in the name of allah most merciful - ahli united€¦ · in the name of allah the most gracious the...

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In The Name OF Allah The Most Gracious The

Most Merciful

His HighnessSheikh Sabah Al-Ahmad Al-Jaber Al-Sabah

Amir of The State of Kuwait

His HighnessSheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah

Crown Prince of The State of Kuwait

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CONTENTSThe Chairman’s Statement 8

CEO´s Statement 10

The Board of Directors 12

Shari’ah & Fatwa Supervisory Board Report 16

Shari’ah & Fatwa Supervisory Board Members 16

The Executive Management 18

Financial Performance 19

Management Report & Performance Analysis 22

Executive Summary 26

Corporate Governance 32

Independent Auditor’s Report 49

Consolidated Financial Statements 51

Basel 3 Pillar 3 - Disclosures 90

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Dr.Anwar Al MudhafCHAIRMAN OF AHLI UNITED BANK K.S.C.P.

Dear Shareholders,

Al Salam Alaikum Wa Rahmatu Allah Wa Barakatuh

On behalf of myself and my dear fellow members of the Board of Directors, I have great pleasure to present you with the 50th annual report of Ahli United Bank, K.S.C.P. and its consolidated financial statements for the fiscal year ending December 31, 2015. This report highlights the most prominent achievements represented by preserving the stability and success, despite of the difficult economic conditions during 2015, most notable of which were the collapse of global oil prices and sharp decline in the indices of GCC stock markets simultaneously with the negative developments associated with geopolitical instability in the region.

The Bank’s Financial PerformanceAhli United Bank’s Management succeeded to achieve strong performance of the Bank and counter the challenges during 2015, thanks to Allah the Almighty, through its successful strategy and reserved policy, prudent management of risks and its compliance with the highest Banking business criteria, and maintained stability revenues with focus on expanding its scope of businesses.

Ahli United Bank’s operating profits from its core businesses reached to KD 77.7 million in 2015, 12.9% increase from KD 68.8 million in 2014.

Ahli United Bank’s net profits amounted to KD 42.8 million (KD 47 million for 2014), after taking a precautionary provision for the amount of KD 8.1 million, in addition to an exceptional; (one time) provision of KD 7.9 million and other necessary provisions to mitigate the impacts of market volatility witnessed subsequent to the sharp decline in global oil price during 2015.

The Bank’s return on average equity (ROAE) recorded 12.7% at the end of 2015 which is the highest rate on average equities among local Banks. Its return on average assets (ROAA) recorded 1.2%, which is also one of the highest rates in the Kuwaiti market. The earnings per share (EPS) recorded 30.2 Kuwaiti fils per share as of 31 December2015. This reflects the strong financial position of the Bank and its ability to generate sustainable revenues from its core businesses while maintaining the solid funding resources.

Assets increased to KD 3,904 million as of 31 December 2015 (KD 3,597 million as of 31 December 2014) mainly due to increase in financing portfolio by KD 200 million reaching to KD 2,680 million as of 31 December 2015. The total clients’ deposits increased by 8.4% as of 31 December 2015 reaching to KD 2,661 million (KD 2,454 million as of 31 December 2014) which reflects customers trust and confidence for the Bank.

In accordance with Basel III regulations, capital adequacy ratio recorded 15.51% (prior to proposed distributions) exceeding the minimum limit specified by the Central Bank of Kuwait of 12.5%. These positive results reflect the Bank’s balanced approach and prudent risk management policies.

Return on investment’s accounts of depositors at the Bank surpassed their peers in the Banking market during 2015 and are considered among the one of highest returns granted by Kuwaiti Banks. According to the Bank’s results in 2015, return on annual investment accounts recorded 2.11% p.a. and 1.6% p.a. for semi-annual investment accounts.

THE CHAIRMAN’S STATEMENT

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Return on saving accounts rose to 1.55% p.a. In light of these results, the Board of Directors proposed to the shareholders annual general assembly to distribute cash dividends of 5% and bonus shares of 10% (5 fils and 10 shares per 100 shares respectively) subject to approval of the regulatory authorities and annual general meeting approvals.

Credit RatingsAhli United Bank managed to maintain its high credit ratings by international credit classification agencies. Fitch reaffirmed the Bank’s long-term credit solvency by A+ rate and F1 for the short term with a stable future outlook. Moody’s agency affirmed the Bank’s deposits in local currency at A2 rating with a stable future outlook. Likewise, Capital Intelligence affirmed the long term credit assessment of the Bank in foreign currency at A+ and reinforced the short-term assessment in foreign currencies at A2. These assessments reflect the quality and solvency of the Bank’s financial position with stability and ability to maintain rising profitability trend in the future.

The Bank’s Human WealthThe Bank’s management believes that the Bank’s best investment lies in investing in its human wealth. Therefore, the Bank is keen to select the best qualified elements and provide them with all available training opportunities within a business environment for accommodating distinguished potentials and help them give the best. For this purpose, the Bank management draws an integrated plan every year for optimal benefit from the human resources through training courses both locally and abroad.

Our Social ResponsibilityAhli United Bank views its social responsibility as an authentic part of its identity. Being the oldest Bank to operate in Kuwait since 1942, it has its distinguished social contributions throughout different decades and multi occasions.

Bank still believes that its success in assuming its social role is no less important than its success in providing Banking products and services. With this belief, Bank participated during 2015 in various supporting and sponsoring activities and events bearing positive returns on the local society in all economic, social, cultural and sports fields.

Appreciation and GratitudeFinally, I would like to express, on my behalf and on behalf of my fellow Board Members and the Executive Management of the Bank, the highest thankfulness and gratitude to His Highness the Amir of Kuwait, Sheikh Sabah Al Ahmad Al Jaber Al Sabah, and to Crown Prince of the Kuwait, His Highness Sheikh Nawaf Al Ahmad Al Jaber Al Sabah, may Allah protect them and guide them for the progress, glory and stability of our beloved country Kuwait. In addition, I cannot miss to thank officials of the Central Bank of Kuwait, particularly Dr. Mohammad Yousef Al Hashel, the Governor, for their sound management of the monetary policy, their constructive instructions and continuous follow up to guarantee the safety and stability of the Banking sector.

I would also like to thank all our dear shareholders for their loyalty and support to the Bank and to extend our thanks to our valued clients for their confidence in us which has always been a source of our pride and a stimulus for us to preserve the prestigious position of Ahli United Bank.

Last but not least, I cannot miss to express, on my behalf and on behalf of fellow Board members, our thanks and deep appreciation to the competent Executive Management and to all staff in this deeply rooted Banking institution for their efforts and dedication and for their continous hard work to achieve these distinguished results.

Dr. Anwar Ali Al Mudhaf Chairman

THE CHAIRMAN’S STATEMENT (CONTINUED)

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CEO´s Statement

Ahli United Bank, Kuwait, reported another year of strong underlying growth, despite continued global and regional economic uncertainties and operating challenges. The Bank’s operating profit increased by 12.9% to KD 77.7 million for 2015 as compared with KD 68.8 million in 2014. Furthermore, the Bank’s net profit attributable to shareholders was KD 42.8 million in 2015 as compared with KD 47 million in 2014 after having applied additional precautionary provisioning and an exceptional impairment provision reflecting a difficult operating environment. The increase in 2015 operating profit is testament to the Bank’s strong underlying business model built up over many years, and its effective control framework. This is further evidenced by a return on average equity (ROAE) of 12.7% and a return on average assets (ROAA) of 1.2%, both amongst the best returns in the market in 2015.

In March 2015, the Board of Directors approved a new, five years strategy for the Bank. The agreed Vision for the Bank during 2015-2019 is “To become a leading innovative Islamic Bank operating with international standards while placing our customers always First”. Our Mission includes the provision of innovative Shari’ah-compliant financial solutions, competitive products and quality services for customers; to maintain the highest level of corporate governance and risk management with a solid capital base; to achieve maximum returns for shareholders on a sustainable basis; to develop our human resources in a meritocratic management structure, thereby becoming an employer of choice; to adopt the latest technology to meet the needs of our customers; and to contribute to the social and economic advancement of local communities in line with our commitment to corporate social responsibility.

The Strategic Plan sets out with confidence the continued growth of the Bank in all aspects of its business, being Corporate Banking, Retail Banking, Private Banking and Wealth Management, and Treasury, and in accordance with Shari’ah.

Our achieved success, stability, and the numerous awards we secured in 2015 are a source of pride and underscore our positive asset growth in 2015, along with our sound capital adequacy ratio of 15.5% (prior to proposed dividend) as of 31 December 2015. As a result of implementing best Banking practices, the Bank received the award of the ”Best Islamic Bank in Kuwait for 2015” from ”The Banker” magazine for the third consecutive year. This award was in appreciation of the Bank’s accomplishments and progress in providing distinguished Islamic Banking services. In addition, the Bank was awarded the title of ”The Second Most Secure Islamic Bank in Kuwait for 2015” by “Global Finance” which also included Ahli United Bank in the list of the Most Secure Banks in the GCC. The selection came after a strict evaluation process of the stability of regional Banks.

During the year, the Bank continued to make significant progress in developing all our Shari’ah compliant businesses, especially in Corporate Banking, Retail Banking, Private Banking and Wealth Management and Treasury ably supported by the wide range of Operational Support functions. These too were recognized through the Quality Award in Banking Operations for 2015 from JP Morgan Chase and, for the fourth year in a row, the Bank received CommerzBank’s Annual Award for Payments in recognition of the excellent performance in executing trade and financial payments. These awards reflect the Bank’s high level of operational competence. Undoubtedly, we look forward to achieving more success and progress in the years to come. We believe that we have to work harder to satisfy the aspirations of our clients with the rapidly changing developments in the Banking sector. We also emphasize the importance of diversity and continued development in our services and products thereby continuing to add

Richard W L GrovesChief Executive Officer

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CEO´s Statement (CONTINUED)

value to our Banking activity. Again, this approach is underscored by the positive reviews issued by the international credit ratings agencies in 2015. Three ratings agencies, Fitch, Moody’s and Capital Intelligence all reaffirmed the Bank’s strong ratings, being Fitch with a long term at A+ and a stable outlook, Moody’s at A2, with a stable outlook, and Capital Intelligence with a long-term rating of A+ and an enhanced foreign currency short-term rating of A2.

Whilst reflecting on the Bank’s fine history in Kuwait, it is vitally important to appreciate that success comes from sustainability - sustainability in our people, both our staff and our customers, who combine to ensure the longevity and the relevance of our role in the local economy. We help both individuals and businesses realise their ambitions of growth and prosperity. Notwithstanding the changes in recent years in the regulatory environment, in technology and Banking practices generally, this essential role continues. The Bank’s management and staff are dedicated to ensure this success continues in the years to come.

Furthermore, our role in society extends to giving support to the communities in which we operate. I am proud of the numerous activities undertaken by my colleagues throughout the year to support good causes as outlined in this Annual Report. As always, we can do more, and in 2016 we will expand our activities especially to help those members of society who have special needs and who require our support.

Finally, I would like to express my gratitude to the Board of Directors for their active and continued support and invaluable guidance throughout the year and similarly to our Fatwa & Shari’ah Supervision Board. I also wish to thank the Governor and staff of the Central Bank of Kuwait for their inestimable support and guidance for the Bank and management.

I would like to offer my deepest thanks to all our clients for their ongoing business and the faith they place in us and to all my colleagues in Ahli United Bank, Kuwait, for their professionalism, commitment and hard work which have been essential in achieving another year marked by a strong performance and sustainable growth.

Richard W L Groves Chief Executive Officer

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Sheikh Abdulla Jaber Al-Ahmad Al-Sabah (Vice Chairman)Vice Chairman, Head of Compensation and Nominating Committee and Chairman of the Executive Committee(Non-Executive Director)

Sheikh Abdulla Jaber Al-Ahmad Al-Sabah joined the Bank’s Board in March 2009.Qualifications & Experience: Sheikh Abdulla holds a Bachelor of Arts degree from Brown University, USA and a Master’s Degree in Business Administration from the University of Colombia, NY. He has experience in the Banking industry and the investment sector.Current Positions: Deputy Director General for Investment- Public Institution for Social Security (Kuwait), Chairman - Housing Finance Company K.S.C (Kuwait), Vice Chairman of Bank of London & Middle East (FSA Regulated - UK), Vice Chairman of Ahli United Bank (Kuwait).Former Positions: Chairman - Kuwait Financing Services Co. (Kuwait), Board Member - Ahli Bank of Kuwait, Vice President - Wafra Investment Advisory Group (New York - USA), Board Member - Global Investment House (Kuwait).

Mr. Jamal Shaker Al KazemiMember of Corporate Governance Committee & Member of Risk Committee(Non-Executive Director)

Mr. Jamal Shaker Al Kazemi joined the Bank’s Board in May 2004.Qualifications & Experience: Mr. Al Kazemi holds a Diploma in applied Business Sciences (Accounting). He has experience in the commercial and investment sectors.Current Positions: Director – Zain (Kuwait)Former Positions: Deputy Chairman – Marsa Alam Holding Company K.S.C.C. (Kuwait); Deputy General Manager – Kazema Engineering Projects WLL (Kuwait).

Dr. Anwar Ali Al Mudhaf (Chairman)Chairman of Governance Committee(Non-Executive Director)

Dr. AlMudhaf joined the Bank’s Board in March 2014, He is also the Chairman of the Corporate Governance Committee.Qualifications & Experience: Dr. AlMudhaf holds Ph.D. in Finance from Peter F. Drucker Graduate School of Management, Claremont Graduate University, California, U.S.A. He has more than 18 years of experience in Banking and finance.Current Positions: Chairman & CEO of Al-Razzi Holding Company; Chairman of Banco ABC Brasil S.A., Chairman of Sama Educational Company, Director of the Board of Governors of the Oxford Institute for Energy Studies, Director of the Board for Arab Banking Corporation-Bahrain; Member of the Board of Directors of the Public Authority for Applied Education.Former Positions: Dr. Al Mudhaf has formerly served as a Lecturer in Corporate Finance, Investment Management and Financial Institutions at Kuwait University, Chairman of the International Bank of Asia in Hong Kong; Director of the Board of Directors of the Public Institution for Social Security (PIFSS), Advisor to the Finance and Economic Affairs Committee at Kuwait’s Parliament; Member of the Economic Task Force dealing with the implications of the 2008 Global Financial Crisis on Kuwait, Vice Chairman in Al Mal Investment Company, and a Director of Al Ahli Bank in Kuwait.

THE BOARD OF DIRECTORS

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Mr. Adel M. A. El-LabbanMember of Compensation and Nominating Committee & Member of the Executive Committee(Non-Executive Director)

Mr. Adel A. El-Labban joined the Bank’s Board in March 2002. Qualifications & Experience: Mr. El-Labban holds a Bachelor’s degree of Economics (Honors Degree) from American University, Cairo and Master’s degree in Economics (Honors Degree) from the American University of Cairo. He has vast experience in Banking, investment sector, financing, risk management and internal controls covering the MENA region with particular focus on the GCC countries and Egypt.Current Positions: Group Chief Executive Officer & Managing Director - Ahli United Bank (Bahrain) BSC - First Deputy Chairman - Ahli Bank (Oman) SAOG - Deputy Chairman - Ahli United Bank (Egypt) SAE - Deputy Chairman - United Bank for Commerce & Investment (Libya) LSC - Deputy Chairman - Commercial Bank of Iraq (Iraq) PSC - Director - Ahli United Bank (UK) PLC - Director - Ahli United Bank (Kuwait) KSC - Director - Bahrain Association of Banks (Bahrain)Former Positions: Chief Executive Officer and Director - United Bank of Kuwait PLC, UK, Managing Director - Commercial International Bank of Egypt, Chairman - Commercial International Investment Company, Egypt, Vice President - Corporate Finance, Morgan Stanley, USA, Assistant Vice President - Arab Banking Corporation (Bahrain), Director - Bahrain Stock Exchange, Bahrain, Director - Kuwait & Middle East Financial Investment Co. (Kuwait), Director - Middle East Financial Investment Co (Saudi Arabia).

Mr. Herschel E PostHead of Audit and Compliance Committee(independent Director)

Mr. Herschel Post joined the Bank’s Board in March 2009.Qualifications & Experience: Mr. Post holds a Bachelor’s degree in Law from the University of Harvard, USA. He has extensive experience in Banking industry, finance, risk, internal audit and investment sectors.Current Positions: Director and Chairman of Audit Committee of Ahli United Bank (Bahrain), Director and Chairman of the Audit Committee of Ahli United Bank (UK) PLC, Director and Chairman of the Audit Committee - Ahli United Bank (Egypt), Director and Chairman of the Audit Committee - Kuwait & Middle East Financial Investment Company, Director and Chairman of the Audit Committee, Threadneedle Asset Management Holdings S.A.R.L., Trustee - Earthwatch Institute (Europe).Former Positions: Deputy Chairman of the London Stock Exchange, CEO and Deputy Chairman - Coutts & Co.; Chief Operating Officer - Lehman Brothers International Ltd., Director - Christie’s International Limited, Director - Euroclear SA/ NV & Euroclear PLC, Director and Chairman of the Audit Committee - Euroclear UK and Ireland Ltd, Director - Investors Capital Trust PLC.

THE BOARD OF DIRECTORS (CONTINUED)

Mr. Keith Henry GaleHead of Risk Committee & Member of the Executive Committee(Non-Executive Director)

Mr. Keith Gale joined the Bank’s board in March 2015 . Qualification & Experience: Mr. Keith Gale holds a Bachelor’s degree in Accounting & Finance from Lancaster University and has a fellowship certification in Chartered Accounting from the legal Accounting Institute. He has vast experience in Banking sector and risk management.Current Position: Deputy Group CEO - Risk, Legal and Compliance, Ahli United Bank B.S.C. - Bahrain. Director, Ahli Bank S.A.O.G. - Oman; Ahli United Bank K.S.C.P. - Kuwait; Ahli United Bank S.A.E - Egypt; Ahli United Bank (UK) Plc.Former Positions: Group Head of Risk Management, Ahli United Bank B.S.C. - Bahrain; Head of Credit and Risk at ABC International Bank PLC; Assistant Vice President, Arab Banking Corporation, B.S.C. - Bahrain.

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Mr. Abdulla Ahmed AlRaeesiMember of Corporate Governance Committee & Member of Audit and Compliance Committee(Non-Executive Director)

Mr. Abdulla Al Raeesi joined the Bank’s Board in March 2015. Qualifications & Experience: Mr. Abdulla Al Raeesi is a senior Banking professional with over 28 years of international experience in managing retail Banking, operations, finance, strategic planning, conventional and Islamic Banking, mergers, and acquisitions and restructuring for Banking institutions in Bahrain, Kuwait, Qatar, Oman, Egypt, Libya, Iraq and UK.Current Positions: Deputy Group CEO- Retail Banking of Ahli United Bank (B.S.C), Board of Director and Member of the Audit and Compliance Committee and Member of Corporate Governance Committee of Ahli United Bank (Kuwait), Deputy Chairman of Legal & General Gulf, Deputy Chairman of Legal & General Gulf Takaful, Chairman of Ahli United Bank Group IT Steering Committee, Member of Group Assets and Liabilities Committee, Member of Group Management Committee and Member of Group Operation Risk Committee.Former Positions: Board Director of Ahli Bank (Qatar), Board Director of Ahli United Bank (Egypt), Board Director of International Chamber of Commerce, Board Director of Benefit Company, Chairman of Ahli Man Investment Committee, Vice Chairman of Charity Committee of Ahli United Bank, Head of Business Consulting Group of Arthur Andersen and Assistant General Manager of Commercial Bank of Qatar.

Mr. Mohammed Tariq Mohammed Sadiq Mohammed AkbarMember of Audit and Compliance Committee(Independent Director)

Mr. Mohammed Tariq Mohammed Sadiq joined the Bank’s Board on March 2015.Qualification & Experience: Mr. Tariq is a Fellow Chartered Accountant from the Institute of Chartered Accountants in England and Wales. He enjoys vast experience in the fields of financial advisory consultancy, Audit services and business Development.Current Position: Managing director, Keystone consulting, Inc. W.L.L., independent director member of the Audit & compliance committee , director in Al-Zayani investments WLL Bahrain, Independent Director Golf Course Company and Ahli United Bank B.S.CFormer Positions: MENA Area Leadership Team Member and Head of Advisory – EY Middle East and North Africa (MENA). MENA Area Leadership Team Member and Head of Accounts & Business Development – Ernst & Young Middle East & North Africa. office Managing Partner of the Bahrain practice responsible for Assurance, Advisory, Tax and Transaction service lines staff partner in addition to providing audit and advisory services to a cross section of industries, including Banking and financial services sector, government and public sector, realty and hospitality, retail, healthcare etc

THE BOARD OF DIRECTORS (CONTINUED)

Mr. Michael Gerald EssexMember of Compensation and Nominating Committee and Member of Risk Committee(Independent Director)

Mr. Michael Essex joined the Bank’s Board in March 2015. Qualification and Experience: Mr. Essex holds an Executive Development Program Certificate from Harvard Business School,Boston-USA,1997; M.A. Public Administration from Carleton University, Ottawa-Canada,1975; and, B.A. Economics & Political Science from University of Western Ontario, London-Canada 1972. He has extensive experience in Asia & Pacific , Africa and MENA regions in Banking, infrastructure, energy, industrial & service sectors in investment, portfolio management, risk and financeCurrent Positions: Board Director & Member of Audit Committee - Ahli United Bank ( Bahrain) ; Board Director & Member of Audit & Risk Policy Committees - Ahli United Bank ( Egypt); Board Director & Member of Risk Policy & Compensation Committees - Ahli United Bank (Kuwait); Member Investment Committee, APIS Growth Fund (UK); and, Board Director SBI Macquarie Bank India Infrastructure Fund (Singapore, India).Former Positions: Director, Investment & Advisory Operations, Middle East & North Africa region, International Finance Corporation (IFC) ; Deputy Director IFC Global Industry & Service Investments; Managing Director, Corporate Banking , NZI Securities Ltd, Australia; and Risk Supervisor for Asia, Bank of Nova Scotia.

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SHARI’AH & FATWA SUPERVISORY BOARD REPORT

Praise be to Allah and prayer and peace be upon His messenger Mohammad, his family and all of his companions.

To: M/S Ahli United Bank (K.S.C.P.) Shareholders,

Based on the general assembly resolution to appoint the Shari’ah Fatwa and Supervision Board and tasking us with that, we hereby submit our following report.

The Shari’ah Fatwa and Supervision Board has audited and reviewed the applied principles and the contracts pertinent to the transactions submitted by the Bank during the period from January 1st, 2015 to December 31st, 2015. We have performed the reviewing and the supervision to give our opinion whether the Bank complies with the Islamic Shari’ah rules and regulations as well as with the fatwas, regulations and specific guidelines issued by us. The execution of these is the sole responsibility of the Bank Management and our responsibility is confined to giving an independent opinion based on what we have seen and reviewed.

Our revision has been performed with due diligence and controls that involved examining the contracts and the applied procedures by the Bank based on checking each type of transaction. We have received all information and the necessary clarifications necessary for issuing an opinion on the extent of the Bank’s compliance with the Islamic Shari’ah provisions.

In our opinion:1- The contracts, documents and transactions concluded by the Bank during the above period have been carried out in accordance with the Islamic Shari’ah provisions and principles.2- All profits achieved from sources prohibited or restricted by the Islamic Shari’ah have been avoided in accordance with the fatwas issued in this regard.

We pray to Allah the Almighty to help the Bank officials serve our straight religion and our dear homeland and to achieve success.

AHLI UNITED BANK – KUWAITReport of the Shari’ah Fatwa and Supervision Board

For the Period from 01/01/2015 to 31/12/2015

Dr. A.Aziz Khalifa Al Qassar

Member

Dr. Khaled Mathkour Al Mathkour

Chairman

Dr. Essam Khalaf Al Enezie

Member

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SHARI’AH & FATWA SUPERVISORY BOARD

Dr. Khaled Mathkour Al MathkourChairman

- Ph.D. in Shari’ah and Law at Al-Azhar University- Cairo.- Faculty member at Kuwait University, Comparative Fiqh and Shari’ah Policy at Shari’ah and

Islamic Studies College.- Head of Fatwa Committee at the Ministry of Awkaf and Islamic Affairs, State of Kuwait.- Head of the Higher Consulting Committee for the Application of Islamic Shari’ah Principles - Amiri

Diwan - State of Kuwait.- Member of the Scientific Committee for the Fiqh Encyclopedia at the Ministry of Awkaf and

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

World Union.- Member of Fatwa and Shari’ah Supervision in many Islamic Banks and Financial Institutions.- A founding member of the International Islamic Charity Authority headquartered in Kuwait.

Dr. A.Aziz Khalifa Al QassarMember and Reporter

- Ph.D. in Shari’ah at Shari’ah and Law College- Al Azhar University, Cairo.- Prof. of Comparative Fiqh at the Shari’ah and Islamic Studies College, KU.- (Ex) Assistant Dean for Scientific and Higher Studies and Research Affairs. - Member of Fatwa and Shari’ah Supervision in many Islamic Banks and Financial Institutions both

in Kuwait and abroad.- Lecturer in Islamic Financial Transactions.- Author of a lot of studies in research in Islamic Fiqh and Contemporary Financial transactions.

Dr. Essam Khalaf Al EnezieMember

- Ph.D. in Shari’ah - The Jordanian University, (Fiqh Major).- Faculty Member at Kuwait University, Comparative Fiqh Section - Shari’ah and Islamic Studies

College.- Member of the Shari’ah Council at the Accounting and Audit Board for Islamic Financial Institutions.- Member of Fatwa and Shari’ah’s Supervision Board in many Banks and Islamic Financial Institutions.- Author of several studies and research works.

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THE EXECUTIVE MANAGEMENT

Richard W L GrovesChief Executive OfficerMr. Richard Groves joined Ahli United Bank-Kuwait (AUBK) in April 2015 as Chief Executive Officer. Prior to joining AUBK, Mr. Groves had extensive international financial and Banking experience, including senior management roles, with HSBC Group. These roles included Chief Executive Officer, HSBC Oman and Managing Director, The Saudi British Bank in a career spanning over 30 years which also included assignments in Europe and Asia. Mr. Groves holds a Bachelor of Arts degree in Economic and Social History from the University of Hull, United Kingdom.

Moataz El-RafieSenior Deputy CEO- Banking Business Group Mr. Moataz El Rafie, CFA, currently Senior Deputy CEO Banking Group at Ahli United Bank – Kuwait with over 35 years of well-rounded Banking experience where he assumed multiple senior positions including Chief Executive Officer of Ahli Bank – Qatar, General Manager – Corporate Banking & Treasury at Boubyan Bank, General Manager - Business Development at National Bank of Kuwait. Mr. El Rafie, started his career in 1976 at the Chase National Bank of Egypt (now Commercial International Bank) in several positions covering Bank Operations and Treasury. In 1988 he successfully completed the rigorous 9 months Credit Training program, to complement his overall Banking experience and start his specialization in the corporate finance field. Mr. El Rafie, assumed Board membership at Watani Bank of Egypt, United Bank of Credit and Investment – Libya, and Boubyan Capital. He earned his B.SC degree in Business Administration from Cairo University in 1976 and had multiple trainings arranged by Harvard Business School, Warton school, IMI Geneva, Chase Manhattan Bank and other reputable organizations. He also earned the professional designation of Chartered Financial Analyst (CFA).

Ahmed ZulficarSenior Deputy CEO - Banking Support GroupMr. Ahmed Zulficar joined the Bank as Deputy Chief Executive Officer – Risk, Finance and Operations in January 2007. He is a Director of the United Bank for Commerce & Investment (Libya) and Director of the Commercial Bank of Iraq (Iraq). Prior to joining AUBK, Mr. Zulficar held various managerial positions in credit, marketing, risk, trade finance and operations in several Banks, including National Bank of Kuwait. He started his carrier with Chase National Bank of Kuwait in 1976. He holds a Bachelor of Commerce degree from Cairo University. He had multiple training arranged by Harvard Business School, Warton school, Chase Manhattan Bank and other reputable organizations.

Jehad Soud Al-HumaidhiGeneral Manager - IT & OperationsMs. Jehad Al-Humaidhi joined the Bank in 1984 as an IT Programmer and has held several managerial positions related to operations, administration, electronic systems, data processing and system development. Since 2011, she has held the position of General Manger of IT & Operations. She is the Chairman of Kuwait & the Middle East Financial Investment Company. Ms. Jehad holds a Bachelor of Science degree in Mathematics (Major) and Economics (Minor) from Kuwait University.

Hisham ZaghloulGeneral Manager - Corporate BankingMr. Hisham Zaghloul joined the Bank in 2007. He holds a Bachelor of Arts degree in Economics from Cairo University and has extensive experience in Corporate Banking, Treasury, and Trade Finance, having worked for various Banks and financial institutions including BNP Paribas (Egypt), Commercial International Bank (Egypt), United Bank for Commerce & Investment (Libya). Mr. Zaghloul is Board Member of Commercial Bank of Iraq P.S.C. and Board Member of Kuwait & Middle East Financial Investment Company K.S.C.P.

Hossam Al-Deen GawdatGeneral Manager - TreasuryMr. Hossam Gawdat joined the Bank in 2007 as the Head of Treasury & Treasurer. Prior to joining AUBK, he headed various Treasury and Investment functions in leading Banks in the Gulf region from 1999 till 2007 he was with NBK Kuwait and from 1989 till 1999 in Riyad Bank in Saudi Arabia, and thus enjoys extensive Banking experience in this field. He holds a Bachelor of Science degree in Economics and Political Sciences from faculty of Economics and Political Sciences , Cairo University 1982.

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

Amgad YounesGeneral Manager - FinanceMr. Amgad Younes joined AUBK in 2014 as General Manager, Finance. previously he served in regional commercial and Islamic Banks in senior positions for Finance, Strategy, Planning, Operations and Technology. He holds a Bachelor of Commerce degree in Accounting and Finance from Cairo University in 1985 and attained a post-graduate accountancy diploma from the same university before obtaining his Masters Degree in Business Administration from the American University in Dubai. He is a Certified Public Accountant and member of the American Institute of Certified Public Accountants in addition to being an International Certified Public Arab Accountant and member of Arab Institute of Certified Public Accountants. He carries certifications also in the Project Management, Islamic Finance Qualification from the Chartered Institute for Securities and Investments (UK) and Certified Business Manager from the American Institute for Management.

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

Tanu GoelGeneral Manager - AuditMr. Tanu Goel joined the Bank in 2006 as the Head of Audit. Prior to joining AUBK, he held various managerial positions in Audit functions. He is a Certified Bank Auditor, Certified Information System Auditor and Financial Risk Manager, and holds a Bachelor of Commerce degree from the University of Mumbai, India and holds several certifications from the Institute of Cost and Works Accountants of India and the Institute of Chartered Accountants of India.

Shabbir ShaikhGeneral Manager - Risk ManagementMr. Shabbir Shaikh joined the Bank in 2006 as the Head of Risk Management. Prior to joining AUBK, he was Head of Risk at AUB Group Head Office, Bahrain since January 2001. His previous experience was with Standard Chartered Bank ( 1996 – 2000) as Senior Credit Officer for Bahrain, Qatar, Oman and Saudi Arabia and Head of Corporate at its Bahrain and Karachi office respectively. He also held managerial positions in the area of Treasury and Corporate Banking in American Express Bank, Societe General and Bank Al Falah in Pakistan. He holds a Bachelor and Master’s degree in Business Administration from University of Karachi.

THE EXECUTIVE MANAGEMENT (CONTINUED)

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KD THOUSANDS UNLESS OTHERWISE STATED Dec 15 Dec 14 Dec 13

NET PROFIT 42,805 47,008 42,459

NET FINANCING INCOME 89,082 79,518 77,840

FINANCING RECEIVABLES 2,680,334 2,480,431 2,140,922

TOTAL ASSETS 3,904,303 3,596,928 3,164,976

TOTAL DEPOSITS 3,490,618 3,210,494 2,793,414

SHAREHOLDERS EQUITY 356,158 326,868 309,792

RETURN ON AVERAGE ASSETS (ROAA) 1.2% 1.4% 1.5%

RETURN ON AVERAGE EQUITY (ROAE) 12.7% 15.1% 14.9%

COST TO INCOME 29.9% 32.0% 30.9%

CAPITAL ADEQUACY RATIO 15.2% 15.7% 17.8%

EARNINGS PER SHARE (Fils) 30.2 33.2 29.9

Financial Performance Summary

FINANCIAL PERFORMANCE

21

20

40

60

0

500

1,000

1,500

2,000

2,500

3,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Net Financing IncomeKD Million

89,082

Total AssetsKD Million

3904,303

2680,334

3490,618

Financing ReceivablesKD Million

Total DepositsKD Million

2013

2014

2015

2014

2015

2013

2015

2013

2014

2013

2014

2015

80

100

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FINANCIAL PERFORMANCE (CONTINUED)

22

MANAGEMENT REPORT & PERFORMANCE ANALYSIS

Overview of Bank StrategySince inception, Ahli United Bank (AUBK) has contributed to the economic and social development of Kuwait through its Retail and Corporate Banking businesses, including Private Banking and Wealth Management and Treasury. This has been conducted through the acceptance of deposits, and by partaking in the financing of infrastructure, industrial and commercial projects, as well as personal lending. Various strategic initiatives including the Bank’s conversion to a fully fledged Shari’ah compliant Islamic Banking entity since April 2010, together with ongoing focused relationship management and marketing, has led to a considerable increase in the Bank’s customer base resulting in the Bank’s continued expansion in the marketplace.

On 29 March 2015 the Bank’s Board of Directors approved the strategy for the years 2015-2019. AUBK’s vision is “To become a leading innovative Islamic Bank operating with international standards while placing our customers always First”.

AUBK’s plan includes the following initiatives and objectives:• Maximize shareholders’ value on a sustainable basis through high standards of corporate governance and risk management

with a solid capital base• Provide innovative Shari’ah compliant financial solutions, competitive products and quality services to customers• Maintain solid capital and liquidity measures• Entrench a disciplined risk and cost management culture• Provide cutting-edge technology adopting customer centric technology• Retain and develop qualified and professional employees by establishing a meritocratic management structure and be the

employer of choice. Develop a cross-cultural and efficient management structure. • Contribute to the social and economic advancement of communities thereby fulfilling our corporate and social responsibility

The Bank implements quantitative measures wherever feasible, but tracks both qualitative and quantitative indicators of performance in terms of both financial and non-financial outcomes. The strategy monitoring framework forms an integral part of the Bank’s performance management system.

AUBK, as part of the commercial Banking sector in Kuwait is appreciative of and also benefits from the close supervision and guidance of the Central Bank of Kuwait including adoption of the best corporate governance standards resulting in the improvement in the financial performance measurement of the overall Banking sector. Given the significant potential for furtherance of the Islamic Banking landscape both locally and regionally, AUBK is confident that, under the guidance and oversight of the Central Bank of Kuwait, it will continue to play a greater part in the development and growth of customer centric Shari’ah compliant Islamic Banking services.

Business ProfileFollowing the roll-out of the Shari’ah compliant Banking services, the Bank has conducted its business in accordance with Islamic Shari’ah provisions under the oversight of its Fatwa & Shari’ah Supervision Board. The conversion has been beneficial, resulting in growth in AUBK’s business both in terms of deposits and net financing assets in the Islamic Banking sector. The progress achieved since conversion has laid the foundation to target further growth in a prudent and risk acceptable manner.

Financial & Performance OverviewAUBK’s assets base comprises mainly net financing constituting 69% of the total assets. Cash and balances with Banks, including inter-Bank deposits, account for 25% of the total assets, thereby reflecting the rising liquidity levels within the Bank. Available for sale investments reached 4% of total assets. On another front, the Bank’s liabilities mainly comprise customer deposits, and deposits from Banks and financial institutions being 75% and 23% respectively of total liabilities.

AUBK achieved its operational effectiveness and efficiency, owing to its focused Asset Liability Management within its Board approved prudent risk framework. Adoption of an effective risk managed approach led to its asset base rising by 9% from KD 3,597 million in 2014 to KD 3,904 million in 2015.

Total customer deposits increased in a diversified manner during the year 2015 by KD 207 million to reach KD 2,661 million as of 31 December 2015, with the rise in deposits from Banks and financial institutions by KD 73 million during 2015 to reach KD 830 million.

23

MANAGEMENT REPORT & PERFORMANCE ANALYSIS (CONTINUED)

The following table shows comparison of growth rates of AUBK from 2013 to 2015:

201320142015Main Indicators

3,1653,5973,904Total Assets (million KD)

20%14%9%Annual Assets Growth Rate

2,1412,4802,680Total Financing (million KD)

24%16%8%Annual Financing Growth Rate (%)

2,0932,4542,661Total Customer Deposits (million KD)

17%17%8%Annual Customer Deposit Growth Rate (%)

The success of AUBK’s business attainment is reflected in its operating profit in 2015 rising by 12.9% to reach KD 77.7 million against KD 68.8 million in 2014.

Net Profit Trends Attributable to Shareholders:

201320142015Main Indicators

77.879.589.1Net Financing Income (million KD)

98.7101.2110.9Total Operating Income (million KD)

42.547.042.8Net Profit for Shareholders (million KD)

29.933.230.2Earnings Per Share (fils)

The average return on equity (ROE) and average return on assets (ROA) in AUBK reached 12.7% and 1.2% respectively for 2015, along with a solid capital adequacy ratio of 15.2% (after proposed dividend) under the Basel-III accord, being higher than the regulatory requirement of 12.5% as of 31 December 2015.

The Bank re-affirmed its prominent position in the Islamic Banking business by winning the award for the Best Islamic Bank in Kuwait in 2015 for the third consecutive year from the global specialized magazine “The Banker”, once again confirming the Bank’s ability to render distinctive Banking services and products. AUBK has been selected amongst the most secure and safest Islamic Banks in Kuwait and among the top 50 safest Banks worldwide by “Global Finance” based on evaluating its long-term foreign currency ratings granted by the international rating agencies.

The Bank achieved the following rating by international credit rating agencies. “Fitch” affirmed the Bank’s credit strength on the Long-Term and Short-Term to ‘A+’ and ‘F1’ respectively with a stable Outlook. “Moody’s” affirmed ‘A2’ global local currency (GLC) deposit rating with a stable Outlook. “Capital Intelligence” has affirmed the Bank’s Long-Term Foreign Currency (FC) and Short-Term FC Rating to ‘A+’ and ‘A2’ respectively with a stable Outlook. These ratings underscore AUBK’s sound financial position and the strength in its ability to maintain a rising profitability trend.

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MANAGEMENT REPORT & PERFORMANCE ANALYSIS (CONTINUED)

Future OutlookThe Bank has adopted appropriate risk management standards and structures to effectively manage all business and operating risks alike with a view to adapting to the ever-changing Banking landscape. AUBK has over time been resilient in successfully traversing the volatile macro level business swings and remains cautiously optimistic. With the backing of its professional and skilled management and staff, support of its stakeholders and guidance of its regulators, it will pursue its strategic growth path going forward. The Bank believes that it enjoys a number of key competitive advantages which will maintain the positive outlook for the future despite the various market challenges. These competitive advantages are:• Strong regional group presence, distinguished brand and local franchise• Innovative and extensive product range• Shari’ah -compliance• Stable funding base• Quality of service and speed of response time• Competent, loyal and professional management• Strength in staff training• Systematic approach to developing strategy• Strong association with the community

25

Ahli United Bank...

The Islamic Bank of the Yearfor three consecutive years

26

CORPORATE BANKINGCorporate Banking has continued to achieve satisfactory growth during 2015 not only in terms of credit portfolio size, but also in terms of profitability whilst ensuring diversification in targeted economic sectors and following a conservative credit policy. These have contributed to maintaining the Bank’s position as the highest in terms of Return on Equity and the second largest Shari’ah Compliant financier in the State of Kuwait.

Moreover, Corporate Banking has continued to offer its Shari’ah Compliant mix of products and services with a high level of professionalism to its clients of large local and foreign corporates as well as Small to Medium Enterprises (SMEs). This has been achieved through sector specialized units being Contracting & Manufacturing, Food, Pharmaceutical & Energy, Trading & Services, Real Estate & Investments, and the SME Unit.

With the intent of growing client deposit levels and account balances under Corporate Banking and at reasonable costs to ensure competitiveness in achieving a diversified portfolio and depositor base, Cash Management services have been further developed in 2015. We have witnessed substantial growth in the number of clients benefiting from our Business to Business (B2B) on-line Banking service, specialized in offering a secure overall electronic solution aimed at facilitating and streamlining Banking transactions through integration between client’s Enterprise Planning System (ERP) and the Bank’s system. Moreover, Cash Management has succeeded in soliciting the operational accounts and deposits of a multitude of existing and new corporate clients.

Corporate Banking has succeeded in achieving a set of objectives in terms of maintaining a high-quality asset portfolio, offering a fully rounded product/service mix offering, growing the client base amongst varying business sectors and consequent diversification on both the asset and liability sides; aiming also to enhance its market share and profitability. In this regard, Corporate Banking has continued its focus on risk-calculated growth, soliciting new clients, taking an active participation in Kuwait’s Government Development Plan through supporting a good number of large-scale projects, and bolstering human capital through attracting young qualified national and senior Bankers of high Islamic Banking experience and credentials.

Corporate Banking strives to continue its distinguished performance whilst enhancing the Bank’s Islamic brand equity across the State of Kuwait and the Region and to contribute positively to the Banking sector and overall economy.

PRIVATE BANKING AND WEALTH MANAGEMENTBuilding on its prestigious status as the Best Private Bank in Kuwait in 2015 as recognized by “The Banker” magazine, Ahli United Bank’s Private Banking and Wealth Management continued to offer an integrated package of distinguished Banking products and investment services. Based on understanding the clients’ aspirations, risk profiles and needs, the Bank managed to counter the challenges of a difficult global financial arena, while catering to the ever rapidly changing investment aspirations of clients.

The strategic partnership between Ahli United Bank and the London office of the international real estate company, Jones Lang La Salle (JLL), generated several major real estate projects in 2015. These projects were offered exclusively to Ahli United Bank’s clients, who enjoyed JLL’s extensive expertise as well as the renowned financial, legal, and estate planning services provided by the Bank’s Private Banking & Wealth Management division .

In line with the Bank’s strategy of catering to client needs and keeping them informed, Private Banking and Wealth Management continued its efforts to educate clients on the developments of both local and international investments. Periodic seminars were organized to keep clients fully aware of the changes in real estate taxes in the United Kingdom and any future potential changes which may impact the purchase of properties in that market.

Private Banking and Wealth Management prides itself on the exceptional services rendered to its clients through the strength of its personal relationships. Personalized investment advisory services, asset allocation and risk profiling are carried out confidentially and based on client risk appetite.

EXECUTIVE SUMMARY

27

RETAIL BANKING SERVICESAhli United Bank’s Retail Banking plays a pivotal role in providing innovative products and services. The unit structure was strengthened with the recruitment of professional retail Banking management and reorganization of its branch network for better customer service and control. The Direct Sales Unit has been restructured to respond to the Bank’s objectives of customer acquisition and improved service through total customer satisfaction.

The Bank’s retail products were enhanced by introducing the innovative interest-free loan (Qard Hassan) which offers profit-free finance. This service was well received by customers who seek to benefit from this facilitation in meeting their short-term cash needs.

The Hassad Islamic Savings Investment program is another innovative service; it is the only prize account in Kuwait conforming to Islamic Shari’ah which has been tailored to meet our customers’ needs and increase their winning opportunity to win valuable cash awards totaling KD 3.4 million per year.

The Bank’s marketing strategy through direct channels and tailored promotional campaigns during 2015 involved participation in more than 10 different events and shows with special focus on real estate and retail Banking. Real Estate financing continues to be one of the most attractive products offered by Retail Banking through its unique and competitive features.

The Bank also extended its sales network to cover all main automotive car dealers. AUB customers are now well received and served by our professional sales staff at the point they make their car purchase decisions.

Retail Banking also enhanced the credit card rewards scheme, rewarding customers with free travel miles on leading airlines; with more and more customers benefiting from the best rewards program in Kuwait.

To increase comfort and ease to its clients, the Bank’s direct distribution channels and ATM network were enhanced and extended by modernizing and upgrading them to conform to the highest technological standards. They provide exclusive services to our customers who can now update their phone numbers registered with the Bank through ATMs to obtain more services from the Bank.

The Call Center facility continue to improve its services and employs the best practices. Existing security measures have been reinforced for more credibility and ease of use.

Direct channels services were expanded to offer merchant customers the latest POS devices that meet their needs, even after working hours. As a result, Merchant Relations Department achieved a 10% increase of installed POS and 5% in transactions made.

In addition, the Banking Services Department drafted an integrated plan during 2015 to develop the Banking services provided to individuals with Special Needs in line with the Bank’s strategy. This strategy concentrates on meeting the requirements of the Bank’s customers with special needs out of its concern to reinforce their integration in society, which forms a top social priority for the Bank.

Within this context, Retail Banking held and organized several training courses for branch personnel to learn the gesture language to facilitate their communication with hearing impaired customers. It has also designated branches to be eligible to provide this special service in response to the Central Bank’s initiatives in this respect.

Furthermore, Retail Banking organized a program to educate customers on the regulations governing consumer and instalment financing in response to the instructions and guidelines of the Central Bank so as to increase customers’ awareness. This included launching a campaign in the media to enhance customers’ awareness of their best choices related to financing. It also led to help educate Bank employees about their role in explaining to customers such regulations as well as continuing to follow up with training courses on “Customer Protection” with a special focus on the regulations governing consumer and installment financing and the Bank’s requirements.

EXECUTIVE SUMMARY (CONTINUED)

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TREASURY Treasury applied its strategy positively in 2015 in terms of managing liquidity, fulfilling financial requirements and conforming to growth in the financial portfolio by reconciling compliance with the additional supervisory criteria, whilst reducing overall deposit costs. Treasury succeeded in this regard despite the challenges resulting from dynamic fluctuations in markets throughout the year.

Treasury introduced a number of innovative solutions conforming to Islamic principles and suitable for existing market conditions. It developed and improved hedging tools that are consistent with the variables and fluctuation faced by financial markets. Treasury also intensified its activity in the sukuk market by investing in a substantial sukuk portfolio and through making available a diversified set of Shari’ah compliant Banking products.

In addition, Treasury struck noticeable progress during the past year in expanding its client base, whilst maintaining and developing existing relationships. It established strong relations with Islamic and regional Banks, and attracted a new category of public institutional clients. These successes were reflected positively on Treasury’s activities and growth in its market share in 2015.

RISK MANAGEMENTRisk is at the core of the Bank’s business activities. The Risk Management Framework, Risk Management Policy and related documents, which incorporate risk mitigation, as well as the governance structure provide comprehensive control and management of the risk/reward relationship across the entire Bank.

The Risk Management Framework clearly establishes the dynamic link between risk appetite and return target, internal controls and capital adequacy management. The Risk Management Division (RMD) is the primary body responsible for setting the overall risk threshold.

The Board of Directors in Ahli United Bank is the ultimate owner of risk appetite and approves all risk appetite related policies. The RMD structure has a distinct identity and independence from the business units, making it the ideal partner in achieving business objectives within the acceptable risk/reward criteria.

RMD is headed by the General Manager, who has direct reporting line to the Board via the Board Risk Committee. RMD is comprised of the following units to address the pertinent risk exposure of the Bank:

• Credit Risk• Market Risk • Operational Risk • Credit Administration• Credit Control & MIS

RMD co-ordinates and communicates with each line of business to properly manage its risks. The General Manager – RMD is a member of several management committees that have the overall responsibilities and authorities vested in them for the day-to-day risk management activities of the Bank. Such authorities are exercised within the objectives and policies approved by the Board and subject to the rules and regulations laid down by CBK.

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


29

INFORMATION TECHNOLOGYInformation Technology (IT) has been central to the Bank’s initiatives in enhancing the Banking experience, for customers, upgrading systems and meeting regulatory requirements. The Bank has enhanced the technology platform to continuously augment functionalities in all channels in 2015, mainly by providing;

• New products in Islamic Banking • Improved Internet Banking• Improvements and additional functionality in Cards System, B2B (Business-to-Business) and ATM systems • Systems upgrade to strengthen delivery capabilities

The Bank has continuously focused on understanding customer requirements, improving customer convenience and reducing processing time. By doing so, the Bank has upgraded its Internet Banking portal to meet customer needs along with enhanced security. Internet Banking services offer products which provide greater convenience and more flexibility for customers. We have enhanced our B2B (Business-to Business) solution, a custom-built application which is updated regularly, to meet the diverse Banking business requirements of corporate customers. Additionally, in order to speed up the clearance of cheques and enhance administrative efficiency, and in-line with Central Bank’s guidelines, have successfully implemented the Automated Cheque Clearing system.

The Bank has implemented a major upgrade to modernize the IT Data Center Disaster recovery infrastructure by moving from an “Active-Passive” to an “Active-Active” connectivity mode between our Production Site and the Backup Data Center. With this technology the Bank ensures business continuity in case one of the Data Centers is not available. By doing so, we have become one of the few financial institutions in the region to have such an advanced facility.

With major emphasis on availability, the Bank implemented significant changes to network, security, storage and server virtualization infrastructure. With Active-Active Datacenters, Bank has the ability to deliver its mission critical services with limited or no impact on the business. With this new, ground-breaking architecture, the Bank can avoid disruptions and achieve continuous operations by converging a high level of availability and disaster recovery practices. In order to stay updated with the latest Security measures, firewalls and virtual private network devices were upgraded. An expansion of business continuity area was carried on to accommodate various critical business units for easy recovery access on site in the event of a business area disaster or disruption.

The financial services industry is undergoing significant changes in recent years driven by rapid growth in technology. The Bank will continue to invest in innovations and ensure that our technology systems evolve in line with new trends and deliver value to our customers.

HUMAN RESOURCES Human Resources pursued the implementation of its policy and plans to attract competent Kuwaiti graduates utilizing all available opportunities to develop and refine their skills on personal and professional levels within a developed and ambitious business climate. Human Resources paid great attention to potential Future Leaders who will assume the front line responsibilities reinforcing what is known as “Displacement and Job Succession Planning” through ongoing programs of training and development systems both internally and externally. Within this context, Human Resources focused on activating the competencies-based management program “Talent Management” to refine the proven capabilities of fresh graduates and prepare them to assume the tasks of middle management as a prelude to assuming senior leadership positions and roles.

To enable the Bank to achieve its goal of sustainable, profitable growth, Human Resources has provided qualified and professional cadres to all business sectors of the Bank whilst conforming to its desire to be a forerunner in utilizing and increasing the national labour percentage in the Bank. As a result, Human Resources managed to employ 183 well qualified Kuwaiti nationals in various Bank departments in 2015.

Given the high priority given to training in 2015, Human Resources conducted more than 150 training programs in accordance with the latest Banking requirements benefitting more than 800 employees. The Bank was also active in the highly regarded training programs provided by the Institute of Banking Studies (IBS), especially the renowned specialized and professional certificates. Furthermore, a diversified group of technical Bank staff took part in a number of local and foreign training programs and conferences. Likewise, a number of Kuwaiti staff participated in specialized programs on risk management, compliance, governance , Basel III rules and International Financial Reporting Standard 9 (IFRS9).


30


HUMAN RESOURCES (continued) Human Resources focused on providing all Bank employees with awareness programs pertinent to various monitoring and regulatory requirements including, for example and not for limitation, the Consumer Protection Manual, Combatting Money Laundering and Terrorism Financing, and Customer Complaints and Protection. Human Resources reaffirms that investment in people is a key component of the Bank’s success and its social responsibility towards refining the Kuwaiti youth skills and expertise, and directing them to the labor market through first-class approaches that conform to the highest international standards. In addition, Human Resources is keen to introduce summer training programs for students from institutions and universities, training programs for Kuwaiti youth trainees at the Legal Department of the Public Institution for Social Securities, as well as social and cultural activities provided by the Bank to its employees.

Consequently, Human Resources managed, with the dedication of experienced staff, to maintain its “excellent” status which made it eligible for the renewal of the quality certificate ISO 9001:2008 for the next three years.

COMPLAINTS & CUSTOMER PROTECTIONThe Bank’s management provides overall protection coverage to customers, based on the “Customer Protection Manual” published in September 2015 by the Central Bank of Kuwait and on a long experience of dealing with customers. The Bank has established a Complaints & Customer Protection Department to expand and enhance the function of the Customer Complaints Unit in the Bank. Since this Department was established in September 2015, the Bank’s management has held internal training for staff and has reviewed the policies and procedures concerning the application of the Customer Protection Manual.

Before the formation of the Complaints & Customer Protection Department, the Quality Control Department in Ahli United Bank undertook to enhance the Bank’s competitive strength, based on the quality services rendered to customers. In this regard, quality service policies and procedures in the Bank were subjected to a quality audit (ISO 9001:2008) and were awarded the ISO German Quality Certificate “TUV NORD”, which is deemed a culmination of the Quality Control Department’s efforts in providing the best Banking services, thereby resonating the enhancement of its competitive capability in the market.

In 2015, Quality Control Department intensified its efforts to undertake the regular surveys to identify the range of customer satisfaction with services and products rendered by the Bank, and refer these proposals to management for review and implantation as appropriate.

To enhance the culture of excellence and realize quality service tailored to the best world standards with continued monitoring to increase the awareness of employees of the necessity of quality, Quality Control Department organized training courses and workshops on the importance of service quality, and to identify for trainees of the latest developments in the area of improvement and development of service quality.

Quality Control Department has been absorbed into the Complaints & Customer Protection Department to benefit the customer experience.

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SOCIAL RESPONSIBILITYSocial responsibility is a major priority for Ahli United Bank and is considered a main pillar of its stability, success and sustainability, throughout its history. Since its inception 75 years ago, the Bank has been keen to harness its full potential by providing numerous social services and to support activities and events that serve and develop a civil society.

Within this context, 2015 was an eventful year with a number of social activities and programs in which the Bank was a prominent participant, and actively partnering with various other institutions.

A busy social program during the month of Ramadan

As in every year, to celebrate the arrival of the Holy Month of Ramadan, the Bank prepared a full social program that included offering Iftar meals to fasting individuals throughout the month. The event took place in the Bank’s Ramadan tent near Head Office. Hundreds of Moslems broke their fast in the tent daily during Ramadan.

Another event encouraged employees and their children to memorize and recite the Holy Quran as well as understanding its meaning. The Bank organized a Quran’s Recitation Competition which was open to employees and their children up to the age of 14 years.

A further event organized during Ramadan was a religious seminar for employees at the Head Office under: The Blessing of the last 10 days of Ramadan. The lecturer was Sheikh Dr. Khaled Al Mathkour, Chairman of Ahli United Bank’s Fatwa and Shari’ah Supervision Board. The attendance was impressive reflecting the interest in the lecture topic.

Supporting Economic Activities

The Bank participated in a number of prominent real estate shows due to their role linked with facilitating Kuwaiti citizens’ ownership of property, in addition to the building and construction sector, thereby expanding its production base which serves the building sector in Kuwait. The Bank participated in a number of eminent economic events especially those related to the Islamic economy and finance. Hence, Ahli United Bank sponsored the Sixth Shura Al Fiqhi Conference in November 2015.

Individuals with Special Needs

With social activities catering towards individuals with special needs and out of concern for them and care for their integration in society, the Bank was a sponsor of the Human Marathon 2015 organized by Kuwait’s Voluntary Youth Team to foster the positive integration concept in society between individuals with special needs and their counterparts. This took place in November.

Participants from various societies, centers and clubs concerned with the special-needs individuals took part in the Marathon. By its distinct involvement, the Bank reaffirms that it will continue its efforts to offer much needed support to those with special needs to assist them in reaching their potential in society.

Our Human Resources

Ahli United Bank seeks to include its employees among beneficiaries from its social program. Therefore, it honored employees in 2015 who had performed outstandingly well and whom the Bank considers to be among its role models for dedication and giving.

Likewise, the Bank encouraged young employees who had excelled in obtaining specialized professional certificates. It also trained staff to be future leaders and the Bank is keen to promote their success.

Within the same context, the Bank offered many positive social activities which were well-received by Bank staff.

Sports

Sport plays a large part in the well-being of staff and promotes positive energy and team work. The Bank hosts a number of sports teams – cricket, football and bowling for example, and many staff are involved in regular sports activities, especially on an interBank basis. Ahli United Bank is very supportive of such activities, being well received both internally and externally.

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CORPORATE GOVERNANCE

33

CORPORATE GOVERNANCE

Principles of Sound Corporate GovernanceAhli United Bank, Kuwait (AUBK) incorporates the Corporate Governance principles into core business practices, essentially based on guidelines and instructions issued by the Central Bank of Kuwait, Capital Markets Authority (CMA) and Kuwait Stock Exchange (KSE), along with the best international applicable practices.

Corporate Governance involves balancing the interests of stakeholders in the Bank; namely, shareholders, management, customers, government and the community. Corporate Governance also provides the framework for attaining the Bank’s objectives. As such, it practically encompasses every sphere of management, from action plans and internal controls to performance measurement. Therefore, the Bank is dedicated to align its internal policies and procedures in line with the Corporate Governance practices to ensure transparency and proper corporate disclosure.

Corporate Governance Structure of the Bank:

The nine (9) pillars on which AUBK operates its business pursuant to the Central Bank of Kuwait’s instructions issued in this regard are:• Board of Directors• Corporate Values, Conflict of Interest and Group Structure• Senior Executive Management• Risk Management & Internal Control• Remuneration Regulations & Policy• Disclosure and Transparency• Complex Corporate Structure• Protection of Shareholders Rights• Protection of Stakeholders Rights

34

CORPORATE GOVERNANCE (CONTINUED)

Key elements of good Corporate Governance practiced at AUBK

Board Of DirectorsThe Board of Directors is the ultimate governing body of the Bank. The AUBK board is composed of nine non-executive directors, out of which three are independent. All directors collectively possess the required skills and expertise to assume the roles and responsibilities vested in them to comply with regulatory requirements. Some AUBK board directors are graduates of famous universities, such as Harvard University, others hold PHD or are graduates with honors from prominent universities, whilst holding a wide diversified experience in Banking & Financial business lines with profound understanding of Risk management. Biographical details are set out at the Board of Directors profile section of this annual report.

Coming from diverse business and professional backgrounds, all nine directors (including independent directors) of the Bank have shared their valuable experiences to the Board for promoting the best interests of AUBK and its shareholders. All directors actively participated in the board committees of the Bank and they have made significant contributions of their skills and expertise to these committees.

At the date of this report, the board comprises of the following directors:

Non-Executive Directors• Dr. Anwar Ali Al-Mudhaf• Sheikh Abdullah Jaber Al-Ahmad Al-Sabah• Jamal Shaker Al-Kazemi• Adel Mohamed Abdelshafi El-Labban• Keith Henry Gale• Abdulla Ahmed Al-Raeesi

35


Board Of Directors (continued)Independent Directors• Herschel E. Post• Michael Gerald Essex• Mohamed Tariq Mohamed Sadeq Mohamed Akbar

Corporate Vision, Mission, Objectives and Values

Vision

To become a leading innovative Islamic Bank operating with international standards while placing our customers always “FIRST”

Mission

• To provide innovative Shari’ah-compliant financial solutions, competitive products and quality services to our customers• To maintain high standards of corporate governance, risk management and solid capital base while achieving the maximum

returns for shareholders on a sustainable basis.• To retain and develop our qualified and professional employees by establishing meritocratic management structure and be the

employer of choice• To provide cutting-edge technology and adopt customer centric technology• To contribute to the social and economic advancement of communities which the Bank operates and fulfil the corporate social

responsibility

Corporate Core Objectives

• To maximize shareholder values on a sustainable basis• To maintain highest corporate governance and compliance standards• To maintain solid capital and liquidity measures• To entrench a disciplined risk and cost management culture• To develop a cross-cultural and efficient management structure• To optimize staff development through business driven training, talent management programs and profit sharing• To contribute to the social and economic advancement of communities

Core Values

• Integrity; we are honest with everyone ... our customers, employees, regulators, Shareholders and the public.• Customer Centric; customer needs are always in the heart of everything we do.• Hospitality; we provide a warm welcome to all customers and to those we deal with• Transparency; we are transparent in everything we do.• Justice & tolerance; we accept, promote and provide only fair treatment• Teamwork & Synergy; working in groups will be always behind our success• Commitment & Excellence; we do the best and on time

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Board of Directors Focus and Achievements for 2015

Board Focus

Board Effectiveness Review, Evaluation of DirectorsThe Board is committed to operating effectively, it focuses on the Bank’s strategic priorities and key monitoring activities, as well as reviewing significant issues. In addition, the Board engages with senior management to discuss key elements of the business and “develops and promotes its collective vision of the Bank’s objectives, its culture, its values and the behaviors it wishes to promote in conducting business”.

The Bank continues to explore methods to enable continuous enhancement of the Board’s effectiveness. The Compensation and Nominating Committee facilitates this process by conducting annual effectiveness reviews via questionnaires, self-evaluation or executive session discussions of which collective answers are analyzed to decide points of strength & weakness. This review assesses the performance of the Board of Directors / committees. This assessment does not only involve the Board as a whole, but also reviews the contribution of individual directors and committees through the process of self-assessment.

Achievements of the Board of Directors for 20151- Approving the Financial Statements2- Approving the Bank’s five year strategy plan and monitoring implementation3- Appointing three independent directors4- Appointing the Bank’s CEO5- Approving opening new branches as part of the Bank’s expansion plan6- Participating in IBS Kuwaiti graduates program7- Approving Risk Management framework (Risk Appetite)8- Approving Bank lines & country limits9- Review and approve ICAAP and Stress Testing10- Accomplishing Board assessments11- Approving 2016 budget12- Reviewing quarterly performance via reports prepared by management13- Approving the succession plan of AUBK executives


37

Board Committees The Board of Directors formed five committees to help the Board of Directors fulfil its supervisory roles and responsibilities, as set forth in their respective charters. The Board committees are listed below, noting that they submit reports of their activities to the Board on regular basis: • Corporate Governance Committee • Nominatings & Compensations Committee • Board Risk Committee • Audit and Compliance Committee • Executive Committee

Board of Directors / Board Committees Meetings and Attendance

Number of Meetings held in 2015* Board of Directors Meetings

Corporate Governance Committee

Board Risk Committee

Audit & Compliance Committee

Compensations & Nominating Committee

Executive Committee

6 2 4 4 2 3

Meetings held up to March 29 2015 2 0 1 1 1 0

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

Anwar Ali Al-Mudhaf 2

Abdullah Jaber Al-Ahmad Al-Sabah 1 1

Jamal Shaker Al-Kazemi 1 1

Adel Mohamed El-Labban 2 0 1

Herschel E Post 2 1 1

Sanjeev Baijal 2 1

Keith Henry Gale 2 1

Abdul Hamid Gloum Al-Me’amari 2 1

*Board of Directors Meetings in its previous formation from 1/1/2015 to 29/3/2015

Number of Meetings held in 2015* Board of Directors Meetings

Corporate Governance Committee

Board Risk Committee

Audit & Compliance Committee

Compensations & Nominating Committee

Executive Committee

6 2 4 4 2 3

Meetings held From March 29 2015 till December 31 2015

4 2 3 3 1 3

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

Anwar Ali Al-Mudhaf 4 2

Abdullah Jaber Al-Ahmad Al-Sabah 4 1 3

Jamal Shaker Al-Kazemi 3 2 3

Adel Mohamed EL-Labban 4 1 3

Herschel E Post 4 3

Keith Henry Gale 4 3 3

Michael Gerald Essex 3 2 1

Mohamed Tariq Mohamed Sadiq Mohamed Akbar

4 3

Abdulla Ahmed Al-Raeesi 3 2 3

** Board of Directors Meetings with its current formation from 29/3/2015 to 31/12/2015.


38

Committees Emanating from the Board of Directors

1- Corporate Governance Committee

Objectives

The purpose of the Corporate Governance Committee (CGC) is to provide support to the Board of Directors in providing its oversight responsibilities related to good governance, including developing a set of corporate governance guidelines, overseeing the management and the Board committees and taking a leadership role in delineating the Bank’s corporate governance policies. Additionally, the CGC designs the framework and manual for Corporate Governance, as well as monitor the execution, implementation and amendments, whenever required.

2015 Achievements

• Develop and recommend for Board approval suggested changes to the Bank’s Corporate Governance framework and monitor its compliance with Corporate Governance guidelines.

• Conduct on-going assessment of the Corporate Governance framework to ensure it remains appropriate to the Bank’s structure.• Review and assess the adequacy of the Bank’s policies and practices and monitor that the principles described are being

incorporated into the Bank’s culture and business practices. In addition, recommend and propose changes to the Board for approval.

• Review significant shareholder investor relations issues and the Bank’s.• Review the Corporate Governance section to be included in the Annual Report relating to the corporate governance activities of

the Bank.• Annually review the Terms of Reference of the CGC and recommend suggested changes to the Board, if necessary.• Perform any other activities consistent with the Terms of Reference, the Bank’s Articles of Association and governing laws, as

the Board deems necessary or appropriate.• Oversight on Corporate Governance subsidiaries.

2- Compensation & Nominating Committee

Objectives

The role of the Compensation & Nominating Committee (CNC) is to assist the Board of Directors in fulfilling its oversight responsibilities related to managing the Bank’s compensation arrangements including short and long term performance related remuneration and recommending for the Board’s own approval the remuneration of Directors in line with Islamic Shari’ah principles and international best practice. In addition, the CNC identifies individuals qualified to become members of the Board and the Bank’s Senior Management; to recommend to the Board nominees to serve on each committee of the Board and to assess the performance of the Board, its members and individual Committees.

2015 Achievements

• Initiated and approved the criteria of Board nominees, and assessed the candidates for the vacant position;• Reviewed and approved the annual Training Plan for the Board of Directors and monitored its implementation;• Reviewed and approved the Key Performance Indicator’s linked to the Senior Management compensation;• Reviewed the annual remuneration of the Senior Management & presented its related disclosures for Board approval;• Reviewed and approved the Senior Management Succession Plan;• Reviewed and approved the staff coding (senior management, material risk takers and control functions) as per CBK requirements;• Established a framework for the annual assessment of the Board, committees and their members;• Reviewed the compensation packages in light of market pay and aligned the compensation as it may be required;• Evaluated the performance of risk takers positions and recommended both short and long term remuneration structures;• Reviewed the fairness of the performance appraisal systems and emphasized the independence of those roles that require

independence; and • Reviewed the Board and its Committee members remunerations.


39

3- Board Risk Committee

Objectives

The Board Risk Committee (BRC) assists the Board of Directors in fulfilling its oversight responsibilities related to present and emerging risk issues, strategies, the risk appetite associated with the Bank’s Banking and financing activities, including the investment portfolio. BRC recommends to the Board the risk management policies, risk appetite and framework, ensures adherence to the risk appetite policy and provides oversight on major risk categories and adequacy of the provisions and reserves.

2015 Achievements

• Reviewed the capital adequacy ratios based on the Basel-III requirements;• Reviewed the resulting Liquidity Coverage Ratios and Net Stable Funding Ratios based on the Basel III requirements; • Reviewed the assessment of the Bank’s performance based on CAMEL B-com; • Reviewed the adequacy of provisions based on the IFRS guidelines;• Reviewed and discussed the Bank’s risk appetite including risk concentrations, operational risk, compliance, anti-money

laundering, liquidity and disaster recovery and business continuity;• Reviewed risk management and related policies• Reviewed the Bank’s risk strategy and risk appetite and submitted recommendations to the Board of Directors for approval;• Regular interaction with the risk management function and review of the risk management information;• Evaluated the performance of the General Manager (GM) – Risk Management Division (RMD) and recommended his compensation

to the Board of Directors;• Reviewed the adequacy and efficiency of the Risk Management function and discussed that with the GM – RMD;• Reviewed the 5-year strategy and risk strategies and confirmed adherence to the approved risk appetite;• Reviewed all stress-tests and ICAAP submissions, underlying analysis and methodologies; • Reviewed all reports submitted by the Operational Risk Committee on timely basis; and• Reviewed all disclosures required under Basel III

4- Audit and Compliance Committee

Objectives

The Audit & Compliance Committee (ACC) carries out its functions in accordance with the authorities & responsibilities vested in it by the Board of Directors with regard to the oversight of the Bank’s financial reporting, accounting principles, internal and external audit, compliance and internal control matters as well as liaison with the Bank’s external auditors.

2015 Achievements

• Approved the internal Audit risk-based Plan for 2015 and submitted relevant recommendations;• Reviewed and evaluated the Internal Audit reports and their efficiency;• Monitored the execution of corrective action plans;• Reviewed the Internal Audit, Risk Management and Governance reports;• Evaluated the nature, framework and implementation of the compliance plan in addition to the mechanism of monitoring

performance;• Reviewed reports from the anti-money laundering (AML) unit;• Reviewed complaint reports from the Complaints Unit to ensure the effectiveness of internal procedures in handling these

complaints in line with the relevant policies and regulatory requirements;• Reviewed and discussed the consolidated financial statements of the Bank and submitted recommendations to the Board of

Directors for their approval;• Met with internal and external auditors to discuss financial and internal audit reports and matters;• Reviewed all quarterly and annual financial statements and management letters;• Followed up adequacy of internal audit and compliance resources and commitment to ensure their success.• Recommended for Board approval the External Auditors Policy.


40

5- Executive Committee

Objectives

The Executive Committee (EC) assists the Board in discharging its responsibilities in two capacities namely, acting on behalf of the Board on matters normally reserved to the Board’s own resolutions, and discharging responsibilities delegated by the Board including credit, investment, liquidity and market risks, in excess of the limits assigned to other committees.

2015 Achievements

• Reviewed and approved a number of financing proposals within its authority & responsibility.• Reviewed activities of the administrative committees.• Coordinated with Risk management regarding limits and exposures to risks.• Reviewed the Bank’s financing portfolio to ensure its alignment to the Bank`s approved limits & exposures.• Provided the required coaching for the functioning management committees.

Board of Directors Induction and TrainingIn order to ensure that the Board maintains its knowledge and familiarity with all rules & regulations in an ever changing regulatory environment, the Board was enrolled in programs pertaining to Basel III vs Basel II impacts on MENA region. In addition to attending programs regarding the new liquidity requirements by the Central Bank of Kuwait such as Liquidity Coverage Ratio(LCR) & Net Stable Funding Ratio(NSFR). Training also included latest trends & developments of International Financial Reporting Standards (IFRS9) on Banks in Kuwait.

The Board was also oriented about risk control and long-term value creation, a program that gave them a broad overview of risk governance framework and risk appetite. More courses were taken via e-learning such as Foreign Account Tax Compliance Act.

Fatwa and Shari’ah Supervisory BoardShari’ah Board resolutions are binding upon the Bank management. The Bank is responsible for implementing these resolutions. The Shari’ah board shall have to ensure the management observance of these resolutions. The Shari’ah Board shall submit its reports to the Bank’s General Assembly, and such reports shall include its opinion on the Bank business adherence to the Islamic Shari’ah provisions

Shari’ah Supervision StructureIn accordance with the law No. 30 of 2003, an independent Shari’ah Supervision Board must be formed in each Islamic Bank to supervise its business. The number of members of the Shari’ah Board shall not be less than three members, and shall be appointed by the Bank’s General Assembly. There should be a provision in the Bank’s memorandum and articles of association on the existence of Shari’ah Board, the means of its formation, its terms of reference and the approaches of exercising its functions.

Shari’ah Executive CommitteeIt is an Executive Committee delegated by the Sharia Board responsible to study and review the matters referredto the committee by the management or the Sharia Board

Members of the Shari’ah Board • Sheikh Dr. Khaled M. Al-Mathkour • Sheikh Dr. Abdulaziz K. Al-Qassar • Sheikh Dr. Essam K. Al-Enezi


41

Shari’ah Compliance

1- Shari’ah Auditing

Shari’ah Department conducts semi-annual audit on all the Bank departments to ensure their compliance with the Fatwa and Shari’ah Supervision Board resolutions, and that the Bank exercises its business in accordance with the Islamic Shari’ah provisions based on the resolutions of the Shari’ah Board. The Shari’ah Department submits its reports to the Fatwa and Shari’ah Supervision Board on the findings of the audit function and recommendations of the Shari’ah Department on these findings.

2- Shari’ah Revision

Shari’ah Department replies to the queries of the Bank departments as well as the Bank’s customers on the Shari’ah matters, and explains and illustrates the resolutions of the Fatwa and Shari’ah Supervision Board resolutions. The Shari’ah Department also reviews the policies, procedures, contracts, various forms, and checks the Bank advertisements in newspapers, as well as the various daily submissions presented from the Bank departments and approves them based on the resolutions of the Fatwa and Shari’ah Supervision Board.

Violations of Shari’ah RegulationsViolations Resulting in Profits or Expenses in Breach of Islamic Shari’ah Provisions.

Some violations of the resolutions of the Fatwa and Shari’ah Supervision Board are discovered during the Shari’ah audit functions. The nature of these violations are financial (that means financial impacts result therefrom, either by collection of prohibited income or payment of prohibited expenses, according to the resolutions of the Fatwa and Shari’ah Supervision Board).

These violations are listed at the end of each financial period, and are sent to the Committee for Disposition of the Islamic Shari’ah non-compliant income, to be spent in charity channels according to the mechanism approved by the Committee.

No violations of this type were discovered during the financial year ending 31/12/2015.

Annual Zakat Paid by the BankIn accordance with the law No. 46 of 2006, and according to the resolution of the Ministry of Finance No. 58/5007, the Bank shall have to pay zakat tax imposed by force of the law. In some cases, the zakat tax covers the zakat amount to be paid by the Bank shareholders as zakat for their money.

The amount of zakat tax for the fiscal year ending 31/12/2015 amounted to KD 449,197.

Remuneration of the Fatwa and Shari’ah Supervision BoardThe annual general assembly endorses appointment/reappointment of the Shari’ah Board members and authorizes the board of directors to determine their remunerations.

Risk Governance and Risk Management FunctionsRisk is at the core of the Bank’s business activities. Risk Management Framework, Risk Management Policy and related documents, which incorporate risk mitigation, as well as the governance structure provide comprehensive control and management of the risk/reward relationship across the entire Bank.

Risk Management Framework clearly establishes the dynamic link between risk appetite and return target, internal controls and capital adequacy management. The Risk Management Division (RMD) is the primary body responsible for setting the overall risk threshold.


42

Risk Governance and Risk Management Functions (continued)The Board of Directors is the ultimate owner of risk appetite and approves all risk appetite related policies. The RMD structure has a distinct identity and independence from the business units, making it the ideal partner in achieving business objectives within the acceptable risk/reward criteria.

RMD is headed by the General Manager (GM), who has direct reporting line to the Board via the Board Risk Committee. RMD is comprised of the following units to address the pertinent risk exposure of the Bank:• Credit Risk• Market Risk • Operational Risk • Credit Administration• Credit Control & MIS

RMD co-ordinates and communicates with each line of business to properly manage its risks. The GM – RMD is a member of several management committees that have the overall responsibilities and authorities vested them for the day-to-day risk management activities of the Bank. Such authorities are exercised within the objectives and policies approved by the Board and subject to the rules and regulations laid down by CBK.

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

Internal controlManagement assumes the task of executing the internal control rules. The Board of Directors assumes full responsibility for the adequacy of the internal control systems. The Audit and Compliance Committee oversees the Bank’s internal control framework. The Risk Management, the Internal Audit and the independent External Auditors submit their evaluations to the Board of Directors. The Board reviewed the Internal Control systems and the Risk Management task and ensured their effectiveness within AUBK for the year 2015. In light of CBK instructions on internal audits within financial institutions, and to ensure the effectiveness and adequacy of its internal control systems, AUBK has reviewed the Bank’s internal control systems through an independent and certified external audit firm. The Internal Control Report (ICR) was discussed by the Board of Directors as of December 2015 and no significant control gaps were detected in the opinion concluded by the report. Accordingly, the Board of Directors certifies to the adequacy of the internal controls and supervision of the Bank.

A copy of the opinion letter about ICR report is attached in Appendix 1.


43


Appendix 1.

44


45

Code of Professional ConductThe objective of the Bank’s Code of Conduct is to guide all AUBK employees to ethical and professional business practices of the industry. Policies & procedures have been created internally with the intention to have a user friendly guide for staff interactions and decision-making. It serves as a bridge between the Bank’s objectives and functioning realities, and speaks about our commitment to our Mission. AUBK is committed to fostering and maintaining a work environment that supports ethical behavior and actively encourages an open dialogue on ethics and conduct.

Failure to adhere to this Code by any employee or officer will be subject to appropriate disciplinary action.

Reporting Policy (Whistle Blowing)Whistle blowing policies are generally intended to make it easier for staff members to report irregularities in good faith, without having to fear adverse consequences for their action. The Bank has adopted a Whistle blowing Policy to maintain the highest possible standards of ethical and legal conduct. Staff members are encouraged to speak up if they have any genuine concerns about malpractice or unlawful conduct which they suspect is taking place within the Bank. Such misconduct may relate to financial malpractice, failure to comply with a legal or regulatory obligation, a criminal offence, behavior detrimental to the image or reputation of the Bank, the endangering of health and safety or the environment, or the deliberate concealment of any such matters (“misconduct”). The Bank will protect and support anyone raising genuine concern and will remain anonymous. The Whistle blowing Policy is in furtherance of the Bank’s desire to strengthen the Bank’s system of integrity and fight against corruption, fraud and related offences.

Conflict of InterestConflict of Interest Policy has been prepared to ensure that the highest degree of transparency and objectivity is maintained within Ahli United Bank. Bank employees, Directors, their immediate family members and the Bank, should avoid conflict of interest over their commercial and economic transactions. The Bank’s policy is to take all reasonable steps to maintain and operate effective organizational and administrative arrangements to identify and manage relevant conflicts. The Bank has in place business-specific procedures that address the identification and management of actual and potential Conflicts of Interest that may arise in the course of the Bank’s business. The Bank is required to take all reasonable steps to identify and adequately manage Conflicts of Interest entailing a material risk of damage to a client’s interest. This policy sets requirement of the Bank, to have in place appropriate procedures and measures in order to identify and manage any such material Conflicts of Interest.

The following are examples of conflicts of interest that Directors and employees must avoid: 1. Receiving loans or guarantees of obligations as a result of one’s position as a Director or employee of the Bank.2. Engaging in conduct or activity that improperly interferes with the Bank’s existing or prospective business relationships with

a third party.3. Engaging in a business or activity that directly or indirectly competes with the Bank’s business or activities.4. Accepting bribes, kickbacks or any other improper payments for services relating to the conduct of the business of the Bank.5. Accepting, or having a member of a Director or employee’s immediate family accept, a gift from persons or entities that deal

with the Bank, in cases where the gift, considered in light of the totality of the circumstances, would reasonably be expected to influence the Director or employee’s actions as a member of the Bank.


46

ConfidentialityConfidentiality is among the key principles of Banking business is essential earning confidence by all parties dealing with Banks, being depositors, borrowers, investors or otherwise. The Bank has adopted a Confidentiality Policy that shall serve as the standard reference for its Directors, officers and employees in concern of the collection, use, retention and security of non-public personal financial information of individual Bank customers and about the Bank itself. All Board members and the Bank’s employees are responsible for safeguarding the confidential and proprietary information in compliance with all applicable laws and approved policies. Furthermore, the Bank customers have access to a broad range of products and services such as basic Banking products, mortgages and online Banking. To deliver these products and services effectively and conveniently, it is extremely important that the Bank uses technology to manage and maintain certain customer information while ensuring that customer information is kept confidential and protected. The safeguarding of customer information is an issue that the Board of Directors at the Bank takes seriously. In addition, all Bank employees upon employment have pledged themselves to a code of conduct in which one of the basic principles is to maintain the confidentiality, security and privacy of information in each client’s records.

Related Parties DealingsThe policy of dealing with related parties has been prepared in line with the relevant laws and resolutions including CBK rules and International Financial Reporting Standards (IFRS) requirements. The related party transactions are subject to review and audit by Internal Audit and the Board of Directors.

The Bank ensures that all disclosures of the related party transactions are in line with the local rules and regulations.

Largest Shareholders: Number of Shares Holding Percentage

Ahli United Company 1,060,408,802 67.33%

Public Institution for Social Securities 182,054,048 11.56%

Complaints and Customer ProtectionIn furtherance of the Central Bank of Kuwait’s regulations concerning the “Bank Customer Protection Manual”, and the principles and rules it contains for application of transparency and disclosure concepts, as well as creation of an appropriate environment to maintain customer rights, in the framework of a balanced relation that covers the principles of protection of Banking confidentiality, privacy of information, and requirements of application of the Banking and financial comprehensive programs, the Bank has enforced the functions of the Complaints Unit, by means of establishing “Complaints and Customer Protection Unit”, to apply the stipulations provided for in the Customer Protection Manual. The Bank has also appointed KPMG to help apply the instructions and requirements provided for in this manual. Furthermore, and in order to preserve the customers’ rights and raise awareness, CBK launched a phone service (1864444) to reply to inquiries from the individual consumers of the financial institutions and explain the mechanism for implementing CBK instructions relating to the products and services provided by such institutions including consumer and installment loans, credit cards, charges and commissions and terms and conditions that apply to rights and obligations of those consumers to make all these clear for the consumers before they make their decisions on the financial products and services they will obtain.”

Stakeholders ProtectionAUBK works on stakeholder interests in a logical extension based on the Bank’s core values, and it lays the foundation for the ongoing opportunities to attract investors, customers and staff. The Bank recognizes that stakeholders’ rights constitute an essential part of good governance. In fact, Bank’s final success is the outcome of the joint efforts of many parties and a pre-requisite for long-term development and value creation.Bank aims to:• Protect its shareholders rights, including minority shareholders, as well as the Bank’s various stakeholders• Encourage the effective participation of shareholders • Make timely disclosures to all stakeholders


47


Remuneration

Remuneration Policy The Bank’s remuneration policies are formulated in compliance with the Central Bank of Kuwait regulations and instructions related to remuneration of employees and Directors.Performance related variable compensations aim at recognizing & rewarding staff contribution beyond their regular job requirements, particularly those contributions that increase the Bank’s productivity and profitability.

Rewards are Risk based remuneration, in cases where performance related pay exceeds a certain percentage of the executive total annual salary, remuneration will be differed and subject to a Clawback criteria where such pay can be withdrawn or reclaimed in cases such as executive decisions fail to achieve what were expected of them profitability wise.

All remunerations and compensations are subject to the Compensation & Nominating Committee approval, remuneration levels are benchmarked against comparable and relevant levels in the market, and determined by industry measurable statistics, which will attract appropriate talents to the Bank. The guiding principles of remunerations are also aligned to the Bank’s short or long term financial performance, and reflective to match risks and their timelines.

Remuneration policy & disclosuresThe Bank has categorized its staff into Senior Management, Material Risk Takers and Control functions.Board of Directors and Senior Management Remuner ationRemuneration of the BOD and the related committees committed to KD 109 thousand collectively. Total remunerations of the top eight (8) Bank’s executives, including the Financial Director, the Internal Audit Director and the Risk Management Director KD 992,513VariableDisclosure of Remuneration as per Employees Categories

Personnel Categories No. of Employees Fixed Remunerations (KD)

Variable Remuneration (KD)

Total Payments (KD)

Senior Management 15 1,275,181 265,394 1,540,575

Material risk takers 24 1,009,720 244,558 1,254,278

Financial & Control Functions

14 695,398 67,721 763,119

Independent Auditors’ Report 49

Consolidated Statement of Profit or Loss 52

Consolidated Statement of Profit or Loss and Other Comprehensive Income 53

Consolidated Statement of Financial Position 54

Consolidated Statement of Changes in Equity 55

Consolidated Statement of Cash Flows 56

Notes to the Consolidated Financial Statements 57

CONSOLIDATED FINANCIALSTATEMENTS

49

INDEPENDENT AUDITOR’S REPORT

50

INDEPENDENT AUDITOR’S REPORT (CONTINUED)

CONSOLIDATED FINANCIALSTATEMENTS

52

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

2015 2014

Notes KD 000 KD 000

Financing income 3 120,839 110,693

Distribution to depositors 4 (31,757) (31,175)

Net financing income 89,082 79,518

Net fees and commission income 5 10,508 10,479

Foreign exchange gains 4,209 4,328

Net gain on sale of investment properties 3,831 -

Net gain on sale of investments 1,365 4,770

Share of results from associate 13 373 326

Other income 6 1,504 1,754

Total operating income 110,872 101,175

Provision and impairment losses 7 (24,779) (20,089)

Operating income after provisions and impairment losses 86,093 81,086

Staff costs (20,359) (19,441)

Depreciation (2,391) (2,808)

Other operating expenses (10,454) (10,133)

Total operating expenses (33,204) (32,382)

PROFIT FROM OPERATIONS 52,889 48,704

Impairment loss on asset held for sale

Attributable to Bank’s equity shareholders 21 (7,928) -

Attributable to non-controlling interests 21 (7,886) -

Taxation 8 (2,006) (2,172)

Directors’ remuneration 22 (150) (122)

Net loss attributable to non-controlling interests 7,886 598

NET PROFIT FOR THE YEAR ATTRIBUTABLE TO Bank’S EQUITY SHAREHOLDERS 42,805 47,008

Basic and diluted earnings per share attributable to the Bank’s equity shareholders (fils) 9 30.2 33.2

CONSOLIDATED STATEMENT OF PROFIT OR LOSSFor the year ended 31 December 2015

53


CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 December 2015

2015 2014

Note KD 000 KD 000

Net profit for the year attributable to the Bank’s equity shareholders 42,805 47,008

Net loss for the year attributable to non-controlling interests (7,886) (598)

Other comprehensive loss:

Other comprehensive (loss) income to be reclassified to profit or loss in subsequent periods:

Net movement in cumulative changes in fair values of investments available for sale (1,219) (7,127)

Exchange differences on translation of foreign operations 222 192

Net other comprehensive loss to be reclassified to profit or loss in subsequent periods (997) (6,935)

Other comprehensive income not to be reclassified to profit or loss in subsequent periods:

Revaluation of freehold land 15 483 127

Net other comprehensive income not to be reclassified to profit or loss in subsequent periods 483 127

Other comprehensive loss for the year (514) (6,808)

Total comprehensive income attributable to Bank’s equity Shareholders 42,180 40,513

Total comprehensive loss attributable to Non-controlling interests (7,775) (911)

34,405 39,602

54

2015 2014

Notes KD 000 KD 000

ASSETS

Cash and balances with Banks 10 344,455 88,983

Deposits with Central Bank of Kuwait 265,199 345,329

Deposits with other Banks 376,812 421,594

Financing receivables 11 2,680,334 2,480,431

Investments available for sale 12 139,167 150,929

Investment in associate 13 - 9,857

Investment properties 14 29,572 32,842

Premises and equipment 15 30,954 38,973

Other assets and intangibles 16 14,816 27,990

Assets classified as held for sale 21 22,994 -

TOTAL ASSETS 3,904,303 3,596,928

LIABILITIES AND EQUITY

LIABILITIES

Deposits from Banks and other financial institutions 829,989 756,737

Deposits from customers 17 2,660,629 2,453,757

Other liabilities 18 49,351 47,114

Liabilities directly associated with assets held for sale 21 3,499 -

3,543,468 3,257,608

EQUITY

Share capital 19 157,488 143,171

Reserves 19 242,627 227,654

400,115 370,825

Treasury shares 20 (43,957) (43,957)

Attributable to Bank’s equity shareholders 356,158 326,868

Non-controlling interests 4,677 12,452

360,835 339,320

TOTAL LIABILITIES AND EQUITY 3,904,303 3,596,928

Dr. Anwar Ali Al-MudhafChairman

Richard GrovesChief Executive Officer

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAs at 31 December 2015

CON

SOLI

DAT

ED S

TATE

MEN

T O

F CH

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QU

ITY

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the

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514

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111

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483

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142

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- -

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508

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08)

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- -

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201

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4,49

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(4,4

96)

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- -

- -

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Bal

ance

as

at 3

1 D

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ber

2015

157,

488

12,8

8369

,962

22,6

6011

8,18

97,

792

10,0

1497

415

324

2,62

7(4

3,95

7)4,

677

360,

835

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ance

as

at 1

Janu

ary

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130,

155

12,8

8360

,536

22,6

6010

0,95

415

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9,91

297

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3,59

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323,

155

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- 47

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47,0

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the

year

- -

- -

- (6

,718

)12

7-

96(6

,495

)-

(313

)(6

,808

)

Tota

l com

preh

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ve in

com

e (l

oss)

for

the

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r-

- -

- 47

,008

(6,7

18)

127

- 96

40,5

13-

(911

)39

,602

Div

iden

d -

2013

(N

ote

19)

- -

- -

(23,

437)

- -

- -

(23,

437)

- -

(23,

437)

Bonu

s sh

ares

issu

ed 2

013-

(N

ote

19)

13,0

16-

- -

(13,

016)

- -

- -

(13,

016)

- -

-

Tran

sfer

to

rese

rves

(N

ote

19)

- -

4,93

0-

(4,9

30)

- -

- -

- -

- -

Bal

ance

as

at 3

1 D

ecem

ber

2014

143,

171

12,8

8365

,466

22,6

6010

6,57

99,

011

10,0

3997

442

227,

654

(43,

957)

12,4

5233

9,32

0

56


2015 2014

Notes KD 000 KD 000

Operating activities

Net profit for the year attributable to the Bank’sequity shareholders 42,805 47,008

Net loss for the year attributable to non-controlling interests (7,886) (598)

Adjustments for:

Net gain on sale of investment properties (3,831) -

Net gain on sale of investments (1,365) (4,770)

Net loss on sale of premises and equipment 21 -

Share of results from associate 13 (373) (326)

Dividend income 6 (1,115) (1,346)

Net income from investment properties 6 (373) (291)

Depreciation 2,391 2,808

Impairment loss on assets held for sale 21 15,814 -

Provision and impairment losses 7 24,779 20,089

Operating profit before changes in operating assets and liabilities 70,867 62,574

Changes in operating assets / liabilities:

Deposits with Central Bank of Kuwait 40,129 (17,741)

Deposits with other Banks 113,955 (110,002)

Financing receivables (227,081) (359,185)

Other assets 1,291 2,078

Deposits from Banks and other financial institutions 73,252 56,332

Deposits from customers 206,872 360,748

Other liabilities (10) 101

Net cash from (used in) operating activities 279,275 (5,095)

Investing activities

Purchase of investments available for sale (229,250) (123,124)

Sale and redemption of investments available for sale 233,143 37,992

Purchase of investment properties (3,645) (196)

Proceeds from sale of investment properties 11,007 -

Sale/(Purchase) of premises and equipment 5,516 (2,303)

Net income from investment properties 6 373 291

Dividend from associate - 428

Dividend income received 6 1,115 1,346

Net cash from (used in) investing activities 18,259 (85,566)

Financing activities

Dividends paid to shareholders 19 (12,890) (23,437)

Net cash used in financing activities (12,890) (23,437)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 284,644 (114,098)

Cash and Cash equivalents at 1 January 268,000 382,098

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 10 552,644 268,000

CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31 December 2015

57

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

58

1. INCORPORATION AND ACTIVITIES

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

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

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

The Bank’s principal subsidiary is Kuwait and Middle East Financial Investment Company K.S.C.P. (“KMEFIC”), a company incorporated in the State of Kuwait, listed on the Kuwait Stock Exchange and engaged in investment and portfolio management activities for its own account and for clients. The Bank held 50.18% effective interest in KMEFIC as at 31 December :2014) 2015 50.18%).

The consolidated financial statements comprising the financial statements of the Bank and its subsidiary (the “Group”) were authorised for issue in accordance with a resolution of the Board of Directors of the Bank on 9 February 2016 and are subject to the approval of the Ordinary General Assembly of the shareholders’ of the Bank. The Ordinary General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance.

2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES

2.1 Basis of preparation

The consolidated financial statements are prepared under the historical cost convention except for the re-measurement at fair value of investments available for sale, freehold land, Islamic Forward Agreements and assets classified as held for sale.

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

2.2 Statement of compliance

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standard Board (“IASB”), as adopted for use by the State of Kuwait for financial services institutions regulated by the Central Bank of Kuwait. These regulations require adoption of all IFRSs except for the International Accounting Standard (IAS) 39: Financial Instruments: Recognition and Measurement requirement for collective provision, which has been replaced by the Central Bank of Kuwait’s requirement for a minimum general provision as described under the accounting policy for impairment of financial assets.

The Central Bank of Kuwait and the Bank’s Fatwa and Shari’ah Supervisory Board had approved a time frame upto 29 May 2016 to convert all remaining conventional investments and products of the Group to be vi’ah compliant.

2.3 Changes in accounting policies

The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the previous year, except for the adoption of the following new or amended IFRS applicable to the Group.

IFRS 3 Business Combinations (Amendment)The amendment is applied prospectively for annual periods beginning on or after 1 January 2015 and clarify that all contingent consideration arrangements classified as liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IAS 39. This is consistent with the Group’s current accounting policy and, thus, this amendment did not impact the Group’s accounting policy.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAs at 31 December 2015

59

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

IFRS 8 Operating Segments (Amendment)The amendments are applied retrospectively for annual periods beginning on or after 1 January 2015 and clarify that:

• An entity must disclose the judgements made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are ‘similar’

• The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities.

The Group has not applied the aggregation criteria and, thus, this amendment did not impact the Group’s accounting policy.

IAS 24 Related Party Disclosures (Amendment)The amendment is applied retrospectively and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. This amendment is not relevant for the Group as it does not receive any material management services from other entities.

IFRS 13 Fair Value MeasurementThe amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IAS 39. The Group does not apply the portfolio exception in IFRS 13.

IAS 40 Investment Property (Amendment) The description of ancillary services in IAS 40 differentiates between investment property and owner-occupied property (i.e., property, plant and equipment). The amendment is applied prospectively and clarifies that IFRS 3, and not the description of ancillary services in IAS 40, is used to determine if the transaction is the purchase of an asset or a business combination.

Other amendments to IFRSs which are effective for annual accounting period starting from 1 January 2015 did not have any material impact on the accounting policies, financial position or performance of the Group.

2.4 New and revised IASB Standards, but not yet effective

Standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are listed below. The Group intends to adopt those standards when they become effective.

IFRS 9: Financial Instruments:The IASB issued IFRS 9 - Financial Instruments in its final form in July 2014 and is effective for annual periods beginning on or after 1 January 2018 with a permission to early adopt. IFRS 9 sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non- financial assets. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The adoption of this standard will have an effect on the classification and measurement of Group’s financial assets but is not expected to have a significant impact on the classification and measurement of financial liabilities. The Group is in the process of quantifying the impact of this standard on the Group’s consolidated financial statements, when adopted.

IFRS 15 – Revenue from Contracts with customersIFRS 15 was issued by IASB on 28 May 2014 is effective for annual periods beginning on or after 1 January 2017. IFRS 15 supersedes IAS 11 – Construction Contracts and IAS 18 – Revenue along with related IFRIC 13, IFRIC 18 and SIC 31 from the effective date. This new standard would remove inconsistencies and weaknesses in previous revenue recognition requirements, provide a more robust framework for addressing revenue issues and improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The Group do not expect any significant impact on adoption of this standard.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)As at 31 December 2015

60

2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

2.5 Basis of consolidation

The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at 31 December 2015. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has:

• Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee)• Exposure or rights to variable returns from its involvement with the investee, and• The ability to use its power over the investee to affect its returns

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

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

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

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

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

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

2.6 Financial instruments

ClassificationAs per IAS 39, the Group classifies its financial instruments as “investments at fair value through profit or loss”, “loans and receivables”, “investments available for sale” or “financial liability other than at fair value through profit or loss”. Management determines the appropriate classification of each instrument at the time of acquisition. (i) Investments at fair value through profit or lossThese are financial assets that are either financial assets held for trading or those designated as investments at fair value through profit or loss upon initial recognition. A financial asset is classified in this category only if they are acquired principally for the purpose of generating profit from short-term fluctuation in price or if so designated by the management in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis. This includes all derivative financial instruments, other than those designated as effective hedging instruments. (ii)Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Cash and balances with Banks, deposits with Central Bank of Kuwait, deposits with other Banks, financing receivables, and certain other assets are classified as “loans and receivables.

On conversion to an Islamic Bank, the Bank offers Shari’ah compliant products and services such as Murabaha, Musawamah, Wakala and Ijara.


61


2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)2.6 Financial instruments (continued)

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

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

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

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

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

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

Financial liabilities include depositors’ accounts created by Murabaha, Mudaraba and Wakala contracts.

Recognition and de-recognitionA financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All “regular way” purchases and sales of financial assets are recognised on the settlement date, i.e. the date that the Group receives or delivers the asset. Changes in fair value between the trade date and settlement date are recognised in the consolidated statement of profit or loss or in the consolidated statement of profit or loss and other comprehensive income in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. A financial asset (in whole or in part) is derecognised either when: (i) the contractual rights to receive the cash flows from the asset have expired or (ii) the Group has retained its right to receive cash flows from the assets but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or (iii) the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset.

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

62


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

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

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

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

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

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

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

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

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


63


General provisionIn accordance with the Central Bank of Kuwait instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically. In March 2007, the CBK issued a circular amending the basis of making minimum general provisions on facilities changing the rate from 2% to 1% for cash facilities and 0.5% for non-cash facilities. The required rates were to be applied effective from 1 January 2007 on the net increase in facilities, net of certain categories of collateral during the reporting period.

The minimum general provision in excess of the present 1% for cash facilities and 0.5% for non-cash facilities is retained as a general provision until further directives from the CBK.

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

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

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

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

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

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

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

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

indirectly observable• Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

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

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

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

For investments in equity instruments, where a reasonable estimate of fair value cannot be determined, the investment is carried at cost.

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


64

2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)2.6 Financial instruments (continued) Fair values measurement (continued)

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

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

2.7 Islamic Forward Agreements

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

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

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

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

For the purpose of hedge accounting, hedges are classified as cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment.

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

For those contracts classified as cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised directly as other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the consolidated statement of profit or loss.

Amounts recognised as other comprehensive income are transferred to the consolidated statement of profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognised as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognised in fair value reserve are transferred to the consolidated statement of profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognised in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss.


65


2.8 Financial guarantees

In the ordinary course of business, the Group provides financial guarantees, consisting of letter of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, being the premium received, in other liabilities. The premium received is amortized in the consolidated statement of profit or loss on a straight line basis over the life of the guarantee. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amortised premium received and the best estimate of net cash flow required to settle any financial obligation arising as a result of the guarantee.

2.9 Renegotiated financing receivables

Where considered appropriate, the Group seeks to restructure past due financing receivables. This may involve extending the payment arrangements and the agreement of new financing conditions including enhancing collateral position. Management continuously reviews renegotiated financing receivables, if any, to ensure that all criteria are met and that future payments are likely to occur. Once the terms have been renegotiated, the facility is neither considered past due nor impaired.

2.10 Investment in an associate

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

Under the equity method, the investment in associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.

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

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

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

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

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

2.11 Investment properties

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

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

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


66

2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)2.11 Investment properties (continued)

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

2.12 Premises and equipment

Freehold land is initially recognised at cost and not depreciated. After initial recognition freehold land is carried at the revalued amount, which is the fair value at the date of revaluation. The revaluation is carried out periodically by professional property evaluators. The resultant revaluation surplus or deficit is recognised in the consolidated statement of profit or loss and other comprehensive income to the extent the deficit does not exceed the previously recognised surplus. The portion of the revaluation deficit that exceeds a previously recognised revaluation surplus is recognised in the consolidated statement of profit or loss. To the extent that a revaluation surplus reverses a revaluation decrease previously recognised in the consolidated statement of profit or loss, the increase is recognised in the consolidated statement of profit or loss. Upon disposal, the revaluation reserve relating to the freehold land sold is transferred to retained earnings. Buildings, other premises and equipment are stated at cost, less accumulated depreciation and impairment losses if any. Depreciation of buildings and other premises and equipment is provided on a straight-line basis over their estimated useful lives. The estimated useful lives of the assets for the calculation of depreciation are as follows:

Buildings 40 to 45 years

Other premises and equipment 2 to 5 years

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

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

2.13 Non-current assets held for sale

The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. When the Group is committed to a sale plan, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale.

Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell unless the items presented in the disposal group are not part of the measurement scope as defined in IFRS 5 Non-current Assets held for Sale and Discontinued Operations.

2.14 Intangible assets

Intangible assets acquired separately are measured at cost on initial recognition. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with indefinite useful lives are not amortised but are tested annually for impairment and adjusted for the same, if any.


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2.15 Impairment of non-financial assets

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

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

2.17 Treasury shares

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

2.18 Cash and cash equivalents

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

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

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

Once a financial instrument categorised as “loans and receivables” is written down to its estimated recoverable amount, related income is thereafter recognised on the unimpaired portion based on the original effective profit rate that was used to discount the future cash flows for the purpose of measuring the recoverable amount.


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2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)2.19 Revenue recognition (continued)

(ii) Fee and commission incomeThe Group earns fee and commission income from a diverse range of services it provides to its customers.

Fee income can be divided into the following two categories:

Fee income earned from services that are provided over a certain period of time are accrued over that period

Fee income arising from negotiating or participating in the negotiation of a transaction for a third party, are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria. (iii) Dividend income is recognised when right to receive payment is established. (iv) Rental income is recognised on an accrual basis.

2.20 Taxation

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

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

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

2.21 Provisions

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

2.22 Foreign currency

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

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

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


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2.23 Segment information

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

2.24 Contingencies

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

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

2.25 Fiduciary assets

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

2.26 Significant accounting judgement, estimates and assumptions

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

Judgements are made in the classification of financial instruments based on management’s intention at acquisition, i.e. whether it should be classified as financial assets at fair value through profit or loss or available for sale. In making these judgements, the Group considers the primary purpose for which it is acquired and how it intends to manage and report its performance.

Such judgements also determine whether the financial instruments are subsequently measured at amortised cost or at fair value and if the changes in fair value of instruments are reported in the consolidated statement of profit or loss or directly in equity. Judgements are also made in determination of the objective evidence that a financial asset is impaired. The Group treats investments available for sale as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement and involves evaluating factors including industry and market conditions, future cash flows and discount factors.

When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the income models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Any changes in these estimates as well as the use of different, but equally reasonable estimates may have an impact on their carrying amounts.

In accordance with the accounting principles contained in the International Financial Reporting Standards, management is required to make estimates and assumptions that may affect the carrying values of financing receivables, unquoted equity instruments classified as investments available for sale and intangible assets.

Estimates are made regarding the amount and timing of future cash flows when measuring the level of provisions required for non-performing financing receivables as well as for impairment provisions for investments available for sale and intangible assets. Estimates are also made in determining the useful lives of buildings and other premises and equipment and fair values of financial assets and derivatives that are not quoted in an active market.


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2. SUMMARY SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)2.26 Significant accounting judgement, estimates and assumptions (continued)

Such estimates are necessarily based on assumptions about several factors involving varying degrees of uncertainty and actual results may differ resulting in future changes in such provisions.

The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

Any changes in these estimates and assumptions as well as the use of different, but equally reasonable estimates and assumptions may have an impact on the carrying amounts of financing receivables, unquoted instruments classified as investments available for sale and intangible assets for the year.

3. FINANCING INCOME

Financing income includes interest income amounting to KD 323 thousand (2014: KD 95 thousand) received from non-converted loans and advances granted before conversion to an Islamic Bank, which represents 0.3% (2014: 0.1%) of the total financing income. Treatment of interest income is subject to resolutions of the Bank’s Fatwa and Shari’ah Supervisory Board.

4. DISTRIBUTION TO DEPOSITORS

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

5. NET FEES AND COMMISSION INCOME

2015KD 000

2014KD 000

Investment management fees 1,823 2,054

Credit related fees and commission 9,271 8,476

Brokerage fees 961 1,462

Total fees and commission income 12,055 11,992

Fees and commission expense (1,547) (1,513)

Net fees and commission income 10,508 10,479

6. OTHER INCOME2015

KD 0002014

KD 000

Dividend income 1,115 1,346

Net income from investment properties 373 291

Other income 16 117

1,504 1,754


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7. PROVISION AND IMPAIRMENT LOSSES

2015KD 000

2014KD 000

Financing receivables (Note 11) 25,185 45,161

Recoveries from written off financing receivables (2,343) (25,485)

Non-cash credit facilities (Note 11) 318 (1,941)

Investments available for sale 1,593 1,463

Investment properties (Note 14) (157) 1,100

Others 183 (209)

24,779 20,089

8. TAXATION2015

KD 0002014

KD 000

Contribution to Kuwait Foundation for the Advancement of Sciences (KFAS) 412 450

National Labour Support Tax (NLST) 1,145 1,235

Zakat 449 487

2,006 2,172

9. BASIC AND DILUTED EARNINGS PER SHARE

2015 2014

Profit for the year attributable to the Bank’s equity shareholders (KD 000) 42,805 47,008

Weighted average number of shares outstanding during the year 1,417,938,093 1,417,938,093

Basic and diluted earnings per share attributable to the Bank’s equity shareholders (fils) 30.2 33.2

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

2015 2014

Weighted average number of Bank’s issued and paid up shares 1,574,880,475 1,574,880,475

Less: Weighted average number of treasury shares (156,942,382) (156,942,382)

1,417,938,093 1,417,938,093

Earnings per share was 36.5 fils for the year ended 31 December 2014 before retroactive adjustment to the number of shares following the bonus issue (Note 19).

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


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10. CASH AND CASH EQUIVALENTS

Cash and cash equivalents included in the consolidated statement of cash flows consists of the following:

2015KD 000

2014KD 000

Cash and balances with Banks 344,455 88,983

Deposits with Central Banks and other Banks -with an original maturity of seven days or less 208,189 179,017

552,644 268,000

11. FINANCING RECEIVABLES

Financing receivables comprise Islamic Shari’ah compliant facilities extended to the customers of the Bank in the form of financing contracts. Wherever necessary, financing receivables are secured by acceptable forms of collateral to mitigate the related credit risk.

Financing receivables include loans and advances carried forward from prior periods before conversion to an Islamic Bank amounting to KD 2,008 thousand (2014: KD 3,982 thousand) which represents 0.1% (2014: 0.2%) of net financing receivables. The Bank is in the process of converting these facilities to comply with Islamic Shari’ah.

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

Retail financing

Commercial financing Total

KD 000 KD 000 KD 000

At 1 January 2015 10,486 78,952 89,438

Charge for the year (Note 7) 2,846 22,339 25,185

Amounts written off (3,734) (10,500) (14,234)

Transferred to assets classified as held for sale - (3,512) (3,512)

At 31 December 2015 9,598 87,279 96,877

At 1 January 2014 9,247 77,594 86,841

Charge for the year (Note 7) 4,670 40,491 45,161

Amounts written off (3,431) (39,133) (42,564)

At 31 December 2014 10,486 78,952 89,438

As at 31 December 2015, non-performing financing receivables on which income has been suspended from recognition amounted to KD 67,993 thousand (2014: KD 76,038 thousand).

The available specific provision on cash facilities is KD 10,456 thousand (2014: KD 13,362 thousand).

The provision charge/(recovery) for the year on non-cash facilities is KD 318 thousand [(2014: KD 1,941 thousand)]. The available provision on non-cash facilities of KD 6,058 thousand (2014: KD 5,740 thousand) is included in other liabilities (Note 18).The policy of the Group for calculation of the impairment provision for financing receivables complies in all material respects with the provision requirements of Central Bank of Kuwait. According to the Central Bank of Kuwait instructions, a minimum general provision of 1% for cash facilities and 0.5% for non-cash facilities has been made on all applicable credit facilities (net of certain categories of collateral), that are not provided for specifically.


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12. INVESTMENTS AVAILABLE FOR SALE

2015KD 000

2014KD 000

Sukuk 121,809 114,197

Equity securities and funds

- Quoted 4,572 12,587

- Unquoted 12,786 24,145

139,167 150,929

Investments available for sale include unquoted equity instruments carried at cost of KD 140 thousand (2014: KD 140 thousand).

13. INVESTMENT IN AN ASSOCIATE

The Group has 30% (2014: 30%) interest in Middle East Financial Investment Company, an unquoted company incorporated in Kingdom of Saudi Arabia engaged in investment activities.

The share in assets, liabilities and results of the associate for the year ended is as follows:

2015KD 000

2014KD 000

Share of associate’s statement of financial position:

Current assets 3,763 3,941

Non-current assetsNon-current assets

7,165 6,412

Current liabilities (403) (307)

Non-current liabilities (66) (189)

Transferred to assets classified as held for sale (Note 21) (10,459) -

Net assets - 9,857

Share of associate’s results:

Operating income 667 498

Profit for the year 373 326


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14. INVESTMENT PROPERTIES

These represents properties acquired by the Group and is recognized at cost. Investment properties were revalued by independent valuers using market comparable approach that reflects recent transaction prices for similar properties and is therefore classified under level 2 of the fair value hierarchy. In estimating the fair value of investment properties, the highest and best use of the properties is their current use. There has been no change to the valuation technique during the year. The fair value of the investment properties at the reporting date is KD 33,069 thousand (2014: KD 36,911 thousand)

Movement for the year is as follows:

2015KD 000

2014KD 000

At 1 January 32,842 33,906

Addition 3,205 196

Disposals (6,474) -

Reversal of impairment/(charge) 157 (1,100)

Depreciation charged for the year (158) (160)

At 31 December 29,572 32,842

15. PREMISES AND EQUIPMENT

Premises and equipment includes a revaluation increase of KD 483 thousand (2014: increase of KD 127 thousand) in the value of freehold land based on valuations determined by independent valuation experts. Freehold land was revalued by independent valuers using significant valuation inputs based on observable market data and is classified under level 2 of the fair value hierarchy.

16. OTHER ASSETS AND INTANGIBLES

2015KD 000

2014KD 000

Financing profit receivable 8,982 5,443

Stock exchange brokerage licence - 12,500

Positive fair value of Islamic Forward Agreements (Note 24) 591 146

Others 5,243 9,901

14,816 27,990 Stock exchange brokerage license is classified as intangible asset with an indefinite life and is transferred to assets classified as held for sale (Note 21).


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17. DEPOSITS FROM CUSTOMERS

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

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

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

Saving Investment AccountsThese are open-term deposits and the client is entitled to withdraw the balances of these accounts or portions thereof at any time.

Fixed-Term Deposit Investment AccountsThese are fixed-term deposits based on the deposit contract executed between the Bank and the depositor. These deposits mature monthly, quarterly, semi-annually, or annually.

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

Funds utilized in investments for each investment deposit are computed using ratios identified in the contracts for opening of these accounts with clients. The Bank guarantees to pay the remaining un-invested portion of these investment deposits. Accordingly, this portion is considered Qard Hassan from depositors to the Bank, on the grounds of Islamic Shari’ah.

The fair values of deposits from customers do not differ significantly from their carrying values.

18. OTHER LIABILITIES

2015KD 000

2014KD 000

Depositors’ profit share payable 9,605 9,509

Provision for staff indemnity and passage 3,196 4,783

Provision for non-cash credit facilities (Note 11) 6,058 5,740

Negative fair value of Islamic Forward Agreements (Note 24) 520 493

Account payables, accruals and others 29,972 26,589

49,351 47,114


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19. EQUITY

i) The authorised, issued and fully paid share capital as at 31 December 2015 comprises 1,574,880,475 ordinary shares (31 December 2014: 1,431,709,523 shares) of 100 fils each.

ii) The Board of Directors of the Bank has proposed bonus shares of 10 % (2014: bonus shares of 10%) and cash dividend of 5% amounting to 5 fils per share (2014: 10 fils). The proposed bonus shares are subject to the approval of the shareholders at the Bank’s Annual General Assembly. The bonus shares for the year ended 31 December 2014 were approved by the Bank’s Annual General Assembly held on 29 March 2015.

iii) The Bank is required by the Companies’ Law and the Bank’s Articles of Association to transfer 10% of the profit for the year attributable to the Bank’s equity shareholders before KFAS, NLST, Zakat and Directors’ remuneration to the statutory reserve. The Bank may resolve to discontinue such annual transfers when the statutory reserve equals 50% of the paid up share capital. The Bank has transferred KD 4,496 thousand (2014: KD 4,930 thousand) to statutory reserve. Distribution of the statutory reserve is limited to the amount required to enable the payment of a dividend of up to 5% of share capital in years when retained earnings are not sufficient for the payment of such dividend.

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

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

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

20. TREASURY SHARES

There was no purchase or sale of treasury shares during the current year.

2015 2014

Number of treasury shares 156,942,382 142,674,893

Treasury shares as a percentage of total shares issued 9.97 % 9.97%

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

Market value of treasury shares (KD 000) 81,610 88,458

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

21. ASSETS HELD FOR SALE

The board of directors of the Bank on December 2015 approved to sell its entire equity interest in a non-converted asset and recorded this as assets held for sale as per IFRS 5.

The major classes of assets of the non-converted asset held for sale comprises of investments and liabilities comprise of accruals. The non-controlling interest disclosed in statement of Financial position relates to the asset held for sale.

Fair value less cost to sell for asset classified as held for sale is lower than the carrying amount of the related assets and liabilities and therefore Group has recorded an impairment provision against the assets held for sale as at 31 December 2015 and the amount attributable to non-controlling interests is KD 7,886 thousand.Net assets classified as held for sale is after impairment provision and inter-group eliminations.


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22. TRANSACTIONS WITH RELATED PARTIES

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

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

Number of directors and executive officers

Number of parties related to directors and executive

officers Amount

2015 2014 2015 2014 2015 2014

KD 000 KD 000

Directors

Financing receivables - 1 1 3 7,425 7,993

Deposits from customers 2 3 1 4 222 1,059

Commitments and contingent liabilities - 1 1 2 3,799 3,982

Key management

Financing receivables 1 2 1 1 138 112

Credit Cards 10 11 1 1 52 64

Deposits from customers 11 11 2 2 1,062 1,049

2015 KD 000

2014 KD 000

ParentOther related parties Parent

Other related parties

Deposits with other Banks 90,165 18,546 76,221 19,422

Deposits from Banks and other financial institutions 54,917 322,024 12,375 351,634

Commitments and contingent liabilities 36,832 2,700 34,357 2,382

Islamic Forward Agreements 14,156 - 4,291 266

Transactions

Financing income 301 224 465 480

Distribution to depositors 116 4,888 94 4,126

2015KD 000

2014KD 000

Directors:

Board of Directors’ remuneration 150 122

Key management compensation:

Salaries and other short term benefits 2,191 1,599

Post-employment benefits 248 241

2,589 1,962

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


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23. COMMITMENTS AND CONTINGENT LIABILITIES

a) Credit- related commitments

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

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

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

2015KD 000

2014KD 000

Acceptances 19,276 16,800

Letters of credit 91,806 117,720

Guarantees 388,919 339,093

500,001 473,613

Irrevocable credit commitments to extend credit at the reporting date amounted to KD 8,237 thousand (2014: KD 11,287 thousand).

b) Capital commitment

The capital commitment for purchase of assets as at 31 December 2015 is KD 1,497 thousand (2014: KD 1,425 thousand).

24. ISLAMIC FORWARD AGREEMENT

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

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

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

The table below shows the fair value and notional amounts of the Waad transactions:

Assets(Positive)

Liabilities(Negative)

Less than 1 month

1 to 3 months

3 to 12 months Total

KD 000 KD 000 KD 000 KD 000 KD 000 KD 000

2015 591 520 13,294 55,886 2,337 71,517

2014 146 493 15,844 5,243 30,693 51,780

Most of the Group’s Islamic Forward Agreement relate to deals with customers, which are normally matched by entering into reciprocal deals with counterparties.


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25. FAIR VALUES MEASUREMENT

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

Fair value measurement hierarchy for assets and liabilities as at 31 December 2015 is as follows:

Level: 1KD 000

LevelKD 000

Level: 3KD 000

Total KD 000

2015

Assets measured at fair value

Financial assets

Investments available for sale 118,934 11,110 8,983 139,027

Islamic Forward Agreements

Waad - 591 - 591

118,934 11,701 8,983 139,618

Liability measured at fair value


Waad - 520 - 520

- 520 - 520

2014

Assets measured at fair value

Financial assets



Waad - 146 - 146

122,791 15,264 12,880 150,935

Liability measured at fair value


Waad - 493 - 493

- 493 - 493

Investments classified under level 1 are valued based on the quoted bid price. Equity securities and funds classified under level 2 are valued based on market multiples and declared NAV’s. Equity securities and funds classified under level 3 are valued based on discounted cash flows and dividend discount models. The movement in level 3 is mainly on account of transfer to assets held for sale. The significant inputs for valuation of equity securities classified under level 3 are annual growth rate of cash flows and discount rates and for funds it is the illiquidity discount. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value. The impact on the consolidated statement of financial position or the consolidated statement of shareholders’ equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5 per cent. There was no material changes in the valuation techniques used for the purpose of measuring fair value of investment securities as compared to the previous year.

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


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26. MATURITY ANALYSIS OF ASSETS AND LIABILITIES

The table below summaries the maturity profile of the Group’s assets and liabilities analysed according to remaining contractual maturity:

2015Up to

3 months 3 to 12 months

Over1 year Total

ASSETS

Cash and balances with Banks 344,455 - - 344,455

Deposits with Central Bank of Kuwait 150,406 114,793 - 265,199

Deposits with other Banks 376,812 - - 376,812

Financing receivables 1,460,320 627,310 592,704 2,680,334


Investment properties - - 29,572 29,572

Premises and equipment - - 30,954 30,954

Other assets and intangibles 13,248 1,556 12 14,816

Assets classified as held for sale - 22,994 - 22,994

TOTAL ASSETS 2,415,802 773,820 714,681 3,904,303

LIABILITIES

Deposits from Banks and other financial Institutions 633,862 170,814 25,313 829,989

Deposits from customers 2,142,583 500,555 17,491 2,660,629

Other liabilities 40,024 7,394 1,933 49,351

Liabilities directly associated with assets held for sale - 3,499 - 3,499

TOTAL LIABILITIES 2,816,469 682,262 44,737 3,543,468

NET LIQUIDITY GAP (400,667) 91,558 669,944 360,835

2014ASSETS

Cash and balances with Banks 88,983 - - 88,983

Deposits with Central Bank of Kuwait 208,714 136,615 - 345,329




Investment in associate - - 9,857 9,857

Investment properties - - 32,842 32,842

Premises and equipment - - 38,973 38,973

Other assets and intangibles 10,980 1,670 15,340 27,990

Total assets 2,292,370 580,674 723,884 3,596,928

LIABILITIES

Deposits from Banks and other financial Institutions 547,230 209,507 - 756,737



Total liabilities 2,482,972 761,261 13,375 3,257,608

Net liquidity gap (190,602) (180,587) 710,509 339,320


81

27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

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

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

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

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

A. CREDIT RISK

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

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

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

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

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

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


82

27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)RISK MANAGEMENT (CONTINUED)A. CREDIT RISK (CONTINUED)

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

Net maximum exposure

2015

Netmaximumexposure

2014

KD 000 KD 000

Credit risk exposures relating to consolidated statement of financial position items:

Balances with Banks 328,339 73,060

Deposits with the Central Bank of Kuwait 265,199 345,329


Financing receivables 2,680,334 2,480,431


Other assets 13,620 11,603

Assets classified as held for sale 2,937 -

3,789,050 3,446,214

Credit risk exposures relating to off - balance sheet items: (Note 23a)

Acceptances, letters of credit, and guarantees 500,001 473,613

Irrevocable credit commitments 8,237 11,287

508,238 484,900

The gross maximum credit exposure to a single client or counterparty as of 31 December 2015 was KD 45,559 thousand (2014: KD 40,518 thousand) and credit exposure net of eligible collateral to the same counterparty Nil (2014: Nil).


83


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

Assetsrepresenting

credit risk

CommitmentsRepresenting

credit risk2015

Geographic region: KD 000 KD 000

Kuwait 3,149,594 389,335

Other GCC 288,612 86,840

Europe 46,158 17,926

North America 233,719 1,314

Other countries 70,967 12,823

3,789,050 508,238

Industry sector:

Trading and manufacturing 522,821 185,603

Banks and financial institutions 1,156,529 109,456

Construction and real estate 1,331,914 148,440

Other 777,786 64,739

3,789,050 508,238

2014Geographic region:

Kuwait 3,063,525 368,768

Other GCC 229,954 86,518

Europe 29,131 8,359

North America 59,450 1,481

Other countries 64,154 19,774

3,446,214 484,900

Industry sector:

Trading and manufacturing 478,842 187,118

Banks and financial institutions 1,011,886 102,914

Construction and real estate 1,273,177 134,863

Other 682,309 60,005

3,446,214 484,900

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


84


Neither past due nor impaired (KD 000)

2015High

grade Standard

gradeClosely

monitored Total

Balances with Banks 328,339 - - 328,339

Deposits with Central Bank of Kuwait 265,199 - - 265,199



Investments available for sale 121,809 - - 121,809

Other assets 13,620 - - 13,620

Assets classified as held for sale - 2,937 - 2,937

3,518,396 123,104 66,280 3,707,780

2014

Balances with Banks 73,060 - - 73,060

Deposits with Central Bank of Kuwait 345,329 - - 345,329



Investments available for sale 114,197 - - 114,197

Other assets 11,603 - - 11,603

3,205,887 150,573 11,343 3,367,803

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

up to 60 daysPast due

61 to 90 days Total

2015 KD 000 KD 000 KD 000

Financing receivables

-Retail financing 19,625 2,736 22,361

-Commercial financing 1,372 - 1,372

20,997 2,736 23,733

Fair value of collateral 5,794

2014


-Retail financing 14,431 811 15,242

-Commercial financing 493 - 493

14,924 811 15,735

Fair value of collateral 12,937


85


Financial assets by class that are impaired:

Gross exposure Impairment provision

Fair value of collateral

2015


-Retail financing 5,413 1,905 -

-Commercial financing 62,580 8,551 109,215

67,993 10,456 109,215

2014


-Retail financing 9,917 2,107 -

-Commercial financing 66,121 11,255 125,118

76,038 13,362 125,118

The factors the Group considered in determining impairment are disclosed in Note 2 - Significant accounting policies.

Renegotiated financing receivables:The Group has not renegotiated any financial asset in 2014) 2015: Nil) that would otherwise be past due or impaired.

B. LIQUIDITY RISK Liquidity risk is the risk that the Group will be unable to meet its net funding requirements. Liquidity risk can also be caused by market disruptions or credit downgrades which may cause certain sources of funding to dry up immediately. To guard against this risk, management has diversified funding sources and assets are managed with liquidity in mind, maintaining an adequate balance of cash, cash equivalents, and readily marketable securities.

Analysis of financial liabilities by remaining contractual maturitiesThe table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted repayment obligations including profit share. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment earlier than the contractual date and the table also does not reflect the expected cash flows indicated by the Group’s deposit retention history.

Less than 1 month

KD 000

1 to 3monthsKD 000

3 to 12monthsKD 000

1 to 5 years

KD 000

Over5 yearsKD 000

TotalKD 000

2015

Deposits from Banks and other financial institutions 521,290 112,899 172,199 25,922 - 832,310

Deposits from customers 1,207,010 938,135 504,562 17,640 - 2,667,347

Other liabilities 25,342 14,682 7,394 1,933 - 49,351

Liabilities directly associated with assets held for sale - - 3,499 - - 3,499

1,753,642 1,065,716 687,654 45,495 - 3,552,507


86

27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)RISK MANAGEMENT (CONTINUED)B. LIQUIDITY RISK (CONTINUED)

Analysis of financial liabilities by remaining contractual maturities (continued)

Less than 1 month

KD 000

1 to 3monthsKD 000

3 to 12monthsKD 000

1 to 5 yearsKD 000

Over5 yearsKD 000

TotalKD 000

2014

Deposits from Banks and other financial institutions 312,926 234,726 211,775 - - 759,427

Deposits from customers 1,257,466 651,073 545,317 5,147 - 2,459,003

Other liabilities 26,543 2,637 9,703 8,231 - 47,114

1,596,935 888,436 766,795 13,378 - 3,265,544

The table below shows the contractual expiry by maturity of the Group’s credit related contingent liabilities and commitments as disclosed in Note 23:

Less than 1 month

KD 000

1 to 3monthsKD 000

3 to 12monthsKD 000

1 to 5 years

KD 000

Over5 yearsKD 000

TotalKD 000

2015

Credit related contingent liabilities 20,752 65,448 210,422 196,979 6,400 500,001

Irrevocable credit commitments - - - 37 8,200 8,237

20,752 65,448 210,422 197,016 14,600 508,238

2014

Credit related contingent liabilities 12,472 56,705 234,132 166,479 3,825 473,613

Irrevocable credit commitments - - - - 11,287 11,287

12,472 56,705 234,132 166,479 15,112 484,900

C. MARKET RISK

The Group defines market risk as the uncertainty in future earnings on the Group’s on and off balance sheet positions resulting from changes in market variables such as interest rate risk, currency risk and equity price risk.

C.1 INTEREST RATE RISK

Interest rate risk arises from the possibility that changes in interest rates will affect the value of the underlying financial instruments. The Group is not exposed to interest rate risk since in accordance with Islamic Shari’ah the Bank does not charge interest except on non-converted loans and advances. The sensitivity of net interest income for one year on these loans is not considered to be significant.

Changes in interest rates may, however affect the fair value of financial assets available for sale. Change in the interest rates by 25 basis point, with all other variables held constant will affect the equity by KD 301 thousand (2014: KD 384 thousand).


87

27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)RISK MANAGEMENT (CONTINUED)C. MARKET RISK (CONTINUED)

C.2 CURRENCY RISK

Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits.

The Group had the following net exposures denominated in foreign currencies.

The effect on profit before tax, as a result of change in currency rate, with all other variables held constant is shown below:

Effect on profit before tax

Currency

Change in currency rate

in %2015

KD 0002014

KD 000

US Dollars +5% 2 (201)

Sensitivity to currency rate movements will be on a symmetric basis, as financial instruments giving rise to non-symmetric movements are not significant. There is no significant impact on the equity.

C.3 EQUITY PRICE RISK

Equity price risk is the risk that the fair values of equity investments decrease as a result of the changes in the level of equity indices and the value of the individual stocks. The non-trading equity price risk exposure arises from the Group’s investment portfolio.

The effect on equity as a result of a change in the fair value of the equity instruments at 31 December due to a reasonable possible change in the equity indices, with all other variables held as constant is as follows:

Market indices

Changes in equity price

in % Effect on equity

2015KD 000

2014KD 000

Kuwait Index +5% 375 558

MSCI Index +5% - 138

Sensitivity to equity price movements will be on a symmetric basis, as financial instruments giving rise to non-symmetric movements are not significant.

C.4 PREPAYMENT RISK

Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate mortgages when profit rates fall. Due to the contractual terms of its Islamic products, the Bank is not significantly exposed to prepayment risk.


88

27. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)RISK MANAGEMENT (CONTINUED)

D. OPERATIONAL RISK

The Group has a set of policies and procedures approved by the Board of Directors and are applied to identify, assess and supervise operational risk in addition to other types of risk relating to the Banking and financial activities of the Group. Operational risk is managed by the Risk Management Division. This Division ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall Global Risk Management.

The Group manages operational risks in line with the Central Bank of Kuwait instructions dated14 November 1996 regarding general guidelines for internal control systems and directives issued on 13 October 2003 regarding “Sound Practices for the Management and Control of Operational Risks”.

28. SEGMENT REPORTING

The Group’s operating segments are determined based on the reports reviewed by the Chief Operating decision maker that are used for strategic decisions. These segments are strategic business units having similar economic characteristics that offer different products and services. These operating segments are monitored separately by the Group for the purpose of making decisions about resource allocation and performance assessment.

These operating segments meet the criteria for reportable segments and are as follows:

• Retail and Commercial Banking – comprising a full range of Banking operations covering credit and deposit services provided to customers. The Bank uses a common marketing and distribution strategy for its commercial Banking operations.

• Treasury and Investment Management – comprising correspondent Banking, clearing, money market, foreign exchange, sukuk, other treasury and miscellaneous operations, proprietary investment, securities trading activities and fiduciary fund management activities.

Segment results include revenue and expenses directly attributable to a segment and an allocation of cost of funds to segments based on the daily weighted average balance of segment assets.

The Group measures the performance of operating segments through measure of segment profit or loss net of taxes in management and reporting systems.

Segment assets and liabilities comprise those operating assets and liabilities that are directly attributable to the segment.

Retail and Commercial Banking

Treasury and Investment Management Total

2015 2014 2015 2014 2015 2014

KD 000 KD 000 KD 000 KD 000 KD 000 KD 000

Segment revenue 82,076 75,801 28,796 25,374 110,872 101,175

Segment result 30,166 29,463 4,753 16,947 34,919 46,410

Add: Loss attributable to non-controlling interests 7,886 598

42,805 47,008


89

28. SEGMENT REPORTING (CONTINUED)

Retail and Commercial Banking

Treasury and Investment

Management Others Total

2015 2014 2015 2014 2015 2014 2015 2014

KD 000 KD 000 KD 000 KD 000 KD 000 KD 000 KD 000 KD 000

Segment assets 2,990,296 2,793,110 845,243 736,868 68,764 66,950 3,904,303 3,596,928

Segment liabilities 2,195,277 2,054,596 1,295,341 1,155,898 52,850 47,114 3,543,468 3,257,608

The Group primarily operates in Kuwait.

29. CAPITAL MANAGEMENT

The primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong and healthy capital ratios in order to support its business and to maximize shareholders’ value.

The Group actively manages its capital base in order to cover risks inherent in the business. The adequacy of the Group’s capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision (BIS rules/ratios) and adopted by the Central Bank of Kuwait in supervising the Group.

The Group’s regulatory capital and capital adequacy ratios (Basel III) for the year ended 31 December 2015 are calculated in accordance with CBK circular number 2/RB, RBA/2014/336 dated 24 June 2014 are shown below:

2015 KD’000

2014 KD’000

Risk weighted assets 2,495,987 2,082,622

Total Capital required 311,998 249,915

Capital available

Tier 1 capital 357,304 314,685

Tier 2 capital 29,906 24,948

Total capital 387,210 339,633

Tier 1 capital adequacy ratio 14.32% 15.11%

Total capital adequacy ratio 15.51% 16.31%

The Group’s financial leverage ratio for the year ended 31 December 2015 is calculated in accordance with CBK circular number 2/BS/ 2014/342 dated 21 October 2014 is shown below:

2015 KD’000

2014 KD’000

Tier 1 capital 357,304 314,685

Total exposure 5,115,461 4,786,084

Financial leverage ratio 6.98% 6.57%


Basel III –Pillar III Disclosures

91

Basel III – Pillar III Disclosures

December, 31 2015

In accordance with Central Bank of Kuwait

(“CBK”) Rules and Regulations concerning

Capital Adequacy Standard (Basel III) vide

circular reference 2/RB,RBA/A336/2014

dated June 24, 2014

92

Information on Subsidiaries and Significant InvestmentsThe public disclosures under this section have been prepared in accordance with the Central Bank of Kuwait (“CBK”) Rules and Regulations concerning Capital Adequacy Standard (Basel III) vide circular reference 2/RB,RBA/A336/2014 dated June 24, 2014, which apply to Ahli United Bank, Kuwait (“the Bank” or “AUBK”). The disclosures under this section consist of disclosures of the Bank and its subsidiary (together known as “the Group”).

The Bank’s principal subsidiary is Kuwait and Middle East Financial Investment Company K.S.C.P. (“the Subsidiary”), a company incorporated in the State of Kuwait and engaged in investment management activities and regulated by the CBK and the Capital Market Authority (“CMA”). The Bank held 50.18% effective interest in KMEFIC at 31 December 2015 (2014: 50.18%).

The board of directors of the Bank in December 2015 approved to sell its entire equity interest in a non-converted asset and recorded this as assets held for sale as per IFRS 5.

Investments by the Bank in the Group are in accordance with the CBK instruction No.2/BSA/143/2003 on Organization of Local Bank’s Investment Policy and subsequent amendments / updates.

Information Related to the Capital Structure of the Licensed BankThe Group’s capital comprises Tier (1) capital which demonstrates the Group’s strength and includes share capital, reserves, non-controlling interest, minus the treasury shares, dividends declared, goodwill, intangible assets and investments with an ownership below 10% and above 10%, above the threshold calculation, additional tier (1) capital includes additional paid in capital and non-controlling interest and tier (2) consists of non-controlling interest and general provision up to 1.25% of the total credit risk weighted assets according to CBK rules and regulations.

The authorized, issued and fully paid share capital as at 31 December 2015 comprises 1,732,368,523 (31 December 2014: 1,574,880,475) ordinary shares of 100 fils each (31 December 2014: 100 fils each). In accordance with the CBK instruction vide circular 2/IBS/101/2003 and subsequent amendments / updates, the Group may purchase treasury shares up to 10% of the issued shares. No cash dividend is paid on treasury shares held by the Group.

The Group does not have structured or complex capital instruments which are prohibited by Islamic Shari’ah principles.

Basel III – Pillar III Disclosures

93

Information Related to the Capital Structure of the Licensed Bank (Continued)

Table 1 – Capital Structure

Details2015

KD 0002014

KD 000

Common Equity Tier 1

Paid up share capital 173,237 157,488

Minority interest in the equity of consolidated company - -

Property revaluation reserve 10,014 10,039

Cumulative changes in fair value reserve 7,792 9,011

Profit equalization reserve 2,313 2,313

Statutory Reserve 69,962 65,466

General Reserve 22,660 22,660

Other disclosed reserve 14,010 13,899

Retained earnings 93,037 77,059

Less:

Treasury shares (43,957) (43,957)

Goodwill - (1,972)

Intangible assets - (12,500)

Total Common Equity Tier 1 349,068 299,506

Additional Tier 1

Eligible non-controlling interest in consolidated subsidiaries 1,146 2,289

Total Additional Tier 1 1,146 2,289

Total Core Capital 350,214 301,795

Tier 2 capital

Eligible non-controlling interest in consolidated subsidiaries 228 458

General provision (up to 1.25%) 29,678 24,490

Total Tier 2 capital 29,906 24,948

Total Eligible Capital 380,120 326,743

Basel III – Pillar III Disclosures (CONTINUED)

94


Table 2 – Reconciliation between the statement of financial position and the regulatory capital elements – December 2015(Step1)

Details

2015KD 000

Statement of financial position as per

published financialstatement

Under regulatoryscope of consolidation

ASSETS




Financing receivables 2,680,334 *2,766,757


Investment properties 29,572 29,572

Premises and equipment 30,954 30,954

Other assets and intangibles 14,816 **37,810

Assets classified as held for sale 22,994 **-

Total assets 3,904,303 3,990,726

LiabilitiesDeposits from Banks and other financial institutions 829,989 ***-

Deposits from customers 2,660,629 ***-

Other liabilities 49,351 ***-

Liabilities directly associated with assets held for sale 3,499 ***-

Total liabilities 3,543,468 ***-

Equity

Share capital 157,488 *****173,237

Reserves 242,627 *****219,788



Non-controlling interests 4,677 ****1,374

Total equity 360,835 350,442

* Difference is due to inclusion of general provision which was deducted for the accounting consolidation.** Differences are due to inclusion of “Assets held for sale” in other exposures under regulatory reporting which was separately disclosed in the “Statement of financial position”. *** Liabilities are not considered in the capital adequacy computations under Basel III Pillar I.**** Difference is due to calculation of minority interest as per the Basel III guidelines.***** Difference is due to proposed dividends and bonus shares.


95


(Step 2)

Details

2015KD 000

Statement of financial position as per published

financial statement

Under regulatory scope of

consolidationReference

Asset

Cash and balances with Banks(a) + (b) + (c)

Cash items (a) 16,183 16,183 (a)

Bank balances with CBK (b) 47,511 47,511 (b)

Bank balances at other Banks (c) 280,761 280,761 (c)







Other assets and intangibles 14,816 37,810

Assets classified as held for sale 22,994 -

Total assets 3,904,303 3,990,726

Liabilities

Deposits from Banks and other financial institutions 829,989 -

Deposits from customers 2,660,629 -

Other liabilities 49,351 -

Liabilities directly associated with assets held for sale 3,499 -

Total liabilities 3,543,665 -


96


(Step 2 (Continued))

Details

2015KD 000


financial statement



Equity

Share capital (a) + (b)

Common Equity Tier (1) (a) 157,488 *173,237 (a)

Additional Tier (1) (b) - - (b)


Reserves (d) + (e)+ (f) + (g)+ (h)+ (i) + (j)

Statutory reserve (d) 69,962 69,962 (d)

Voluntary reserve (e) 22,660 22,660 (e)

Cumulative changes in fair value (f) 7,792 7,792 (f)

Property revaluation surplus (g) 10,014 10,014 (g)

Other disclosed reserves (h) 14,010 14,010 (h)

Profit equalisation reserve (i) - *2,313 (i)

Retained earnings (j) 118,189 *93,037 (j)

attributable to Bank’s equity shareholders 356,158 349,068

Non-controlling interests (k)+ (l) + (m)

Common Equity Tier (1) (k) 4,677 - (k)

Additional Tier (1) (l) - 1,146 (l)

Tier (2) (m) - 228 (m)

total equity 360,835 350,442

* Profit equalization reserve reclassified from “Retained earnings” and shown separately. Moreover, proposed dividends and bonus shares deducted from the “Retained earnings” and proposed bonus shares added to “Common Equity Tier (1)”.


97


(Step 3)

Common Equity Tier 1 capital

2015KD 000

Component of regulatory capital

reported by the Bank

Source based on reference of the

statement of financial position under the regulatory scope of

consolidation from Step 2

Share capital 173,237 (a)

Eligible non-controlling interest in consolidated subsidiaries - (b)

Retained earnings 93,037 (j)

Revaluation reserve 10,014 (g)

Fair Value reserve 7,792 (f)

PER belonging to Bank’s shareholders 2,313 (i)

Statutory Reserve 69,962 (d)

Voluntary Reserve 22,660 (e)

Other Disclosed Reserves 14,010 (h)

common Equity Tier (1) capital before regulatory adjustments 393,025

Treasury shares (43,957) (c)

Goodwill -

Intangible -

Total 349,068


98


Table 3 – Reconciliation between the statement of financial position and the regulatory capital elements – December 2014(Step1)

Details

2014KD 000

Statement of financial position as per published financial statement

Under regulatory scope of consolidation

ASSETS



Deposits with other Banks 421,594 *424,523

Financing receivables 2,480,431 **2,559,000

Investments available for sale 150,929 ***151,430


Investments in associates 9,857 9,857


Other assets and intangibles 27,990 ****22,054

Total assets 3,596,928 3,672,991

Liabilities

Deposits from Banks 756,737 756,737

Customer accounts 2,453,757 2,453,757

Other liabilities 47,114 47,114

Total liabilities 3,257,608 3,257,608

Equity

Share capital 143,171 *****157,488

Reserves 227,654 *****200,477



Non-controlling interests 12,452 ******2,747

Total equity 339,320 316,725

* Difference is due to reclassification of a financing facility extended to foreign financial institution from “financing receivables”. ** Difference is due to inclusion of general provision which was deducted for the accounting consolidation, reclassification of accrued profit from “Other assets” and, as mentioned above, reclassification of a financing facility extended to foreign financial institutions to “Deposits with other Banks”.** Difference is due to reclassification of accrued profit on investment in sukuks from “Other assets”.**** As mentioned above, difference is due to reclassification of accrued profit related to financing receivables and investment in sukuks to “Financing receivables” and “Deposits with other Banks”. Moreover, trading assets are not considered in the calculation of regulatory statement of financial position.***** Difference is due to proposed dividends and bonus shares.****** Difference is due to calculation of minority interest as per the Basel III guidelines.


99


(Step 2)

Details

2014KD 000

Statement of financial

position as per published financial

statement



Asset

Cash and balances with Banks (a) + (b) + (c)

- Cash items (a) 15,953 15,953 (a)

- Bank balances with CBK (b) 8,435 8,435 (b)

- Bank balances at other Banks (c) 64,595 64,595 (c)

Deposits with CBK 345,329 345,329





Investments in associates 9,857 9,857


Other assets and intangibles (d) + (e) + (f) + (g)

Trading portfolio assets (d) 14 - (d)

Goodwill (e) 1,972 1,972 (e)

Intangible assets (f) 12,500 12,500 (f)

Other assets (g) 13,504 7,582 (g)

total assets 3,596,928 3,672,991

Liabilities

Deposits from Banks 756,737 756,737

Customer accounts 2,453,757 2,453,757

Other liabilities 47,114 47,114

Total liabilities 3,257,608 3,257,608


100


(Step 2 (Continued))

Details

2014KD 000


financial statement



Equity

Share capital (h) + (i)

Common Equity Tier (1) (h) 143,171 *157,488 (h)

Additional Tier (1) (i) - -

Treasury shares (43,957) (43,957) (i)

Reserves (j) + (k)+ (l) + (m)+ (n)+ (o) + (p)

Statutory reserve (j) 65,466 65,466 (j)

Voluntary reserve (k) 22,660 22,660 (k)

Cumulative changes in fair value (l) 9,011 9,011 (l)

Property revaluation surplus (m) 10,039 10,039 (m)

Other disclosed reserves (n) 13,899 13,899 (n)

Profit equalisation reserve (o) - *2,313 (o)

Retained earnings (p) 106,579 *77,059 (p)

attributable to Bank’s equity shareholders 326,868 *313,978

Non-controlling interests (q)+ (r) + (s)

Common Equity Tier (1) (q) 12,452 - (q)

Additional Tier (1) (r) - 2,289 (r)

Tier (2) (s) - 458 (s)

total equity 339,320 316,725

* Profit equalization reserve reclassified from “Retained earnings” and shown separately. Moreover, proposed dividends and bonus shares deducted from the “Retained earnings” and proposed bonus shares added to “Common Equity Tier (1)”.


101


(Step 3)

Common Equity Tier 1 capital

2014KD 000

Component of regulatory capital

reported by the Bank

Source based on reference of the

balance sheet under the regulatory scope of consolidation from

Step 2

Share capital 157,488 (h)

Retained earnings 77,059 (p)

Revaluation reserve 10,039 (m)

Fair Value reserve 9,011 (l)

PER belonging to Bank’s shareholders 2,313 (o)

Statutory Reserve 65,466 (j)

Voluntary Reserve 22,660 (k)

Other Disclosed Reserves 13,899 (n)

Common Equity Tier (1) capital before regulatory adjustments 357,935

Treasury shares (43,957) (i)

Goodwill (1,972) (e)

Intangible (12,500) (f)

Total 299,506


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Table 4 – Main features of regulatory capital instruments

Share Capital

Issuer Ahli United Bank K.S.C.P.

Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement)

ALMUTAHED

Governing laws of the instrument

Law No. 32 of 1968, as amended, concerning currency, the Central Bank of Kuwait and the organisation of the Banking business and Companies Law No. 25 of 2012.

Type of Capital (CET1, AT1 or T2) CET1

Eligible at solo/group/group and solo Group

Instrument type Equity instrument

Amount recognised in regulatory capitalKD 173,237 thousands (2014: KD 157,488 thousands)

Par value of instrument 100 fils each

Accounting classification Equity

Original date of issuance Various

Perpetual or dated Perpetual

Fixed or floating dividend/coupon Floating

Fully discretionary, partially discretionary or mandatory Fully discretionary

Noncumulative or cumulative Noncumulative

Convertible or non-convertible Non-convertible

Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument)

Most Senior

Non-compliant transitioned features None


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Information on Licensed Bank’s Capital AdequacyThe process of assessing the capital requirements of the Group commences with the compilation of the annual business plan by individual business units which are then consolidated into the annual budget plan of the Group. The annual budget plan provides an estimate of the overall growth in assets, its impact on capital and targeted profitability which helps the Group in capital management.

Annual dividend payout, is prudently determined and proposed by the Board of Directors (“the Board”), endeavoring to meet shareholder expectations while ensuring adequate retention of capital to support budgeted growth.

The Bank seeks to maintain sufficient capital to meet its current and projected business requirements commensurate with Board approved business plans/strategic initiatives by developing/ maintaining an optimal Tier I / Tier II capital mix while having sufficient cushion over and above the mandatory regulatory minimum capital requirements set by the Central Bank of Kuwait for its operations. As per Group standards, the Bank is required to maintain at least 0.5% cushion over the regulatory minimum at all points in time.

The Group assesses the adequacy of its capital to support its current and future activities on an ongoing basis. Risk weighted assets and capital are monitored periodically to assess the quantum of capital available to support assets growth and optimally deploy capital to achieve targeted returns.

The Group regularly monitors its credit and market risks exposures, limits transactions with specific counterparties, and continually assesses the creditworthiness of counterparties to avoid any unexpected capital charge.

The Bank has been given the credit rating of ‘A2’ and ‘A+’ by Moody’s and Fitch respectively. Given the favorable ratings, the Bank is confident of meeting any additional capital requirements including resorting to eligible Shari’ah compliant instruments at competitive pricing to support any need for regulatory capital requirement and maintaining it at optimal levels.

Currently the Group’s measurement of capital requirement is based on the CBK guidelines on capital adequacy. However the Group ultimately, aims to achieve a convergence of the regulatory capital with economic capital as it adopts advanced risk measurements for performance evaluation and capital adequacy.

At 31st of December 2015, the total Capital Adequacy Ratio (CAR) 15.23% (Post dividend) (31 December 2014: 15.69%) compared to the ratio required by regulatory authorities of 12.5% (31 December 2014: 12%) and Tier (1) Capital 14.03% (31 December 2014: 14.49%) and CET1 Capital 13.99% (31 December 2014: 14.38%).

• The percentage of the total CAR is derived from dividing the Eligible Capital (CET (1) + AT (1) + Tier (2)) by the total risk weighted exposure (credit risk weighted exposure + market risk weighted exposure + operational risk weighted exposure).

• The percentage of the Tier (1) Capital is derived from dividing the core capital (CET (1) + AT 1) by the total risk weighted exposure (credit risk weighted exposure + market risk weighted exposure + operational risk weighted exposure).

• The percentage of the CET1 Capital is derived from dividing the common equity capital (CET1) by the total risk weighted exposure (credit risk weighted exposure + market risk weighted exposure + operational risk weighted exposure).

The Group ensures the fulfillment of Central Bank of Kuwait requirements in relation to capital adequacy through monitoring the internal limits which are supported by a special capital planning mechanism.


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Information on Licensed Bank’s Capital Adequacy (Continued)

Table 5 – Capital requirement for Credit, Market and Operational Risks

Standard Portfolio

2015KD 000

2014KD 000

Risk Weighted

Assets

Minimum capital

requirement

Risk Weighted

Assets

Minimum capital

requirementClaims on Banks 158,870 19,477 121,939 15,512

Claims on corporate 1,496,376 183,120 1,156,481 146,762

Claims on regulatory retail 329,343 40,193 308,420 38,995

Past due exposures 23,859 2,912 24,152 3,053

Goods & commodity other than real estate 514 63 821 104

Investments in real estate and real estate inventory

59,144 7,217 65,684 8,302

Share & commercial real estate financing 207,059 25,272 146,819 18,561

Securitized Sukuk 64,394 7,858 60,786 7,683

Other exposures 87,345 10,663 124,396 15,728

Total credit risk weighted assets 2,426,904 296,775 2,009,498 254,700

Credit risk weighted assets adjustments (65,829) (8,229) (60,379) (7,849)

Net credit risk weighted exposure 2,361,075 1,949,119

Minimum capital requirement for credit risk 288,546 246,851

Minimum market risk capital charge 187 1,700

Minimum operational risk capital charge 23,265 22,190

Total 311,998 270,741

Information Related to a Licensed Bank’s Internal Capital Adequacy Assessment Process (ICAAP)The Board and Senior Management take active interest in the overall capital adequacy assessment process. The Bank takes reasonable care in organizing and controlling its affairs responsibly and effectively. This is supported by adopting risk management systems in line with industry best practices and maintaining adequate financial resources.

Internal Capital Adequacy Assessment Process (ICAAP) provides the foundation as to how the Bank internally assesses the capital requirements of the Bank. It is intended to:• Determine the level of capital required to support the risk profile of the Bank over and above the minimum capital adequacy

required by the Central Bank of Kuwait;• Assess the additional risks under Pillar 2 and correspondingly required capital to cover those risks• Stresses Bank’s exposure to risk areas under Pillar 1 (Minimum Capital Requirements) and those under Pillar 2 (Supervisory

Review Process);• Assess available risk mitigation techniques and their impact on gross exposures;• Help in capital and liquidity planning to support current and future capital and funding requirements vis-à-vis business growth

targets;• Provide robust management information system regarding coverage, scenarios and key assumptions used, segregation of roles,

independent review, reporting the outcome and periodicity of such reporting; and• Provide a guidance in the business decision-making process vis-à-vis capital adequacy requirements and its impact.


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Information Related to a Licensed Bank’s Internal Capital Adequacy Assessment Process (ICAAP) (Continued) The Bank’s ICAAP comprises a comprehensive analysis of the Bank’s key risks. Below are the key risks that form part of the Bank’s ICAAP under Pillar 1 and Pillar 2:

Risks covered under Pillar 1 (impact on profit & loss)• Credit Risk• Operational Risk• Market Risk

Risks covered under Pillar 1 (impact on equity)• Investment Risk

Risks Covered Under Pillar 2 (impact on risk-weighted assets)• Credit Concentration Risk - Group exposure - Sectorial exposure• Underestimation of Credit Risk• Residual Credit Risk due to Standardized approach• Fraud Risk• Profit Rate Risk • Liquidity Risk• Residual Market Risk• Legal Risk• Regulatory & Shari’ah Non-compliance Risk• Reputational Risk• Strategic Risk

The stress testing under the Bank’s ICAAP Policy is to determine the Bank’s financial position under severe but plausible scenarios. Stress testing also provides an indication of the appropriate level of capital necessary to ensure the economic viability of the Bank in the face of deteriorating business conditions. ICAAP is an ongoing process and reviewed by management on a semiannual basis.

Stress Testing

Stress testing and scenario analysis are essential tools that the Bank employs for its capital management and planning as well as risk management process.

Stress testing is an evaluation of the Bank’s financial position under severe scenarios that try to capture potentially adverse conditions. It covers a range of risks and business areas, including at the Bank-wide level and the wider environment within which the tests are developed, evaluated and used within the decision making process. Consequently it alerts the Bank’s management to adverse unexpected outcomes related to a variety of risks and provides an indication of how much capital might be needed to absorb losses, should economic shocks occur.


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Information Related to a Licensed Bank’s Internal Capital Adequacy Assessment Process (ICAAP) (Continued)

Stress Testing (Continued)

In consultation with the Board of Directors and Senior Management, the process takes into account the following major considerations, which are then communicated across all the business units. These include the following:• Risks that the Bank is and may be exposed to as well as assessment of adequacy of compensating control processes• Assessment of business conditions prevailing in the markets, including marketing practices, level of competition and consumer

preferences• Assessment of the legal and regulatory environments pertaining to the business activities and sources of financing• Short-term and medium-term business plans and strategies to achieve such plans• Assessment of the level of capital required to protect the Bank against anticipated as well as unanticipated business risks• Sources of capital• Profit distribution• Supplementary funding

While stress tests provide an indication of the appropriate level of capital necessary to endure deteriorating economic conditions, the Bank alternatively employs other actions in order to help mitigate increasing levels of risk. In this connection, stress testing is a supplementary tool to other risk management approaches and measures.

Information Related to a Licensed Bank’s Risk ManagementThe Bank maintains a strong risk management culture and manages the risk / reward relationship within and across each of the major risk-based lines of business. The Bank continuously reviews its risk management policies and practices to ensure that it is not subject to large asset valuation and earnings volatility. Stress testing is also conducted on a periodical basis to sensitize the secured exposures with Real Estate and Shares, along with a comprehensive sensitization of the portfolio in relation to stress scenarios. The Board, senior management, risk officers, and line managers contribute to effective Bank wide risk management. The Board defines its expectations, and through its oversight determines its accomplishment. The Board also has ultimate responsibility for risk management as they set the tone and other components of an enterprise-wide risk management framework. Risk officers have the responsibility for monitoring progress and for assisting line managers in reporting relevant risk information. The line managers are directly responsible for all business booked in their respective domains. The effective relationship between these parties significantly contributes to the improvement in the Bank risk management practices as this leads to the timely identification of risk and facilitation of appropriate response.

The Risk Management Division (RMD) structure has a distinct identity and independence from business units. RMD is headed by “General Manager – Risk Management” reporting to the Board’s Risk Committee. The division is comprised of the following units to address the pertinent risk exposure of the Bank:• Credit risk;• Market & operational risk;• Risk management;• Credit control.

RMD’s main responsibilities are to:

1- Evaluate and analyze the Bank wide risk profile by developing risk monitoring techniques;2- Set up and develop criteria for defining the Bank’s risk threshold in terms of various risk;3- Develop and establish tools for the measurement of the Bank’s various risk types; and4- Recommend appropriate strategies / actions for mitigating risk and ensuring a sound risk asset structure for the Bank.


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Information Related to a Licensed Bank’s Risk Management (Continued)

The following committees have the overall responsibility and authorities vested in them for the day-to-day risk management activities of the Bank. Authorities vested in the committees are exercised within the objectives and policies approved by the Board, and subject to the rules and regulations laid down by the CBK.

1- Board Risk Committee (BRC) to assist the Board of Directors of the Bank in fulfilling its oversight responsibilities related to present and emerging risk issues, strategies and appetite associated with the Bank’s Banking and credit activities including the investment portfolio. BRC recommends to the Board the risk management policies and framework, ensures adherence to the risk appetite policy and provide oversight on major risk categories.

2- Executive Committee (EC) to assist the Board in discharging its responsibilities in two capacities, deputizing between Board meetings on matters normally reserved to the Board’s own decision and discharging responsibilities delegated by the Board including credit, investment, liquidity and market risks, in excess of limits assigned to other committees.

3- Shari’ah Supervisory Board (SSB), whose members are assigned by the General Assembly, supervises and controls the validity of the Group’s activities to ensure that they comply with principles and rulings of the Islamic Shari’ah, and provides its recommendations. It has the right to submit written objections to the Board of Directors with respect to any of the Group’s activities which it considers non-compliant with any of the principles and rulings of the Islamic Shari’ah.

4- Senior Credit Committee (SCC) approves risks in excess of limits assigned to individual executives or other committees, within the set parameters by the Board. The committee likewise reviews Bank and country exposures and makes appropriate recommendations to the Board, where needed.

5- Credit Committee (CC) reviews and approves credit proposals which exceed individual credit authority limits, within the set parameters by the Board, provided the proposal meets the Bank’s credit criteria requirements.

6- Credit Classification and Evaluation Committee (CCEC) studies and evaluates classified accounts and the Bank’s over-all financing portfolio including investments and determines an appropriate provisioning level.

7- Assets and Liabilities Committee (ALCO) meets periodically to review and approve strategies relating to the management of assets and liabilities including liquidity, profit rate, foreign exchange, cost of funds, cost allocation, deposit pricing matrix and strategic trading positions.

8- Risk Management Committee (RMC) reviews the effectiveness of the Bank’s overall risk management processes and procedures, amendments to the credit risk, market risk, operational risk and treasury policies, new products and information technology security, procedures, processes and framework. It also monitors compliance with financial regulatory ratios, corporate legislations and recommends to the Board, changes in the Bank’s policies and methodologies needed to identify, measure, manage and monitor the multiple dimensions of risks inherent in the Bank’s business activities.

The risk management function of the subsidiary is managed by its independent Board of Directors and Senior Management. The Bank’s nominee directors on the Board of Directors of the subsidiary through its oversight manage and monitor the risk management activities of the subsidiary.

The following sections below, detail the risks inherent in the activities undertaken by the Bank, their nature and approach adopted towards management / mitigation of these risks.


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Strategic Risk

The Bank defines strategic risk as the current or prospective impact on Bank’s earnings, capital, and risks arising from changes in environment the Bank operates in, from adverse strategic decisions, improper implementation of decision or lack of responsiveness to industry strength, economic direction or technological changes. In this regard the Bank has put in place strategic risk framework to identify, measure, monitor and report strategic risk exposures. For the purposes of strategic risk the sources of risks are from

• Inadequate strategic governance framework;• Inadequate identification of factors that impact the strategy and/or business plans;• Insufficient planning and resource allocation process;• Failure in execution of plans, projects and initiatives; and• Issues related to environment dynamics – internal and external including products, services and practices of the Bank.

Strategic risk will be primarily assessed in terms of the controls available to mitigate such risks and the Bank’s ability to successfully implement its goals under its long term strategic plan. Matrices have been developed to monitor and measure through a score card process to assess strategic risks on strategic plan, and consider whether the Bank has adequate capacity to withstand those risks against stated / approved risk appetite. Capital is assessed based on metric score taking into account all strategic initiatives that impact the business and earnings through a self-assessment exercise.

Financing Risk

Financing risk is the risk that one party to a financial instrument will fail to discharge an obligation on time and in full as contracted and cause the other party to incur a financial loss. Financing risk includes the major risks mentioned below:

Direct Financing RiskThe risk that actual customer obligations will not be repaid on time. Direct financing risk occurs in various Islamic products offered by the Bank, both secured and unsecured. It exists for the entire life of the transactions.

Contingent Financing RiskThe risk that potential contingent obligations will become actual obligations and will not be repaid on time. Contingent financing risk occurs in products offered by the Bank ranging from letters of credit and guarantees to unused financing commitments. It exists for the entire life of the transaction.

Issuer RiskThe risk that the market value of a security or other financing instrument may change when the perceived or actual financing standing of the issuer changes thereby exposing the Bank to a financial loss. It is interrelated to price risk.

Pre-Settlement RiskThe risk that a counter-party with which the Bank trades may default on a contractual obligation before settlement of the contract.

Settlement RiskThe risk occurs when the counter-party fails to settle the transaction on settlement date.

The Bank’s Financing Policy aims to promote a strong financing risk management architecture that includes financing policies, procedures and processes. The policy defines the areas and scope of financing activities undertaken by the Bank and its main goal is not simply to avoid losses, but to ensure achievement of targeted financial results with a high degree of reliability in an efficient manner. The Bank’s financing risk management focuses on the dynamic and interactive relationship between three financing extension processes.


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Financing Risk (Continued)

Portfolio Strategy and PlanningThe portfolio strategy and planning phase defines desired financial results (in each Business Unit and for the Bank) and the credit standards required to achieve them. Business strategies integrate risks and meet defined hurdles for risk-adjusted return on capital. Facility structure translates this risk-conscious business strategy into terms and conditions that mitigate risk. Portfolio management establishes composition targets, monitors the results of these diverse business strategies on a continual basis, and allows the Bank to manage concentrations that can result from seemingly unrelated activities. Specifically, portfolio management involves setting concentration limits by standard dimensions so that no one category of assets or dimension of risk can materially harm the overall performance of the Bank.

The Risk Management and Senior Management, on monthly basis reviews portfolio concentrations in terms of geographical concentrations, individual economic sectors and credit risk rating to ensure that there are no undue concentrations in one sector or risk rating, and that the limits are within those set out by the Bank. These reports are submitted to the Board on quarterly basis.

The Approving bodies (EC, SCC and CC) approve Bank-wide portfolio credit concentration limits to corporate or individual counterparties based on the Bank’s overall risk capacity, capital considerations, and assessment of the internal and external environments. The Bank’s credit exposure to individuals or group of counterparties is in accordance with the CBK instructions BS/101/1995 on Maximum Credit Concentration Limits and subsequent amendments / updates.

The process of periodic review and approval of country and Bank limits is done within the Bank. The approved limits are then segregated sector wise, which cover Commercial Banking, Treasury and Investments.

A summary of Bank wide risk exposure incorporating all the above concentration limits plus discussion on past due, non performing financing (NPFs), collateral concentration, funding profile, capital adequacy and other risk management initiatives are reviewed by the Senior Management and Group Risk on monthly basis and reported to the Board on quarterly basis.

Financing Origination and MaintenanceIn the Financing origination and maintenance phase, each Business Unit solicits, evaluates and manages credit according to the strategies and portfolio parameters established in the portfolio strategy and planning phase. Transactions are generated within well-defined target market criteria, product structure and are approved on risk-adjusted basis through the use of risk rating models.

The Bank uses a Credit Risk Rating (“CRR”) model using Moody’s system to assess the credit worthiness of borrowers. The Financing risk measurement methodology is geared towards measuring Financing risk for corporate and private Banking portfolio in a scale of 1 to 10 which meets the requirements of Bank for International Settlements (BIS). Risk ratings 1 to 6 for performing assets; and risk rating 7 to watch list accounts while ratings from 8 to 10 for classified accounts.

Financing maintenance involves processes to control documentation and disbursement, monitor timely repayment, value collateral and review the status of exposures. Within this phase, origination and underwriting for distribution to investors take place. All financing proposals are reviewed independently by Credit Risk before proposals are sent for approval. A Post Fact Approval Unit independently reviews Financing approvals to ensure that the approvals are consistent with policy and that all covenants of the approvals are met prior to disbursement of proceeds and throughout the tenure of the Financing facilities.


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Financing Risk (Continued)Financing Origination and Maintenance (Continued)

Financing maintenance also includes early problem identification and remedial management of troubled exposures. The Special Asset Management Unit established within Risk Management Division provides a more focused attention to irregular and delinquent accounts. The primary objective of the unit is to develop effective strategies in order to either rehabilitate or restructure impaired financing.

During any financial crisis, the Bank constantly reviews the entire Financing portfolio and conduct stress tests in order to provide senior management with clear indication of the composition, maximum exposure at risk, overall Financing quality as well as identifying potential signs of weaknesses. As a result, the Bank is able to take timely and appropriate courses of action.

For secured Financing exposure, the collateral valuation is updated in robust manner. Quoted securities are independently valued on a daily basis while the most recent independent valuation for other securities, including real estate, is obtained. Whenever a gap in minimum-security coverage is identified, the concerned counterparty is asked to provide collateral top-up and/or reduce the outstanding exposure to comply with the minimum-security requirement. For unsecured exposure, selected counterparties are requested to provide acceptable collateral. While structuring Financing facilities, the Bank ensures that financing exposure will be repaid from clearly identifiable and unencumbered sources of repayment.

Performance Assessment and ReportingThe performance assessment and reporting phase allows both the Senior Management and Business Units to monitor results and improve performance continually. Both portfolio and process trends are monitored in order to make appropriate and timely adjustments to business strategies, portfolio parameters, and financing policies and credit origination and maintenance practices. This phase of the credit process draws on information within the Bank and external benchmarks to help evaluate performance.

Credit performance is assessed through analysis of:

1- Portfolio concentrations by obligor, industry, risk rating, tenor, product, collateral and other dimensions2- Credit quality indicators3- Exceptions to risk acceptance criteria4- Other policy exceptions

The Bank has adopted an internal account profitability model (APM) to determine the profitability of corporate and private Banking accounts. The methodology is based on the risk-adjusted return on capital (RAROC).

In addition, periodic review of both portfolio and process are performed by the Business Units as well as by Risk Management and Audit Division.

In accordance with the instructions of the CBK dated 18 December 1996, setting out the rules and regulations regarding the classification of financing facilities, the Bank has a Credit Classification and Evaluation Committee which is composed of senior management. The committee studies and evaluates existing financing facilities of each customer of the Bank, and identifies any abnormal situations and difficulties associated with a customer’s position which might cause the debt to be classified as irregular and to determine an appropriate provisioning level.

Market Risk

The Bank defines ‘Market risk’ as the uncertainty in future earnings, of the Bank’s on and off Balance Sheet positions, resulting from changes in market conditions i.e. changes in prices of assets, currency rates and profit rates. Market risk pertains to the profit, equity, foreign exchange and commodity risks in the Bank’s trading and Banking books.

Market Risk Management addresses the following areas: • Quantitative parameters that define the acceptable level of market risk;• Authorized instruments and hedging policies for managing risk exposures; and• Exposure limits.


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Market Risk (Continued)

Risk Exposure ReportingRisk Management Division submits on monthly basis the risk exposure report to senior management.

Periodic Stress TestingRisk Management Division, on regular basis, prepares the stress test report covering the trading book, profit rate risk in the Banking book and liquidity risk. This exercise is conducted in order to assess the Bank’s exposure to certain stress scenarios.

The Market Risk Management policy covers the following broad areas:Profit rate risk management in the trading book and Banking book;The Bank assesses its profit rate risk in the balance sheet through gapping analysis based on the re-pricing mismatches of assets and liabilities. Given the Islamic nature of Bank’s Assets and Liabilities there is no significant exposure to profit rate risk in the Banking Book.

Profit rate risk also arises when fixed-income investments are present valued against changing profit rate curves. Bank faces this risk if profit rates increase – resulting in a negative valuation impact on fixed-income investments i.e. Sukuks.

Foreign exchange risk management in the trading book and Banking book;Foreign exchange risk in the Banking book arises from a currency mismatch between the Bank’s assets and liabilities. The Bank views itself as a Kuwaiti entity with Kuwaiti Dinars as its functional currency. Conventional methods such as limiting the net open positions, are used to manage any significant risk in other currencies. Assets carried at fair values that are not denominated in Bank’s functional currency are hedged using non-derivative Islamic financial liabilities for foreign currency risk, such as borrowing foreign currency to fund respective foreign currency assets.

Risk Management Division monitors the various foreign exchange limits (overnight, forward gap, stop loss, etc.) on daily basis and the report summarizing all these are presented to ALCO on regular basis.

Equity risk management in the trading book and Banking book;Equity price risk arises from the changes in fair values of equity investments. Values of individual securities can fluctuate in response to a variety of factors, other than movements in the profit or exchange rates. For example market valuations of equity securities may respond to factors such as operating results of the company, rights issues, key corporate decisions, changes in credit ratings of the securities and other market changes.

The Bank does not have any exposure in equities in trading book. Equity risk in the Banking book is mitigated through diversification of investments in terms of risk sector, geography, equity issuer, beta and other market dynamics.


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Liquidity risk

The Bank defines liquidity risk as its ability to meet all present and future financial obligations in a timely manner and without undue effort and cost.

The following key factors are taken into consideration while assessing and managing the liquidity risk of the Bank:

• The Bank keeps a well-diversified base for funding sources comprising a portfolio of retail customers, large corporate and institutions, small and medium enterprises, high net worth individuals without significant correlation or concentrations thereby diversifying the funding base and mitigating concentration risks.

• The past behavioral pattern analysis of Bank’s main liabilities, management expects large portion of our customers deposits to be rolled over at contractual maturity.

• As per Central Bank of Kuwait rules and regulation the Bank keeps at least 18% of its deposits in qualifying short term liquid assets.

• Commitments for financing are approved after taking into account the Bank’s overall liquidity position• Bank calculates its high quality liquid assets against net cash outflows in 30-days as part of CBK’s newly introduced Liquidity

Coverage Ratio (LCR).

In application of the general guidelines highlighted above, the Bank maintains, reviews and reports the following:• A liquidity gapping report is likewise prepared following the CBK guidelines which show periodic and cumulative net outflows

between asset and liability run-off profiled in terms of their contractual maturities.

• A monthly liquidity report is submitted to senior management. This report summarizes the 8-week liquidity forecast taking into account the behavioral adjustments, duly approved by ALCO, and presents different scenarios for efficient management of liquidity risk.

In order to supplement the existing liquidity risk monitoring reports, a set of liquidity ratios, are monitored on a regular basis to manage liquidity funding profile of the Bank.

A liquidity contingency plan to address systemic and localized liquidity emergencies is reviewed periodically to ensure that it is kept up to date and in line with the business continuity plan.

Bank is also producing short-term and long-term Basel III liquidity ratios of LCR and Net Stable Funding Ratio (NSFR) on quarterly basis. Short-term ratio assesses Bank’s ability to sustain liquidity stress in the next 30-day time period.

Bank is also preparing and submitting reporting on LCR to Central Bank of Kuwait on monthly basis. NSFR reporting will be prepared and submitted to CBK from 2016.


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Liquidity risk (Continued)

Table 6 – Maturity analysis of liabilities

2015KD 000

Standard Portfolio Up to 3 Months 3 to 12 Months Over 1 Year Total

Deposits from Banks and other financial institutions

633,862 170,814 25,313 829,989



Liabilities directly associated with assets held for sale

- 3,499 - 3,499

Total 2,816,469 682,262 44,737 3,543,468

2014KD 000

Standard Portfolio Up to 3 Months 3 to 12 Months Over 1 Year Total

Deposits from Banks and financial institutions

547,230 209,507 - 756,737

Deposit from customers 1,906,562 542,051 5,144 2,453,757


Total 2,482,972 761,261 13,375 3,257,608

Operational Risk

The Bank defines operational risk as the risk of direct and indirect loss resulting from inadequate or failed internal processes, people or systems or from external events. This definition clearly includes disaster recovery planning as a function of operational risk management. It is for this reason that the Bank finds it prudent to include the same consideration, namely, unexpected significant and unusual one-time events, such as disaster events in its framework for operational risk management.

The Bank’s conversion to an Islamic financial institution has brought with it the added risk of non-compliance with Shari’ah principles. To address this risk, the Bank went through an enterprise wide assessment of potential risks, came up with robust control processes, updated the policy and procedures documents and educated the staff on the Islamic products, processes and systems. These were complemented by the establishment of the Shari’ah Board to ensure that the Bank’s activities comply with the principles and rulings of the Islamic Shari’ah.

The operational risk management framework provides the Bank with the foundation for a comprehensive and an effective operational risk management program with the following major objectives:

1) Provide a clear understanding throughout the Bank of what constitutes an operational risk event;2) Promote communication among senior management and risk taking units on various elements that impact operational risk,

thereby clarifying accountability; and3) Systematically track relevant operational risks by business lines across the Bank and build up an operational loss database.


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Operational Risk (Continued)

The framework likewise outlines Bank-wide principles of how operational risk is to be identified , assessed, monitored and controlled/ mitigated and has the following core elements:

• Operational Risk Policies and procedures – the Bank has Operational Risk policies and procedures which are being updated on periodic basis;

• Operational Risk Management – the Bank has outlined the process of identifying, assessing, monitoring and mitigating operational risks. The process helps to identify inherent and residual risks and controls;

• Loss Recording Policy – The Bank has the process of recording all actual losses and near miss events as per the BASEL accord;• Reporting – Operational Risk Management submits reports to Board sanctioned committees and Senior Management highlighting

their analysis, thus enabling these committees and Senior Management to take risk based business decisions;• New Products/ Process/ System Changes – All the new products, processes, and any significant change in the existing process

and change in system will be reviewed by Operational Risk;• Business Continuity Management – Business Continuity Plans have been designed, developed and implemented for all business

units to recover all critical business functions at the time of disaster scenarios. Business Impact Analysis has also been done on an yearly basis to identify all the critical processes in the Bank and critical resources to recover the processes and critical systems;

• Risk Awareness – The Bank is committed to train its employees on Operational Risk Management to ensure all employees are able to understand and identify operational risk in their respective business areas; and

• Outsourcing – An integral part of Operational Risk management is associated with oversight on outsourcing of services. Operational Risk management and concerned business units evaluate all the risks associated with such outsourcing and ensure proper risk mitigation.

The Bank defines “contingency planning”, Disaster Recovery Plan (DRP) and Business Continuity Plan (BCP) as the process of identifying critical information systems and business functions and developing plans to enable those systems and functions to be resumed in the event of a disruption.

Business Impact Analysis (BIA) is being performed to assess the critical functions in the Bank and plans are being developed accordingly to ensure we recover all such identified critical processes at the time of Disaster.

Bank performs regular testing to ensure that contingency plans are effective. During the testing process, management verifies that the business unit plans complement the information systems plans that are in effect for mainframe functions.

The Bank’s DRP, in its entirety, constitute four critical factors, namely (a) Technical DRP, (b) Business Continuity Plans, (c) logistical requirements in the event of a disaster and (d) procedures to be followed to activate during the implementation of the DRP. Integral to the DRP is the assignment of key individuals who will be tasked to trigger and oversee the DRP until the Bank regains normal operations.

The Technical DRP is the foundation on which the remaining three factors have been built up e.g. the business continuity plan or recovery process is developed, reviewed and updated based on the progress in the technical disaster recovery front. In case of disaster at Head Office, all the data is replicated at DR site on real-time basis.

The Bank has been conducting periodic DRP tests wherein all the critical units operates from the BCP site and recover critical functions. In addition Bank also performs “data integrity” and branch “off-host” tests. The “off host” tests are conducted for all branches on regular basis. All “off host” transactions posted by the branches are accepted as soon as the system is shifted back to “on-host” mode. The data integrity test is also conducted at the Disaster Recovery Site at regular intervals. The results of both “off-host” and “data integrity” tests have been found to be satisfactory.

BCP procedures are updated regularly in line with any technical changes implemented by IT. The exercise also requires the end users to accomplish a “business impact analysis” to assess and support business continuity in the end-users’ respective areas.

The above operational risk initiatives comply in all material respects with the CBK instructions dated 14 November 1996 regarding general guidelines for internal control systems and directives issued on 13 October 2003 regarding “Sound Practices for the Management and Control of Operational Risks”.

Moreover, the Bank conducted fire drills intended to meet any contingency. The results of these tests were very satisfactory.


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Reputation Risk

Reputation risk is defined as the risk of current or prospective negative impact on the Bank’s earnings or capital arising from damage to the Bank’s reputation in the perception of major stakeholders. The Bank seeks to manage its reputation risk through:

• Identifying key reputation risk indicators under each drivers;• Establishing the roles and responsibilities of different entities in the reputation risk assessment and management process; and• Developing a formalized and structured approach for managing reputation risk of the Bank.

The Bank has identified various reputation risk indicators and has classified them under 12 drivers. These Key Risk Indicators (KRI) are managed under customer satisfaction, financial soundness, corporate governance, management integrity, business practice, risk management and control environment, regulatory compliance, transparency, media and rumors, corporate culture, staff competence and crisis management. These parameters are used for assessing and managing reputation risk.

Data Security Management

Data Security is a fundamental element in the Bank’s overall posture; breaches in security often pose an immediate threat. Lapses in data security could result in breaches of privacy, theft or corruption of information, contamination of programs and theft of resources or assets. An unsecured network may allow access to sensitive information (e.g., personnel, financings, or payroll records, customer information). In order to safeguard the Bank from the various security threats a robust information security program has been established. A few of the core elements are discussed below:

• The Bank has deployed a well-defined information security framework (Policies, Procedures, Processes, Guidelines), which forms the basis for protecting critical information. The policy is circulated to employees, third party vendors, partners and others to demonstrate that the Bank takes the security of data seriously. The Bank’s main statement of policy is to implement a secure information system by identifying the responsibilities at every level of information handling i.e. from data ownership (encoding) to data access.

The comprehensive Information security framework and policy covers not only the technical aspects of security, but also defines how Bank employees should treat sensitive information, this is to ensure:

1) Data confidentiality 2) Availability of resources3) Data integrity

• Well defined baselines are in place to handle core infrastructure including but not limited to firewalls, Intrusion Detection and Prevention, network devices, servers. These baselines identify the minimal configurations required to ensure security.

• To ensure the integrity of critical systems the Bank maintains change management procedures in addition to audit logs.

• Configuration assessment, periodic vulnerability assessment and penetration testing (internally and externally) on infrastructure components are carried out to ensure that the Bank maintains a good security posture.

• The Bank analyzes network traffic to important critical servers and network devices on daily basis and proactively blocks any suspicious activity to ensure that any unseen security risks are controlled.

• The Bank also provides security guidelines on Banking projects to establish an equitable and standard approach.

• Periodic audits are conducted to ensure compliance with the information security framework set by the Bank.

• In the area of Payment Cards security, the Bank attained PCI-DSS certification and is recertified annually.

•The Bank achieved ISO27001:2013 certification and is recertified annually.

•Periodic security awareness for the new joiners and current staff.


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Legal and Compliance

Legal risks represent the possibility of incurring a monetary loss as a result of an inability to enforce contracts / agreements signed by the Bank due to faulty documentation or improper drafting. As a general rule, the Bank ensures that counterparties and customers have legal and necessary authorities to engage in contracts and transactions with the Bank and that obligations arising from these transactions are enforceable.

Legal Division ensures that the Bank is compliant with all legislation applicable to the Bank’s business activities. Meanwhile, the Compliance Unit ensures that the Bank is compliant with all the requirements of CBK and any other legislative party, to which the Bank is held responsible to directly communicate or report. Part of the Compliance Unit’s main responsibilities is to comply with the CBK’s instruction regarding combating money laundering and terrorist financing. Policy and procedures manual are updated on regular basis and regulatory reporting is conducted and delivered within the appropriate time frames.

The Bank, whenever required, follows international standards and adopts best market practices when it comes to risk management activities. RMD stays aware of developments both within the organization as well as in the marketplace to ensure that the Bank may quickly adapt its risk management policies for any significant changes. The risk control programs are periodically benchmarked against regulatory standards and industry best practices.

Whilst the Bank adheres to the regulatory standards and best market practices, it also recognizes the fact that the myriad of risks, affecting different parts of the Bank’s risk-taking activities is continuously evolving. The biggest challenge, therefore, is keeping the information updated and relevant to facilitate better understanding of risk and effective response. To this end, RMD periodically performs a re-evaluation of significant risk management policies and procedures and develops action plans to correct any weaknesses. This also ensures that the Bank moves further along the continuum in terms of sophistication and analytical tools with respect to each of the risk dimensions.

Information Related to a Licensed Bank’s Counterparty Credit RiskThe Bank faces Counterparty Credit Risk (“CCR”) in terms of FX Waad Contracts, where the mark-to-market could be on either side.

In order to cover CCR, the Bank has setup FX limits for clients as well as Banks. Setting up limits is based on usual limit setting process of financial review, past history, transaction requirements and other credit worthiness criteria.

The Bank actively monitors all those FX Waad contracts based on valuation on forward points and uses Credit Value Adjustment (CVA) based on standardized approach as per CBK guidelines to account for potential counterparty credit deterioration. The Bank has setup thresholds where counterparty negative mark-to-market is compared with FX limit as well as transactional FX amount.

A daily monitoring of the Bank’s exposure to counterparties against approved limits and tenor is presented to senior management. The Bank periodically reviews the latest available quantitative and qualitative information on the counterparties and based on the findings, limits and tenor are adjusted accordingly.


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Information Related to a Licensed Bank’s Counterparty Credit Risk (Continued)

Waad transactions are reported gross and there are no netting arrangements or collaterals.

The table below shows the fair value and notional amount of the Waad transactions:

Table 7 – Waad

Statement

2015KD 000

2014KD 000

Assets(Positive)


Notional amount

Assets(Positive)


Notional amount

Waad 591 520 71,517 146 493 51,780

Information Related to a Licensed Bank’s Investment & Finance Exposures

Credit Risk Management

The objective of Credit Risk Management is to establish and maintain a performing financing portfolio that minimizes the incidence of customer default. The process of risk management begins with the relationship manager who is responsible to assess the markets in which the customer operates and evaluate their credit requests before recommending the same to the respective approving authorities. The Board of Directors determines the authorities for various approving levels including Executive Committee, Senior Credit Committee and Credit Committee. In AUB, credit decisions are taken, based on an overall assessment of the customer’s profile primarily relating to its ability to service the due obligations. Collateral is taken as security to mitigate loss in the event of a default by the customer.

All the applications including consumer financing, are reviewed independently in the business before being submitted to the risk management department for assessment and recommendation. The Credit Committee deliberates on the recommendation of risk management department and takes appropriate decision. All applications which are beyond the scope of approving authority assigned to the Credit Committee are elevated to the next approving level.

Finance facilities with overdue amounts of 90 days or less are identified as past due. In line with regulatory guidelines, facilities with overdue amounts of more than 90 days are classified as either sub-standard, doubtful or bad depending on the number of days which the amounts are overdue.

The provision for impairment of credit facilities covers losses where there is objective evidence that losses may be present in components of the finance facilities portfolio at the balance sheet date. These have been estimated based on historical patterns of losses in each component, the credit ratings allotted to the borrowers and reflecting the current economic climate in which the borrowers operate. Besides, as per the CBK’s requirements, a minimum general provision of 1% for cash facilities and 0.5% for non-cash facilities is made on all asset based and proxy based facilities not subject to specific provision.


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Information Related to a Licensed Bank’s Investment & Finance Exposures (Continued)

Credit Risk Management (Continued)

The Bank uses Moody’s Risk Rating calculator to assign an internal risk rating to corporate customers. The internal ratings are mapped to the ratings of ECAI as below:

Risk Rating RR 1 RR 2 RR 3 RR 4 RR 5 RR 6 RR 7 RR 8 RR 9 RR 10

Moody’s AaaAa

(1-3)A

(1-3)Baa (1-3)

Ba (1-3)

B (1-3)

Caa (1-3) Ca C D

S&P AAAAA

(+/-)A

(+/-)BBB (+/-) BB (+/-)

B (+/-)

CCC (+/-) CC C D

Where available, the Bank uses External Credit Assessment Institutions (ECAI) ratings for categorizing riskiness of credit assets.

ECAI’s have been used for the following standard portfolios

Standard portfolio ECAI

Claims on Banks Fitch, Moody’s and Standard & Poor’s


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Credit Risk Management (Continued)Table 8 – Gross Credit Risk exposures before CRM

Standard Portfolio

2015KD 000

Year end balances Monthly average balances

Self-financed

URIA TotalSelf-

financedURIA Total

Claims on Cash Items 15,414 769 16,183 13,846 691 14,537

Claims on sovereigns 297,541 14,843 312,384 369,768 18,446 388,214

Claims on Banks 677,613 33,802 711,415 554,792 27,676 582,468

Claims on corporate 2,050,809 102,304 2,153,113 1,904,449 95,003 1,999,452

Claims on regulatory retail 344,688 17,195 361,883 337,400 16,831 354,231

Past due exposures 67,237 3,354 70,591 75,274 3,755 79,029

Inventory & commodity other than real estate 261 13 274 750 37 787

Investment in real estate and real estate inventory 28,167 1,405 29,572 31,332 1,563 32,895

Share & commercial real estate financing 352,508 17,585 370,093 391,205 19,515 410,720

Securitized Sukuk 116,021 5,788 121,809 115,613 5,767 121,380

Other exposures 83,195 4,150 87,345 78,965 3,939 82,904

Total 4,033,454 201,208 4,234,662 3,873,394 193,223 4,066,617

Standard Portfolio

2014KD 000

Year end balances Monthly average balances

Self-financed

URIA TotalSelf-

financedURIA Total

Claims on Cash Items 15,069 884 15,953 16,635 976 17,611

Claims on sovereigns 334,167 19,604 353,771 359,015 21,062 380,077

Claims on Banks 511,720 27,104 538,824 531,477 27,966 559,443

Claims on corporate 1,874,450 100,207 1,974,657 1,884,883 99,414 1,984,297

Claims on regulatory retail 320,236 18,590 338,826 321,803 18,657 340,460

Past due exposures 71,378 4,187 75,565 43,973 2,578 46,551

Inventory & commodity other than real estate 414 24 438 410 24 434

Investment in real estate and real estate inventory 31,022 1,820 32,842 31,185 1,829 33,014

Share & commercial real estate financing 324,732 18,824 343,556 296,350 17,355 313,705

Securitized Sukuk 108,341 6,357 114,698 30,578 1,794 32,372

Other exposures 88,948 5,137 94,085 91,942 5,289 97,231

Total 3,680,477 202,738 3,883,215 3,608,251 196,944 3,805,195

Average balances are calculated by averaging month-end balances of capital adequacy returns which is the most frequent reporting interval for Management reporting purpose.


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Credit Risk Management (Continued)Table 9 – Geographic distribution of exposures

Standard Portfolio

2015KD 000

KuwaitOther

Middle-EastEurope

USA & Canada

Other countries

Total

Cash Items 16,183 - - - - 16,183

Claims on sovereigns 312,384 - - - - 312,384

Claims on Banks 218,892 216,764 46,107 226,752 2,900 711,415

Claims on corporate 2,085,479 56,751 8,638 - 2,244 2,153,113

Claims on regulatory retail 361,883 - - - - 361,883

Past due exposures 51,474 19,117 - - - 70,591

Inventory & commodity other than real estate

274 - - - - 274


25,958 3,614 - - - 29,572

Share & commercial real estate financing

370,093 - - - - 370,093

Securitized Sukuk - 47,504 - 7,565 66,740 121,809

Other exposures 85,896 1,113 336 - - 87,345

Total 3,528,516 344,863 55,081 234,317 71,884 4,234,662

Standard Portfolio

2014KD 000

KuwaitOther

Middle-EastEurope

USA & Canada

Other countries

Total

Cash Items 15,953 - - - - 15,953

Claims on sovereigns 353,771 - - - - 353,771

Claims on Banks 292,253 181,727 10,038 52,780 2,026 538,824

Claims on corporate 1,937,396 31,210 3,320 2,679 52 1,974,657

Claims on regulatory retail 338,826 - - - - 338,826

Past due exposures 56,801 18,764 - - - 75,565


438 - - - - 438


31,977 865 - - - 32,842


343,556 - - - - 343,556

Securitized Sukuk - 51,707 - 7,366 55,625 114,698

Other exposures 88,499 1,828 2,159 138 1,461 94,085

Total 3,459,470 286,101 15,517 62,963 59,164 3,883,215

The exposures are allocated under each geographic unit based on the residence / domicile of the obligor.

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Table 10 - Distribution of gross exposures by industry

Standard Portfolio

2015KD 000

2014KD 000

Funded Unfunded Total Funded Unfunded Total

Trading & manufacturing 539,032 84,763 623,795 497,385 80,838 578,223

Banks & financial institutions 1,204,282 54,593 1,258,875 1,053,055 50,928 1,103,983

Construction & real estate 1,414,469 69,960 1,484,429 1,353,964 62,859 1,416,823

Others 832,944 34,619 867,563 754,118 30,068 784,186

Total 3,990,727 243,935 4,234,662 3,658,522 224,693 3,883,215


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Credit Risk Management (Continued)Table 11 - Distribution of gross exposures by residual contractual maturity

Standard Portfolio

2015KD 000

Up to 1 Month

1 to 3 Months3 to 12 Months

Over 1 Year Total

Cash Items 16,183 - - - 16,183

Claims on sovereigns 87,350 110,243 114,791 - 312,384

Claims on Banks 588,606 73,849 38,980 9,980 711,415

Claims on corporate 623,342 681,498 536,481 311,792 2,153,113

Claims on regulatory retail 16,648 2,087 5,486 337,662 361,883

Past due exposures 70,591 - - - 70,591


274 - - - 274


- - - 29,572 29,572


65,248 108,039 144,315 52,491 370,093

Securitized Sukuk 33,368 33,372 7,167 47,902 121,809

Other exposures 14,745 551 24,501 47,548 87,345

Total 1,516,355 1,009,639 871,721 836,947 4,234,662

Standard Portfolio

2014KD 000

Up to 1 Month

1 to 3 Months3 to 12 Months

Over 1 Year Total

Cash Items 15,953 - - - 15,953

Claims on sovereigns 102,526 115,219 136,026 - 353,771

Claims on Banks 464,175 27,657 42,861 4,131 538,824

Claims on corporate 665,417 609,639 412,159 287,442 1,974,657

Claims on regulatory retail 10,447 7,492 17,065 303,822 338,826

Past due exposures 75,565 - - - 75,565


438 - - - 438


- - - 32,842 32,842


126,696 118,620 55,737 42,503 343,556

Securitized Sukuk 23,424 32,702 7,482 51,090 114,698

Other exposures 19,502 7,593 3,874 63,116 94,085

Total 1,504,143 918,922 675,204 784,946 3,883,215


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Information Related to a Licensed Bank’s Investment & Finance Exposures (Continued)Credit Risk Management (Continued)Table 12 - Impaired financings and provisions

Standard Portfolio

2015KD 000

Impaired Financing

Past Due Financing

Specific Provisions

* Charge for the

YearWrite Off

General Provisions

Trading & manufacturing 29,205 295 7,250 6,524 690 16,895

Banks & financial institutions 1,385 - - (496) 146 2,596

Construction & real estate 28,939 14,104 1,017 (411) 793 41,441

Others 8,464 649 2,189 7,218 12,605 25,489

Total 67,993 15,048 10,456 12,835 14,234 86,421

Standard Portfolio

2014KD 000

Impaired Financing

Past Due Financing

Specific Provisions

* Charge for the

YearWrite Off

General Provisions

Trading & manufacturing 20,807 250 1,417 13,337 17,029 14,755

Banks & financial institutions 9,910 - 2,142 3,727 4,510 2,498

Construction & real estate 38,950 6,786 7,622 3,842 - 37,486

Others 6,371 8,699 2,181 19,628 21,025 21,337

Total 76,038 15,735 13,362 40,534 42,564 76,076

* Charge for specific provision

The impaired financing and specific provision includes KD 21,566 thousand (31 December 2014: KD 19,967 thousand) and KD 2,449 thousand (31 December 2014: KD 1,203 thousand) respectively which relates to a party in United Arab Emirates. There are no other impaired or past due financings outside Kuwait.As at 31 December 2015, the Bank carries a total provision of KD 96,877 thousand (31 December 2014: KD 89,438 thousand) including the above mentioned specific provision and general provision of minimum 1% on all claims on corporate and regulatory retail exposure (net of certain categories of collateral), that are not provided for specifically in line with CBK instructions. Profit amounting to KD 6,172 (31 December 2014: KD 7,077) has been suspended on the above mentioned impaired financing.

Table 13 – Movement in specific provision

Details

2015KD 000

2014KD 000

Specific provision Specific provision

At 1 January 13,362 15,392

Charge for the year 14,837 40,534

Amounts written off (14,234) (42,564)

Transferred to assets classified as held for sale (3,509) -

At 31 December 10,456 13,362


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Irregular and past due financing facilitiesIrregular Credit facilities (Impaired) are classified upon meeting conditions of irregularity defined by CBK and consist of the following categories:• Watch list Category requiring specific provisions: Includes regular clients but upon management’s discretion, provisions

have been taken to confront any possible future deterioration, in addition to credit facilities that are overdue for 90 days or less (inclusive). The specific provision percentage is determined based on each case and after a thorough study by the management and after deducting deferred, suspended profit and eligible collateral.

• Sub-standard: If facilities are irregular for a period of 91 – 180 days (inclusive), a provision rate of minimum 20% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral.

• Doubtful Debts: If debts are irregular for a period of 181 – 365 days (inclusive),a provision rate of minimum 50% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral.

• Bad Debts: If debts are irregular for more than 365 days, a provision rate of 100% shall be applied on the total of the facilities net of deferred and suspended profit and eligible collateral.

Table 14 – Ageing of Past Due Exposure

Details

2015KD 000

2014KD 000

Past due exposure Past due exposure

Past due but not impaired

90 days or less 23,733 15,735

Past due and impaired

91 – 180 days 11,842 48,507

181 – 365 days 33,864 9,193

More than 365 days 22,287 18,338

At 31 December 91,726 91,773


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Renegotiated financing:The Bank has not renegotiated any financial asset of major exposures that would otherwise be past due or impaired.

Table 15 - Exposure post risk mitigation and credit conversion

Standard Portfolio

2015KD 000

2014KD 000

Rated Unrated Total Rated Unrated Total

Claims on Banks 158,751 119 158,870 121,910 29 121,939

Claims on corporate - 1,496,376 1,496,376 - 1,156,481 1,156,481

Regulatory retail exposures - 329,343 329,343 - 308,420 308,420

Past due exposures - 23,859 23,859 - 24,152 24,152


- 514 514 - 821 821


- 59,144 59,144 - 65,684 65,684


- 207,059 207,059 - 146,819 146,819

Securitized Sukuk 64,394 - 64,394 60,786 - 60,786

Other exposures - 87,345 87,345 - 124,396 124,396

Total 223,145 2,203,759 2,426,904 182,696 1,826,802 2,009,498

Information Related to Financing Risk MitigationCollateral is obtained from clients pursuant to the Bank’s appraisal of the financial position, solvency, reputation and past experience of the client and the Bank’s estimation of the degree of financing risks. Adequate collateral coverage ratios are maintained by the Bank in line with CBK guidelines and Bank policies. In the event of a decline in value of collateral, additional coverage is sought by the Bank. A significant portion of the Bank’s financing portfolio is adequately covered either by tangible collateral that adhere to the Islamic Shari’ah principles or assignment of revenues and third party receivables or other kind of support such as personal/corporate guarantees.

In order to mitigate the financing risk the Bank is exposed to, it accepts collateral in the form of cash (e.g., fixed deposits, deposit certificates and/or other savings instruments); shares / portfolio of shares traded on recognized exchanges and are compliant with the Islamic Shari’ah principles and unconditional Stand-by letters of credit or Bank guarantees by financial institutions having pre-approved limits covering principal amount plus profit.

In addition to the above, the Bank accepts lien on sponsored funds, mortgages on real estate properties and chattel, legal assignment of contracting works or supply contracts as well as legal assignment of rentals or leases.

With respect to counter-party guarantors, the Bank considers only those that fall within the acceptable criteria.

Where applicable, on and off-balance sheet netting are used to the extent allowed as per the provisions of the contracted documentation, legal right to set-off and there being no maturity mismatches.


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Information Related to Financing Risk Mitigation (Continued)

The Bank has a system of periodic collateral valuation, monitoring, and follow-up for inadequate coverage. This ensures that the Bank has an effective collateral management process, wherein:

1) The collateral are appraised periodically, following the CBK guidelines as the minimum time interval, e.g. real estate properties are appraised at least annually while shares / portfolio of shares traded on recognized stock exchanges are monitored daily;

2) The minimum financing to Value (FTV) of 60% is required upon granting share/real estate financing bearing in mind, that FTV for individual obligor maybe lower than that set parameters depending on the financing circumstances, structure of facility, and creditworthiness of the obligor;

3) the Bank executes documentation with borrowers empowering the Bank, the right to liquidate or take legal possession of the collateral; and

4) The obligor and the value of the collateral do not have a material positive correlation.

Financing exposure is reviewed monthly to ensure that there is no undue concentration. In the event that there is heavy concentration towards specific economic sector or counter-party, the Bank takes corrective actions including but not limited to sell down the related assets and / or requires the client to put up sufficient liquid security.

Table 16 – Eligible financial collateral and guarantees

Standard Portfolio

2015KD 000

2014KD 000

Gross Exposure

Eligible collaterals

Eligible Guarantees

Gross Exposure

Eligible collaterals

Eligible Guarantees

Claims on Banks 711,415 23,178 - 538,824 22,363 -

Claims on corporate 2,153,112 656,737 - 1,974,657 818,176 -

Regulatory retail exposures 361,883 28,340 - 338,826 27,962 -

Past due exposures 70,591 24,358 - 75,565 37,783 -

Real Estate & Shares Trading 370,093 232,054 - 343,556 245,677 -

Total 3,667,094 964,667 - 3,271,428 1,151,961 -

Information Related to Market Risk for Trading Portfolio, Foreign Exchange and Commodities ExposureThe Bank currently follows the standardized approach in determining capital requirement for market risk on the trading book. For measuring the market risk in the trading book, all positions are marked to market daily, including recognition of accrued profit, dividends or other benefits as appropriate. Foreign exchange positions are marked to market using a close-out valuation based on a mid-market price for spot positions. Financial instruments that impact profit rate risk positions are valued based on industry accepted valuation models. Equities and commodities are marked to market, using bid prices.

Table 17 - Capital requirement for components of Market Risk

Standard Portfolio2015

KD 0002014

KD 000

Commodity risk 75 125

Equity position risk - 3

Foreign exchange risk 112 1,572

Total 187 1,700


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Information Related to Operational RiskOperational risk is defined by Bank as the risk of direct and indirect loss resulting from inadequate or failed internal processes, people or systems or from external events. The operational risk capital charge is calculated using the Basic Indicator approach. As required under this approach, the Bank has computed its capital as a percentage of the positive average annual gross income of the previous three years. Gross income for this purpose is defined as net profit income plus net non-profit income.

The Basel III accord requires Banks to hold capital against operational risk. The accord offers a continuum of approaches from the simplest basic indicator approach to the more advanced measurement approaches. The Bank realizes that the current spectrum of possible quantitative approaches to operational risk is broad.

Risk identification is vital to the development of viable operational risk monitoring and control systems. Risk identification considers internal factors such as the Bank’s structure, the nature of its activities, the quality of its human resources, organizational changes and employee turnover. It also examines external factors such as changes in the industry, major political and economic changes, and technological advances.

In its endeavor to adopting a risk sensitive approach to assess the operational loss, the Bank views operational risk management as a progression involving three layers of activity. These could be summarized as follows:

Level 1 - Risk Self-Assessment deals with words more than numbers. It involves:• Qualitative review of inherent risks• Review of controls and procedures• Specification of corrective actions if necessary and follow-up on implementation of such actions

The self-assessment process involves both line management (business risk officer) and external facilitator (ORSA facilitators are officers from both Risk Management and Internal Audit Divisions) to encourage frank and open discussions of issues and remedial actions. This activity is seen to generate significant amounts of descriptive and subjective rating information.

Level 2 - Key Risk Indicators (KRI) is the process of collecting and reporting on an eclectic set of quantitative measures that correlate with the likelihood of potential failures in a process. These indicators are not readily combined into a single aggregate, rather, they are useful on a comparative basis across similar processes and over time. They allow effective benchmarking of processes.

When tracked overtime, they can give valuable early warning of possible problems and can facilitate timely corrective action.

Level 3 - Loss Data Collection. The Bank’s collection of historical operational risk losses as well as “near misses” is an ongoing exercise. Internal loss data are not the only, or necessarily the most important, indicators of operational risk. But such losses do represent the ultimate negative consequences of process failures. Combined with external loss data (where available), they are central to scaling the magnitude of an aggregate risk capital allocation.

The Bank is resolute in reducing and controlling operational risk, and to this end, has adopted a disciplined approach to all layers of operational risk identified above. This qualitative to quantitative approach to operational risk is in line with the recommendations of the BIS.

The Bank has also documented the policy for business continuity in case of outbreak of contagious diseases. The document has been circulated to all officers and staff for their information and proper action.

Operational risk weighted exposures calculated during the year 2015 amounted to KD 186,120 thousand (31 December 2014: KD 170,691 thousand) as per the Basic Indicator Approach. The amount calculated for operational risk weighted exposures is adequate to cover any projected risks to maintain a reasonable profit ratio for shareholders and investment account owners. The minimum required capital for operational risk exposures amounts to KD 23,265 thousand (31 December 2014: KD 22,190 thousand).


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Table 18 – Capital requirement for operational risk

Year2015

KD 0002014

KD 000

Net income from financing activities 25,672 24,836

Net income from investing activities 1,528 1,105

Fees and service income 2,484 2,483

Deduction:

Investment Account Holders’ Share of Income (6,419) (6,234)

Total 23,265 22,190

Information Related to Investment SecuritiesInvestments in the Banking book are made in Shari’ah compliant instruments and are classified at the time of acquisition into those acquired for capital gains and strategic investments. The Bank also has in its books, non-Shari’ah compliant investments that existed prior to conversion and are carried over after conversion to Islamic Bank. The Bank is in the process to liquidate these non-Shari’ah compliant investments from its books. Investments acquired with a view of generating income and profits from capital appreciation are reviewed periodically and disposed off at opportune instances.

The Bank reviews its strategic investment portfolio based on the industry, market and economic developments and then either liquidates or further consolidates holdings in these investments. Strategic investment represents the investment in other entities with long term objective in line with the overall Bank’s strategy, rather than short term profit making.

In accordance with International Financial Reporting Standard, investment in sukuks and equity positions in the Banking book are classified as available for sale securities. These investments are fair valued periodically and revaluation gains / losses are accounted as cumulative changes in fair value in equity. For investments quoted in organized financial markets, fair value is determined by reference to quoted bid prices. Fair values of unquoted investments are determined by reference to the market value of a similar investment, on the expected discounted cash flows, or other appropriate valuation models. The significant assumptions used for valuation of unquoted equity securities include annual growth rate of cash flows and discount rates and illiquidity premium. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value.

Equity investments whose fair value cannot be estimated accurately are carried at cost less impairment if any.

Table 19 – Investment securities in Banking book

Investment Type

2015KD 000

2014KD 000

Carrying Value Capital Charge Carrying Value Capital Charge

Publicly traded 118,934 14,819 113,857 13,616

Privately held 20,233 3,560 37,072 3,804

Total 139,167 18,379 150,929 17,420


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Information Related to a Licensed Bank’s Investment & Finance Exposures (Continued) Information Related to Investment Securities (Continued)

Classification of investment available for sale by industry - Table 20

Industry sector

2015KD 000

2014KD 000

Carrying ValueMinimum capital

requirementsCarrying Value

Minimum capital requirements

Banks and financial institutions 116,738 15,082 124,697 14,635

Services 6,781 827 6,429 772

Real estate 2,763 307 5,708 638

Others 12,885 2,163 14,095 1,375

Total 139,167 18,379 150,929 17,420

Publicly traded investments represent quoted securities traded on local and international stock exchanges. Privately held investments represent investments in unquoted securities and venture funds. The total value of investments in the Banking book in the statement of financial position is KD 139,167 thousand (31 December 2014: KD 150,929 thousand ). Cumulative realized gain from sale of available for sale securities is KD 1,365 thousand (31 December 2014: KD 4,770 thousand). The total unrealized gain recognized in the equity is KD 7,792 thousand (31 December 2014: KD 9,011 thousand).

Investment AccountsThe Bank receives deposits from customers as part of several unrestricted investment accounts. These deposits are fixed-term, open-term, or renewable automatically with different investment rates.

These funds are used by the Bank in all finance activities that will achieve a targeted return. Investment returns are distributed among the Bank as a Mudarib and investment account holders on proportionate basis for each type of these accounts and the elapsed period of these funds.

The Bank also receives deposits from customers that are restricted. The Bank is investing these deposits as an investment agent (Wakeel).

Customers’ deposits are received and invested according to certain regulations that are mentioned in the procedures manual and instructions guide to ascertain that these funds, whether they were in Kuwaiti Dinar or foreign currency, are invested according to Islamic Shari’ah principles.


130

Investment Accounts (Continued)

Following are the Investment percentages for major Mudaraba based deposits used for the Profit distribution:

Table 21 – Deposit Accounts Investment Percentage

Deposit CategoryInvestment Percentage Investment Percentage

2015 2014

Savings 60% 60%

1 Month 60% 60%

3 Months 60% - 62% 60% - 62%

6 Months 65% 65%

9 Months 70% 70%

1 Year 70% - 90% 70% - 90%

Table 22 – Classification of Deposit Accounts

Deposit categories

2015KD 000

2014KD 000

Profit equalization

reserve

Investment risk reserve

Profit equalization

reserve

Investment risk reserve

Unrestricted 2,372 2,278 2,194 2,276

Restricted - - - -

Total 2,372 2,278 2,194 2,276

Table 23 – Deposit Accounts Ratios

2015KD 000

2014KD 000

Deposit categories

Profit rate reserve

to profit-sharing deposits

Investment risk

reserve to profit-sharing deposits

Profit distributed to profit-sharing deposits

Profit rate reserve

to profit-sharing deposits

Investment risk

reserve to profit-sharing deposits

Profit distributed to profit-sharing deposits

Unrestricted 0.83% 0.79% 1.26% 0.74% 0.77% 1.77%

Restricted - - - - - -

Shari’ah GovernanceShari’ah Governance is a main pillar in any Islamic financial institution. The strengths of the Shari’ah Control unit in any Bank provides assurance on the solidity of its operations and accuracy of its businesses and income in compliance with Shari’ah rules and regulations. It will further protect the Bank from accepting expenses or incomes which do not comply with Islamic principles and places the transparency as main principle of the business values.


131

Shari’ah Governance (Continued)

Shari’ah Control Structure

Fatwa & Shari’ah Supervisory Board (Shari’ah Board)

The Shari’ah Board is formed in Islamic Banks in Kuwait consisting of at least three members appointed by the AGM in compliance with the Memorandum and Articles of Association (AOA) and the Law number 30/2003. The AOA provides the terms of reference and responsibilities of the Shari’ah Board. The resolutions of the Shari’ah Board are enforceable and due for execution as specified and determined. The Shari’ah Department & Shari’ah Board are responsible to ensure compliance and report the results of the annual review to the AGM.

Shari’ah Executive Committee

It is an Executive Committee delegated by the Shari’ah Board responsible to study and review the matters referred to the committee by the Bank management or the Shari’ah Board.

Secretary of the Shari’ah Board

Attending the meetings and responsible for Shari’ah Board & Shari’ah Executive Committee meetings, prepares the agendas, minutes of meetings, circulates the resolutions and studies / reviews all matters delegated or referred to him by the Shari’ah Board and Executive Committee. He has further to monitor the execution of the Shari’ah resolutions.

The Supervisory Authority on Revenues Received from Non-Shari’ah Compliant Sources or Activities.

Revenues generated from non-Shari’ah compliant sources either pre-conversion to Islamic Bank or having resulted from some unintentional defective transactions contradicted with the Shari’ah guidelines are maintained under a restricted account. This account is monitored and controlled by the Supervisory Authority and no withdrawals are allowed prior to obtaining a permit from the Authority according to the rules and laws determined by the Shari’ah Board.

Shari’ah compliance Department

Shari’ah Audit

Shari’ah Audit department carries out periodical audits on all departments of the Bank to ensure compliance with the resolutions of the Shari’ah Board. All findings are discussed with the concerned department and subsequently escalated to the Shari’ah Board.

Shari’ah Advisory & Training

Part of the Shari’ah Compliance Department duties is to act as advisor on all inquiries or matters referred to the department for review, e.g. contracts, engagements, letters, policies, procedures and newspapers advertisements. The department, in coordination with Human Resources, arranges all the required training and career development plans for the Shari’ah related skills for employees at all levels. The Secretary of the Shari’ah Board is responsible to schedule and arrange all Shari’ah meetings, circulate the resolutions and follow up with management on all Shari’ah related matters to ensure that Shari’ah resolutions are properly maintained and communicated.

Shari’ah Violations

Violating the Shari’ah guidelines may result in turning the underlined revenue or expense to be non- Shari’ah compliant. The financial consequence of this violation is reported to the Shari’ah Board after discussing it with concerned department and all proceeds are transferred accordingly to the restricted account designed for that purpose which is used for charitable contributions upon proper approvals

During 2015, no violation was observed at the Bank that may have a financial impact on the results of the Bank and its operations.


132


Shari’ah Violations (Continued)

Violating the Shari’ah guidelines in other cases may not result in gaining any income or incurring expenses or does not have material financial impact on the Bank. In such circumstances, the Shari’ah Departments directs the concerned department to take the corrective action and monitors the compliance subsequently.

Zakat

In accordance with the Law No. 46 of 2006 and as per the resolution of the Ministry of Finance No. 58/2007, the Bank pays the Zakat. Occasionally, the Zakat covers the Zakat amount to be paid by the Bank’s shareholders. Any inquiries on Zakat are adequately addressed by the Shari’ah Department.

The amount of the Zakat for the financial year ended 31 December 2015 amounted to KD 494 thousand (31 December 2014: KD 487 thousand).

Remunerations of the Fatwa & Shari’ah Supervisory Board Members

The AGM endorses the appointment/ reappointment of the Shari’ah Board members and authorizes the Board of Directors to determine & pay the related remuneration. During the year, remuneration paid/ will be paid to the members of Shari’ah Board amounts to approximately KD 32 thousand (31 December 2014: KD 32 thousand).

Remuneration

The Bank has set up policies over remuneration practices and guides its remuneration based on performance and risk. For this purpose the Bank has set up a Compensation & Nominating Committee (“CNC”) to independently assess and monitor remuneration systems.

CNC consists of three non-executive board members. CNC met 2 times during the year 2015. During the year, remuneration paid/ will be paid to the members of CNC amounts to KD 6,000 approximately which is subject to approval of the Board of Directors.

The remuneration policy provides the basis of determining remuneration to Group’s employees, including material risk-takers based on their responsibilities and authority levels. Senior executives and material risk-takers comprise those whose activities have a significant impact on the Bank’s risk profile and their divisional financial matrix (KPIs), which is cascaded from the annual business targets, expanded to incorporate risk measures (KRIs). These risk measures and weights shall be defined by respective business functions in concurrence with Risk Management. Remuneration is determined based on this policy guidelines including performance rewards and these policy guidelines are applicable to the Group. The material risk takers includes CEO and the business line executives of Corporate Banking, Retail Banking, Private Banking, Treasury and Direct Investments.

Remuneration includes a fixed component that rewards the capacity to hold a position in a satisfactory manner through the employee displaying the required skills and variable components that aim to reward collective and individual performance, depending on the smart objectives defined at the beginning of the period and conditional to meeting said objectives, according to the performance standards and risk parameters defined by the Bank.

In addition, for senior executives and key risk-takers, remuneration is aligned with prudent risk taking and quantitative and human judgment measures included for risk adjustment. Risk adjustment accounts for all type of risks including intangibles such as reputation risk, liquidity risk and cost of capital. Back testing and stress testing is required to test performance alignment of remuneration with risk.

The remuneration processes are designed to reward based on evaluation of performance and advice of external consultants are sought whenever required. Specific employee roles and responsibility related to performance metrics are designed in the form of Key Performance Indicators Matrices (KPIs) to continuously evaluate performance of executives and staff employees. Performances are evaluated based on smart objectives and their achievement measured on a transparent basis that are applied for determining rewards. The CNC regularly reviews the remuneration policy and updates as required.

The Bank takes into account the risk taken by business executives in determining remuneration where the future risks and crystallization of such risks are considered. In cases where the performance-related pay exceeds 60% of the senior executive’s total annual salary, then the performance bonus portion above 60% is deferred for the subsequent 3 years subject to claw back rules in case of negative performance.


133


Remuneration (Continued)

The Bank has put in place ex-ante operating profits, net profit, NPLs and ex-post matrices like , trends in NPLs, Peer comparison in key matrix etc, that are used to determine rewards taking long term view including deferred payment of such rewards.

The performance of the Bank’s employees are measured through a performance management system with measurable metrics for performance rewards. Rewards will vary based on the performance of individual managers and employees which are linked to overall performance of the Bank and HR compares the rewards with the normal distribution curve to ensure consistency and that any variances have been investigated.

Performance assessment of the Bank’s designated approved persons in the function of Risk Management, Internal Audit, Operations, Finance, Shari’ah audit, compliance and AML functions measured primarily on the achievement of the objectives and targets of their functions, ensuring independence from business areas. The performance assessment, fixed and variable compensations for the Heads of Audit and Compliance and the GM – Risk Management are specifically discussed by the committee and endorsed by the Chairman of Audit & Compliance Committee and approved by the CNC.

Table 24 – Type of Remuneration

Remuneration type

2015KD 000

2014KD 000

Unrestricted Unrestricted

Fixed remunerations

Cash based 1,988 2,470

Variable remuneration

Cash based ** 265 ** 608

Total 2,253 3,078

Table 25 – Number of Employees and Remuneration Paid

Remuneration type

2015KD 000

2014KD 000

Number of employees

Total remuneration

Number of employees

Total remuneration

Senior management* 18 1,825 17 1,727

Material risk takers* 32 1,495 27 1,351

Financial and control functions* 20 950 21 1,008

*Some of the positions are duplicated in these categories.**Variable remuneration is estimated using the prior year’s variable remuneration and is subject to approval of the Board of Directors by the end of first quarter of 2016.

Table 26 – Number of Employees and Other Employment Benefits

Remuneration type

2015KD 000

2014KD 000

Number of employees

Amount Number of employees

Amount

End of service benefits (Senior Management and Material Risk-takers)

50 331 30 154


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