2013 2Annual Repor Annual R t epor

Transcription

1 2013 Annual Report

2 In The Name of Allah The Most Gracious The Most Merciful

3 4 Annual Report 2013 Annual Report H. H. Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah Amir of Kuwait H. H. Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah Crown Prince H. Sheikh Jaber Al-Mubarak Al-Hamad Al-Sabah Prime Minister Warba Bank P.O.Box 1220 Safat Kuwait Tel.: Fax:

4 6 Annual Report 2013 Annual Report Contents Warba Profile 9 Chairman Message 10 Board of Directors 14 Executive Management 16 Sharia Supervisory Committee s Members 18 Sharia Report 20 Management Discussion & Analysis 22 Governance Report 28 Capital Adequacy Disclosures 42 Financial Statements 70 and Independent Auditors Report

5 8 Annual Report 2013 Annual Report Profile, Vision and Mission Profile Warba Bank was established in 2010 by virtue of the Amiri Decree No. 289/2009, and was officially registered in the Central Bank of Kuwait s register of Islamic Banks on April 7th The State of Kuwait, represented by Kuwait Investment Authority (KIA), owns 24% of the bank s total shares, while the remaining 76% of shares, fully subscribed by the government, has been equally allocated to all Kuwaiti nationals. Warba Bank s overarching objective is to be a world-class bank, especially in terms of Islamic banking. It offers full-fledged gamut of banking & investment services in compliance with the principles of the Islamic Sharia. Warba seeks to grow and expand by means of introducing innovative banking products and unique services, thereby gaining the confidence of customers from various walks of life. Vision To be the Bank of Choice in Kuwait. Mission To provide customer-centric, innovative, genuinely Sharia-compliant products and solutions, with unparalleled service quality delivered by exceptional people. Retail Banking 6 Branches, 18 ATMS Hawaly Branch Al Qiblah Branch Al Salmiya Branch Al Sharq Branch Al Farwaniya Branch Avenues Branch Hawaly, Ibn Khaldoon St., Al Remal Complex Kuwait City, Fahad Al Salem St., Awtad Tower Al Salmiya, Salem Al Mubarak St., Laila Gallery Mall Kuwait City, Al Sharq area, Ahmad Al Jaber St., Khalifa Tower Al Farwaniya, Habeeb Al Munawer St., Al Yousef Complex Al Rai, Avenues Mall

6 10 Annual Report 2013 Annual Report Chairman Message Emad Abdullah Al Thaqeb Chairman In the Name of God, the Most gracious, the Most Merciful All praise is due to Allah, the Lord of the universe, and peace and blessings of Allah be upon the best of all messengers, Prophet Muhammad (PBUH), his household and companions. Valued Shareholders, Peace, mercy and blessings of Allah be upon you. It gives me a great pleasure to present to you the third Annual Report and the audited Financial Statements of Warba Bank for 2013, which include the key achievements of the bank s different sectors at the local, regional and global levels. Warba Bank s business indicators of 2013 showed a remarkable improvement in the bank s performance as well as the operating efficiency of assets. The bank was able to increase the operating income and act in line with its strategic plan, with progressive business results. Additionally, Warba has enhanced its capabilities by means of supporting the framework of corporate governance and risk management practices. It has also been keen to increase investment in national workforce. It is noteworthy that Warba s listing in Kuwait Stock Exchange (KSE) in September was the most significant event to take place during 2013, it required much work and full compliance with the highest technical standards in order to fulfill the conditions of KSE listing and the requirements of both the Capital Markets Authority (CMA) and the Central Bank of Kuwait (CBK).

7 12 Annual Report 2013 Annual Report Indeed, we are prepared for 2014 with optimism and determination, particularly through the adoption of ambitious short and medium term strategic plan which is suitable for the current status of the bank, and focuses mainly on shifting to profitability, covering the basic and necessary expenses, and maintaining a robust financial position that safeguards the bank s shareholders. The bank s business sectors, i.e., Retail Banking Group, Corporate Banking Group, as well as Investment and Treasury Group, exert great efforts, in line with the approved strategic plan, in terms of offering new products and services to cater for the customers requirements, and reach the various targeted segments of individuals and companies in order to build portfolios of balanced and distributed risks. They seek to extend their outreach through strategic partnerships with regional and global banks and financial institutions, which will enable the bank to access geographically new markets, explore more investment opportunities, reach more investors, and take new growth opportunities at the level of all sectors. Furthermore, we are in the process of completing the arrangements and obtaining the approvals of competent authorities required for establishing a wholly owned Sharia compliant subsidiary Warba International Investment Co. with a capital of KD 16 million. By doing so, Warba seeks to have a standalone entity to handle its investment products and fund management activities, while the bank will focus on its core banking activities. The strategic plan accentuates the recruitment of the talented national workforce in its various sectors, and urges on training and developing them to support the bank in the coming stage. It is important to note that Warba has exceeded the Kuwaitization level of 60%, while certain sectors in the bank, like Corporate and Retail Banking Groups, have achieved a Kuwaitization level of more than 80%. Warba Bank has realized operating income of KD 10.3 million for the year 2013 compared with KD 8.1 million in 2012, with an increase of 27%, while the realized operating income, from sale of investments and exclusive of non-recurring transactions, increased at 75% (i.e., KD 10.3 million for 2013 compared with KD 5.9 million for 2012). In addition, Warba has a strong financial position and quality assets, which are evident through the bank s end of year Capital Adequacy Ratio of 47.54%. Thus, Warba has a potential for future growth and new investment opportunities that would achieve optimum returns to the shareholders and depositors. However, this will require more time to materialize, given the current economic conditions that mark scarcity of new reasonable-risk investment opportunities at the level of global and local markets. However, on the local level, certain development projects were launched during the second half of 2013, but the need arises for more developmental spending in the future so as to serve the best interests of the local macro-economy. The revenues generated from financing and deposits increased to reach KD 8.2 million compared with KD 3.2 million in 2012, with a growth of 156%. The bank s realized losses reached KD 3.7 million in 2013 compared with KD 1.9 million in 2012, with an increase of KD 1.8 million attributable to the general and precautionary provisions made at the request of the regulatory bodies, not to cover any specific defaulting finances. However, Warba was able to control the operating expenses that have reached 8% only despite the bank s expansions and new branches, and the remarkable increase of businesses during the year This is expected to increase the volume of the income generating portfolio so as to cover the bank s main expenses, and allow the bank to shift to profitability in the near future. While gladly furnishing you with this report, I would like to express my sincere thanks and appreciation to the Central Bank of Kuwait for its constant support, and essential supervisory and regulatory role. Further, I would like to thank my fellow Board Members for their sincere efforts and devotion to elevate our promising institution; the thanks are also extended to the revered chairman and members of the bank s Fatwa and Sharia Supervisory Board; as well as to the executive team; and all WB s employees for their efforts and dedication to work. Finally, I supplicate Allah, the Almighty, to guide our steps in the best interests of Kuwait, its people and Warba Bank and to help us achieve more progress and prosperity under the patronage of H.H. Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, the Amir of Kuwait; H.H. Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah, the Crown Prince; and H.H. Sheikh Jaber Al- Mubarak Al-Hamad Al-Sabah, the Prime Minister, may Allah bless and protect them all. The Bank s total assets grew by 81% as at the end of 2013, reaching KD million compared with KD 223 million as at the end of 2012, while the financing portfolio increased to KD 218 million compared with KD 82.9 million as at the end of 2012, with a growth of 163%. It is important to refer to the portfolio s high quality which is evident through the lower percentage, i.e., 0.30%, of defaulting finances. The provisions made by the bank for the defaulting finances reached 479% as at the end of Meanwhile, customers deposits reached KD million as at the end of December 2013 (compared with KD 78.2 million as at the end of December 2012), with a growth of 216%. Emad Abdullah Al Thaqeb Chairman

8 14 Annual Report 2013 Annual Report Board of Directors Emad Abdullah Al Thaqeb Chairman Jassar D. Al Jassar Vice Chairman & CEO Jamal A. Dashti Board Member Ahmad A. Al Melhem Board Member Abdulwahab A. Al Houti Board Member Mahmoud A. Abdulrahman Board Member Hisham A. Al Razzuqi Board Member

9 16 Annual Report 2013 Annual Report Executive Management Basel J. Al-Obeid Chief Corporate Banking Officer Khaled H. Hafez Chief Financial Officer Adnan S. Al-Salem Chief Retail Banking Officer Mahmoud M. Yousef Chief Internal Auditor Feroz Noorani Chief Risk Officer Haytham A. Al-Terkait Chief Technology Officer

10 18 Annual Report 2013 Annual Report Sharia Supervisory Committee s Members Sheikh Dr./ Ajeel Jassim Al-Nashmi Head, SSB Sheikh Dr./ Issa Zaki Issa Member, SSB Sheikh Dr./ Abdulaziz Khalifa Al-Qassar Member, SSB Sheikh Dr./ Issam Khalaf Al-Enezi Member & Rapporteur, SSB Sheikh Dr./ Nayef Mohamad Al-Ajmi Member, SSB

11 20 Annual Report 2013 Annual Report Warba Bank Sharia Report For the fiscal year ending on 31 December 2013 In the name of Allah, the Most Gracious, the Most Merciful Praise be to Allah the Lord of the universe, and all blessings and peace to our Master Muhammad, his family, and companions Valued Warba Shareholders, Peace, Mercy and blessings of Allah be upon you According to the General Assembly s resolution to appoint Fatwa and Sharia Supervisory Board (FSSB) for Warba Bank; a responsibility that has been entrusted to us, we present to you the following report: At FSSB of Warba Bank, we have monitored and reviewed the bank s principles and contracts relevant to the products offered by the bank during the fiscal year ending on 31/12/2013, and applied the due diligence to provide our opinion on whether or not the bank is in compliance with the provisions and principles of the Islamic Sharia, as well as the Fatwas, resolutions, principles and guidelines issued by us. Our reasonable control and review included scrutinizing the contracts and procedures used by the bank, on the basis of examining each type of transactions separately. In addition, we have obtained the information and explanations required to form an opinion on the extent of compliance of the bank s activities with the provisions of the Islamic Sharia. It is noteworthy that the responsibility of executing such provisions, principles and Fatwas lies with the bank s Top Management, while our responsibility is confined to issuing an independent opinion based on the relevant information that has been presented to us and reviewed by us. We believe that the contracts, documents and transactions introduced by the bank during the fiscal year ending on 31/12/2013, which we have reviewed, have been concluded in compliance with the provisions and principles of the Islamic Sharia. It is important to note that the Warba Bank is not paying Zakat on behalf of the shareholders, and the FSSB s responsibility is limited to the calculation of the amount of Zakat due per share. Finally, we supplicate Allah, the Almighty, to support the bank s management endeavors serving our beloved religion and country, and to guide and support us all. Peace, Mercy and blessings of Allah be upon you. Peace, mercy and blessings of Allah be upon you. Sheikh Dr./ Ajeel Jassim Al-Nashmi Head, SSB Sheikh Dr./ Abdulaziz Khalifa Al-Qassar Member, SSB Sheikh Dr./ Issa Zaki Issa Member, SSB Sheikh Dr./ Nayef Mohamad Al-Ajmi Member, SSB Sheikh Dr./ Issam Khalaf Al-Enezi Member & Rapporteur, SSB

12 22 Annual Report 2013 Annual Report Management Discussion & Analysis Introduction The establishment of Warba Bank, as an Islamic banking institution, was the outcome of meritorious efforts that reflect the keenness of the country s competent decision makers, and their belief in the significance of establishing a prestigious financial institution in line with the vision of H.H. Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah. As such, Warba Bank has been incorporated, with ownership shared equally by all Kuwaiti nationals, which set the bank as a testament of the government s utmost keenness to develop the country and support the nationals in a way that delivers social justice. Warba applies the sound practices of the banks governance through the development of comprehensive frameworks for governance standards and basis, bearing in mind that the proper application of such standards and basis is a significant component of the bank s success to enhance the efficiency and effectiveness of internal controls with a view to safeguard the shareholders equity and the depositors interests. Risk Group Philosophy Warba Bank has embedded risk culture across the organization in its endeavor to ensure that a broad spectrum of risk types is managed effectively in its business and operational activities. The risk management framework is intended to raise risk awareness throughout the Bank. Risk Management Group operates independent of all business lines to provide oversight on the enterprise-wide risk management and controls, and is viewed as a strategic partner in achieving appropriate balance between risk and reward objectives. It coordinates and communicates with each line of business through-out the business cycle for optimum risk control over Assets and Liabilities. The identification of risks, its measurement, monitoring and reporting thereof is followed to maintain the integrity of the bank s financial position and to maximize its capability to realize business objectives within the acceptable risk levels and risk tolerance limits agreed with the Board of Directors. In order to implement the governance instructions issued by CBK on 20/06/2012 for mandatory application on 01/07/2013, Warba has formed board committees to enhance the board s effective oversight over the bank s key operations. Such committees include the Governance Committee, Nominations and Remunerations Committee, Risk Committee and Audit Committee, and submit periodic reports to the board. Risk Group s Framework The Bank has established comprehensive framework for managing all material risks identified under Basel guidelines, including credit, market, operational, information security and regulatory compliance risks. The Bank also complies with all guidelines for managing risks as advised by the Central Bank of Kuwait. Risk Management Group has established an effective regulation for risk management to create a dynamic link between risk appetite and return target, within the framework of regulatory controls applicable to the Bank and the capital adequacy ratio, and is responsible for setting the overall bank-wide Risk Appetite as approved by the Board of Directors.

13 24 Annual Report 2013 Annual Report Retail Banking Group Warba s Retail Banking Group endeavored constantly and indefatigably during 2013 to develop the retail banking services, diversify the financing products and services in line with the provisions of the Islamic Sharia. Indeed, Warba seeks to expand geographically with a view to present its banking products to the various segments of the Kuwait community. The retail banking activities include personal financing products, issuance of all types of banking cards, and monitoring the quality of the products presented to Warba customers. Warba s Retail Banking Group was able to expand the local branches network with a view to reach more customers. Accordingly, two new branches were inaugurated during 2013 at The Avenues Mall and in Al Farwaniyah Governorate, increasing the number of branches to 6 distributed geographically as planned. Additionally, retail financing activities and products; i.e., credit cards, retail financing services, and quality control of the offered services, have been introduced. Warba s official website has also been launched with clear information on the bank s products and services. The website provides a portal for online banking in a user friendly and safe way that complies with the highest international banking security standards. Retail Banking Group seeks to achieve more geographical expansion during As such, two new branches are expected to be launched during 2014; one at Al Jahra, and another at Al Fahaheel. Retail Banking Group seeks to achieve more geographical expansion during As such, two new branches are expected to be launched during 2014; one at Al Jahra, and another at Al Fahaheel. Corporate Banking Group The Group offers its services in form of direct financing or by means of syndications. The bank was able to build a good financing portfolio and seeks to diversify its financing sectors in order to minimize the relevant risks. During 2013, the Corporate Banking Group has posted positive results in terms of financing products and services, which have been favorable to the bank s performance and returns. The corporate financing portfolio increased to KD 218 million as at the end of 2013 compared to KD 82.9 million as at the end of 2012, i.e., a growth of 163%. Investment and Treasury Group Investment Department Warba s Investment Department achieved significant milestones in terms of foreign investment, delivering a return of 18% arising from the divestment of a property in New York. This construction financing for a multifamily apartment complex in Long Island City, New York is the first of its kind in terms of compliance with Sharia principles as well as the collaterals taken against it. Additionally, Warba acted as the mandated lead arranger for a Sharia compliant receivable backed financing facility for Alok International Middle East (FZE) LLC. This is the first ever Sharia compliant transaction for an Indian Group. Warba Bank also acted as the mandated lead arranger alongside Citibank for a Sharia compliant receivable backed transaction for Pakistan International Airlines. Going forward, the Investment team endeavors to provide genuine Sharia compliant investment products that Warba would like to eventually offer to its customers. Warba is currently originating a number of cross border financing transactions for obligors in the regional and international markets; where Warba will lead manage the whole issuance, thereby generating a portfolio of diversified financing assets with core fee based income for the Bank. The Bank will continue to originate, execute and manage innovative Sharia-compliant investments in the international markets that would deliver solid secured better-than-market returns on the short and medium terms. We expect to further strengthen Warba s position as an emerging market leader in the provision of innovative and risk optimal Islamic Banking products. Warba is in the process of setting up an investment company which will act as a platform for Warba to start providing asset management and fund management products and services to its customers. The investment company platform will also provide customers with access to liquid investments yielding excellent cash on cash returns with the ability to generate superior capital gains. Furthermore, Warba was able to structure the first ever Sharia compliant liquidity management product that consists of underlying commodity backed trade finance transactions, with a key focus on Asia. Warba has so far financed two companies viz. Starcom Resources Ltd, and Singapore and PT APAC, Indonesia for their commodity purchases. The program targets a return of circa 5% per annum and is a pioneering product for Islamic Financial Institutions for managing their excess short term liquidity. Warba has enhanced its position, as a financial institution, by building strong relationships with most of the local banks and institutions, it also built up a portfolio of quality Sukuk that has been fairly resilient in the current market conditions and provides predictable, sustainable, periodical and secured cash flows from regular profit distributions. Treasury Department During 2013, the Treasury Department of Warba Bank has provided and continues to be the main driver of supporting all departments of the bank whether in straight Inter-Bank Funding or from the use of our facilities of Foreign Exchange lines. The Treasury maintained an excellent service level and provided special rates to its highly valued customers, including financial institutions. It has grown exponentially in terms of Money Market Placements and Deposits compared to This is due to the fact that the Treasury Department maintains optimal liquidity levels and manages cash flows within the Bank to meet expected funding requirements. The annual increase of the cost of funds helped to maximize its returns on Treasury Dealing activities. Currently, the Treasury Department has four tools that are used throughout its business and are as follows: Wakala Deals, Murabaha Deals, FEX-Spot market coverage and Tawarruq Deals which are mainly covered by the Central Bank of Kuwait. It is noteworthy that the levels of placements increased by 59% during 2013 compared to 2012, while the borrowing levels were steady of around 1% increase. The Treasury has also generated other revenues from Sukuk, MFR and FEX deals. In 2014, Treasury looks to expand its income, offer clients lucrative exchange and deposit rates and generate revenue from Money Market arbitrage. Operations Group A review was conducted for all the Operations support units during 2013 to pinpoint areas of improvements and to develop the means of enhancing quality of the Operations center and making it comparable to professional Operations Centers in Kuwait. A mechanism was put in place to track down the volume of work for the various operations activities with a view to monitor the volume increases to enable a proper resource allocation within the Operations Group. In addition, a payroll utility was developed to automate the processing of a number of corporate payroll layouts, plus the automation of the Civil Service payroll file processing. The key objectives targeted by the Operations Group during 2014 include the automating credit card settlements and other payments and other payment methods, automation of the processing of all corporate Payroll files in addition to the automation of the dues collection.

14 26 Annual Report 2013 Annual Report Institutional Capabilities Warba is passionate to play an effective role in the country s developmental plan. Thus, and based on its firm belief in the significance of investment in human resources, Warba is keen to recruit talents with banking experiences and qualifications. The human element is essential to materialize successes and achievements which could lead to innovation and excellence, and create a great impression in the Islamic banking sector. It also provides the theoretical and practical training and qualification programs on the bank s various disciplines and areas, using advanced systems. With a view to develop the newcomers of Kuwaiti youth, Warba has organized a 27 day special program to qualify them for working in the banking sector. Organized in cooperation with the Institute of Banking Studies, the program covered theoretical, practical and regulatory topics like anti-money laundering. Staff members were divided into groups of three persons to work on their graduation project under the newcomers program, with a view to instill the spirit of team working into them. The programs resulted in the enhancement of their skills as well as the development of their creative thinking. Given such results, the Executive Management is now more passionate to recruit the Kuwait youth. It is important to note that Warba has exceeded the Kuwaitization level of 60%, while certain sectors in the bank, like Corporate and Retail Banking Groups, have achieved a Kuwaitization level of more than 80%. This accentuates the bank s continuous commitment toward supporting the national workforce and providing tangible contributions to the development of the Kuwaiti talents. Warba uses high tech technologies to provide its retail and corporate customers with high quality banking services and creative financial solutions so that the bank can stand out well against other banks. In line with its strategy, Warba provides its banking services 24/7 through a multi-channel network including the Call Center, ATMs, Online & Mobile Banking, as well as branch services. Warba invests in social media technology and network in order to enhance its market presence, support markets, raise social awareness, and provide the best banking services as well as the most innovative products. Corporate Social Responsibility As part of its firm belief that big economic entities should play a social role apart from profitability and competition, Warba pays a special attention to the society, contributing to and promoting the development and prosperity of the human element as well as the society itself. Indeed, Warba has committed itself to qualify and prepare the Kuwait talents to assume their social responsibility for developing the national economy of their society and country. With that end in view, Warba offered real job opportunities to the qualified Kuwaiti youth, increasing the Kuwaitization to a remarkable level. In this context, Warba is keen to take part in and support social, cultural, educational and sports activities relevant to the youth being the fuel of the country s future. In light of its keenness to communicate with educational institutions, enrich the experiences of the youth and practically prepare them for the future, Warba has received a group of students from the Australian College of Kuwait on the basis of site visits to the Call Center where they have received a detailed explanation on the mechanism of the Center s daily activities. Financial Highlights Key Performance Indicators Million KD Total assets Customer financing Customers deposits Total operating revenues* * Profits of 2011 are for the period from 17 February 2010 to 31 December 2011 Despite the volatile conditions of the capital market and their repercussions on various business sectors, and given the fierce competition it encounters being recently established, Warba has posted high growth rates though the posed general and specific challenges. Warba Bank has realized total operating income of KD 10.3 million for the year 2013 with a growth rate of 27% compared to 2012, while Warba s total assets grew by 81% as at the end of 2013, reaching KD million. Meanwhile, customers deposits reached KD million as at the end of 2013, with a growth rate of 216%. Although the bank s loss reached KD 3.7 million in 2013, the Executive Management was able to control the operating expenses that have reached 8% only, while the total income rose by 27% as referred to above. Warba s Capital Adequacy Ratio reached 47.5%, the minimum limit required by CBK is 12%. This reflects the bank s strong financial position and showcases its capability to expand its assets base in the future. Future Outlook Warba seeks to deliver huge growth in corporate financing area with greater emphasis on sectors where performance could be further improved, while keeping up our commitment to provide customer-centric, innovative & genuinely Sharia compliant service. The overall business plan of the Bank would be deployed within the acceptable risk tolerance based on diligent evaluation of risk versus reward. We will target a sizable growth for our Corporate Banking business, expanding our Retail network to be close to our customers while providing a staggering service by opening of new branches; launching new products; and providing new alternative and electronic delivery channels. We aim realize expansion and achieve risk-optimal profitability for our International Banking business with emphasis on the virgin markets for Islamic Finance. Apart from focusing on such endeavors, in our pursuit for becoming the bank of choice and positioning ourselves to compete well in the industry, we will invest in our human capital capabilities as well. * Information mention above is duly approved by the Board of Directors and is based on bank s published financial statements and vision.

15 28 Annual Report 2013 Annual Report Governance Report Introduction Warba Bank was established as a public shareholding company in 17/02/2010 by virtue of the Amiri Decree No. 289/2009. In 07/04/2010, Warba has officially been registered in the Central Bank of Kuwait s register of Islamic Banks, while listed in Kuwait Stock Exchange in 03/09/2013. The State of Kuwait, represented by Kuwait Investment Authority (KIA), owns 24% (two hundred forty shares) of the bank s total shares. Being a Sharia-compliant banking institution, Warba has an ethical vision accentuating the fulfillment of the requirements of laws, regulations, and instructions issued by regulatory and supervision bodies. Warba s Management ensures the bank s adherence, throughout its day-to-day operations, to the requirements of corporate governance and risk management by means of the good and pre-set organization of decision making processes.. Warba Bank s key shareholders (5% and above) Name Shareholding percentage Kuwait Investment Authority 24% Board of Directors Roles and Responsibilities Warba s Board of Directors is responsible for reviewing and approving the bank s strategic plan, setting business priorities, and monitoring the implementation of such strategies. It also sets and approves the policies covering the bank s various activities. The Board is responsible, towards shareholders, for Warba s financial and operating performance, as it supervises the Executive Management and takes all actions and procedures necessary to ensure the achievement of the bank s various objectives and plans with a view to shift to profitability and maximize the long-term value for shareholders. The Board of Directors is responsible for directing the bank s strategy by means of setting the objectives, policies, bases and procedures to ensure Warba s compliance with the strategies, plans and policies; approving the key overall objectives including main projects, acquisitions and investments; setting the framework of risk appetite; monitoring the bank s financial performance and reports; approving the annual budget; preparing and approving the policies of distributing shareholders profits; approving quarterly and annual financial statements as well as the annual report; ensuring independency of internal audit function; monitoring vulnerabilities to ensure having in place the proper structures for managing risks and internal control; reviewing the adequacy and availability of systems in light of the bank s applicable laws and regulations; ensuring having written policies covering the bank s various activities, and reviewed annually for enhancement and amendment; reviewing, in cooperation with the Executive Management, the policies and regulatory controls on regular basis, including internal and supervisory functions, in order to identify and tackle the weaknesses and risks; and ensuring that control and supervision functions are performed satisfactory, have the required support and perform effectively and independently.

16 30 Annual Report 2013 Annual Report Governance Report (continued) Board Members for the first session ( ) Warba s Board Members for the first session were appointed by the Establishment Committee in 17 February 2010, and the Board continued until 13 August About the members of the Board of Directors 1- Mr. Jassar Dakheel Al-Jassar Chairman and Managing Director Al-Jassar has graduated from Helwan University Arab Republic of Egypt, in 1978 and holds BA in Business Administration. He has long experience in Islamic banking, finance and investment sectors as he worked for 25 years with Kuwait Finance House (KFH), holding several posts the last of which continued for five years as a General Manager. In addition, he served as a board member in several local, GCC and international banks and companies like Boubyan Bank, Sharjah Islamic Bank, Al Salam International Hospital, ALAFCO Aviation Lease and Finance Company, Kuwait Petroleum Corporation, and KFH Malaysia. He also participated in numerous sessions and forums in various fields.. 2- Mr. Wael Yacoup Al-Qattami Vice Chairman Al Qattami has graduated from the University of Tampa Florida, in 1980, and holds BA in Business Administration. He has a 27 year experience in (Retail & Corporate) banking, investment and real estate sectors. From 2010-present, Al Qattami holds the position of CEO of Al Mulla International Finance & Investments Company. Before that, he was the Vice Chairman of Warba. He commenced his career in Kuwait and Middle East Bank (now known as Ahli United Bank), then he joined KFH and assumed several leading positions. After that, he held the position of CEO at Aussol Leasing and Finance Company, then the Chairman and CEO of Masaa Real Estate Company. 3- Dr. Ahmad Abdulrahman Al-Melhem Board Member Al Melhem holds Ph.D. in Private and Commercial Law from University of Exeter - UK, in 1990, and Master in Legal Studies in International Trade in 1988 from the same University. He holds the position of Legal Advisor at Kuwait Investment Authority since He commenced his career as a Lawyer at Fatwa and Legislation Department - National Assembly. He works as a Professor Doctor of Private Law at Kuwait University since 2001, and Dean of Faculty of Law from 2003 to He is a member in many authorities, committees, arbitration committees at Ministry of Justice, Chamber of Commerce and Industry, and Kuwait Foundation for the Advancement of Sciences. He produced a number of researches, reports and articles in legal and economic magazines. 4- Mr. Jamal Abdullah Dashti Board Member Dashti holds BA in Economics from the American University of Washington in He contributed to the establishment of a number of local companies in various sectors, and holds the position of CEO at Cozmo Entertainment Company since In the banking sector, he worked in the area of local and international corporate financing for 13 years. Further, he participated in specialized training courses in top international banks in the area of corporate risk management. He is a board member in a number of financial companies like Credit One Company. the last 14 years of his tenure. He also attended a great number of training courses and prepared significant studies in the area of planning and management. 5- Mr. Ahmed Duaij Al-Duaij Board Member Al-Duaij holds a BA in Commerce, Major of Accounting, from the University of Kuwait in He started his career in the Financial Auditing Department - State Audit Bureau and formed an economic advisory bureau. He is a former Member of Parliament and rapporteur of the Committee on Financial and Economic Affairs. He used to be a member in a number of governmental councils and committees like the Supreme Council for Planning and Development, Human Development Report Advisory Committee. In addition, he is the Vice Chairman of Aayan Real Estate Company. He participated in many conferences and training programs in economics and finance. 6- Mousa Jaafar Maarafi Board Member Maarafi holds a BA in Mechanical Engineering from the University of North Carolina USA, in He commenced his work in the oil sector in a number of deep rooted Kuwaiti oil companies like Kuwait National Petroleum Company (KNPC), Petrochemical Industries Company (PIC), and Kuwait Melamine Company (KMI). In addition, he spent 27 years of his career in Kuwait Shipbuilding and Repair Company, holding the position of the Company s Chairman and Managing Director for 7- Mr. Yousef Ali Al-Meilem Board Member Al Meilem holds a BA of Commerce Major of Accounting, from Kuwait University in He commenced his career at Kuwait Real Estate Bank (now known as Kuwait International Bank), then joined Kuwait Finance House for 27 years assuming leading positions, the last of which was the position of Vice General Manager. During his tenure in KFH, Al Meilem acquired long experience in real estate and finance sectors. In addition, he is a board member in a number of leading real estate companies in Kuwait like Enmaa Real Estate Company, and Kuwaiti Manager. He also is a member in a number of committees and professional councils.

17 32 Annual Report 2013 Annual Report Governance Report (continued) Board Members for the second session ( ) At the Ordinary General Assembly meeting held on 14 August 2014, a representative for Kuwait Investment Authority was appointed for the second session of the board, and six members also were appointed. Briefs on Board Members 1- Mr. Emad Abdullah Al-Thaqeb Chairman (elected) Al Thaqeb holds the position of the Chairman of Warba s Board of Directors for its second session since 15 August Born in 29 September 1960, Al Thaqeb holds BA in Accounting from Kuwait University in He commenced his career as a Real Estate Manager in Awqaf Public Foundation during the period from 1993 until 1998, and then he held the position of General Manager in Real Estate Asset Management Company (REAM) from 1998 until After that, he assumed the position of Assistant General Manager of Finance Sector Department at KFH from 2001 until 2012, and now holds the position of VP of Real Estate Investment Group. He was a board member in a number of companies, most notably Nakheel United Real Estate Company, Kuwait Manager Company, and Jenan Real Estate Company Saudi Arabia. Further, he participated in many courses and forums. 2- Mr. Jassar Dakheel Al-Jassar Vice Chairman & CEO (elected) Board Member for the first session ( ) 3- Dr. Ahmad Abdulrahman Al-Melhem Board Member (elected) Board Member for the first session ( ) 4- Jamal Abdullah Dashti Board Member (elected) Board Member for the first session ( ) 5- Mr. Hisham AbdulRazzaq Al-Razzuqi Board Member (elected) Born in 11 March 1949, Al Rezouqi holds BA in Public Administration from the American University in Beirut, and attended Senior Management Program organized by Harvard University in He commenced his career in Kuwait Foreign Trading Contracting Investment Company since 1974 until 1984, assuming several positions, the last of which was the Deputy General Manager. He joined Gulf Investment Corporation as Vice CEO from 1984 to 1995, then promoted to General Manager from 1995 to 2001, then to CEO from 2001 to He worked as a consultant of The Conference Board, and a faculty member of Solaiman Alalian School of Business Administration - American University of Beirut. Additionally, he worked as a board member and Chairman in more than 19 local and regional companies, banks and financial institutions, namely Bahrain Steel Company, National Industrialization Company KSA, Burgan Bank, Kuwait Investment Company, Tawasul Telecom Company, Kuwait Reinsurance Company, and Global Investment House. 6- Mr. Abdulwahab Abdullah Al-Houti Board Member (elected) Born in 12 January 1953, Al Houti holds BA in Business Administration from Kuwait University in 1976, and Master of Business Administration from the University of New Haven USA in Currently, he works as an Advisor for the Chairman of the International Islamic Charity Organization since Al Houti commenced his career as a Teacher of commercial subjects in Ministry of Education during the period from 1983 to 1997, and then he assumed the position of Department Manager and Assistant Undersecretary in Ministry of Awqaf and Islamic Affairs during the period from 1983 to During the period from 1994 to 2004, he worked as a board member in a number of companies and banks, namely Boubyan Bank, Islami Bank Bangladesh, Capivest Investment Bank, and Real Estate Asset Management Company (REAM). 7- Dr. Mahmoud Ahmad Abdulrahman Board Member - Representative of Kuwait Investment Authority Born in 19 July 1962, Abdulrahman holds a BA of Law from Kuwait University in 1988, and Ph.D. in Commercial Law from University of Exeter - UK, in He is a member of Warba s Board of Directors for its second session since 11 December Currently, he is the Manager of Legal Affairs Department of Kuwait Investment Authority since He commenced his career in 1989 as a Delegation Member Lecturer in Faculty of Law - Kuwait University, then Teacher, Assistant Professor and Assistant Dean for Students Affairs in Faculty of Law in He is now a Board Member in Kuwait Cement Company since 2013 and National Offset Company since Mr. Othman Ibrahim Al-Essa Board Member - Resigned on 22 October 2013 Al Essa assumed the position of Board Member from 22 August 2013 until resigned in 22 October He resigned for conflict of interests between his position in Warba as a Board Member and his new position as a CEO of Kuwait Clearing Company. Born in 1 January 1958, Al Essa holds a BA in Finance from Kuwait University in 1981, and Master of Business Administration from the American International Institute of Massachusetts in He commenced his career as an Assistant Manager of Internal Audit Function in Gulf Investment Corporation from 1985 to 1993, then Investment Accounting Department Manager in Kuwait Investment Authority from 1993 to 2006, and Executive Manager of Operations Sector in Kuwait Investment Authority from 2006 to 2013.

18 34 Annual Report 2013 Annual Report Governance Report (continued) Attendance at Meetings of the Board and the Board Committees First Session s Board from January 2013 to 13 August 2013 Board Committees Membership and Duties Board Credit and Investment Committee The Committee is chaired by Mr. Jassar Dakheel Al Jassar, and included as members Mr. Imad Abdullah Al Thaqeb, Mr. Jamal Abdullah Dashti, and Mr. Hisham Abdul Razzaq Al Rezouqi. The Committee reviews, evaluates, develops and recommends the board approval of all issues related to the strategy, business plans, budget, financial performance, finance and investment proposals, fees and commissions, financing portfolio performance, investments, provisions, as well as the legal actions taken in case of defaulting customers. Board Audit Committee The Committee is chaired by Mr. Abdulwahab Abdullah Al Houti, and includes as members Dr. Ahmad Abdulrahman Al Melhem, and Dr. Mahmoud Ahmad Abdulrahman. It reviews and monitors the bank s actions pertinent to fraud; reviews the reports issued by the Department and the Internal Auditor; checks the integrity of internal control aspects, adequacy of control systems; evaluates the performance of the Chief Internal Auditor, and determines his remuneration as well as that of the internal auditors; and considers the recommendation of the Executive Management regarding the appointment and termination of external auditors and determines their fees. Board Risk Committee The Committee is chaired by Dr. Ahmad Abdulrahman Al Melhem, and includes as members Mr. Abdulwahab Abdullah Al Houti, and Dr. Mahmoud Ahmad Abdulrahman. The Committee helps the Board of Directors to execute the latter s duties and responsibilities relevant to strategies, risk appetite and finance and investment activities. It is also responsible for highlighting and developing the bank s risk strategy. Board Governance Committee The Committee is chaired by Mr. Jamal Abdullah Dashti, and includes as members Mr. Hisham Abdul Razzaq Al Rezouqi, Dr. Ahmad Abdulrahman Al Melhem, and Mr. Imad Abdullah Al Thaqeb. The Committee helps the Board of Directors to fulfill the governance requirements. In addition, it prepares and updates the bank s governance list, ensures adherence of the bank s connected parties to the implementation of governance requirements and standards, and reports the same to the Board of Directors. Member / Board and Board Committees Jassar Dakheel Al-Jassar Chairman and MD Wael Yacoup Al-Qattami Vice Chairman Board meetings BCIC committees Board Audit committee meetings Board Risk committee meetings Board Governance committee meetings Board Nomination & Remuneration Committee meetings 6 )6( 13 )14( )0( - 5 )6( )4( 0 )0( 0 )0( Ahmed Duaij Al-Duaij 4 )6( - 4 )4( - 0 )0( - Dr. Ahmad Abdulrahman Al-Melhem 5 )6( - 4 )4( 1 )4( - - Jamal Abdullah Dashti 6 )6( 12 )14( )0( Mousa Jaafar Maarafi 4 )6( - 3 )4( 1 )4( - - Yousef Ali Al-Meilem 2 )6( 11 )14( )0( Numbers between brackets in the above table refer to the number of meetings held by the Board and Board Committees during Board Nominations & Remunerations Committee The Committee is chaired by Dr. Mahmoud Ahmad Abdulrahman, and includes as members Mr. Jamal Abdullah Dashti, and Mr. Abdulwahab Abdullah Al Houti. The Committee helps the Board of Directors to determine the powers of board membership nominees, as well as the nominees for CEO and Deputy CEO positions. It also ensures the effectiveness of nomination policy implementation as well as its alignment with the bank s objectives.

19 36 Annual Report 2013 Annual Report Governance Report (continued) Executive Management Name Title Experience Nationality Education Member / Board and Board Committees Imad Abdullah Al-Thaqeb Chairman Jassar Dakheel Al-Jassar Vice Chairman & CEO Dr. Ahmad Abdulrahman Al-Melhem Jamal Abdullah Dashti Abdulwahab Abdullah Al-Houti Othman Ibrahim Al-Essa* Dr. Mahmoud Ahmad Abdulrahman** Hisham Abdul Razzaq Al-Rezouqi Second Session s Board from 14 August 2013 to 31 December 2013 Board meetings BCIC committees Board Audit committee meetings Board Risk committee meetings Board Governance committee meetings Board Nomination & Remuneration Committee meetings 4 )6( 6 )8( )2( - 6 )6( 8 )8( )6( - 2 )3( 2 )2( 1 )2( - 6 )6( 8 )8( )2( 1 )1( 4 )6( - 3 )3( 2 )2( - 1 )1( 4 )6( - 1 )3( 1 )2( - 0 )1( 1 )6( - 1 )3( 1 )2( - 0 )1( 3 )6( 4 )8( )2( - Numbers between brackets in the above table refer to the number of meetings held by the Board and Board Committees during 2013 * Resigned his position as a representative of Kuwait Investment Authority on 22 October ** Appointed in place of the representative of Kuwait Investment Authority on 11 December Jassar Dakheel Al Jassar Basel Jasem Al Obeid Khaled Hasan Hafez Adnan Salman Al Salem Mahmoud Mohammad Yousof Vice Chairman & CEO Chief Corporate Banking Officer Chief Financial Officer Chief Retail Banking Officer Chief Internal Auditor 25 years Kuwait University degree 26 years Kuwait University degree 20 years Egypt University degree 15 years Kuwait University degree 30 years Egypt University degree Feroz Noorani Chief Risk Officer 31 years India Master Haytham Abdulazeez Al Terkait Chief Information Technology Officer Brief on the Executive Management Mr. Jassar Dakheel Al-Jassar Vice Chairman & CEO A brief mentioned on board of director browsing Mr. Basel Jasem Al-Obeid Chief Corporate Banking Officer 19 years Kuwait University degree Al Obeid has obtained a BA in Finance from Faculty of Commerce and Political Sciences in 1987, and has 26 years of experience in banking and financial sector. He commenced his career in 1987 at Kuwait and Middle East Bank (now known as Ahli United Bank) where he assumed several posts, the last of which was Corporate Banking, Commercial and International Operations Department in 1998, then moved in 2002 to Securities House Company where he assumed several posts, the last of which was Assistant Managing Director for Credit and Treasury. In 2012, he joined Warba Bank as a Chief Corporate Banking Officer, and still holding this position. In addition, he is a board member in a number of institutions and member of the Family Support Fund.

20 38 Annual Report 2013 Annual Report Governance Report (continued) Mr. Khaled Hasan Hafez Chief Financial Officer Hafez has obtained a BA in Accounting from Cairo University in In addition, he is a fellow member of the Chartered Accountants Association in USA, and holder of CPA from the Accounting Council of California, and a Diploma in Islamic Economy from Faculty of Sharia Kuwait University. Hafez has over 20 years of experience in the area of Islamic banks and financial institutions and auditing. He worked with a number of the world s big audit and consultancy firms like Ernst & Young, and PricewaterhouseCoopers, and held and executive position in KFH. In addition, he worked as a lecturer for a number of professional and academic certificates, and participated in numerous conferences and forums on banking activity and Islamic economy. Further, he worked in the area of consultancy, offering advisory services on structuring, acquisitions and Asset Assessment. He joined Warba at the early stages of establishment and contributed to the establishment of the bank and its infrastructure and structure. Currently, he holds the position of Head of Financial Control & Planning Group. Mr. Adnan Salman Al-Salem Chief Retail Banking Officer Al Salem has obtained a BA in Business Administration, Major of Marketing, from Kuwait University in 1997, as well as numerous specialized certificates in the banking sector from international renowned bodies. He has 15 years of experience in the banking sector, commenced his career as a staff member in Gulf Bank, and then moved to KFH where he assumed several administrative posts, the last of which was the position of Area Manager until In 2010, he joined Warba Bank as a Deputy Chief Retail Banking Officer to assist in the establishment of the bank in addition to the duties assigned to him. In 2012, he was promoted to Chief Retail Banking Officer, and still holding this position. Mr. Mahmoud Mohammad Yousef Chief Internal Auditor Certified in Risk and Information Systems Control (CRISC) from the Information Systems Audit and Control Association (ISACA), USA, and graduated from Brooklands Technical College, Weybridge, Surrey, England ( ) and holding HNC in Computer Studies in addition to an A Level in Computer Science, he worked at National Bank of Kuwait (NBK) since 1983 for 28 years in the positions of Assistant General Manager and Deputy Chief Internal. During this period, he was able to provide independent, objective assurance and consulting services designed to add value and improve the bank s operations. In addition, he participated in various projects steering committees in the Head Office and conducted on-site audit reviews of all NBK s international branches & subsidiaries. He joined Warba Bank as a Chief Internal Auditor at the end of 2011 to date. Mr. Feroz Noorani Chief Risk Officer Noorani has obtained Master degree in business and finance in 1986 from the University of Mumbai, and holds a BA in Law and Accounting as well as a number of professional certificates in areas of banking, corporate governance, and risk management. He has 30 years of experience in the area of banking and financial institutional services in GCC / Middle East region and India as he held several senior positions in commercial, investment and Islamic banks, as well as risk, governance and compliance management. In 2011, Noorani joined Warba Bank in the position of Chief Risk Officer, his responsibilities include managing the bank s wide risks and focusing on having in place strict measures for risk management and governance. Mr. Haytham Abdulazeez Al-Terkait Chief Information Technology Officer Al Terkait has obtained a BA of Mechanical Engineering, from University of Denver, Colorado - USA in He attended many significant and specialized training courses on IT sciences. Al Terkait has 19 years of experience in this field acquired throughout his career, as he worked for KFH, and Kuwait Institute for Scientific Research. He joined Warba Bank in 2011 as Chief IT Officer. Management Committees Duties and Responsibilities Executive Credit and Investment Committee FIC is authorized to consider all finance and investment related proposals. And as appropriate, it will approve such proposals and forward the same to the Chairman / Executive Committee for approval as per the approved authorities. FIC is responsible for monitoring the bank s financing and investment portfolio, and recommending any appropriate actions to the Executive Committee or the Board of Directors. Assets and Liability Management Committee (ALCO) ALCO is responsible for all banking activities internally and externally, and for ensuring the smooth application, management and control of the budget. It develops the framework of the outcome policy relevant to market and liquidity risks encountered by the bank. The core objective of the committee is to reduce, to the minimum level possible, the bank s exposure to the risks of market s fluctuations, and to maximize profitability. In addition, the committee is responsible for supervising all aspects of optimal balance of assets and liabilities on the short, medium and long term, so as to achieve business growth and profitability and to comply with the regulatory and financial requirements. Provisioning Committee Established by the board in 25 July 2012, the Provisions Committee is responsible for reviewing and approving impaired finance and investment accounts, recommending the proper levels of specific and required provisions, and recommending an action plan as deemed appropriate. It also reviews and ensures the application general and specific provisions requirements based on the relevant accounting and regulatory requirements. In addition, the committee reviews debt write offs and provides relevant recommendations to the Board of Directors or the Executive Committee. Management Committee The Committee is responsible for the implementation of Warba s vision and strategy. It convenes monthly to ensure the flow of information to the Executive Management with a view to reach a unified opinion on the decisions that could affect the bank s conditions in general. The committee s monthly meetings ensure flow of information and provision of informed opinions to the Executive Management on the bank s wide decisions affecting the bank. The committee s scope of work includes, for example, issues related to the bank s operations and procedures, schemes of new products and services, private projects, human resources, information technology, as well as contracts, purchasing and administrative affairs. It also tackles and decides on all other issues which do not fall within the remit of any specific committee. Adequacy of Internal Control Systems Based on CBK s instructions, an independent auditor has prepared a report on the bank s internal controls for The report was presented to the Board Audit Committee, as well as the Board of Directors at its meeting No. 6, held on 17/7/2013. The report, showing the adequacy of Warba s internal controls and stress systems, was presented to CBK.

21 40 Annual Report 2013 Annual Report Governance Report (continued) Compensation Policy (Salary & Remuneration) Warba has a compensation policy that provides fair, equitable and competitive compensation for its employees; encouraging and rewarding high performance; attracting individuals of the right caliber, qualifications and experience for the jobs in the Bank; and providing flexibility to adapt to market changes and imperatives in a structured and standardized manner. Warba has developed systematic procedures for disbursement of financial rewards, taking into account the application of the Claw Back in necessary. The role of the Board is to provide effective oversight over the remuneration systems and processes, as well as to review and monitor the salary structure to ensure that they are properly implemented in cooperation with the Nominations and Remunerations Committee that is responsible for preparing the Compensation Management Policy, and the same is submitted to the Board of directors for approval. The committee shall also perform a periodic review of the policy and provide the recommendations that ensure effective and proper implementation of the policy. Components of the Compensation (Salary & Remuneration) The compensation package includes a number of items given to the employees. Such items are divided into two categories: Basic salary and allowances paid monthly to the employee and specified according to the staff member s evaluation standards and the bank s grading system. Other benefits and rewards like, travel tickets, health insurance, tuition allowance, end of service benefits as well as the remunerations approved by the Board of Directors in coordination with the Nominations and Remunerations Committee. Disclosures of salaries and remunerations as per CBK (corporate governance) instructions: First: Board Members Remunerations Since the establishment of the bank, no remunerations were distributed to the Board Members for their periodic meetings and membership in various board committees. Members of the previous and existing Boards waived their right to avail the maximum remunerations applicable as per the Companies Law of Second: Compensations paid to the bank s highest paid executives: According to the instructions of CBK and the rules of corporate governance, this section covers the total compensations and remunerations paid to the five key executives who received the highest compensation package for Such package includes their salaries, as well as short and long term incentives, and covers the CEO. CRO, CFO, and CIA. The total salaries and remunerations paid to the five key executives plus another position that is required to be mentioned, amounted to KD 741,724 inclusive of basic salaries, allowances, entitlements and end of service benefits. Third: compensations as per Warba s various categories of employees: 1. Total compensations paid to the CEO and his deputies and / or other senior executives whose appointment is subject to the approval of the regulatory and supervisory bodies, i.e., nine individuals, amounted to KD 1,200,000 inclusive of basic salaries, allowances, entitlements and end of service benefits. 2. Total compensations paid to the Financial Control and Risk employees, i.e., 22 employees, amounted to KD 733,497 inclusive of basic salaries, allowances, entitlements and end of service benefits. 3. Total compensations paid to the employees exposed to risks, i.e., 9 employees, amounted to KD 439,026 inclusive of basic salaries, allowances, entitlements and end of service benefits. This category includes the Top Management, Division Heads with financial authorities who delegate responsibilities to their staff members, and who are responsible and accountable for the risks. As at the date of the General Assembly meeting, no annual remunerations were distributed to the bank s employees and executive management for the year However, a maximum amount of KD 500,000 has been earmarked for this issue, pending the approval of the Nominations and Remunerations Committee as well as the Board of Directors. Anti-Money Laundering As a financial institution, Warba Bank is fully committed to mitigating and controlling the threats and risks of Money Laundering and other financial crimes including Financing of Terrorism. It complies with all laws and regulations issued the Central Bank of Kuwait (CBK) on Anti-Money Laundering (AML) and Combatting the Financing of Terrorism (CFT). Accordingly, the guidelines and requirements under the new Kuwaiti AML/ CFT Law No. 106 of 2013 and CBK Instructions No. 308 of 2013 have been incorporated in the policies and procedures of the bank. This is to ensure full compliance with all legislative and regulatory requirements, especially the application of risk assessment for the risks associated with money laundering and financing of terrorism, and to identify the risk factors related to customers and transactions. Additionally, the Know-Your-Customer (KYC) principle is used all the time to organize the customer s relationship with the bank. Further, the Bank seeks to abide by the relevant international guidelines and best practices. In order to combat money laundering and prevent financial crimes, Warba Bank ensures the effectiveness of its personnel and systems in identifying possible unusual or suspicious transactions. Accordingly, Warba s staff members receive annual awareness training and get the guidelines and tools required to with any such situation. In is noteworthy that Warba has set the systems required to mitigate the risks of money laundering and financing of terrorism. Compliance In line with the regulatory body s instructions relevant to the fundamental principles of compliance, an independent head of compliance has been appointed to report directly to the Governance Committee, with full access direct to the Top Management and all bank related information. Head of Compliance will coordinate all regulatory reports required by CBK and Kuwait Stock Exchange. Additionally, the bank maintains comprehensive policies and procedures to ensure full compliance with CBK s instructions. Code of Business Conduct and Ethics Warba Bank s practices and activities are governed by the standards of behavioral ethical conduct that apply to all Warba staff members working for the bank or representing the bank and serving its best interests. instructions. Disclosure and Transparency Professionally and transparently, Warba Bank communicates with its partners expressly through various channels including the annual report, the website, and local commercials. The bank s website constitutes a significant part of the disclosure channels, plus the board reports, financial statements and notes, information related to the bank s activities like main products and services, and regular press releases published by media.

22 42 Annual Report 2013 Annual Report Capital Adequacy Disclosures Warba Bank For the year ended 31 December 2013 First : Bank Structure Second : Capital Structure Third : Capital Adequacy Ratios Fourth : Risk weighted assets and capital required Fifth : Risk Management Sixth : Capital Exposures Seventh : Investment Accounts Eighth : Sharia Regulations

23 44 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait Capital Adequacy Disclosures Qualitative and quantitative disclosures related to Capital Adequacy Standard have been prepared under Basel II for Islamic Banks licensed in the State of Kuwait in accordance with Central Bank of Kuwait instructions and regulations issued as per their circular No.2/RBA/44/2009 dated 15 June General disclosures related to Capital Adequacy Standard under Basel II rely on calculating the minimum capital required to covering credit and market risks using the Standardized Approach and the minimum capital required to cover operational risk using the Basic Indicator Approach. First: Bank Structure Warba Bank K.S.C. (the Bank ) is engaged in providing Islamic banking and finance and investment services that comply with Islamic Shari a. The bank has no subsidiaries to be fully consolidated into the Bank s financial statements nor any associates to be accounted for. Second: Capital Structure The bank s capital comprises Tier 1 capital which demonstrates the bank s underlying strength and includes share capital, reserves according to rules and regulations. The bank s capital does not have structure or complex equity instruments. As at 31 December 2013, Tier 1 Core Capital amounted KD 91,512 thousand (2012: KD 95,221 thousand), Tier 2 Supplementary Capital amounted KD 1,921 thousand (2012: KD 1,044 thousand) as detailed below: Capital Structure Tier (1) Core Capital 2013 (KD 000) 2012 (KD 000) Share Capital Paid 100, ,000 Disclosed reserves (4,779) (2,920) Minority interest in consolidated subsidiaries - - Total (1) 95,221 97,080 Deduction from Tier (1) Core Capital - - Treasury shares - - Goodwill - - Accumulated losses for the current year 3,709 1,859 Total (2) 3,709 1,859 A) Total Tier (1) Capital 91,512 95,221 Tier (2) Supplementary Capital - - Asset revaluation reserves - - Fair value reserves (390) 144 General provisions 2, Total (3) 1,921 1,044 Deduction from Tier (2) Supplementary Capital - - Unconsolidated financial institutions subsidiaries - - significant minority investments - - Investment in insurance entities - - Total (4) - - B) Total tier (2) of capital 1,921 1,044 Total Available Capital 93,433 96,265 Third: Capital Adequacy Ratios At 31st of December 2013 the total Capital Adequacy ratio is 47.57% and Tier (1) is 46.56% (2012: total Capital Adequacy ratio was 77.23% and Tier (1) wad %), compared to the minimum ratio required by regulatory authorities of 12%. The bank ensures the fulfillment of Central Bank of Kuwait requirements in relation to capital adequacy.

24 46 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait Fourth: Risk weighted assets and capital required 1. Credit risk The minimum required capital for credit risk exposures was KD 22,282 thousand (2012: KD 13,941 thousand) as at 31 December 2013 as detailed below: 2013 )KD 000( SN Description of Credit Risk Exposures 2012 )KD 000( Total Exposures Net Exposures Risk-Weighted Assets Required Capital 1 Cash items Claims on sovereigns 76,261 76,261 3, SN Description of Credit Risk Exposures Total Exposures Net Exposures Risk-Weighted Assets Required Capital 3 Claims on international organisations Cash items 1,514 1, Claims on sovereigns 76,613 76,613 2, Claims on international organisations Claims on public sector entities 5,937 5, Claims on multilateral development banks Claims on banks 68,333 68,333 17,962 2,155 7 Claims on corporates 136, ,300 78,054 9,366 8 Regulatory retail exposure 34,451 34,451 21,715 2,606 9 Qualifying residential housing financing facilities Past due exposures Commodities and goods positions Real estate investments 24,480 24,480 30,859 3, Investment and finance transactions with customers 51,093 21,862 19,584 2, Sukuk and securitization Other exposures 15,799 15,799 14,208 1,705 Total 415, , ,682 22,282 4 Claims on public sector entities Claims on multilateral development banks Claims on banks 46,824 46,824 16,186 1,942 7 Claims on corporates 83,353 81,533 66,900 8,028 8 Regulatory retail exposure 6,505 6,505 5, Qualifying residential housing financing facilities Past due exposures Commodities and goods positions Real estate investments 11,025 11,025 18,197 2, Investment and finance transactions with customers Sukuk and securitization Other exposures 5,410 5,410 5, Market Risk Total 231, , ,178 13,941 Market Risk-weighted exposure during the financial year 2013 amounted KD 3,042 thousand (2012: KD 3,637 thousand), based on the standardized approach. The minimum required capital for market risk exposures amounts to KD 365 thousand (2012: KD 436 thousand).

25 48 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait 3. Operational Risk Operational Risk-weighted exposures calculated during the year 2013 amounted to KD 7,825 thousand (2012: KD 4,833 thousand) as per the Basic Indicator Approach. The minimum required capital for operational risk exposures amounts to KD 939 thousand (2012: KD 580 thousand). Fifth: Risk Management Risk is inherent in all activities of a Bank and is managed through a process of ongoing identification, measurement, mitigation and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank s financial health and continuing profitability. The Bank s business generates exposure to the following broad risks from its financial transactions and use of financial instruments: Credit risk Market risk Liquidity risk Operational risk In addition, there are other risk areas that need to be monitored and controlled. This note presents information about the bank s exposure to each of the above risks, the bank s objectives, policies, models and processes for measuring, mitigating and managing risks, and the bank s management of capital. 1. Risk Management Structure The Board of Directors (the Board ) has overall responsibility for the establishment and oversight of Bank s Risk Management Framework. The Board has established Board Risk Committee (the BRC ) comprising members from the Board, to set the framework and monitor the Bank s Risks and Control related requirements. For specific risk types like credit, market and liquidity risks, the Board has further set up a Board Credit & Investment Committee ( the BCIC ). At the management-level, the following committees the Executive Credit & Investment Committee (the ECIC ); Assets and Liabilities Management Committee (the ALCO ); and the Provisioning Committee; are set-up to assist it in fulfilling its responsibilities. An independent Risk Management Group (the RMG ) headed by the Chief Risk Officer (the CRO ) reports to the BRC, responsible for Enterprise-wide Risk, so as to assists it in carrying out the oversight responsibility of the Board. 2. Risk Management Framework The Board Risk Committee (the BRC ) sets the framework and monitors the Risks and Control functions of the Bank. The Board has also established a Board Audit Committee (the BAC ), as required by Central Bank of Kuwait (the CBK ), which amongst other functions is also required to monitor adherence with the Bank s Risk Management principles, policies and procedures, and for reviewing the adequacy of the Risk Management Framework. The Assets and Liabilities Management Committee (the ALCO ) is responsible for all matters related to the Bank s Balance Sheet management including all assets & liabilities, asset allocation, liability structure, funding diversification & cost-effectiveness, asset & liability maturity profile, net return margin, as well as all other issues related to capital adequacy with respect to market and liquidity risk management. The Executive Credit & Investment Committee (the ECIC ) is the executive management decision making body which is empowered to consider all financing and investment proposals for approval within its delegated authorities and/or recommendations to the Board Credit & Investment Committee for final approval. The Provisioning Committee is responsible for reviewing the entire financing and investment portfolio of the Bank, to assess against actual delinquency or potential impairment and recommend the required level of provisioning as the Central Bank of Kuwait (CBK) regulations and financial/accounting standards. 3. Risk Management Systems In order to manage risks in a holistic manner and to measure risks on a consolidated basis, the Bank has a formal Risk Governance Framework, which provides detailed guidelines for a sound framework for enterprisewide risk management. The objectives of risk management are supported by various risk policies that are reviewed and updated regularly. The risk policies, in general, cater to detailed planning for various risks based on business strategies, past performance, future expectations, economic conditions and, internal as well as external regulations. The policies also require comprehensive analysis of a set of pre-determined parameters prior to introduction of new products or instruments. The policies have put in place internal limits (nominal as well as risk based) for continuous monitoring and ensuring that risks are maintained within the Bank s risk appetite. Periodical reporting of risks to various authorities including the ALCO, ECIC, BCIC and the BRC ensures that the Board and the executive management are continuously kept aware of positions thereby enabling informed decision-making. The Risk Management policies are established to identify, measure, mitigate, and analyze the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and ensure adherence to the limits. Risk management policies and systems are subject to review regularly, on an ongoing basis, to reflect changes in economic environment, market conditions, products and services offered by the Bank. 4. Types of Risks Following are the main risks which the Bank is exposed to: 4.1 Credit Risks Credit risk is the risk of financial loss to the Bank if any counterparty to a financial obligation or instrument fails to meet its contractual obligations, and arises principally from the Bank s receivables from Islamic financing activities, Ijara and Investments, etc. For risk management control purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country risk and sector risk) in one measure about riskiness of an exposure. Credit Risk Framework The Bank s Board has approved Financing and Investment Policies for various business groups and investment asset types. The Board has also approved the Executive Credit & Investment Committee (the ECIC ) Charter empowered for initial screening of proposals and approval within its delegated authorities and the Board Credit & Investment Committee (the BCIC ) Charter, which provides guiding principles and approving authorities for the various financing and investment proposals of the Bank. Risk Management provides independent opinion and assessment of risk for every financing and investment proposal marketed and presented to the approving authorities for decision making. In addition, the Bank manages the credit exposure by obtaining security where appropriate and limiting the tenor of exposure or structures that are beneficial to the Bank s management of risks to an exposure.

26 50 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait Net Credit Exposures (Rated and Unrated) 2012 )KD 000( 2013 )KD 000( SN Description of Credit Risk Exposures Net Credit Exposure Rated Exposures Unrated Exposures SN Description of Credit Risk Exposures Net Credit Exposure Rated Exposures Unrated Exposures 1 Cash items Claims on sovereigns 76,261 9,382 66,879 1 Cash item 1,514-1,514 2 Claims on sovereigns 76,613 8,407 68,206 3 Claims on international organizations Claims on public sector entities 5, ,563 5 Claims on multilateral development banks Claims on international organisations Claims on public sector entities Claims on multilateral development banks Claims on banks 46,824 18,054 28,770 6 Claims on banks 68,333 39,315 29,018 7 Claims on corporates 81,533 3,667 77,866 7 Claims on corporates 120, ,591 8 Regulatory retail exposure 6,505-6,505 8 Regulatory retail exposure 34,451-34,451 9 Qualifying residential housing financing facilities Past due exposures Commodities and goods positions Real estate investments 24,480-24, Investment and finance transactions with customers 21,862-21, Sukuk and securitization Other exposures 15,799-15,799 9 Qualifying residential housing financing facilities Past due exposures Commodities and goods positions Real estate investments 11,025-11, Investment and finance transactions with customers Sukuk and securitization Other exposures 5,410-5,410 Total 369,780 48, ,975 Total 229,483 31, ,883

27 52 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait Total Credit Risk exposures (Self-Financed and Financed from Investment Accounts) SN 2013 )KD 000( Description of Credit Risk Exposures Self Financed Financed From Investment Accounts 1 Cash items 1,514-2 Claims on sovereigns 21,432 55,181 3 Claims on international organisations Claims on public sector entities 1,547 4,390 5 Claims on multilateral development banks Claims on banks 28,624 39,709 7 Claims on corporates 33,843 96,011 8 Regulatory retail exposure 8,979 25,472 9 Qualifying residential housing financing facilities Past due exposures Commodities and goods positions Real estate investments 6,379 18,101 SN 2012 )KD 000( Description of Credit Risk Exposures Self Financed Financed From Investment Accounts 1 Cash items Claims on sovereigns 49,823 26,438 3 Claims on international organisations Claims on public sector entities Claims on multilateral development banks Claims on banks 31,944 14,880 7 Claims on corporates 49,925 26,828 8 Regulatory retail exposure 4,231 2,274 9 Qualifying residential housing financing facilities Past due exposures Commodities and goods positions Real estate investments 7,172 3, Investment and finance transactions with customers Sukuk and securitization Other exposures 4,973 - Total 149,653 74, Investment and finance transactions with customers 13,316 37, Sukuk and securitization Other exposures 10,986 4,813 Total 126, ,817 Excess Risk Concentrations Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Bank s performance to developments affecting a geographic location or particular industry.

28 54 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait Geographical Distributions for Credit Risk Exposure 2013 (KD 000) SN Credit Risk Exposures MENA North America Europe Asia Others Total 1 Cash items 1, ,514 2 Claims on sovereigns 76, ,613 3 Claims on international organisations Claims on public sector entities 5, ,937 5 Claims on multilateral development banks Claims on banks 51,487 11,362 4,369 1,115-7 Claims on corporates 125, ,166-68, ,348 8 Regulatory retail exposure 34, ,451 9 Qualifying residential housing financing facilities Past due exposures Commodities and goods positions (KD 000) SN Credit Risk Exposures MENA North America Europe Asia Others Total 1 Cash items Claims on sovereigns 66,879-8, ,261 3 Claims on international organisations Claims on public sector entities Claims on multilateral development banks 6 Claims on banks 37, Claims on corporates 8 Regulatory retail exposure 9 Qualifying residential housing financing facilities ,134 6,505 8, ,281 3,681 2,257-46,824 83, , Past due exposures Commodities and goods positions Real estate investments 10, Investment and finance transactions with customers 13, ,480 51, , Real estate investments 13 Investment and finance transactions with customers 2,302-8, , Sukuk and securitization Sukuk and securitization Other exposures 15, , Other exposures 4, ,410 Total 372,15 11,362 18,362 13, ,059 Total 195,411 2,891 3, ,303

29 56 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait Maturities of total Credit Risk exposures SN Credit Risk Exposures 2013 (KD 000) Up to 3 months 3 to 12 months Over 1 year Total SN Credit Risk Exposures 2012 (KD 000) Up to 3 months 3 to 12 months Over 1 year 1 Cash items Total 1 Cash items 1, ,514 2 Claims on sovereigns 47,712 2,612 26,289 76,613 3 Claims on international organisations Claims on public sector entities ,563 5,937 5 Claims on multilateral development banks Claims on banks 47,131-21,202 68,333 7 Claims on corporates 88,621 46,476 1, ,348 8 Regulatory retail exposure ,165 34,451 9 Qualifying residential housing financing facilities Past due exposures Commodities and goods positions Real estate investments ,480 24,480 2 Claims on sovereigns 30,645 35,038 10,578 76,261 3 Claims on international organisations Claims on public sector entities Claims on multilateral development banks Claims on banks 23,153 12,651 11,020 46,824 7 Claims on corporates 30,822 45,875 6,656 83,353 8 Regulatory retail exposure ,546 6,505 9 Qualifying residential housing financing facilities Past due exposures Commodities and goods positions Real estate investments ,025 11, Investment and finance transactions with customers 36,540 14,553-51, Investment and finance transactions with customers Sukuk and securitization Sukuk and securitization Other exposures 1, ,266 15, Other exposures 1, ,586 5,410 Total 222,840 65, , ,059 Total 86,994 95,401 48, ,303

30 58 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait Main sectors of total Credit Risk exposures SN Credit Risk Exposures Manufacturing & Trade 2013 (KD 000) Banks & Financial Institutions Construction & Real Estate Government Others Total WARBA Bank K.S.C. State of Kuwait SN Credit Risk Exposures Manufacturing & Trade 2012 (KD 000) Banks & Financial Institutions Construction & Real Estate Government Others Total 1 Cash items Cash items ,514 1,514 2 Claims on sovereigns ,613-76, Claims on international organisations Claims on public sector entities Claims on multilateral development banks ,937-5, Claims on banks - 68, Claims on corporates 63,176 10,045 36,156-26, Regulatory retail exposure Qualifying residential housing financing facilities 68, , ,451 34, Past due exposures Claims on sovereigns ,261-76, Claims on international organisations Claims on public sector entities Claims on multilateral development banks Claims on banks - 46, ,824 7 Claims on corporates 54,221-26,874-8 Regulatory retail exposure Qualifying residential housing financing facilities 2,258 6,505 83,353 6, Past due exposures Commodities and goods positions Commodities and goods positions Real estate investments Investment and finance transactions with customers 24,480 24, , , Sukuk and securitization Real estate investments , , Investment and finance transactions with customers Sukuk and securitization Other exposures ,799 15, Other exposures ,410 5,410 Total 63,176 78,866 87,249 82, , ,059 Total 54,695 47,321 37,899 76,261 15, ,303

31 60 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait Irregular and past due credit facilities Irregular and past due credit facilities, and impaired exposures are defined in accordance with the relevant CBK regulations. Specific and general provisions are computed in accordance with CBK regulations on provisioning as well as the applicable accounting standards. The CBK regulations pertaining to specific provisioning differentiate between facilities for corporate, retail and sovereign and specific rules and principles are accordingly applied for performing and non-performing facilities. In addition, minimum general provision has to be carried at 1% of the cash credit facilities and 0.5% for noncash credit facilities, where no specific provision has been taken, in accordance with these regulations. Irregular and past due financing facilities exposures in accordance with standard portfolios On December 31, 2013, the value of the irregular financing facilities, including the Bank s accounts receivable, is KD 690 thousand (2012: 611 thousand KD), and it is amounted at KD 641 thousand after excluding the deferred revenues (2012: 591 thousand KD) and KD 641 thousand after excluding the acceptable collaterals (2012: 580 thousand KD) as per the instructions of the Central Bank of Kuwait for the purpose of specific provisions computation. As of 31 December2013, the Bank s provisions are KD 3,766 thousand (2012: 1,016 thousand Kuwaiti Dinar) including a general provision of 3,128 thousand KD (2012: 900 thousand KD). Irregular and past due facilities exposures according to standard conservative 2013 (KD 000) SN Description of Credit Risk Exposures Low value 2012 (KD 000) Specific Provision Net facilities The specified Provision written off during the period Past due 1 Claims on banks Claims on companies The disclosures of consumer control Eligible housing finance operations Investment and financing operations with clients SN Description of Credit Risk Exposures Low value Specific Provision Net facilities The specified Provision written off during the period Past due Total Claims on banks Claims on companies The disclosures of consumer control ,407 4 Eligible housing finance operations Investment and financing operations with clients Total ,407

32 62 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait Irregular and past due facilities exposures according to the geographical division Irregular and past due facilities exposures according to industrial sectors 2013 (KD 000) 2013 (KD 000) SN Description of Credit Risk Exposures Impaired Specific Provision Net Facilities Written-off specific provisions during the period Past Due SN Description of Credit Risk Exposures Impaired Specific Provision Net Facilities Written-off specific provisions during the period Past Due 1 Middle East and North Africa ,407 1 Manufacturing & Trade Europe Banks and financial institutions Asia Constructions and real estates Others ,407 Total ,407 Total ,407 SN Description of Credit Risk Exposures Impaired 2012 (KD 000) Specific Provision Net Facilities Written-off specific provisions during the period Past Due SN Description of Credit Risk Exposures Impaired 2012 (KD 000) Specific Provision Net Facilities Written-off specific provisions during the period Past Due 1 Middle East and North Africa Manufacturing & Trade Europe Banks and financial institutions Asia Constructions and real estates Total Others Total

33 64 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait General Provisions Balance Acceptable Risk Mitigation Methods SN Description of Credit Risk Exposures 2013 (KD 000) 2012 (KD 000) 2013 (KD 000) 1 Claims on banks 57 - SN Description of Risk Mitigation Methods Total Risk mitigation methods Net Risk mitigation methods after haircuts 2 Claims on corporates 2, Cash Collaterals Regulatory retail exposures Bank guarantees Real estate investments Shares Investment and financing with customers Leased assets (commercial) - - Total 3, Real estate and land 89,758 44,879 Total 90,158 45, Applicable Risk Mitigation Methods The Credit Policy of the Bank lays down guidelines for collateral valuation and management which includes, minimum coverage requirement for different categories of collateral, re-measuring, frequency and basis of revaluation, documentation, takaful, custodial requirements etc. According to the credit policy, the frequency of revaluing the collateral depends on the type of collateral. Specifically, daily revaluation is required for share collateral and also in cases where the collateral is in a different currency than the exposure. This process is handled by a department independent of the business groups to ensure objectivity. Acceptable collateral includes cash, bank guarantees, shares, real estate etc. subject to specific conditions on eligibility, margin requirements etc., laid down in the credit policy. The credit risk mitigation used for capital adequacy computation includes collateral in the form of cash and shares as well as guarantees in accordance with the CBK s rules and regulations concerning capital adequacy standard. SN 2012 (KD 000) Description of Risk Mitigation Methods Total Risk mitigation methods Net Risk mitigation methods after haircuts 1 Cash Collaterals Bank guarantees Shares Leased assets (commercial) Real estate and land 2,817 1,409 Total 3,228 1,820

34 66 Annual Report 2013 Annual Report WARBA Bank K.S.C. State of Kuwait WARBA Bank K.S.C. State of Kuwait Credit Risk Exposure, Eligible Collaterals and Banking Guarantees 2012 )KD 000( 2013 (KD 000) SN Description of Credit Risk Exposures Total Credit Exposure Eligible Collaterals Banking Guarantees SN Description of Credit Risk Exposures Total Credit Exposure Eligible Collaterals Banking Guarantees 1 Cash items Cash items 1, Claims on sovereigns 76, Claims on sovereigns 76, Claims on international organisations Claims on international organisations Claims on public sector entities 5, Claims on multilateral development banks Claims on banks 68, Claims on corporates 136,348 16,048-8 Regulatory retail exposure 34, Qualifying residential housing financing facilities Past due exposures Commodities and goods positions Real estate investments 24, Claims on public sector entities Claims on multilateral development banks Claims on banks 46, Claims on corporates 83,353 1,820-8 Regulatory retail exposure 6, Qualifying residential housing financing facilities Past due exposures Commodities and goods positions Real estate investments 11, Investment and finance transactions with customers 51,093 29, Investment and finance transactions with customers Sukuk and securitization Sukuk and securitization Other exposures 15, Other exposures 5, Total 415,059 45,279 - Total 231,303 1,820 -

35 68 Annual Report 2013 Annual Report Market Risks Market risk emanates from the process of fair value or future cash flows of a financial instrument which might fluctuate because of changes in market prices. Market risk may arise from open positions in profit rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market or prices such as profit rates, credit spreads, foreign exchange rates and equity prices. The Risk Management Group is responsible for the development of detailed Market Risk Management policies and for the day-to-day review of their implementation Market Risk Frameworks The Bank uses market practice for the valuation of its positions and receives regular market information in order to regulate market risk. The trading market risk framework comprises of the following elements: Limit to ensure that risk-takers do not exceed aggregate risk and concentration parameters set by the Executive Management. Independent mark-to-market valuation, reconciliation of positions and tracking of stop-losses for trading positions on a timely basis. The policies and procedures and the trading limits are set to ensure the implementation of the Bank s market risk appetite. These are reviewed periodically to ensure that they remain in line with the Bank s Market Risk Management policy. The Bank always works to ensure appropriate and continues support to the market risk management process. The Bank is required to comply with the guidelines and regulations of the Central Bank of Kuwait, which set certain limits on Net Open Position, in addition to its internal policies and procedures. 4.3 Operational Risks Sixth: Capital Exposures In accordance with International Financial Reporting Standard, 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 equity investments quoted in organized financial markets, fair value is determined by reference to quoted bid prices. Fair values of unquoted equity investments are determined by reference to the market value of a similar investment, or the expected discounted cash flows, or other appropriate valuation models. Equity investments whose fair value cannot be estimated accurately are carried at cost less impairment if any. Seventh: Investment Accounts Warba Bank receives deposits from customers as part of unrestricted Wakala investment accounts for either limited or renewable periods. Funds are invested in financing and investing activities that will achieve a targeted return. Eighth: Shari a Regulations Shari a regulations are monitored and implemented by the Shari a Compliance and Control Department based on the decisions issued and approved by the Shari a Supervisory Board of Warba Bank. The Shari a Compliance and Control Department supervises the implementation of such regulations on daily basis and answers any Shari a related inquiries. Part of the activities of the Shari a Compliance and Control Department includes amongst other the review of policies, procedures and documentation including contracts, forms and agreements. Shari a Control and Compliance Department, conducts audit on the bank various operations based on an annual audit plan covering all the banks departments upon which a report covering the findings is reported. The Shari a Supervisory Board accordingly represents its report to the general assembly in its annual general assembly meeting. Operational Risk is defined as the risk of loss arising from inadequate or failed internal processes, systems failure, human error, or from external events including losses resulting from failure to comply with Islamic Sharia regulations. When controls fail to perform, it can have legal or regulatory implications, or lead to financial or reputational loss Operational Risk Frameworks The Bank 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 risks relating to the banking and financial activities. Operational risk is managed under the Risk Management & Compliance Group. This Group ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall prudent and robust Risk Management. The Bank manages operational risks in line with the Central Bank of Kuwait instructions regarding General guidelines for internal control systems and directives regarding Sound Practices for the Management and Control of Operational Risks. The Bank has established its Business Continuity Management (BCM) Policy to meet any internal or external failures and eventualities enabling smooth functioning of the Bank s operations. The Bank has established a Disaster Recovery (DR) site for its IT infrastructure, which ensures that operational risks do not adversely impact the Banking business. The bank pays special attention to operational risks that may arise from non-compliance to Islamic Sharia principles and any possible failure in fiduciary responsibilities.

36 70 Annual Report 2013 Annual Report Financial Statements Contents For the year ended 31 December 2013 Independent Auditors Report 72 Statement Of Financial Position 74 Income Statement 75 Statement Of Comprehensive Income 76 Statement Of Changes In Equity 77 Statement Of Cash Flows 78 Notes To The Financial Statements 79

37 72 Annual Report 2013 Annual Report

38 74 Annual Report 2013 Annual Report Statement of financial position as at December 31, 2013 Income Statements for the year ended December 31, 2013 ASSETS Notes KD 000 KD 000 Cash and balances with banks 3 18,123 5,831 Placements with banks 72,552 96,608 Financing receivables 4 218,028 82,902 Available-for-sale investments 5 63,038 22,096 Investment properties 6 24,480 11,025 Other assets 2,260 1,495 Property and equipment 7,029 3,494 TOTAL ASSETS 405, ,451 LIABILITIES AND EQUITY LIABILITIES Due to banks and other financial institutions 7 65,103 46,518 Depositors accounts 8 246,862 78,212 Other liabilities 2,900 3,179 TOTAL LIABILITIES 314, , INCOME Notes KD 000 KD 000 Placements and financing income 8,224 3,166 Investment income 10 1,380 3,413 Net rental income Net fees and commission income ,485 Foreign exchange gain(loss) 7 (178) 10,323 8,098 EXPENSES Staff costs 5,232 5,040 General and administrative expenses 2,364 2,324 Depreciation 1, Finance cost Provision for impairment 4 2, ,988 9,373 Loss before distribution to depositors (1,665) (1,275) Distribution to depositors (2,044) (584) LOSS FOR THE YEAR (3,709) (1,859) BASIC AND DILUTED LOSS PER SHARE 12 (3.71) fils (1.86) fils EQUITY Share capital 9 100, ,000 Accumulated losses (8,488) (4,779) Fair value reserve (867) 321 TOTAL EQUITY 90,645 95,542 TOTAL LIABILITIES AND EQUITY 405, ,451 Imad Abdullah Al Thaqib Chairman Jassar D. Al Jassar Chairman and Managing The accompanying notes 1 to 18 form an integral part of these financial statements. The accompanying notes 1 to 18 form an integral part of these financial statements.

39 76 Annual Report 2013 Annual Report Statement Of Comprehensive Income for the year ended December 31, 2013 Statement Of Changes In Equity for the year ended December 31, Share Accumulated capital losses Fair value reserve Total equity KD 000 KD 000 KD 000 KD 000 KD 000 KD 000 Loss for the year (3,709) (1,859) Other comprehensive (loss) income: Other comprehensive (loss) income to be reclassified to income statement in subsequent periods Change in fair value of available-for-sale investments (1,184) 2,558 Realised gain on available-for-sale investments transferred to income statement (4) (2,226) Other comprehensive (loss) income for the year (1,188) 332 Total comprehensive loss for the year (4,897) (1,527) Balance at 1 January ,000 (4,779) ,542 Loss for the year - (3,709) - (3,709) Other comprehensive loss - - (1,188) (1,188) Total comprehensive loss for the year - (3,709) (1,188) (4,897) Balance at 31 December ,000 (8,488) (867) 90,645 Balance at 1 January ,000 (2,920) (11) 97,069 Loss for the year - (1,859) - (1,859) Other comprehensive income Total comprehensive (loss) income for the year - (1,859) 332 (1,527) Balance at 31 December ,000 (4,779) ,542 The accompanying notes 1 to 18 form an integral part of these financial statements. The accompanying notes 1 to 18 form an integral part of these financial statements.

40 78 Annual Report 2013 Annual Report Statement Of Cash Flows for the year ended December 31, 2013 Notes OPERATING ACTIVITIES KD 000 KD 000 Loss for the year (3,709) (1,859) Adjustments for: Realised gain on available-for-sale investments 10 (4) (2,226) Dividend income 10 - (198) Sukuk income 10 (1,376) (989) Net rental income 6 (474) (212) Provision for end of service benefits Depreciation 1, Provision for impairment 4 2, (1,454) (3,667) Changes in operating assets and liabilities: Placements with banks 14,032 (51,514) Financing receivables (137,876) (74,056) Other assets (131) 315 Due to banks and other financial institutions 18,585 36,756 Depositors accounts 168,650 65,141 Other liabilities (389) 1,526 Net cash from (used in) operating activities 61,417 (25,499) INVESTING ACTIVITIES Purchase of available-for-sale investments (43,221) (33,667) Proceed from sale of available-for-sale investments ,372 Purchase of investment properties 6 (14,274) (8,889) Purchase of property and equipment (4,737) (2,805) Dividend income received Sukuk income received 1, Rental income received 1, Net cash used in investing activities (59,149) (14,293) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,268 (39,792) Cash and cash equivalents at 1 January 50,925 90,717 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 3 53,193 50, CORPORATE INFORMATION Warba Bank K.S.C.P. (the Bank ) is a Kuwaiti Shareholding Company Public incorporated on 17 February 2010 in the State of Kuwait by Amiri Decree No. 289/2009 and is registered as an Islamic Banking institution in accordance with the rules and regulations of the Central Bank of Kuwait (the CBK ) on 5 April The Bank s registered office is at Sanabil Tower, 26th 28th floor, Abdullah Al Ahmed Street, P.O. Box 1220, Safat 13013, State of Kuwait. The Bank is 24% owned by the Government of Kuwait, represented by Kuwait Investment Authority ( KIA ). During the year ended 31 December 2013, the Bank has completed all listing related procedures and has been listed on the Kuwait Stock Exchange effective from 3 September The Bank is primarily involved in investment, corporate and retail banking activities in accordance with the principles of Sharia h, as approved by the Bank s Sharia h Supervisory Board. The new Companies Law issued on 26 November 2012 by Decree Law no. 25 of 2012 (the Companies Law ), cancelled the Commercial Companies Law No. 15 of The Companies Law was subsequently amended on 27 March 2013 by Decree Law no. 97 of 2013 (the Decree ). The Executive Regulations of the new amended law issued on 29 September 2013 and was published in the official Gazette on 6 October As per Article 3 of the Executive Regulations, the Bank has one year from the date of publishing the executive regulations to comply with the new amended law. The financial statements of the Bank for the year ended 31 December 2013 were authorized for issue in accordance with a resolution of the Board of Directors on 21 January The Annual General Assembly of the shareholders of the Bank has the power to amend these financial statements after issuance. 2.1 BASIS OF PREPARATION Statement of compliance The financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ), as adopted for use by the State of Kuwait for financial services institutions regulated by the CBK. These regulations require adoption of all IFRS except for the International Accounting Standard (IAS) 39 requirement for collective provision, which has been replaced by the CBK s requirement for a minimum general provision as described under the accounting policy for impairment of financial assets.. Basis of preparation The financial statements are prepared under the historical cost convention modified to include the measurement at fair value of available-for-sale investments. The financial statements have been presented in Kuwaiti Dinars (KD) which is the Bank s functional currency, rounded to the nearest thousand except when otherwise stated. The accompanying notes 1 to 18 form an integral part of these financial statements.

41 80 Annual Report 2013 Annual Report CHANGES IN ACCOUNTING POLICIES 2.3 STANDARDS ISSUED BUT NOT YET EFFECTIVE The accounting policies adopted by the Bank are consistent with those used in the previous year, except for the adoption of the following new and amended IFRS and interpretations effective as of 1 January 2013: IAS 1 Presentation of Items of Other Comprehensive Income Amendments to IAS 1 The amendments to IAS 1 change the grouping of items presented in other comprehensive income (OCI). Items that could be reclassified (or recycled ) to income statement at a future point in time would be presented separately from items that will never be reclassified. The amendment affects presentation only and has no impact on the Bank s financial position or performance. IFRS 7: Disclosures Offsetting Financial Assets and Financial Liabilities (Amendment) (effective for annual periods beginning on or after 1 January 2013) These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity s financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. The adoption of this standard does not have any material impact on the financial statements of the Bank. IFRS 13: Fair Value Measurement (effective for annual periods beginning on or after 1 January 2013) IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS. IFRS 13 defines fair value as an exit price. As a result of the guidance in IFRS 13, the Bank re-assessed its policies for measuring fair values. IFRS 13 also requires additional disclosures. Application of IFRS 13 has not materially impacted the fair value measurements of the Bank. Additional disclosures where required, are provided in the notes relating to the assets and liabilities whose fair values were determined. Fair value hierarchy is provided in note 18. Other amendments to IFRSs which are effective for annual accounting period starting from 1 January 2013 did not have any material impact on the accounting policies, financial position or performance of the Bank. Annual improvements May 2012 These improvements, which are effective for annual periods beginning on or after 1 January 2013, will not have any material impact on the Bank, but include: - IAS 1 Presentation of Financial Statements: This improvement clarifies the difference between voluntary additional comparative information and the minimum required comparative information. Generally, the minimum required comparative information is the previous period. Standards issued but not yet effective up to the date of issuance of the Bank s financial statements are listed below. The Bank intends to adopt those standards when they become effective. IFRS 9: Financial Instruments: Classification and Measurement IFRS 9, as issued, reflects the first phase of the IASB s work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. In subsequent phases, the IASB is addressing hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Bank s financial assets. The Bank will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued. The standard was initially effective for annual periods beginning on or after 1 January 2013, but Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December 2011, moved the mandatory effective date to 1 January On November 19, 2013, the International Accounting Standards Board (IASB) issued amendments to IFRS 9 that introduced a new general hedge accounting and removed the 1 January 2015, mandatory effective date from IFRS 9. The new hedge accounting model significantly differs from the IAS 39 hedge accounting model in a number of aspects including eligibility of hedging instruments and hedged items, accounting for the time value component of options and forward contracts, qualifying criteria for applying hedge accounting, modification and discontinuation of hedging relationships etc. Under the amendments, entities that adopt IFRS 9 (as amended in November 2013) can choose an accounting policy of either adopting the new IFRS 9 hedge accounting model now or continuing to apply the hedge accounting model in IAS 39 for the time being. IAS 32: Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities (Amendment) The amendments clarify the meaning of currently has a legally enforceable right to set-off and also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The Bank is currently assessing the impact that this standard will have on the financial position and performance when becoming effective for annual periods beginning on or after 1 January Recoverable Amount Disclosures for Non-Financial Assets (Amendment) These amendments remove the unintended consequences of IFRS 13 on the disclosures required under IAS 36. In addition, these amendments require disclosure of the recoverable amounts for the assets or cash generating units for which impairment loss has been recognised or reversed during the period. These amendments are effective retrospectively for annual periods beginning on or after 1 January 2014 with earlier application permitted, provided IFRS 13 is also applied. Additional disclosure will be made by the Bank when amendment become effective. - IAS 16 Property, Plant and Equipment: This improvement clarifies that major spare parts and servicing equipment that meet the definition of property, plant and equipment are not inventory. - IAS 34 Interim Financial Reporting: The amendment aligns the disclosure requirements for total segment assets with total segment liabilities in interim financial statements. This clarification also ensures that interim disclosures are aligned with annual disclosures.

42 82 Annual Report 2013 Annual Report SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial instruments Classification of financial instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. The Bank classifies financial instruments as finance receivables investment securities, and financial liabilities other than at fair value through profit or loss. Investment securities comprise of available-for-sale investments. Management determines the appropriate classification of each instrument at the time of acquisition. Recognition A financial asset or a financial liability is recognised when the Bank becomes a party to the contractual provisions of the instrument. All regular way purchase and sale of financial assets are recognised using settlement date accounting. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place. De-recognition A financial asset (in whole or in part) is derecognised either when: The contractual rights to receive the cash flows from the asset have expired; or The Bank retains the 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 The Bank has transferred its rights to receive cash flows from the asset and either - has transferred substantially all the risks and rewards of the asset, or - has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Bank 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 Bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank would be required to pay. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. Where an existing financial liability is replaced by another from the same financer on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability and the difference in the respective carrying amounts is recognised in the income statement. Measurement All financial assets or financial liabilities are initially measured at fair value. Transaction costs are added to the cost of all financial instruments 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 income statement. Category of financial instruments Receivables These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Bank offers Sharia h compliant products and services only, such as Murabaha, Wakala and Ijara. These are presented as financing receivables in the statement of financial position and are stated at amortised cost using effective profit method, less impairment. The amount due is settled either by installments or on a deferred payment basis. Murabaha is a sale agreement for commodities and real estate to a promise to buy customer, at a price comprising of cost plus agreed profit, after the Bank has acquired the asset. 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 installments. Ijara could end by transferring the ownership of the asset to the lessee. Wakala is an agreement whereby the Bank provides a sum of money to a customer under an agency arrangement, who invests it according to specific conditions in return for a fee. Available-for-sale investments Financial assets available for sale include equity investments and debt securities (i.e. Sukuk). Equity investments classified as available for sale are those, which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial measurement, available-for-sale investments are subsequently measured at fair value with unrealized gains or losses recognised in other comprehensive income and included in the fair value reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in income statement, or the investment is determined to be impaired, when the cumulative loss is reclassified from the fair value reserve to the income statement. Profit earned whilst holding available-for-sale investments is reported as investment income using the effective profit rate method. The Bank evaluates whether the ability and intention to sell its available-for-sale financial assets in the near term is still appropriate. When, in rare circumstances, the Bank is unable to trade these financial assets due to inactive markets, the Bank may elect to reclassify these financial assets if the management has the ability and intention to hold the assets for foreseeable future or until maturity. Financial liabilities other than at fair value through profit or loss These are subsequently measured at amortised cost using the effective profit method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective profit rate. Due to banks and other financial institutions, depositors accounts and other liabilities are classified as financial liabilities other than at fair value through profit or loss. Financial guarantees In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, being the premium received, in other liabilities. The premium received is recognised in the income statement in net fees and commission income on a straight-line basis over the life of the guarantee. The guarantee liability is subsequently measured as the higher of the amount initially recognised less amortisation or the best estimate of the expenditure required to settle the present obligation at the reporting date.

43 84 Annual Report 2013 Annual Report SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and the Bank intends to settle on a net basis. Fair values measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible by the Bank. 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. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 Quoted (unadjusted) 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. For financial instruments carried at amortised cost, the fair value is estimated by discounting future cash flows at the current market rate of return for similar financial instruments. For investments in equity instruments, where a reasonable estimate of fair value cannot be determined, the investment is carried at cost less impairment. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Bank 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. Impairment of financial assets The Bank assesses at each reporting date whether there is any objective evidence that an individually significant financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets are impaired if and only if, there is objective evidence of impairment as a result of one or more loss events that has occurred after the initial recognition of the financial asset and that the loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets. For the purpose of assessing impairment, the financial assets are grouped at the lowest levels for which there are separately identifiable cash flows. For financing receivables, the Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset s original effective profit rate. The carrying amount of the asset is reduced by the amount of impairment and the amount of impairment loss is recognised in the income statement. Financial guarantees and letter of credit are assessed and provisions are made in a similar manner as for financing receivables. In addition, in accordance with CBK instructions, a minimum general provision on all financing facilities net of certain categories of collateral, to which CBK instructions are applicable and not subject to specific provision, is made. For available-for-sale investments, the Bank assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. Objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Significant is to be evaluated against the original cost of the investment and prolonged against the period in which the fair value has been below its original cost. Where there is evidence of impairment, the impairment loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement is removed from fair value reserve and recognised in the income statement. Impairment losses on equity investments are not reversed through the income statement; increases in their fair value after impairment are recognised directly in other comprehensive income. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of the asset s fair value less cost of sale and value in use. For the purpose of fair value disclosures, the Bank 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.

44 86 Annual Report 2013 Annual Report SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and cash equivalents For purposes of the statement of cash flows, cash and cash equivalents comprise Cash and balances with banks and CBK and Placements with banks and CBK whose original maturity is within 3 months. Investment properties Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day to day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at depreciated cost less impairment. Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognised in the income statement in the year of derecognition. Depreciation is provided on a straight-line basis over the estimated useful lives of properties other than freehold land which is deemed to have an indefinite life. Depreciation on the building is calculated using the straight-line method to allocate their cost, net of their residual values, over their estimated useful lives that range from 20 to 40 years. Property and equipment Property and equipment are stated at historical cost less accumulated depreciation and any impairment in value. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial year in which they are incurred. Land is not depreciated. Depreciation of other property and equipment items is calculated using the straightline method to allocate their cost, net of their residual values, over their estimated useful lives, as follows: Buildings years Furniture, fixtures and equipment 3-5 years Depreciation methods, useful lives and residual values are reassessed at each reporting date. Impairment of non-financial assets The Bank 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 Bank makes an estimate of 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. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is asset s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement. After such a reversal, the depreciation charge is adjusted in future years to allocate the asset s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. End of service indemnity The Bank provides end of service benefits to its employees. The entitlement to these benefits is based upon the employees final salary and length of service. The expected costs of these benefits are accrued over the period of employment. Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised. (i) (ii) Placement and financing income is income from murabaha and wakala investments and is determined by using the effective profit method. The effective profit method is a method of calculating the amortised cost of a financial asset and of allocating the financing income over the relevant period. Rental income from investment properties is recognized on an accruals basis. (iii) Dividend income is recognized when the right to receive payment is established. (iv) Fee and commission income is recognized at the time the related services are provided. Taxation National Labour Support Tax (NLST) The Bank calculates the NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolution 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 has to be 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 transfer to statutory reserve should be excluded from profit for the year when determining the contribution. Zakat Contribution to Zakat is calculated at 1% of the profit of the Bank in accordance with the Ministry of Finance resolution No. 58/2007 effective from 10 December Segment information A segment is a distinguishable component of the Bank that engages in business activities from which it earns revenue and incurs costs. The operating segments are used by the management of the Bank to allocate resources and assess performance. Operating segments exhibiting similar economic characteristics, products and services, classes of customers where appropriate are aggregated and reported as reportable segments.

45 88 Annual Report 2013 Annual Report SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Foreign currencies Foreign currency transactions are recorded at rates of exchange ruling at value date of the transaction. Monetary assets and liabilities in foreign currencies outstanding at the year end are translated into Kuwaiti Dinars at rates of exchange ruling at the reporting date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary assets and liabilities in foreign currencies that are stated at fair value are translated to Kuwaiti Dinars at the foreign exchange rates ruling at the dates that the values were determined. In case of non-monetary assets whose changes in fair values are recognised directly in other comprehensive income, related foreign exchange differences are also recognised directly in other comprehensive income. For other non-monetary assets foreign exchange differences are recognised directly in the income statement. 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. Contingencies Contingent assets are not recognised in the financial statements, but are disclosed when an inflow of economic benefit is probable. Contingent liabilities are not recognised in the financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote. Use of estimates In accordance with the accounting principles contained in the IFRS, management is required to make estimates and assumptions that may affect the carrying values of financing receivables. The basis used by management in determining the carrying values of financing receivables and the underlying risks therein are discussed below: Impairment losses on financing facilities The Bank reviews its financing receivables on a regular basis to assess whether an impairment loss should be recorded in the income statement. In particular, considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty. Judgements In the process of applying the Bank s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements: Impairment of available-for-sale investments The Bank 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 judgment and involves evaluating factors including industry and market conditions, future cash flows and discount factors. Classification of property Management decides on acquisition of a real estate property whether it should be classified as investment property or property and equipment. The Bank classifies property as investment property if it is acquired to generate rental income or for capital appreciation or for an undetermined future use. 3. CASH AND CASH EQUIVALENTS KD 000 KD 000 Cash 1, Current account with CBK 1, Current accounts with commercial banks 14,627 4,256 Cash and balances with banks 18,123 5,831 Placements with CBK whose original maturity is within 3 months 12,000 30,023 Placements with banks whose original maturity is within 3 months 23,070 15,071 53,193 50,925 Placements with banks represent wakala and murabaha placements placed with highly reputed local banks in accordance with wakala and murabaha agreements. 4. FINANCING RECEIVABLES Financing receivables comprise of facilities extended to the customers of the Bank in the form of murabaha and ijara contracts. Wherever necessary, financing receivables are secured by acceptable forms of collateral to mitigate the related credit risk KD 000 KD 000 Murabaha receivables 209,010 85,823 Ijara receivables 24,612 1,505 Others Less: deferred profit (12,132) (3,479) Net financing receivables 221,721 83,849 Less: provision for impairment (3,693) (947) 218,028 82,902 Further analysis of financing receivables net of deferred profit based on class of financial asset and industry sector is given below: KD 000 KD 000 Corporate 186,202 77,344 Retail 35,519 6, ,721 83,849 Less: provision for impairment (3,693) (947) 218,028 82,902

46 90 Annual Report 2013 Annual Report FINANCING RECEIVABLES (continued) Industry sector KD 000 KD 000 Trading and manufacturing 63,170 46,709 Construction and real estate 80,753 28,377 Other 77,798 8, ,721 83,849 Less: provision for impairment (3,693) (947) 218,028 82,902 Movement in provision for impairment: Cash facilities Specific provision KD General provision KD 000 Total KD 000 Specific provision KD 000 General provision KD 000 Total KD 000 Balance at 1 January Provision charged during the year 522 2,228 2, Foreign currency movement - (4) (4) Balance as at 31 December 638 3,055 3, Non-cash facilities Balance at 1 January Provision charged during the year Foreign currency movement - (1) (1) Balance as at 31 December Total facilities Balance at 1 January , Provision charged during the year 522 2,233 2, Foreign currency movement - (5) (5) Balance as at 31 December 638 3,128 3, ,016 The policy of the Bank for calculation of the impairment provision for financing receivables complies in all material respects with the provision requirements of the CBK. According to the CBK instructions, a minimum general provision of 1% for cash facilities and 0.5% for non-cash facilities has been made on all applicable facilities (net of certain categories of collateral) that are not provided for specifically. 5. AVAILABLE-FOR-SALE INVESTMENTS KD 000 KD 000 Sukuk 56,528 22,096 Unquoted equity security 4,098 - Unquoted funds 2,412-63,038 22,096 All available for sale investments are recorded at fair value except for unquoted investments with a carrying value of KD 6,510 thousand (2012: Nil), which are recorded at cost less impairment (if any). Quoted sukuk represent investment in sukuk listed on the various stock markets. The hierarchy for determining and disclosing the fair values of financial instruments by valuation techniques are presented in Note INVESTMENT PROPERTIES KD 000 KD 000 Balance at 1 January 11,025 2,392 Purchase during the year 14,274 8,889 Depreciation and impairment charged for the year (819) (256) Balance at 31 December 24,280 11,025 The fair value of the investment properties at the reporting date is KD 24,842 thousand (2012: KD 11,480 thousand). The fair values of the properties are based on valuations performed by accredited independent valuers, who are specialists in valuing these types of investment properties. The valuation model in accordance with that recommended by the International Valuation Standards Committee has been applied KD 000 KD 000 Rental income derived from investment properties 1, Direct operating expenses generating rental income (876) (341) Net rental income arising from investment properties carried at cost The Bank has no restrictions on the realisability of its investment properties and no contractual obligations to either purchase, construct or develop investment properties or for repairs, maintenance and enhancements. Fair value hierarchy disclosures for investment properties have been provided in Note 18. For the purpose of measuring fair value, the income approach is used where the present value technique is employed to reflect the current market expectations about the future estimated rental value, based on per square meter per month rental rate and annual growth rate in the country in which the investment properties are located. The fair values of financing receivables do not differ from their respective book values.

47 92 Annual Report 2013 Annual Report DUE TO BANKS AND OTHER FINANCIAL INSTITUTIONS Due to banks and other financial institutions represents deposits received from local banks and other financial institutions under wakala and murabaha contracts. 8. DEPOSITORS ACCOUNTS Depositors accounts represent current accounts, saving account and deposits received from customers under wakala and mudarba contracts. 9 EQUITY Share capital The authorised, issued and paid up capital of the Bank comprises 1,000 million ordinary shares of 100 fils each (2012: 1,000 million shares of 100 fils each). The share capital has been contributed in cash. 11. NET FEES AND COMMISSION INCOME In the prior year, net fees and commission income included financing syndication fees earned on the successful completion of a syndicated deal by the Bank. 12. BASIC AND DILUTED LOSS PER SHARE Basic and diluted loss per share is computed by dividing loss for the year by the weighted average number of shares outstanding during the year as follows: Loss for the year (KD 000) (3,709) (1,859) Weighted average number of shares outstanding (thousand) 1,000,000 1,000,000 Basic and diluted loss per share (fils) (3.71) (1.86) As there are no dilutive instruments, outstanding basic and diluted loss per share are identical. Statutory reserve In accordance with the Companies Law and the Bank s Articles of Association, 10% of the profit for the year before contribution to KFAS, NLST, Zakat and Directors remunerations is required to be transferred to a statutory reserve. The Bank may resolve to discontinue such annual transfers when the statutory reserve equals 50% of the paid up share capital. Distribution from this reserve is limited to enable payment of a dividend of 5% of paid up share capital in years when retained earnings are not sufficient for payment of dividends. No transfer has been made to the statutory reserve in the current year and prior year due to losses incurred. Voluntary reserve In accordance with the Bank s Articles of Association, a percentage of the profit for the year before contribution to KFAS, NLST, Zakat and Directors remuneration, is required to be transferred to the voluntary reserve. Such annual transfer can be discontinued by a resolution of shareholders in the annual general assembly meeting upon recommendation by the Board of Directors. There are no restrictions on the distribution of this reserve. No transfer has been made to the voluntary reserve in the current year and prior year due to losses incurred. 10. INVESTMENT INCOME KD 000 KD 000 Gain on sale of available-for-sale investments 4 2,226 Dividend income Sukuk income 1, ,380 3, TRANSACTIONS WITH RELATED PARTIES These are transactions with certain related parties (shareholders, directors and executive officers of the Bank, close members of their families and companies in which they are principal owners or over which they are able to exercise significant influence) who were customers of the Bank in the ordinary course of business. Such transactions were made on substantially the same terms including profit rates and collateral as those prevailing at the same time for comparable transactions with unrelated parties and did not involve more than a normal amount of risk. Balances with related parties included in the statement of financial position amount to KD 84,628 thousand (2012: KD 29,789 thousand) with a major shareholder classified as depositors accounts. Transactions included in the income statement are transactions with a major shareholder amounting to KD 773 thousand (2012: KD 349 thousand) classified as distribution to depositors. Compensation to key management personnel: KD 000 KD 000 Short-term benefits 1,123 1,034 Post-employment benefits ,200 1, COMMITMENTS AND CONTINGENT LIABILITIES KD 000 KD 000 Acceptances and letters of credit 2,694 2,938 Letter of guarantees 11,909 10,519 Contingent liabilities 14,603 13,457 Capital commitments

48 94 Annual Report 2013 Annual Report RISK MANAGEMENT Risk is inherent in all activities of the Bank and is managed through a process of ongoing identification, measurement, mitigation and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank s financial health and continuing profitability. The Bank s business generates exposure mainly to the following broad risks from its financial transactions and use of financial instruments: Credit risk Liquidity risk Market risk Operational risk In additions, there are other risk areas that need to be monitored and controlled. This note presents information about the Bank s exposure to each of the above risks, the Bank s objective, policies, models and processes for measuring, mitigating and managing risk and the Bank s management of capital. a) Risk management structure Board of Directors The Board of Directors (the Board ) has overall responsibility for the establishment and oversight of Bank s Risk Management Framework. The Board has established a Board Risk Committee (the BRC ) comprising of members from the Board, to set the framework and monitor the Bank s Risks and Control related requirements. For specific risk types like credit, market and liquidity risks, the Board has further set up a Board Credit and Investment Committee (the BCIC ) and Assets and Liabilities Management Committee (the ALCO ) to assist it in fulfilling its responsibilities. Risk Management Group An independent Risk Management Group headed by the Chief Risk Officer (the CRO ) reports to the BRC, responsible for Enterprise-wide-risk, so as to assist it in carrying out the oversight responsibility of the Board. Audit Committee The Board has also established a Board Audit Committee (the BAC ), as required by Central Bank of Kuwait, which amongst other functions is also required to monitor adherence with the Bank s risk management principles, policies and procedures, and for reviewing the adequacy of the Risk Management Framework. The Bank s Audit Committee is assisted in these functions by the Chief Internal Auditor. The Risk Management policies are established to identify, measure, mitigate, and analyze the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and ensure adherence to the limits. Risk management policies and systems are subject to review regularly, on an ongoing basis, to reflect changes in economic environment, market conditions, products and services offered by the Bank. b) Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. This includes the risk of decline in the credit standing of the customer. While such decline does not imply default, it increases the probability of the customer defaulting. Financial instruments that create credit risk include financing receivable and commitments to extend credit and investment in debt securities (i.e. sukuk). For risk management control purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country risk and sector risk) in one measure about the riskiness of an exposure. Credit risk management The Bank s Board has approved Financing and Investment Policies for various business groups and investment asset types. The Board has also approved the Executive Credit and Investment Committee (the ECIC ) Charter empowered for initial screening of proposals and, approval within its delegated authorities and the BCIC Charter which provides guiding principles and approving authorities for the various financing and investment proposals of the Bank. Risk Management provides independent opinion and assessment of risk for every financing and investment proposal presented to the approving authorities for decision making. The Bank manages its credit facilities portfolio with the objective of ensuring that it is well diversified and it earns a level of return commensurate with the risks it assumes, at the same time, seeks to ensure the quality of the credit facilities. In addition, the Bank manages the credit exposure by obtaining collateral where appropriate and limiting the tenor of exposure or structures that are beneficial to the Bank s management of risks to an exposure. The Bank has established the Provisioning Committee and approved its Charter, and is primarily responsible for the study and evaluation of the existing credit facilities of each customer of the Bank, to identify any abnormal situations and difficulties associated with a customer s position which may require the exposure to be classified as irregular, and to determine an appropriate provisioning required for impaired/ potential impairment of assets and investments. Maximum exposure to credit risk without taking account of any collateral The following table summarises the maximum exposure to credit risk for the components of the statement of financial position, including off statement of financial position items. The maximum exposure is shown gross (net of impairment), before the effect of mitigation through the use of master netting and collateral agreements. Gross maximum exposure KD 000 KD 000 Credit risk exposures relating to on-statement of financial position items: Balances with banks 16,609 4,878 Placements with banks 72,716 97,015 Financing receivables 230,160 86,381 Available-for-sale investments (investment in sukuk) 56,528 22,096 Other assets 699 1,110 Total 376, ,480 Credit risk exposures relating to off-statement of financial position items: Acceptances and letters of credit 2,694 2,938 Letter of guarantees 11,909 10,519 Total 14,603 13,457 Total credit risk exposure 391, ,937

49 96 Annual Report 2013 Annual Report RISK MANAGEMENT (continued) b) Credit risk (continued) Maximum exposure to credit risk without taking account of any collateral (continued) Where financial instruments are recorded at fair value, the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could give rise in the future as a result of changes in value. Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Bank s performance to developments affecting a geographic location or particular industry. The maximum credit exposure to a single counterparty as at 31 December 2013 was KD 14,060 thousand (2012: KD 14,029 thousand) before taking account of collateral. Risk concentrations of the maximum exposure to credit risk Geographical and industry sector concentrations of financial assets and off statement of financial position items are as follows: Geographic region: Off Financial assets Off statement of financial position items Financial assets statement of financial position items KD 000 KD 000 KD 000 KD 000 Kuwait 257,988 7, ,831 6,350 Other Middle East 69,622 7,061 26,616 7,107 Rest of the world 49,102-26, ,712 14, ,480 13, Off Financial assets Off statement of financial position items Financial assets statement of financial position items KD 000 KD 000 KD 000 KD 000 Industry sector: Banks and financial institutions 152, ,989 - Construction and real estate 80,735 8,824 27,274 7,041 Trading and manufacturing 63, ,915 - Other 80,668 5,070 13,302 6, ,712 14, ,480 13,457 Credit risk mitigation Credit risk mitigation techniques that the Bank is permitted to use are obtaining security where appropriate and limiting the tenor of exposure or structures that are beneficial to the Bank s management of risks to an exposure. Credit quality of financial instruments The Bank classifies the various credit risk exposure which are neither past due nor impaired into two categories of credit quality as under: High quality: Credit exposures where the ultimate risk of financial loss from the obligor s failure to discharge its obligation is assessed to be low-to-moderate. These include exposures to entities with financial strength and risk factors indicative of capacity to repay all contractual obligations. And those exposures that are significantly collateralized with tangible securities. Standard quality: All other exposures whose payment performance is fully compliant with contractual conditions and which are not impaired. The table below shows the credit risk exposure by credit quality of assets by class and grade net of provision: Neither past due nor impaired Past due or impaired High quality Standard quality Total KD 000 KD 000 KD 000 KD Balances with banks 16, ,609 Placements with banks 72, ,716 Financing receivables 164,330 67,425 2, ,853 Available-for-sale investments (investment in sukuk) 56, ,528 Other assets ,706 67,601 2, , Balances with banks 4, ,878 Placements with banks 97, ,015 Financing receivables 65,402 21, ,328 Available-for-sale investments (investment in sukuks) 22, ,096 Other assets - 1,110-1,110 c) Liquidity risk 189,391 22, ,427 Liquidity risk is the risk that the Bank may be unable to meet its obligations associated with its financial liabilities. Liquidity risk can be caused by market disruptions or credit downgrades or market perception, which may cause certain sources of funding to dry up immediately. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required.

50 98 Annual Report 2013 Annual Report RISK MANAGEMENT (continued) c) Liquidity risk (continued) Liquidity risk management The Bank s approach to managing liquidity is to ensure, as far as possible, that it will always have a sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank s reputation. Risk Management Group (RMG) and Treasury monitor bank s liquidity profile daily and take appropriate steps, if required. Treasury is updated daily on the Bank s liquidity profile; overall assets and liabilities as well as for KD and foreign currencies; on Bank s position in terms of Statutory Liquidity Ratio (SLR) as well as Lending to Deposit Ratio (LDR). Treasury also receives from other business groups details of other projected cash flows arising from projected future business. The Treasury Division, is required to maintain a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities and availability of inter-bank facilities at short notice, to ensure that sufficient liquidity is maintained with the Bank. The liquidity requirements of business groups are met through short-term or long-term funding as necessitated. Treasury s liquidity management is performed with most optimization, taking into account the maturity gaps. The daily liquidity position is monitored and regular stress testing is conducted under a variety of scenarios covering the normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by the ALCO. A summary report, including any exceptions and remedial action taken, is reviewed by the ALCO. The Bank is governed by the liquidity limits and maturity ladder profile required by the CBK regulations and approved limits. The table below summarizes the maturity profile of the Bank s assets and liabilities. The maturity profile of the assets and liabilities at the year end are based on contractual repayment arrangement with the exception of some investments which are bucketed as per CBK criteria. The Bank measures liquidity risk by preparing and monitoring the maturity profile of its assets and liabilities. The maturity profile of assets and liabilities as at 31 December is as follows: 2013 Within 3 3 to 6 6 to 12 months months month Over 1 year Total Assets KD 000 KD 000 KD 000 KD 000 KD 000 Cash and balances with banks 18, ,123 Placements with banks 64,657 7, ,552 Financing receivables 124,706 48,005-30, ,028 Available-for-sale investments 27,419-2,098 35,619 63,038 Investment properties ,480 24,480 Other assets 1, ,260 Property and equipment ,029 7, ,221 56,081 15,279 97, ,510 Liabilities Due to banks and other financial institutions 39,426-20,248 5,429 65,103 Depositors accounts 105,868 83,270 57, ,862 Other liabilities 2, , ,768 83,270 77,972 5, ,865 Net liquidity gap 88,453 (27,189) (62,693) 92,074 90,645 Within 3 3 to 6 6 to Over 1 year Total months months month Assets KD 000 KD 000 KD 000 KD 000 KD 000 Cash and balances with banks 5, ,831 Placements with banks 48,919 25,667 22,022-96,608 Financing receivables 28,981 10,172 36,343 7,406 82,902 Available-for-sale investments ,096 22,096 Investment properties ,025 11,025 Other assets 1, ,495 Property and equipment ,494 3,494 84,946 35,973 58,419 44, ,451 Liabilities Due to banks and other financial institutions 21,194-20,019 5,305 46,518 Depositors accounts 50,900 26, ,212 Other liabilities 2, ,179 74,993 26,739 20,592 5, ,909 Net liquidity gap 9,953 9,234 37,827 38,528 95,542 The table below summarises the maturity profile of the Bank s financial liabilities at 31 December based on contractual undiscounted repayment obligations. Repayments which are subject to notice are treated as if notice were to be given immediately. Within 3 3 to 6 6 to 12 months months months Over 1 year Total 2013 KD 000 KD 000 KD 000 KD 000 KD 000 Due to banks and other financial institutions 34,452 5,017 20,479 6,130 66,078 Depositors accounts 109,712 78,994 58, ,951 Other liablities 2, , ,638 84,011 78,724 6, , Due to banks and other financial institutions 18,893 2,250-26,426 47,569 Depositors accounts 51,001 26, ,399 Other liabilities 2, ,179 72,458 29, , ,147

51 100 Annual Report 2013 Annual Report RISK MANAGEMENT (continued) Profit rate risk c) Liquidity risk (continued) The table below shows the contractual expiry by maturity of the Bank s contingent liabilities and commitments: Within 3 3 to 12 months months Over 1 year Total 2013 KD 000 KD 000 KD 000 KD 000 Acceptances and letters of credit 1,433-1,261 2,694 Letter of guarantees 753 7,553 3,603 11,909 Capital commitments ,186 7,799 4,864 14,849 Within 3 3 to 12 months months Over 1 year Total 2012 KD 000 KD 000 KD 000 KD 000 Acceptances and letters of credit 2, ,938 Letter of guarantees ,140 10,519 Capital commitments , ,187 13,894 d) Market risk Market risk emanates from the process of fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk may arise from open positions in profit rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market or prices such as profit rates, credit spreads, foreign exchange rates and equity prices. Market risk management Overall supervision authority for market risk is vested in the ALCO function. The Risk Management Group are responsible for development of detailed Market Risk Management policies and for the day-to-day review of their implementation. The Bank uses market practice for the valuation of its positions and receives regular market information in order to regulate market risk. The market risk framework comprises of the following elements: Limits for all market risk parameters and regular limits monitoring to ensure that bank does not exceed aggregate risk and concentration parameters set by the Management. Independent mark-to-market valuation, continuous review of all open positions and risk review of all nvestment proposals. The policies and procedures and the trading limits are set to ensure the implementation of the Bank s market risk appetite. These are reviewed periodically to ensure they remain in line with the Bank s Market Risk Management policy. The Bank ensure that the market risk management process is always adequately and appropriately staffed. In addition to its internal procedures and systems, the Bank is required to comply with the guidelines and regulations of the Central Bank of Kuwait, which sets certain limits on Net Open Position. Profit rate risk arises from the possibility that changes in profit rates will affect future cash flows or the fair value of the underlying financial instruments. Bank is susceptible to profit rate risk as Bank s fixed income investments are inversely proportional to rising rates. Moreover, change in profit rates might also impact Bank s net earnings or spread. Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Bank is susceptible to currency risk as bank s base currency is KD and all foreign currencies are revalued against KD. Any long or short open position in any currency exposes bank to currency risk. Currency risk is managed on the basis of limits determined by CBK and a continuous assessment of the Bank open positions, and current and expected exchange rate movements. The tables below indicate the currencies to which the Bank had significant exposure at 31 December on its non-trading monetary assets and liabilities and its forecasted cash flows. The analysis calculates the effect of a reasonably possible movement of the currency rate against the KD, with all other variables held constant on the result and the fair value reserve (due to the change in fair value of available-for-sale investments). Change in Currency rate Effect on result Effect on fair value reserve Change in Currency rate Effect on result Effect on fair value reserve Curreny % KD 000 s KD 000's % KD 000 s KD 000 s USD +1 (41) (14) GBP Equity price risk Equity price risk is the risk that the fair values of equities decrease as the result of change in the levels of equity indices and the value of individual stocks. The Bank conducts sensitivity analysis on regular intervals in order to assess the potential impact of any major change in fair value of equity instruments. The Bank is not exposed to equity price risk as the Bank do not have equity instruments carried at fair value listed on stock exchange as at 31 December 2013 (2012: Nil). e) Prepayment risk Prepayment risk is the risk that the Bank 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. f) Operational risk Operational risk is the risk of loss arising from inadequate or failed internal processes, systems failure, human error, or from external events. When controls fail to perform, it can have legal or regulatory implications, or lead to financial or reputational loss.

52 102 Annual Report 2013 Annual Report RISK MANAGEMENT (continued) f) Operational risk (continued) The following table presents operating income, results for the year and total assets information regarding the Bank s reportable segments. Management of operational risk The Bank has a set of policies and procedures approved by the Board 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 Bank. Operational risk is managed under the Risk Management Group. This Group ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall prudent and robust risk management. The Bank manages operational risks in line with the Central Bank of Kuwait instructions regarding General Guidelines for Internal Control Systems and directives regarding Sound Practices for the Management and Control of Operational Risks. The Bank has established its Business Continuity Management (BCM) Policy to meet any internal or external failures and eventualities enabling smooth functioning of the Bank s operations. The Bank has established Disaster Recovery (DR) site for its IT infrastructure, and ensures that the operational risks do not adversely impact the Banking business. The Bank pays special attention to operational risks that may arise from non-compliance to Sharia h principles and any possible failure in fiduciary responsibilities. Corporate Retail Treasury Investment Other Total KD 000 KD 000 KD 000 KD 000 KD 000 KD Segment operating income 5, ,746 2,115-10,323 Segment result 2,005 (2,826) 1,056 1,053 (4,997) (3,709) Segment assets 156,069 34,101 90,350 97,577 27, , Segment operating income 4,018 (266) 2,295 2,051-8,098 Segment result 2,076 (2,548) 2,155 1,625 (5,167) (1,859) Segment assets 79,845 3,374 99,545 35,697 4, , CAPITAL MANAGEMENT The primary objectives of the Bank s capital management are to ensure that the Bank complies with regulatory capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders value. 16. SEGMENT REPORTING The Bank s operating segments are determined based on the reports reviewed by the decision makers that are used for strategic decisions. These segments are strategic business units that offer different products and services. They are managed separately since the nature of the products and services, class of customers and marketing strategies of these segments are different. These operating segments meet the criteria for reportable segments and are as follows: Corporate - comprising of range of banking services and investment products to corporate customers, in addition to providing commodity and real estate murabaha finance and Ijarah facilities; Retail - comprising of a diversified range of products and services to individual customers. The range includes consumer finance, credit cards, deposits and other branch related services. Treasury comprising of Bank s funding operations management, local and international Murabaha and other Islamic financing primarily with banks & financial institutions. Investment - comprising of investment in direct equity, real estate investment and other investments. Other comprising of cost center assets and expenses. Management monitors the operating segments separately for the purpose of making decisions about resource allocation and performance assessment. The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may review the amount of dividend payment to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years. A key Bank objective is to maximise shareholders value with optimal levels of risk and to maintain a strong capital base to support the development of its business. Capital adequacy and the use of regulatory capital are monitored regularly by the Bank s management and governed by guidelines of Basel Committee on Banking Supervision as adopted by the CBK. The Bank s regulatory capital and capital adequacy ratios are shown as below: KD 000 KD 000 Tier I Capital 91,512 95,221 Tier II Capital 1,921 1,044 Total available capital base 93,433 96,265 Total risk weighted exposures 196, ,648 Capital Adequacy Ratio 47.54% 77.23% The disclosure relating to the capital adequacy regulations issued by the CBK as stipulated in CBK circular number 2/RBA/44/2009 dated 15 June 2009 are included under the Risk Management section in the annual report.

53 104 Annual Report 2013 Annual Report FAIR VALUE MEASUREMENT The following table provides the fair value measurement hierarchy of the Bank s assets. Quantitative disclosures of fair value measurement hierarchy for assets as at 31 December: 2013 Date of valuation Total Assets measured at fair value Fair Value Measurement Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant observable inputs (Level 3) KD 000 KD 000 KD 000 KD 000 Financial assets available for sale Sukuk 56,528 56, Government Sukuk 31 December ,326 35, Corporate Sukuk 31 December ,202 21, Assets measured at cost while fair value is disclosed Investment properties 24, ,842 Kuwait 31 December , ,487 Other Middle East 31 December , ,245 Rest of the World 31 December , , Date of valuation Total Assets measured at fair value Fair Value Measurement Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant observable inputs (Level 3) KD 000 KD 000 KD 000 KD 000 Financial assets available for sale Sukuk 22,096 22, Government Sukuk 31 December ,076 11, Corporate Sukuk 31 December ,020 11, Assets measured at cost while fair value is disclosed Investment properties 11, ,480 Kuwait Other Middle East 31 December , ,487 Rest of the World 31 December ,993 8,993 During the year ended 31 December 2013, there were no transfer between level 1, level 2 and level 3 (2012: Nil). Fair values of all financial instruments, except for those disclosed in above table are not materially different from their carrying values. The management of the Bank has assessed that fair value of cash and balances with banks, placements with banks, financing receivables, other assets, due to banks and other financial institutions, depositors accounts and other liabilities approximate their carrying amounts.