 12.5 Intangible assets include fully amortised assets having a gross carrying amounts of MVR 5,857,454/- (2016 1,240,748/-). 12.6 Gross carrying amount At cost Core banking and database software Other computer software Total gross carrying amount 12.7 12.8 12.9 Software work in progress At cost Core banking and database software Other computer software Total gross carrying amount Additions MVR 01 Jan 2016 MVR 14,515,665 3,104,125 17,619,790 Disposals MVR 623,497 138,897 762,394 31 Dec 2016 MVR - Incurred Transfers during the year during the year MVR MVR As at 01 Jan 2016 MVR 392,573 462,908 855,481 541,226 541,226 Acc. Amort. As at Additions for the year 01 Jan 2016 Accumulated amortisation MVR MVR Core banking and database software 7,127,063 2,175,379 Other computer software 2,138,873 512,726 Total Accumulated amortisation 9,265,936 2,688,105 Net book value 9,209,335 15,139,162 3,243,022 18,382,184 As at 31 Dec 2016 MVR (392,573) (472,488) (865,061) Disposals for the year MVR 531,646 531,646 Acc. Amort. As at 31 Dec 2016 MVR 9,302,442 2,651,599 11,954,041 6,959,789 During the financial year, the Bank acquired intangible assets to the aggregate value of MVR 438,559/- (2015 MVR 2,990,968/-). Cash payments amounting to MVR 438,559/- (2015 - MVR 2,990,968/-) were made during the year for the acquisition of intangible assets. 12.10 Intangible assets include fully amortised assets having a gross carrying amounts of MVR 1,240,748/- (2015 MVR 156,506/- ). 13 OTHER ASSETS 2017 MVR Refundable deposits (Note 13.1) Prepayments (Note 13.2) Advance payments against financing Assets (Note 13.3) Other receivables Goods in transit (Note 13.4) 1,319,757 5,521,624 48,008,936 1,477,626 2,230,745 58,558,688 2016 MVR 1,180,750 3,034,742 75,920,614 676,506 3,360,963 84,173,575 13.1 The refundable deposits mainly comprised of the security deposits paid for the leasehold buildings including the visa fees for foreign employees. 13.2 The prepayments are comprised of the IT related support, maintenance fees and takaful paid in advance. 13.3 The advance payments against financing assets comprised of the advance payments made to suppliers for the procurement of goods under finance facilities. 13.4 Goods in transit includes goods purchased by the bank for the purpose of selling on Murabaha basis. 37
39. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 14 CUSTOMERS ' ACCOUNTS 2017 MVR Current accounts Saving accounts General investment accounts Margin accounts (Note 14.1) 2016 MVR 935,315,906 806,824,043 611,902,050 83,783,735 2,437,825,734 988,477,603 752,413,836 517,287,215 79,233,782 2,337,412,436 14.1 Margin accounts include an amount of MVR 1,940,778/- (2016: MVR 1,997,580/-) contributed by customers to acquire the assets financed under diminishing musharaka. 15 16 OTHER LIABILITIES 2017 MVR 2016 MVR Accrued expenses Pension payable Payable to suppliers Prepaid Income Cashiers cheque Charity funds from financing Retention on Istisna'a projects Other liabilities 2,523,431 317,121 3,101,138 2,289,158 1,512,867 1,185,876 431,440 3,500,814 14,861,845 893,241 254,354 4,582,730 3,713,481 8,954,934 385,534 431,440 260,733 19,476,447 1,000,000,000 1,000,000,000 180,000,000 180,000,000 SHARE CAPITAL Authorised share capital 1,000,000 ordinary shares of MVR 1,000/- each Issued and fully paid up share capital 180,000 ordinary shares of MVR 1,000/- each (2016 - 180,000 shares) 16.1 Islamic Corporation for the Development and Amana Takaful Maldives Plc of the Private Sector and the Government of Maldives have subscribed 70%, 5% and 25% respectively for the Banks's issued and fully paid share capital as at 31 December 2017. The holders of the ordinary shares are entitled to dividends as declared from time to time and are entitled to one vote per share at the shareholders' meetings of the Bank. No dividends have been declared by the board of directors for the year ended 31 December 2017 (2016 : Nil). 16.2 Issued and Fully Paid Up Share Capital Name of the Shareholders Islamic Corporation for the Development of the Private Sector No. of shares 2016 Value of shares MVR'000 % No. of shares Value of shares MVR'000 % 126,000 126,000 70% 153,000 153,000 85% The Government of Maldives 45,000 45,000 25% 27,000 27,000 15% Amana Takaful Maldives Plc 9,000 9,000 5% - - 0% 180,000 180,000 100% Total 17 2017 180,000 180,000 100% STATUTORY RESERVE According to the Maldives Banking Act No 24/2010, a Bank shall allocate, after taxes, at least 50% of its net distributable profits for the formation of a capital reserve until the reserve totals 50% of its paid-up capital. Once the reserve reaches 50% of the Bank’s paid-up capital, the allocation shall not be less than 25% of the Bank’s net distributable profit until the reserve totals an amount equal to the bank’s paid-up capital. The Bank may not reduce its capital and the reserve accumulated in the manner described in the act or in any other manner without the MMA’s prior approval. The Bank has transferred MVR 20,027,150/- during the year ended 31 December 2017 (2016: MVR 22,307,202/-). 18 INCOME FROM FINANCING ACTIVITIES 2017 MVR Income from Financing Activities Income from Education Financing Income from Murabaha Income from Istisna'a Income from Diminishing Musharaka Net Income 70,876 59,607,718 31,870,173 19,826,655 111,375,422 38 2016 MVR 1,452 39,360,354 23,671,467 12,887,904 75,921,177
40. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 19 PROFIT PAID ON CUSTOMER ACCOUNTS 2017 MVR General Investment Accounts Savings Accounts 20 21 2016 MVR 14 ,497,505 6,817,079 21,314,584 9,435,630 6,935,470 16,371,100 Commission and fee income Banking services Trade finance services Remittances ATM, POS, Faisa Net and Gateway services Other fees and commissions income Total 1,177,169 2,004,145 11,746,190 3,667,342 211,642 18,806,488 626,917 3,114,037 10,743,212 3,104,948 270,759 17,859,873 Commission and fee expense Fund transfer expenses Total Net commission and fee income (581,783) (581,783) 18,224,705 (659,422) (659,422) 17,200,451 149,001 538,350 NET COMMISSION AND FEE INCOME FOREIGN EXCHANGE GAIN Foreign Exchange Gain Foreign exchange gain represent income received from buying and selling of foreign currency. 22 INCOME FROM AVAILABLE FOR SALE INVESTMENT Dividend received (Note 22.1) 1,441,000 1,061,000 22.1 The dividend income represents the dividend received during the year from investment in the quoted shares of Dhivehi Raajjeyge Gulhun Plc. The dividend income includes MVR 14.41 per share representing interim MVR 5.96 for 2017 and MVR 8.45 final of 2016. (2016: Interim of MVR 5.92 for 2016 and final of MVR 4.69 for 2015) 23 INCOME FROM HELD TO MATURITY INVESTMENTS Wakala / Musharakah Placement Income Islamic Treasury bill Income (Mudharabah/Murabaha) 24 2017 MVR 2016 MVR 3,882,111 33,580,080 37,462,191 3,322,482 51,792,841 55,115,323 31,832,163 1,755,108 4,507,521 162,000 4,351,594 938,979 1,049,291 766,131 941,781 46,304,568 26,287,800 1,384,845 3,664,464 2,493,554 658,792 713,716 320,197 876,759 36,400,127 PERSONNEL COSTS Salaries and wages Contribution to defined contribution plans Housing Allowance Executive Allowance Annual and Ramadhan Bonus Training and development Medical Insurance Uniforms Other staff expenses 39
41. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 25 26 GENERAL AND ADMINISTRATIVE EXPENSES 2017 MVR Rent Technology related expenses Electricity expenses Premises security and insurance Connectivity and internet charges Financing related Expenses Stationary costs Legal and professional expenses Travelling expenses Directors allowance and board related expenses Marketing and advertising expenses Sharia board related expenses Utility expenses Communication expenses Maintenance Charitable donations Other operating expenses 9 ,104,284 4,303,862 2,734,999 1,914,392 2,048,726 643,024 1,991,598 1,063,572 676,459 795,497 1,723,299 419,450 845,578 644,551 738,507 477,722 30,125,520 7,308,207 3,994,188 2,084,018 1,739,471 1,903,258 1,106,298 1,626,369 766,502 1,134,088 1,109,262 1,677,931 418,476 717,843 466,219 867,208 31,089 1,709,584 28,660,011 5,159,233 2,568,638 7,727,871 4,535,439 2,688,105 7,223,544 13,728,923 207,510 13,936,433 15,322,498 18,833 80,664 15,421,995 DEPRECIATION AND AMORTISATION Depreciation on property plant and equipment (Note 11.3, 11.8) Amortisation on intangible assets (Note 12.3, 12.8) 27 INCOME TAX Current tax (Note 27.1) Under provision for previous year's current tax Deferred tax liability (Note 27.3) Income tax expense reported in the statement of comprehensive income 27.1 2016 MVR Current tax The bank is liable to pay income tax (at the rate of 25%) in accordance with the Bank Profit Tax regulations issued in September 1999 by the Department of Inland Revenue. A reconciliation between taxable profit and the accounting profit is as follows. 2017 MVR Accounting profit before tax Add: Aggregate disallowable items Less: Aggregate allowable items Taxable income for the year Income tax @ 25% 40 2016 MVR 53,990,732 16,916,915 (15,991,956) 54,915,691 60,036,398 8,399,754 (7,146,159) 61,289,993 13,728,923 15,322,498
42. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 27 .2 Current tax liability 2017 MVR At the beginning of the year Current tax Under / (Over) provision for previous years Tax paid during the year At the end of the year 27.3 15,322,498 13,728,923 (15,322,498) 13,728,923 2016 MVR 8,151,481 15,322,498 18,833 (8,170,314) 15,322,498 Deferred tax liability The following table shows deferred tax recorded on the statement of financial position and changes recorded in the statement of comprehensive income and other comprehensive income net of tax. Property, plant and equipment MVR 31 December 2017 Deferred tax (asset)/ liability Statement of comprehensive income Other comprehensive income 31 December 2016 Deferred tax (asset)/ liability Statement of comprehensive income Other comprehensive income Intangible assets MVR 1,586,170 382,449 - 978,480 (174,939) - 1,203,721 190,640 - 1,153,419 (109,976) - Changes in fair value of available for sale Inv MVR 1,275,000 1,250,000 25,000 (25,000) Total MVR 3,839,650 207,510 1,250,000 2,382,140 80,664 (25,000) 28 BASIC EARNINGS PER SHARE 28.1 The calculation of basic and diluted earnings per share is based on profit for the year attributable to the ordinary shareholders and weighted average number of ordinary shares outstanding as at reporting date. Basic earnings/(loss) per share is calculated as follows: 2017 Profit attributable to ordinary shareholders (in MVR) Weighted average number of ordinary shares Basic Earnings Per Share - MVR 28.2 Net Assets Per Share - MVR 41 2016 40,054,299 44,614,403 180,000 180,000 222.52 247.86 1,654.70 1,410.78
43. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 29 CLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES 31 December 2017 Note Cash and balances with other banks Balances with Maldives Monetary Authority Available for sale investment : equity shares Investments held to maturity Net receivables from financing activities Other assets Total Financial Assets 6 7 8 9 10 13 Customers' Accounts Other Liabilities Total Financial Liabilities 14 15 31 December 2016 Note Cash and balances with other banks Balances with Maldives Monetary Authority Available for sale investment: equity shares Investments held to maturity Net receivables from financing activities Other assets Total Financial Assets 6 7 8 9 10 13 Customers' Accounts Other Liabilities Total Financial Liabilities 14 15 Held-tomaturity Advances and receivables 602,128,659 602,128,659 209,665,651 648,870,979 1,172,009,592 50,806,319 2,081,352,541 Held-tomaturity Advance and receivables 853,580,526 853,580,526 181,630,423 663,077,913 816,374,548 77,777,870 1,738,860,754 - - 42 Available-forsale 52,200,000 52,200,000 Available-forsale 8,100,000 8,100,000 - Other financial liabilities 2,437,825,734 12,338,414 2,450,164,148 Other amortised cost 2,337,412,436 18,583,206 2,355,995,642 Total carrying amount 209,665,651 648,870,979 52,200,000 602,128,659 1,172,009,592 50,806,319 2,735,681,200 2,437,825,734 12,338,414 2,450,164,148 Total carrying amount 181,630,423 663,077,913 8,100,000 853,580,526 816,374,548 77,777,870 2,600,541,280 2,337,412,436 18,583,206 2,355,995,642
44. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 30 FINANCIAL RISK MANAGEMENT The Bank has exposure to the following risks from its use of financial instruments : Credit risk Liquidity risk Market risk Operational risk This note presents information about the Bank’s objectives, policies and processes for measuring and managing risk. The Bank's board of directors has overall responsibility for the establishment and oversight of the Bank's risk management framework. The board of directors has established the Risk Management and Compliance Unit (RMCU), which is responsible for developing and monitoring risk management policies. The Bank's risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Bank's activities. The Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit Committee oversees how management monitors compliance with the Bank's risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Bank. The Bank Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework. 30.1 Credit Risk ‘Credit risk’ is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank’s financings to customers and Deposits and placements with other banks, and investment in securities. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk). The market risk in respect of changes in value in trading assets arising from changes in market prices applied to securities and specific assets included in trading assets is managed as a component of market risk. The Bank’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. There is no concentration of credit risk geographically. Settlement risk The Bank’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk’ is the risk of loss due to the failure of an entity to honor its obligations to deliver cash, securities or other assets as contractually agreed. For certain types of transactions, the Bank mitigates this risk by conducting settlements through a settlement/clearing agent to ensure that a trade is settled only when both parties have fulfilled their contractual settlement obligations. Settlement limits form part of the credit approval/limit monitoring process described earlier. Acceptance of settlement risk on free-settlement trades requires transactionspecific or counterparty-specific approvals from RMCU. 43
45. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 30 FINANCIAL RISK MANAGEMENT (CONTINUED) The Bank's credit risk management framework The board of directors has delegated responsibility for the oversight of credit risk to its Board Risk Management Committee (BRMC). A separate Risk Management department, reporting to the board of directors, is responsible for managing the Bank’s credit risk, including the following. • Formulating Credit policies in accordance with the Financing Manual approved by the Board and in consultation with business units, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements. • Establishing the authorization structure for the approval and renewal of credit facilities. Authorization limits are allocated to. Financing & Investment Committee (FIC) of the Management. Larger facilities require approval by the board of directors as appropriate. • Reviewing and assessing credit risk: FIC of the Management assesses all credit exposures within its designated limits while exposures are assessed by BRMC in excess of designated limits, before facilities are committed to customers by the business unit concerned. Renewals and reviews of facilities are subject to the same review process. • Limiting concentrations of exposure to counterparties, geographies and industries (for loans and advances "financing" , financial guarantees and similar exposures), and by issuer, credit rating band, market liquidity and country (for investment securities). • Developing and maintaining risk grading system to categorize exposures according to the degree of risk of financial loss faced and to focus management on the attendant risks. The risk grading system is used in determining where impairment provisions may be required against specific credit exposures. The current risk grading framework consists of twelve grades reflecting varying degrees of risk of default. The responsibility for setting risk grades lies with the Business department while its validation and regular reviews is the responsibility of the RMCU. • Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports on the credit quality of local portfolios are provided to FIC, which may require appropriate corrective action to be taken. • Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk. The business unit is required to implement Bank’s credit policies and procedures and is responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios. Regular audits of business units and RMCU's processes are undertaken by internal Audit. Diversification of financing and investment activities; Reviewing compliance, on an ongoing basis, with agreed exposure limits relating to counterparties, industries and countries and reviewing limits in accordance with risk management strategy and market trends. In addition, the Bank manages the credit exposure by obtaining security where appropriate and limiting the duration of exposure. In certain cases, the Bank may also close out transactions or assign them to other counterparties to mitigate credit risk. 44
46. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 30 FINANCIAL RISK MANAGEMENT (CONTINUED) The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Carrying Amount 2017 2016 MVR MVR Cash and balances with other banks Available for sale investments Net receivables from financing activities Held to maturity investments Other assets 209,665,651 52,200,000 1,172,009,592 602,128,659 50,806,319 2,086,810,221 Receivables from Financing Activities Receivables from Financing Activities are summarised as follows; Neither past due nor impaired Past due but not impaired Impaired Total Less: Provision for Impairment Less: Profit in Suspense Net receivables from financing activities 2017 MVR 851,881,410 287,899,305 50,514,020 1,190,294,735 (17,169,620) (1,115,523) 1,172,009,592 181,630,423 8,100,000 816,374,548 853,580,526 77,777,870 1,937,463,367 2016 MVR 749,019,340 67,895,858 7,926,046 824,841,244 (7,980,576) (486,120) 816,374,548 a) Receivable from financing activities neither past due nor impaired Currently, the Bank classify the total loans (financing) and advances into standard and non-performing. The standard assets are further divided into standard and other loan (financing) especially mentioned with no further grading for standard Loans (financing). However, the Bank does an in-depth credit risk assessment on qualitative and quantitative basis before granting a facility. Exposure to each obligor or group of related obligors are again reviewed on a scheduled basis. (i) In evaluating credit risks the Bank considers qualitative criteria pertinent to the Obligor, including management depth and reputation, the obligor's past track record, its business risks, the industry, operating environment and conditions that the obligor operates in. The Bank looks for quality, stability and sustainability of performance. In quantitative assessment, the Bank analyses the obligor's historical and projected financial statements, where pertinent. In this respect, the Bank focuses on the profitability of the business, the efficiency in the employment of its assets, and its financial leverage to assess its liquidity and cash-flow positions and hence its ability to meet its financial commitments. (ii) To manage and mitigate risk of loss in the event of default, the Bank looks first at the protection accorded by the obliger’s net assets to the Bank’s exposure to the company. Where appropriate, the Bank will examine the quality, liquidity and hence the realisable value of its principal operating assets such as account receivables, inventory and capital assets. In establishing financial protection for the Bank’s exposure, the Bank may take security in such assets by way of mortgages, pledges, assignments and the like. In addition the Bank may also take additional collaterals offered by the company’s principals or other third party to ensure adequate protection with a margin. Taking collateral is a prevalent practice in the local financing environment as additional practical and prudential measures of mitigating against potential loss at default. Main reasons for doing so are due to (a) the general lack of confidence in the reliability of financial statements provided, particularly unaudited and/or stale ones, and (b) ensure that assets are not secured to other creditors to the Bank’s detriment. 45
47. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 30 FINANCIAL RISK MANAGEMENT (CONTINUED) b) Receivable from financing activities past due but not impaired Receivable from financing activities less than 90 days past due are not considered as impaired, unless other information is available to indicate the contrary. c) Receivable from financing activities impaired The individually impaired receivables from financing activities before taking into the consideration of the cash flows from collateral held is MVR. 50,514,020/- (2016: MVR. 7,926,046/-). 2017 2016 Non-performing assets by past due period MVR MVR Substandard 46,739,948 4,510,000 Doubtful 2,992,572 773,755 Loss 781,500 2,642,291 50,514,020 7,926,046 Receivables from financing activities net of profit in suspense Neither past due nor impaired 851,881,410 749,019,340 Past due but not impaired 287,899,305 67,895,858 Impaired 49,398,497 7,439,926 Total 1,189,179,212 824,355,124 Impairment losses The impaired provision shown in the statement of financial position at the reporting date is derived from each of the five groups described below. The table below shows the bank's receivables from financing activities net of profit in suspense and associated impairment provision for each of the group. 2017 Gross MVR 2016 Impairment MVR Gross MVR Impairment MVR Receivables from Financing Activities Financing towards Government of Maldives Standard (Pass) Special Mention Accounts Total performing Substandard Doubtful Doubtful - Secured portion Loss Loss (360-719 days) - secured portion Total Non-performing Provisions made on placements Investment in Placements (HDFC) 21,074,531 1,110,802,643 6,788,018 1,138,665,192 46,739,948 1,903,973 1,088,599 781,500 50,514,020 1,189,179,212 5,612,354 203,641 5,815,995 9,347,990 951,986 272,149 781,500 11,353,625 17,169,620 24,135,324 791,056,387 1,237,367 816,429,078 4,510,000 773,755 2,619,106 23,185 7,926,046 824,355,124 4,023,880 37,121 4,061,001 902,000 386,878 2,619,106 11,593 3,919,576 7,980,577 30,000,000 150,000 30,000,000 150,000 The Bank monitors concentrations of credit risk by sector and by Industry organizations. An analysis of concentrations of credit risk from financing activities at the reporting date is shown below: Financing activities Concentration by Industry; 2017 2016 Consumer goods 223,340,819 136,613,006 Transport and communications - transport 99,640,008 49,775,179 Commerce - wholesale and retail trade 107,256,955 115,922,483 Construction - residential/ housing financing 613,409,447 412,387,495 Construction - commercial building 34,449,865 26,006,111 Electricity, lighting and power 38,408,062 45,304,883 Tourism 30,821,426 Water, waterworks and supply 829,359 10,956,504 Fishing 23,853,651 19,408,887 Total 1,172,009,592 816,374,548 Concentration by Sector; Businesses 780,483,960 539,361,727 Individuals 391,525,632 277,012,821 Total 1,172,009,592 816,374,548 46
48. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 30 FINANCIAL RISK MANAGEMENT (CONTINUED) 30.2 Liquidity Risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial assets. The Bank's management reviews the asset and liability position of the Bank on regular basis to ensure that there is no mismatch of assets and liabilities. Management of Liquidity Risk The Bank’s board of directors sets the Bank’s strategy for managing liquidity risk. Board has approved the liquidity policy for the Bank whereby responsibility for oversight of the implementation of this policy is delegated to Management Committee (MC). MC oversees Bank’s liquidity policies and procedures implementation. Treasury function manages the Bank’s liquidity position on a day-to-day basis and reviews daily reports covering the liquidity position of the Bank. A summary report, including any exceptions and remedial action taken, is submitted regularly to MC. The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation. The key elements of the Bank’s liquidity strategy are as follows. • Maintaining a diversified funding base consisting of customer deposits (both retail and corporate) and wholesale market deposits and maintaining contingency facilities. encumbered and so not available as potential collateral for obtaining funding. • Carrying a portfolio of highly liquid assets, diversified by currency and maturity. • Monitoring liquidity ratios, maturity mismatches, behavioral characteristics of the Bank's financial assets and financial liabilities, and the extent to which the Bank's assets are encumbered and so not available as potential collateral for obtaining funding. • Carrying out stress testing of the Bank's liquidity position. Treasury function receives information from other business units regarding the liquidity profile of their financial assets and financial liabilities and details of other projected cash flows arising from projected future business. Treasury function then maintains a portfolio of short-term liquid assets, largely made up of shortterm liquid investment securities, loans (financing) and advances to banks and facilities, to ensure that sufficient liquidity is maintained within the Bank as a whole. Regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. The scenarios are developed taking into account both Bank-specific events (e.g. a rating downgrade) and market-related events (e.g. prolonged market illiquidity, reduced fungibility of currencies, natural disasters or other catastrophes). b) Exposure to Liquidity Risk The key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose, ‘net liquid assets’ includes cash and cash equivalents and investment-grade debt securities for which there is an active and liquid market less any deposits from banks, debt securities issued, other borrowings and commitments maturing within the next month. Details of the reported Bank ratio of net liquid assets to deposits from customers at the reporting date and during the reporting period were as follows. At 31 December Average for the period Maximum for the period Minimum for the period 47 2017 MVR 2016 MVR 40% 39% 49% 28% 37% 41% 51% 30%
49. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 30 FINANCIAL RISK MANAGEMENT (CONTINUED) c) Maturity analysis for financial assets and financial Liabilities 31 December 2017 Assets Cash and balances with other banks Balances with Maldives Monetary Authority Available for sale investment Investments held to maturity Net receivables from financing activities Other Assets Liabilities Customers' accounts Other liabilities Net Gap c) Maturity analysis for financial assets and financial Liabilities 31 December 2016 Assets Cash and balances with other banks Balances with Maldives Monetary Authority Available for sale investment Investments held to maturity Net receivables from financing activities Other Assets Liabilities Customers' accounts Other liabilities Net Gap Carrying Amount MVR 0-12 Months MVR 209,665,651 648,870,979 52,200,000 602,128,659 1,172,009,592 50,806,319 2,735,681,200 209,665,651 648,870,979 52,200,000 602,128,659 335,630,238 50,806,319 1,899,301,846 2,437,825,734 12,338,414 2,450,164,148 285,517,052 2,189,680,298 12,338,414 2,202,018,712 (302,716,866) Carrying Amount MVR 0-12 Months MVR 1-2 Years MVR 2-5 Years MVR - More than 5 years MVR 188,652,501 188,652,501 336,534,605 336,534,605 327,188,233 327,188,233 244,300,870 244,300,870 (55,648,369) 3,844,566 3,844,566 332,690,039 327,188,233 1-2 Years MVR 2-5 Years MVR More than 5 years MVR 181,630,423 663,077,913 8,100,000 853,580,526 816,374,548 77,777,870 2,600,541,280 181,630,423 663,077,913 8,100,000 853,580,526 247,200,777 77,777,870 2,031,367,509 128,755,701 128,755,701 236,008,870 236,008,870 212,875,896 212,875,896 2,337,412,436 18,583,206 2,355,995,642 244,545,638 2,302,601,215 18,583,206 2,321,184,421 (289,816,912) 31,206,855 31,206,855 97,548,846 3,604,366 3,604,366 232,404,504 212,875,896 48
50. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 30 FINANCIAL RISK MANAGEMENT (CONTINUED) d) Liquidity Reserves Carrying amount 2017 2016 MVR MVR Cash and Balances with Other Banks Balances with Maldives Monetary Authority 209,665,651 648,870,979 858,536,630 181,630,423 663,077,913 844,708,336 30.3 Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and profit rates will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. Management of market risk Board has approved Market Risk policy defining parameters for each type of risk in aggregate and for portfolios. MC is set-up with authority to implement these policies and monitor limits on day-to-day basis with market liquidity being a primary factor in determining the level of exposures set for trading portfolios within the defined parameters. The Bank employs a range of tools to monitor and limit market risk exposures. These are discussed below. Exposure to market risk - Non-trading The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market profit rates. profit rate risk is managed principally through monitoring profit rate gaps and by having pre-approved limits for repricing bands. MC is the monitoring body for compliance with these limits and is assisted by Treasury function in its day-to-day monitoring activities. Equity price risk is subject to regular monitoring by MC, but is not currently significant in relation to the overall results and financial position of the Bank. The Bank monitors any concentration risk in relation to any individual foreign currency or in regard to the translation of foreign currency transactions and monetary assets and liabilities into the functional currency of the Bank in accordance with the Foreign Exchange Exposure Limits (FEEL) and Net Open Position (NOP) thresholds stipulated by Maldives Monetary Authority. (a) Profit rate risk At the reporting date, the Bank’s profit rate-bearing financial instruments were: Carrying amount 2017 2016 Fixed rate instruments MVR MVR Financial assets Net receivables from financing activities 1,172,009,592 816,374,548 Financial liabilities Customers' accounts Variable rate instruments Financial assets Investment held to maturity 49 1,418,726,093 1,269,701,051 602,128,659 853,580,526
51. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 30 FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Profit rate sensitivity 31 December 2017 Assets Cash and balances with other banks Balances with Maldives Monetary Authority Receivables from financing assets Held to maturity investments Liabilities Customers' accounts Other liabilities Profit rate sensitivity gap 31 December 2016 Assets Cash and balances with other banks Balances with Maldives Monetary Authority Receivables from financing assets Held to maturity investments Liabilities Customers' accounts Other liabilities Profit rate sensitivity gap Carrying Amount MVR 0-12 Months MVR 1-2 Years MVR 2-5 Years MVR More than 5 Years MVR Total Sensitive MVR Non rate Sensitive MVR 209,665,651 648,870,979 1,172,009,592 602,128,659 2,632,674,881 316,742,706 602,128,659 918,871,365 188,652,501 188,652,501 336,534,605 336,534,605 327,188,233 327,188,233 1,169,118,045 602,128,659 1,771,246,704 209,665,651 648,870,979 858,536,630 2,437,825,734 12,338,414 2,450,164,148 182,510,733 1,283,501,574 1,283,501,574 (364,630,209) 244,300,870 244,300,870 (55,648,369) 3,844,566 3,844,566 332,690,039 327,188,233 1,531,647,010 1,531,647,010 239,599,694 1,019,099,641 12,338,414 1,031,438,055 (172,901,425) Carrying Amount MVR 0-12 Months MVR 1-2 Years MVR 2-5 Years MVR More than 5 Years MVR Total Sensitive MVR Non rate Sensitive MVR 181,630,423 663,077,913 816,374,548 853,580,526 2,514,663,410 247,200,777 853,580,526 1,100,781,303 128,755,701 128,755,701 236,008,870 236,008,870 212,875,896 212,875,896 824,841,244 853,580,526 1,678,421,770 181,630,423 663,077,913 844,708,336 2,337,412,436 18,583,206 2,355,995,642 158,667,768 1,234,889,830 1,234,889,830 (134,108,527) 31,206,855 31,206,855 97,548,846 3,604,366 3,604,366 232,404,504 212,875,896 1,269,701,051 1,269,701,051 408,720,719 1,067,711,385 18,583,206 1,086,294,591 (241,586,255) 50
52. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 30 FINANCIAL RISK MANAGEMENT (CONTINUED) ( c ) Sensitivity Analysis - Equity Price Risk For investments classified as available for sale, a 1% decrease in the prices of Maldives Stock Exchange would have decreased equity by MVR 522,000/-. Available for sale investment as at 31 December 2017 is MVR 52,200,000/-. (d) Exposure to currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates and arises from financial instrument denominated in a foreign currency. In accordance with MMA’s Prudential Regulations, the Net Open Position of the bank is to be maintained at 15% for single currency and 40% for all foreign currencies. The Bank’s exposure to foreign currency risk is as follows based on notional amounts: 2017 US$ Cash and balances with other banks Balances with Maldives Monetary Authority Held to maturity investments Receivables from financing activities Other assets Customers' accounts Other liabilities Net statement of financial position exposure 6,227,266 9,814,693 1,803,067 19,216,813 4,801,179 (38,007,422) (107,113) 3,748,483 2016 US$ 7,760,283 15,335,576 1,741,622 17,662,925 221,050 (41,406,327) (20,531) 1,294,598 Sensitivity analysis A strengthening / (weakening) of the MVR, as indicated below, against the USD as at 31 December would have increased / (decreased) profit or loss by the amounts shown below. 2017 MVR MVR Strengthening Weakening US$ (1% Movement) (577,079) 577,079 2016 MVR MVR Strengthening Weakening (199,303) 199,303 The following significant exchange rate applied during the period: Average Rate 2017 2016 US$ 1 : MVR 15.395 51 15.395
53. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 30 FINANCIAL RISK MANAGEMENT (CONTINUED) 30.4 Operational risk Operational risk’ is the risk of direct or indirect loss arising from a wide variety of causes associated with the Bank’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks, such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Bank’s operations. The Bank’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Bank’s reputation with overall cost effectiveness and innovation. In all cases, Bank policy requires compliance with all applicable legal and regulatory requirements. The board of directors has delegated responsibility for operational risk to Bank's Management Committee, which is responsible for the development and implementation of controls to address operational risk. This responsibility is supported by the development of overall Bank standards for the management of operational risk in the following areas: • Requirements for appropriate segregation of duties, including the independent authorisation of transactions; • Requirements for the reconciliation and monitoring of transactions; • Compliance with regulatory and other legal requirements; • Documentation of controls and procedures; • Requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified; • Requirements for the reporting of operational losses and proposed remedial action; • Development of contingency plans; • Training and professional development; • Ethical and business standards; and • Risk mitigation, including insurance where this is cost effective. Compliance with Bank's standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are submitted to the Audit Committee and senior management of the Bank. 52
54. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 31 CAPITAL MANAGEMENT The Regulator of the Bank , Maldives Monetary Authority, sets and monitors capital requirements for the Bank. In implementing current capital ratio requirements, Maldives Monetary Authority requires the Bank to maintain prescribed minimum ratios. The Bank's regulatory capital consists of the sum of the following elements; 2017 MVR Tier 1 ("Core") Capital Share Capital Retained earnings (shown as previous year amount as MMA requirement) Statutory reserve (shown as previous year amount as MMA requirement) Total Tier 1 Capital 2016 MVR 180,000,000 27,241,198 46,624,998 253,866,196 180,000,000 4,933,997 24,317,796 209,251,793 Tier 2 ("Supplementary") Capital Current Year-to-Date Profit General Provisions (Limited to 1.25% of RWA) Subtotal 40,054,299 5,965,995 46,020,294 44,614,403 4,210,998 48,825,401 Eligible Tier 2 Capital (Limited to 100% of Tier 1 Capital) 46,020,294 48,825,401 299,886,490 258,077,194 253,866,196 299,886,490 1,632,209,799 15.6% 18.4% 209,251,793 258,077,194 1,252,090,750 16.7% 20.6% Total Tier 1 and Tier 2 Capital Core Capital (Tier 1 Capital) Capital Base (Tier 1 and Tier 2 Capital) Risk Weighted Assets Tier 1 Risk Based Capital Ratio ( Minimum 6%) Total Risk Based Capital Ratio (Minimum 12%) The Bank's policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to sustain the future development of the business. The impact of the level of capital on shareholders' return is also recognised and the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Bank has complied with all externally imposed capital requirements. Capital Allocation Management uses regulatory capital ratios to monitor its capital base. The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily on regulatory capital requirements, but in some cases the regulatory requirements do not fully reflect the varying degree of risk associated with different activities. In such cases, the capital requirements may be flexed to reflect differing risk profiles, subject to the overall level of capital to support a particular operation or activity not falling below the minimum amount required for regulatory purposes. The process of allocating capital to specific operations and activities is undertaken independently of those responsible for the operation by Risk Management and Compliance Unit (RMCU) , and is subject to review by the Board Risk Management Committee (BRMC). Although maximisation of the return on risk-adjusted capital is the principal basis used in determining how capital is allocated to particular operations or activities, it is not the sole basis used for decision making. Account is also taken of synergies with other operations and activities, the availability of management and other resources, and the fit of the activity with longer-term strategic objectives of the Bank. The Bank's policies in respect of capital management and allocation are reviewed regularly by the board of directors. 53
55. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 32 FAIR VALUE OF FINANCIAL INSTRUMENTS (a) Valuation Models The Bank measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements. Level 1: Inputs that are quoted market prices (unadjusted) in active markets for identical instruments. Level 2: Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. (b) Valuation Framework The Bank has an established control framework with respect to the measurement of fair values. This framework includes a Product Control function, which is independent of front office management and reports to the Head of Finance, and which has overall responsibility for independently verifying the results of trading and investment operations and all significant fair value measurements. Specific controls include: • Verification of observable pricing; • Re-performance of model valuations; • A review and approval process for new models and changes to models involving both Product Control and Bank Market Risk; • Quarterly calibration and back-testing of models against observed market transactions; • Analysis and investigation of significant daily valuation movements; and • Review of significant unobservable inputs, valuation adjustments and significant changes to the fair value measurement of Level 3 instruments compared with the previous month, by a committee of senior Product Control and Bank Market Risk personnel. When third party information, such as broker quotes or pricing services, is used to measure fair value, Product Control assesses and documents the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS. This includes: • Verifying that the broker or pricing service is approved by the Bank for use in pricing the relevant type of financial instrument; • Understanding how the fair value has been arrived at, the extent to which it represents actual market transactions and whether it represents a quoted price in an active market for an identical instrument; • When prices for similar instruments are used to measure fair value, how these prices have been adjusted to reflect the characteristics of the instrument subject to measurement; and • If a number of quotes for the same financial instrument have been obtained, then how fair value has been determined using those quotes. Significant valuation issues are reported to the Audit Committee. 54
56. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 32 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) (c) Fair value hierarchy The following table analyses financial instruments measured at fair value at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position. The fair values include any deferred differences between the transaction price and the fair value on initial recognition when the fair value is based on a valuation technique that uses unobservable inputs. Measured at fair value 31 December 2017 Available for sale investments 31 December 2016 Available for sale investments Not measured at fair value Level 1 MVR Level 2 MVR Level 3 MVR Total MVR 52,200,000 - - 52,200,000 8,100,000 - - 8,100,000 Level 1 MVR 31 December 2017 Assets Cash and balances with other banks Balances with Maldives Monetary Authority Investments held to maturity Receivables from financing activities Other Assets Liabilities Customers' Accounts Other Liabilities 31 December 2016 Assets Cash and balances with other banks Balances with Maldives Monetary Authority Investments held to maturity Receivables from financing activities Other Assets Liabilities Customers' Accounts Other Liabilities 55 Level 2 MVR Level 3 MVR Total MVR - 209,665,651 648,870,979 602,128,659 1,172,009,592 - 50,806,319 209,665,651 648,870,979 602,128,659 1,172,009,592 50,806,319 - 2,437,825,734 - 12,338,414 2,437,825,734 12,338,414 - 181,630,423 663,077,913 853,580,526 816,374,548 - 77,777,870 181,630,423 663,077,913 853,580,526 816,374,548 77,777,870 - 2,337,412,436 - 18,583,206 2,337,412,436 18,583,206
57. Maldives Islamic Bank Private Limited NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2017 33 33 .1 RELATED PARTY TRANSACTIONS Name of the Related Party ICD Money Market Fund LLP Relationship Affiliated Bank Nature of the Transaction Musharakah Amount 2017 MVR Principal investment 24,632,000 24,632,000 3,126,217 27,758,217 2,180,276 26,812,276 Opening 22,521,460 24,135,324 Profit for the period Settlement 2,152,888 (3,599,817) 21,074,531 2,106,280 (3,720,144) 22,521,460 Additional Investments Accumulated Profits Government of Maldives Amana Takaful Maldives Plc Shareholder Shareholder Istisna'a Deposit Amount 2016 MVR Opening Transactions during the year 33,216,649 (13,792,370) 19,424,279 - 33.2 Collectively, but not individually, significant transactions. The Government of Maldives holds 25% of the shareholding of the Bank. The Bank has transactions with entities directly or indirectly controlled by the Government of Maldives through its authorities, agencies, affiliations and other organizations, collectively referred to as government entities. The Bank has transactions with other government related entities including but not limited to Investments, financing and deposits. Amana Takaful Maldives Plc holds 5% of the shareholding of the Bank. 33.3 Transactions with Key Management Personnel The key management personnel are the members of the Board of Directors. The Company has paid an amount of MVR 4,105,813/- as emoluments to the key management personnel during the year ended 31 December 2017 (2016: MVR 3,813,852/-). 34 COMMITMENTS 2017 MVR (i) Financial commitments Letter of Credits Guarantees and Bonds Bill Collection Acceptance 35 2016 MVR 10,878,259 77,835,615 26,343,680 115,057,554 18,871,492 83,053,540 26,827,144 128,752,176 (ii) Financing commitments Undrawn Financing facilities 354,247,493 228,103,273 Total 469,305,047 356,855,449 OPERATING LEASE COMMITMENTS As at 31 December, the future minimum lease payments under operating lease rent were payable as follows. 2017 MVR Less than one year Between one and five years More than five years 9,466,343 33,534,334 53,610,990 96,611,667 2016 MVR 7,942,969 16,129,750 428,000 24,500,719 36 CONTINGENT LIABILITIES There were no contingent liabilities which require disclosure at the date of reporting. 37 EVENTS AFTER THE REPORTING DATE There are no events after the reporting date which require adjustments to/or disclosure in the financial statements. 56