Simplicity

through
Innovation

Annual Report 2019

We are here to make life simpler
by streamlining all of your
business transactions

OvervieW COnsOlidated FinanCial statements

4 Corporate Profile 61 Independent Auditors’ Report
5 Our Brand Promise 62 Consolidated Statement of Financial Position
6 Our Guiding Principles 63 Consolidated Statement of Income
7 Brand Values 64 Consolidated Statement of Cash Flows
8 Financial Highlights 65 Consolidated Statement of Changes in Owners’ Equity
9 Operational Highlights 66 Consolidated Statement of Sources and Uses of Good Faith Qard Fund
67 Consolidated Statement of Sources and Uses of Zakah and Charity Fund
Business revieW 68 Notes to the Consolidated Financial Statements
10 Board of Directors Report
12 Board of Directors risk and Capital management disClOsure
16 Shari’a Supervisory Board 116 Background
20 Chief Executive Officer Report 116 Statement of Financial Position under the Regulatory Scope of Consolidation
22 Executive Management 118 Capital Adequacy
30 Review on Operations 122 Risk Management
34 Risk Management 151 Glossary of Terms
36 Remuneration Disclosures
43 Corporate Social Responsibility
44 Corporate Governance Review
59 Shari’a Supervisory Board Report

Bahrain islamic Bank B.s.C.

Diplomatic Area
P.O. Box 5240, Manama, Kingdom of Bahrain
Tel: (+973) 17 515 151
Fax: (+973) 17 535 808
Email: contactcentre@bisb.com

Licensed as an Islamic Retail Bank by the Central Bank of Bahrain

 His Royal Highness His Majesty King His Royal Highness Prince
Prince Khalifa bin Salman Al Khalifa Hamad bin Isa Al Khalifa Salman bin Hamad Al Khalifa
The Prime Minister of the Kingdom of Bahrain The King of the Kingdom of Bahrain The Crown Prince, Deputy Supreme
Commander and First Deputy
Prime Minister
4 Bahrain Islamic Bank - Annual Report 2019

Corporate Profile

Incorporated in 1979 The Bank operates under an Islamic Retail Bank license from the Central
Bank of Bahrain and is listed on the Bahrain Bourse.
as the first Islamic
At the end of 2019, the Bank’s paid up capital was BD 106 million, while
Bank in the Kingdom total assets stood at BD 1,224 million. The Bank’s modern branch network
of Bahrain, and the comprises 4 branches, 4 innovative financial malls, 1 Digital branch and 54
ATMs located throughout the Kingdom.
fourth in the GCC.
A steadfast focus on continuous innovation, strong corporate governance
Bahrain Islamic Bank and risk management, employee development, and the use of state of
the art technology to deliver superior customer service, has cemented
(BisB) has played Bahrain Islamic Bank’s position as the leading Shari’a–compliant Bank.
a pivotal role in the
development of
the Islamic Banking
industry and the
Kingdom’s economy.

4 4 54 1
BRANCHES FINANCIAL ATMs DIGITAL
MALLS BRANCH
Bahrain Islamic Bank - Annual Report 2019 5

Our Brand Promise

Fueled by Bahraini devotion,

we craft new ways of
Simplifying Your Money Matters

Face ID Selfie Finger ID Dana

6 Bahrain Islamic Bank - Annual Report 2019

Our Guiding
Principles
Bahrain Islamic Bank - Annual Report 2019 7

Brand Values

Bahraini Innovative
In light of our local religion, We move mountains to create
we follow the values and more effective processes,
norms of Islam by being products and ideas.
generous, modest, polite Being innovative does not
and respectful of others. necessarily mean inventing
We are hospitable and treat something new, it is about
everyone with warmth. We challenging the status quo
desire to establish trust and adapting to changes in
and build relationships with demands to deliver better
people before doing business. products or services to
Family at home and at work everyone around us.
is important to us and we are
loyal to them. We care about
the people we interact with
and offer a helping hand. We
are modern, intelligent and
very literate.

Simple Bold
We strive for clarity and We think big, we’re
consistency, making decisions never afraid to cross
pragmatically and focusing boundaries in order to drive
on the bare essentials. We transformational growth.
acknowledge that banking is Without compromising on
complicated, so we go out of our values, we challenge
our way to find streamlined the norms in order to make
solutions to simplify the lives our mark, differentiating
of everyone around us. ourselves from the
competition so we can
continue to be recognized as
the leading Islamic Bank in
the Kingdom of Bahrain.
8 Bahrain Islamic Bank - Annual Report 2019

Financial Highlights

Total Islamic Financing Investment in Sukuk

BD Millions BD Millions

2019 779 2019 214

2018 767 2018 207

2017 742 2017 228

Net Return on Equity of

Fee and Commission Income, net
Investment Accountholders
BD Millions
BD Millions

2019 10.1 2019 5.9

2018 13.2 2018 5.4

2017 11.3 2017 5.7

Net Profit Income Book Value Per Share

BD Millions Bahraini fils

2019 34.7 2019 114

2018 33.9 2018 111

2017 32.9 2017 121

Bahrain Islamic Bank - Annual Report 2019 9

Operational Highlights

Enhancing Our Customers’ Banking Human Capital

Experience
The emphasis on recruiting, developing
Our continued commitment to making and retaining qualified Bahraini talent is
banking easier for our customers through paramount in our Human Capital strategy.
simplifying their money matters was Online courses for all personnel have resulted
reinforced by the introduction of a further in more than 300 staff participating in training
range of cutting-edge products and services, disciplines in AML, FATCA, Block Chain and
stimulated by our ongoing comprehensive Trade Finance. Employee engagement has
digital transformation. Every facet of our been enhanced with a new programme
business has been positively impacted, from called ‘My Voice’ with a participation rate of
points of customer contact, to seamless 94%. Further system automation permits the
internal coordination and efficiencies, as uploading of trackable staff performance
digitisation has become an intrinsic core pillar appraisals.
of the bank’s strategy.
Brand, Marketing and Corporate
Retail Banking Communications
Mobile banking and the BisB Online portal The new brand promise of simplifying our
have transformed the manner in which the customers’ money matters, crafted in the
Bank reaches its customers. Via our portal, previous year, was shared widely with our
availment of top-up financing is accessible customers and business partners, and fully
in less than four minutes, and the ability to embedded throughout the Bank in 2019,
onboard customers through ‘Selfies’ has reinforcing our values and guiding principles.
made banking even easier than before. We introduced ‘Dana’, our online virtual
Additionally, we have introduced contactless employee, placed ‘Thought Leadership’
debit and credit cards, and replaced all of our articles on LinkedIn, brought aboard our
ATMs and Cash Deposit Machines, simplifying innovation ambassador, social media
further our customers’ experience. influencer, ‘Omar Farooq’ and gave life to our
hashtag ‘#BisB’.
Corporate and Financial Institutional
Division
Our online banking platform is the Bank’s
core strength in improving the end-user
experience, eliminating the need to invest
in expensive infrastructure. The efficiency
in processing financial and administrative
processes is complemented by stronger risk
and regulatory compliance management.
Our revised risk appetite has reshaped our
business, adapting to market conditions and
the local and regional economy.
10 Bahrain Islamic Bank - Annual Report 2019

Board of Directors
Report

6%
Growth in profit income
Bahrain Islamic Bank - Annual Report 2019 11

In the name of Allah, the Most Beneficent. Prayers and Peace be upon On behalf of the shareholders, the Board of Directors record their
the last Apostle and Messenger, His Comrades and Relatives. grateful thanks and sincere appreciation to His Majesty King Hamad bin
Isa Al Khalifa – the King of Bahrain; to His Royal Highness Shaikh Khalifa
On behalf of the Board of Directors, I am privileged to present the bin Salman Al Khalifa - the Prime Minister; to His Royal Highness Shaikh
annual report and consolidated financial statements of Bahrain Islamic Salman bin Hamad Al Khalifa – the Crown Prince, Deputy Supreme
Bank for 2019. Commander and First Deputy Prime Minister.

Despite the continuing geopolitical events, which I have mentioned The Directors also express thanks to all Government ministries and
over the past two years, the Bank has delivered solid results. Profit authorities – in particular to the Central Bank of Bahrain and the Ministry
income, fees and commissions and profit before impairments have of Industry, Commerce & Tourism for their invaluable guidance, kind
all exceeded the previous year. Furthermore, even though expenses consideration and constant support.
increased by 9%, the Bank recorded a 6% growth in profit income and
10% growth in fees and commission income. The Directors are grateful for the guidance and counsel of the Bank’s
Shari’a Supervisory Board. The committed dedication of BisB’s
The Bank’s risk management, governance and compliance policies management and staff is also acknowledged, as well as our loyal
and practices remain prudent and are constantly under review and customers and business partners, for their trust and confidence in
enhancement in order to not only keep up with regulations but equally Bahrain Islamic Bank.
importantly, with increased external risks. Giant leaps in technology
were achieved in 2019 where the Bank introduced various new-to-
market services utilising smart phones and other user-experience-
enhancing delivery channels.

The acquisition by the National Bank of Bahrain of additional 49.75%

shares in BisB was a major event, not only for both banks, but equally
for the industry as a whole and for Bahrain, as well. The new partnership
makes very good sense for both institutions and is expected to
Dr. Esam Abdulla Fakhro
yield two stronger, more diversified banks in their respective market Chairman of the Board
segments. So, I remain optimistic for the future of BisB, particularly
after the new partnership with NBB. We expect, insha’Allah, that future
results will reflect the true picture of BisB’s quality earnings, which had
historically been weighed down by excess legacy provisions.

The success of NBB acquisition of

additional 49.75% shares in BisB.
12 Bahrain Islamic Bank - Annual Report 2019

Board of Directors

Dr. Esam Abdulla Fakhro General Ebrahim Abdullah Al-Mahmoud

Chairman of the Board of Directors Vice Chairman of the Board of Directors
Non-Executive & Non-Independent Director Non-Executive & Non-Independent Director
Appointed on 23 March 2016. Appointed on 28 May 2017.

Dr. Esam Fakhro is a holder of PhD Degree in Mechanical Engineering General Ebrahim Abdulla Al Mahmood currently serves as CFO of
from London University. He was awarded the Bahrain Medal – First Bahrain Defense Force (BDF) after having held many positions, such
Class. He is also a member of the Supreme Council for Education as: Director of Military Consumer Association, Head of Internal Audit
Development, and a member of the Board of Trustees of AMA Division, Head of Financial Control Division and Assistant Financial
International University. Dr. Fakhro was a former member of the Controller. General Ebrahim Al Mahmood is the Vice Chairman of
Economic Development Board. Previously, he chaired the Aluminum Bahrain Aluminum Extrusion Company (Balexco), a Board Member
Bahrain Co. (ALBA), in addition to chairing the Bahrain Chamber of the Military Pension Fund and the Military Consumer Association.
of Commerce & Industry, and the Federation of GCC Chambers. Dr. General Ebrahim Al Mahmood is a certified Arab accountant and
Fakhro was a former member of Mumtalakat Company. Currently, he holds a master’s degree in public administration from the Portland
chairs Abdullah Yousif Fakhro & Sons Group in the field of transport State University, USA, and a B.Sc. in Economics from the University
and electronics, as well as foods and financial services. Dr. Fakhro is of Kuwait. In addition to his participation in many training courses
also the Chairman of the Board of Directors of the Bahrain Cinema in the areas of management, leadership and development, he has a
Company. In addition, he assumes the post of the Deputy Chairman professional experience of more than 38 years.
of National Bank of Bahrain, and the Qatar Bahrain Cinema Company.
He is also a member of the Board of Directors of Trafco and Bahrain
Livestock Company.
Bahrain Islamic Bank - Annual Report 2019 13

Board of Directors (Cont’d)

Mr. Khalid Yousif Abdul Rahman Mr. Muhammad Zarrug Rajab

Board Member Board Member
Non-Executive & Non-Independent Director Non-Executive & Non-Independent Director
Appointed on 23 March 2016. Re-appointed on 23 March 2016.

Mr. AbdulRahman is Vice Chairman and Chief Executive Officer Mr. Muhammad Zarrug Rajab holds a Bachelors degree in
of Yousif AbdulRahman Engineer Holding Company W.L.L. He is Accountancy and is a fellow member of the Institute of Chartered
also Chairman of Food Supply Company Limited, Vice Chairman Accountants in England & Wales. He also held senior posts in Libya,
of National Establishment of Technical and Trade Services, Vice including the Auditor General, the Minister of Treasury, Head of Libyan
Chairman of National Transport Company, and Vice Chairman of Peoples’ Congress, the Prime Minister from 1983 to 1985, Governor
Awal Dairy Company. He is a member of the Board of several major of Libyan Central Bank, and Libyan Foreign Investment. Muhammad
companies in Bahrain, including the National Bank of Bahrain and Rajab has over 45 years of professional experience.
Bahrain Ship Repairing & Engineering Company. He gained his B.Sc
in Mechanical Engineering from Plymouth Polytechnic, UK, and
is a registered member of Bahrain Society of Engineers and the
Committee for Organizing Engineering Professional Practice (COEPP)
Mechanical Engineering Cat. B. Mr. AbdulRahman has over 40 years of
professional experience.
14 Bahrain Islamic Bank - Annual Report 2019

Board of Directors (Cont’d)

Mr. Khalid Abdulaziz Al Jassim Mr. Mohammed Abdulla Al Jalahama

Board Member Board Member
Non-Executive & Independent Director Non-Executive & Independent Director
Elected on 21 March 2019 Elected on 21 March 2019.

Mr. Khalid Abdulaziz Al Jassim has an extensive Mr. Mohammed Abdulla Al Jalahama is currently the
professional career which includes his position as Treasurer of the Kuwait Awqaf Pension Fund. He
Head of Marketing at National Chemical Industries has been a board member on several government
Corporation (NACIC), a subsidiary of SABIC in Saudi organizations in Kuwait. He was also a board member
Arabia, and working within the consultancy division of Bangladesh Islamic Bank and Al Madar Finance and
at Arthur Andersen Bahrain, where his responsibilities Investment Company. He holds a Bachelor’s Degree in
included the formation of policies and procedures for Business Management from the Concordia University in
the Civil Aviation Authority of Bahrain as well as setting the USA.
growth plans for the Government of Bahrain.

In 1998, Mr. Khalid joined Arcapita where his

responsibilities included forming the Bank’s vision
and strategy, establishing the placement team,
and overseeing the Information Technology and
Administration Departments. Mr. Khalid was promoted
to Executive Director in less than four years. In
addition, he secured his position as head of placement
in the MENA region and a member of both the
Management Investment Committee and Management
Administration Committee. Mr. Khalid currently
functions on the Board of several local and international
companies, most recently he was appointed to serve
on the board of BisB as an independent director.

Khalid Al Jassim holds an Executive MBA from

Pepperdine University, California, and a Computer
Science and Mathematics Degree from California
State University, Long Beach, California. Having also
completed several Executive Education programs at
Stanford University, Harvard and London Business
School in addition to his professional experience;
Khalid’s background has crafted him into a multi-
dimensional and multi-skilled entrepreneurial leader
with skills in communication, financial investment, and
team building.
Bahrain Islamic Bank - Annual Report 2019 15

Board of Directors (Cont’d)

Mr. Abdulla Ahmed Kamal Mr. Marwan Khaled Tabbara Mr. Mohamed Abdulla Nooruddin
Board Member Board Member Board Member
Non-Executive & Non-Independent Director Non-Executive & Independent Director Non-Executive & Independent Director
Appointed on 24 February 2019. Elected on 21 March 2019. Elected on 21 March 2019.

Abdulla Ahmed Kamal is the Head of Mr. Marwan Khaled Tabbara is a co-founder Mr. Mohamed Abdulla Nooruddin is the
Operations for Osool Asset Management and Managing Partner of Stratum, a boutique Chairman of Newbury Investments W.L.L., a
B.S.C. (c). He is also a Board Member at advisory services firm based in the Kingdom private entity established in the Kingdom of
Bahrain Car Parks Co. B.S.C. He has an of Bahrain. He also serves as a Board Member Bahrain that provides financial and investment
extensive experience of 15 years in the field of of Bahrain Bourse, Bahrain Development advisory services. He is also a Board member
Audit, Assurance Services, and Business Risk Bank, and Bahrain Flour Mills. Prior to at Al Baraka Bank-Egypt and Tadhamon
Consultancy. Prior to joining Osool, Abdulla Stratum, he worked in the Global Corporate Capital. He is also an Ex-Board Member
worked with Ernst & Young where he was & Investment Banking division of Citigroup of Ibdar Bank. In the past, Mr. Nooruddin
involved with and managed various audit in New York, London, and Bahrain, where he has held several executive positions at
and consultancy projects, including external supported large private and public sector Arcapita Bank, First Islamic Investment
audit, internal audit, corporate governance, clients on transactions within the Middle Bank, Bahrain International Bank and Gulf
risk and control assessment, operational East and internationally. Mr. Tabbara holds a International Bank. He holds a BSc in Business
risk, and compliance programmes. Abdulla Masters of Engineering Management and a Administration from the University of Bahrain.
graduated from the University of Bahrain Bachelors of Science in Electrical Engineering
with a BSc in Accounting. He is a member and Economics from Duke University in the
of the Association of Chartered Certified United States of America.
Accountants (ACCA) and a member of the
Institution of Internal Auditors (IIA). He is
also a Certified Associate Professional Risk
Manager (APRM).
16 Bahrain Islamic Bank - Annual Report 2019

Shari’a Supervisory Board

Shaikh Dr. Abdul Latif Mahmood Al Mahmood Shaikh Mohammed Jaffar Al Juffairi

Chairman of Shari’a Supervisory Board Vice Chairman of Shari’a Supervisory Board

• Former Head of Arabic Language and Islamic • Studied at Al Ahliya University of Najaf, and joined
Studies Department at the University of Bahrain. the Hawza studies for higher education in Shari’ah
sciences (Comparative Studies).
• Member of the Supreme Council for Islamic Affairs,
Bahrain. • Judge of the High Shari’a Court of Appeal and
seconded as President of the High Shari’a Court,
• Member of the Shari’a Supervisory Board of Bahrain
Ministry of Justice, Kingdom of Bahrain.
Central Bank, Oman Central Bank, AlBaraka Banking
Group ,Takaful International, and ABC Islamic Bank • Former Member of the Zakat Committee, Ministry of
Kingdom of Bahrain and London. Justice.

• Preacher at a number of Bahrain’s Masjeds since • He participated in a number of Islamic committees,

1973. courses, seminars and conferences.

• He gives lessons in Quran interpretation,

jurisprudence, principles of jurisprudence and
preaching.

• He participated and spoke in a number of

jurisprudence, educational, economic, intellectual,
social and cultural conferences and seminars.
Bahrain Islamic Bank - Annual Report 2019 17

Shari’a Supervisory Board (Cont’d)

Shaikh Adnan Abdulla Al Qattan Shaikh Dr. Nedham Mohamed Saleh Yacoubi Shaikh Dr. Essam Khalaf Al Enizi

Shari’a Supervisory Board Member Shari’a Supervisory Board Member Shari’a Supervisory Board Member

• Chairman of Shari’a section, Cassation • Member of the Shari’a Supervisory Board • Professor of Comparative Jurisprudence
Court, Ministry of Justice and Islamic Central Bank of Bahrain, Abu Dhabi and Faculty of Shari’a and Islamic Studies,
Affairs and Awqaf, Kingdom of Bahrain. Islamic Bank, UAE., Sharjah Islamic Bank, University of Kuwait.
UAE, Ithmaar Bank, Kingdom of Bahrain,
• Vice Chairman of the Royal Charity • Member of Accounting and Auditing
Gulf Finance House, Kingdom of Bahrain,
Organization. Organization for Islamic Financial
Khaleeji Commercial Bank Bahrain, ABC
Institutions (AAOIFI),
• Chairman of the Pilgrimage Mission, of the Islamic Bank, Kingdom of Bahrain , ABC
Kingdom of Bahrain. Islamic Bank, London and others. • Member of the Shari’a Supervisory Board
at Boubyan Bank – State of Kuwait, Alahli
• Puisne Justice of the High Shari’a Court. • Member of Accounting and Auditing
Bank, Investment Dar – State of Kuwait,
Organization for Islamic Financial
• Preacher of Ahmed Al Fateh Islamic Kuwait Zakat House.
Institutions (AAOIFI).
Masjed.
• He participated and is a speaker in a
• Holds a number of Academic degrees and
• He participated in a number of Islamic number of jurisprudence, educational,
awards, First Degree Award of Capability
committees, courses, seminars and economic, intellectual, social and cultural
for Islamic services within and outside
conferences. conferences and seminars.
Bahrain 2007, from the King of Bahrain,
• He worked as a lecturer at the Islamic Euro Money Award for innovation in
Studies Department, University of Bahrain. Islamic banking supervision, Malaysia
2007, Malaysia Award for contribution to
• Member of the Shari’a Supervisory Board
Islamic banking.
of Alsalam Bank, Ibdar Bank, and LMC.
• He participated and is a speaker in a
number of jurisprudence, educational,
economic, intellectual, social and cultural
conferences and seminars.
18 Bahrain Islamic Bank - Annual Report 2019

Face ID

Automated Face ID
Authentication
Bahrain Islamic Bank - Annual Report 2019 19
20 Bahrain Islamic Bank - Annual Report 2019

Chief Executive
Officer Report
Bahrain Islamic Bank - Annual Report 2019 21

As our industry continues to evolve at unprecedented speed, staying On the business front, BisB continues to generate more sustainable
competitive is becoming more challenging than ever. Banks will continue quality earnings from our core business. Profit income as well as profit
to struggle to keep up with existing, and new regulations, which are before impairment, have both surpassed the 2019 budget. Other critical
not only capital intensive but also can be extremely disruptive if these areas of the bank continue to show significant improvement at levels of
organisations are not agile enough to keep up, or even stay ahead of the industry best practices. Our Governance and Compliance function has
curve. been strengthened to world class standards. We continue to invest in
our Bahraini talents through proper training and a clear succession plan
So, in 2019, a new phase of the Bank’s transformation journey began
at various levels of the organisation. Information security remains a high
with the theme ‘Simplifying Your Money Matters.’ As an organisation, we
priority.
have realised early that, in the face of increasing competition, regulatory
pressures, demographics and consumer behaviour, we needed to take Finally, the recent acquisition of an additional 49.75% of BisB shares by
a drastically different path. One which focuses on the customer first by NBB was consummated successfully and smoothly. The management
offering a seamless and cost-effective banking experience, while retaining of BisB is optimistic that the new partnership between two of Bahrain’s
prudent risk, compliance and governance practices. We have realised leading institutions is expected to generate synergies and increase foot-
that ‘simplification’ is key. This involves, first, simplifying our internal print and product and service coverage of both institutions, insha’Allah.
processes and practices through automation and eliminating silos within I would like to extend my sincere thanks and appreciation to the
the bank, which in turn enables us to continue digitising our customer management teams on both sides for their professionalism, hard work
experience delivery channels. As millennials and ‘generation Z’ continue and diligence to have made this acquisition a success.
to rely heavily on mobile and smart phones, the aim of our ‘Simplification’
approach is to mirror the seamless, reliable and predictable end-user
experience in banking, as much as it is in other services.
Our mobile banking for corporates as well as individuals, remains among
the best in the region. In 2019, this service became more sophisticated
and user-friendly by offering customers to open new accounts in less
than five minutes, by simply using a selfie through their mobile phones,
without any human intervention. Customers can also avail top-up
financing by also using their mobile phones in less than four minutes.
The latest example of Simplifying our customers money matters came
in the fourth quarter by launching a first of its kind KYC update, again
by using a mobile phone, thus eliminating the need to physically visit a
branch or even provide a single piece of paper. As a result, the bank has
become known as an innovation and technology leader in the industry.
I am proud of the tremendous effort the BisB team has put forth during
Hassan Amin Jarrar
this transformation journey.
Chief Executive Officer

In 2019, a new phase of the Bank’s transformation journey

began with the theme ‘Simplifying Your Money Matters.’ As an
organisation, we have realised early that, in the face of increasing
competition, regulatory pressures, demographics and consumer
behaviour, we needed to take a drastically different path.
22 Bahrain Islamic Bank - Annual Report 2019

Executive Management

Hassan Amin Jarrar Wesam Abdul Aziz Baqer

Chief Executive Officer Chief Corporate & Institutional Banking

Mr. Hassan Amin Jarrar is one of the most prominent banking Mr. Wesam Baqer has an experience in a diverse career in
leaders in the region with more than 30 years of international, Corporate Banking, Private Banking, and Business Development.
regional and local banking experience. Prior to joining Bahrain Mr. Baqer joined BisB in 2008 as Head of the Corporate
Islamic Bank on July 1, 2015 as Chief Executive Officer, Mr. Banking. Previously, he held the same position at National Bank
Jarrar held the position of Chief Executive Officer of Standard of Kuwait. Prior to that, he managed corporate relationships
Chartered Bank, Bahrain. Mr. Jarrar’s diverse career in Banking with HSBC for 8 years. He is a Certified Financial Advisor
includes extensive experience in retail, SME, and Corporate (CeFA), and a member of the Chartered Institute of Bankers,
Banking in the Middle East and the US. Regionally, he served as Board member in BIBF Islamic Advisory committee, Member in
Head of Corporate and SME Banking at Abu Dhabi Commercial Finance, Tax, and insurance committee in BCCI and Chairman
Bank, and Head of Corporate Banking at Mashreq Bank, Abu of Islamic Banking Committee in BAB. Mr. Baqer is a Board
Dhabi. Internationally, he has over two decades of experience Member representing BisB in various companies across
in key management positions in leading banking institutions in Bahrain, and is an active member in several local charities and
the USA, namely Security Pacific Bank, and Bank of America. community service societies. Mr. Baqer completed an Executive
He is the Chairman of Liquidity Management Center ”LMC” and Management Leadership Diploma from Darden Graduate School
serves on the Boards of Bahrain Bourse, the Bahrain Association of Business, University of Virginia, in the US. He also holds an
of Banks, and Tamkeen. Mr Jarrar holds a BSc in Finance from MSc (Economics) in Finance and Investment Management from
California State University, San Jose. the University of Aberdeen, Scotland, and a BS in Business
Administration from the University of Bahrain.
Bahrain Islamic Bank - Annual Report 2019 23

Executive Management (Cont’d)

Dalal Ahmed Abdulla Al Qais Ameer Abdul Ghani Dairi

Chief Retail Banking Chief Financial Officer

Before joining BisB back in October 2017, Ms. Dalal Al Qais Mr. Ameer A.Ghani Dairi has over 19 years of experience in
gained extensive experience in customer-lead roles spanning financial management and a broad commercial banking
across various realms of finance. During her 16 years at Standard background in Bahrain. He joined BisB in 2007. Mr. Dairi holds
Chartered Bank Bahrain, Ms. Al Qais was exposed to a diverse a BSc in Accounting from the University of Bahrain and is a
range of areas of focus including retail banking, Small & Medium Certified Public Accountant (CPA) from New Hampshire Board
Enterprise banking, and wealth management. She later earned of Accountancy, and a Certified Management Accountant (CMA)
her position as Head of the Bank’s Consumer Banking Division, licensed by the Chartered Institute of Management Accountants,
which encompassed both local and regional responsibilities US.
covering Bahrain, Qatar and Oman.
Also Mr. Dairi has been awarded certificates in data science
Paving the way for future leaders, Ms. AlQais earned a milestone and analytics from Berkeley University of California as well as
achievement at BisB as the first Bahraini female to hold an leadership from Ivey Business School, Canada. He also serves as
executive position. Combined with a fine-tuned and in-depth representative of BisB as a Board Member in LMC and Abaad
knowledge of consumer banking digitization channels, she Real Estate Company.
earned immense success in leading the BisB’s retail division,
establishing goals and implementing strategies to achieve
growth, digitisation, operational efficiency and a transformative
customer experience. Ms. Qais holds a BSc in Management &
Marketing from the University of Bahrain and an MSc in Finance.
24 Bahrain Islamic Bank - Annual Report 2019

Executive Management (Cont’d)

Fahim Ahmed Shafiqi Mazar Rashid Mohammed Jalal

Chief Risk Officer Chief Compliance & Governance

Mr. Fahim Ahmed has over 20 years of international experience Mazar Rashid Mohammed Jalal has over 19 years of experience
gained through various roles in Corporate Banking and Risk in the financial services industry, covering Asset Management,
Management spanning the markets of Pakistan, GCC, Africa Risk Management, Corporate Governance and Compliance. Prior
and the UK. Prior to joining BisB, Mr. Ahmed held the position to joining BisB, he was Head of Compliance at Kuwait Finance
of Chief Risk Officer at Standard Chartered Bank Bahrain. He House, Bahrain. Mazar has had an extensive experience with
holds a Diploma in Islamic Finance (CDIF) and an MBA from the various Central Bank regulators in the field of compliance and
University of Warwick, UK. corporate governance, AML procedures, and FATCA, among
others. He holds a BSc in Accounting from the University of
Bahrain, and a Diploma in Islamic Banking and Insurance from the
Institute of Islamic Banking and Insurance, UK and Wales, with
which he also has an Associate Fellowship. In 2014, he acquired
the International Diploma in Compliance with distinction.
Bahrain Islamic Bank - Annual Report 2019 25

Executive Management (Cont’d)

Mr. Khaled Waheeb Alnaser Osama Nasr

Chief Internal Audit Chief Information Officer

Mr. Khaled Waheeb Alnaser has over 10 years’ experience in the Mr. Osama Nasr has over 20 years of experience in Information
fields of external audit, financial reporting and control, internal Technology (IT) and he is currently the Chief Information Officer
control, and internal audit. Prior to joining BisB in 2014 he worked in BisB. Mr. Osama has held various IT leadership roles in BisB
in EY as an external auditor with focus on Islamic financial and in a number of specialized companies abroad. In addition to
institutions. He joined BisB as a Senior Manager in Financial his current role at BisB, he is a Non-Executive member of Global
Control in charge of financial reporting and payables, then moved Payment Services- GPS W.L.L. Mr. Osama Nasr holds a Masters
to establish and head the Internal Control department prior to degree in Information System Management from the University of
joining Internal Audit and holding his current position as Chief Liverpool in the United Kingdom.
Internal Audit. He is a Certified Public Accountant (CPA) from
New Hampshire Board of Accountancy, Certified Internal Auditor
(CIA) from the Institute of Internal Auditors (IIA), Certified Islamic
Professional Accountant (CIPA) from Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI), and a
Chartered Global Management Accountant (CGMA). Mr. Alnaser
also completed a Leadership Development Program from Darden
School of Business, University of Virginia, in the US.
26 Bahrain Islamic Bank - Annual Report 2019

Executive Management (Cont’d)

Mahmood Qannati Dawood Khalil Al Ashhab

Chief Corporate Communications & Marketing Officer Chief Shared Services Officer

Mr. Qannati has over 18 years of extensive experience in Mr. Dawood Al Ashhab brings to the Bank a wealth of
Marketing, Communications and Branding on both a local international banking experience and an in depth knowledge
and regional level, and having worked across various sectors of Human Resource (HR) Management best practices. Prior to
including banking, telecommunications, automotive and aviation. joining BisB, Mr. Al Ashhab managed the HR team at Standard
During his time in the United Arab Emirates, Mr. Qannati worked Chartered Bank on a regional level, covering the Bank’s Bahrain,
in prominent and established institutions, leading Standard Oman, Qatar, Jordan and Saudi Arabia offices. Mr. Al Ashhab
Chartered Bank as the Regional Head of Marketing & Branding holds a BS in Public Administration and is a coach certified by
for the entire Middle East, Africa and Pakistan region, as well the prestigious Gallup University, UK. He is also a member of the
as serving as the Middle East Chief Marketing Officer at Cigna Society of HR Management (SHRM).
Insurance, UAE. He has also held several senior positions on a
local level, gaining experience in marketing and communications
at HSBC Bank, Bahrain International Airport and Batelco. Mr.
Qannati holds a Master’s degree in Marketing Information
Systems from the University of Sunderland and a Bachelor’s
degree in Marketing from the University of Bahrain.
Bahrain Islamic Bank - Annual Report 2019 27

Executive Management (Cont’d)

Maisa Jawdat Shunnar Hussain Ebrahim Al Banna Eman Ali Abdulla Ebrahim
Chief Strategy Implementation & Transformation Head of Treasury Department Head of Central Operations

Mrs. Maisa Shunnar has over 20 years of Mr. Hussain Al Banna has more than 15 Ms. Eman Ali Abdulla Ebrahim has more than
experience having worked in international years of conventional and Islamic banking 21 years of experience in Banking Operations,
markets across the USA and Middle East. Prior experience in various capacities. He joined including front and back office coordination
to holding her current position in BisB, Mrs. BisB in 2008 and is currently heading the for Trade Finance, Treasury and Islamic
Shunnar worked in the National Bank of Abu treasury department with a mandate of Finance. She is well-versed in conventional
Dhabi (NBAD) as a Transformation Manager handling Foreign Exchange (FX), Money and Islamic banking operations, as well as
overseeing the aggregated change activity Market (MM) as well as the Bank’s sukuk banking products and services support. Eman
within the Bank. She drove major changes portfolio. His banking career started in joined BisB in 2006, after completing eight
across the Bank such as the centralization 2004 when he joined BNP Paribas as an years with Ahli United Bank in customer
of the non-core business activities and Officer in the Regional Treasury Operations. service and related support functions.
establishing the shared services center. In 2005, he was selected for the Executive
Previously, Mrs. Shunnar headed the Business Management Trainee Program at Bank of
Process Re-engineering (BPR) Department Bahrain and Kuwait (BBK) where he gained
in the Information & eGovernment Authority in-depth knowledge of FX, MM, Asset Liability
in Bahrain and she served as the Manager of Management (ALM), Corporate Treasury
Performance and Productivity Improvements sales and handled over US$ 700 million fixed
for EDS on the Gulf Air Account. Prior to income bond portfolio within the Treasury
moving to the Middle East, Mrs. Shunnar & Investments department. He holds a BS
worked in Shell Oil & Gas as Systems Support, in Banking and Finance from the University
for the City of Houston in the State of of Bahrain and has successfully completed
Texas, USA. Mrs. Shunnar is a certified and a diploma in Treasury and Capital Markets
accredited trainer for the United Nations from Bahrain Institute of Banking and Finance
on Business Process Re-engineering. Mrs. (BIBF).
Shunnar holds a Bachelor Degree in Business
Administration majoring in Computer
Information Systems from the University
of Houston, US and a Master’s degree in
Business Communication and Leadership
from Jones International University, US. She
also have acquired a multiple of professional
certificates in Fintech and Digital Certificates
from Oxford and Columbia Business Schools
and a Diploma in Islamic Finance from CIMA,
UK.
28 Bahrain Islamic Bank - Annual Report 2019

Dana

First Virtual
Employee

Head of
Simplification
Bahrain Islamic Bank - Annual Report 2019 29
30 Bahrain Islamic Bank - Annual Report 2019

Review on Operations

The bank's innovation

lab is the preferred
space for brainstorming
sessions, experimenting
with services, developing
products and providing
innovative solutions.
Bahrain Islamic Bank - Annual Report 2019 31

Review on Operations (Cont’d)

Retail Banking We firmly believe that we gain much from Treasury

efficient financial and administrative processes,
Much of the activity for the Retail Banking Uncertainty has been a constant in the global
especially in the rise of intensified regulatory
Group revolved around further integration economy during 2019.
compliance demands, both in the case of
of digital technology into every part of our 2019 started with hopes of a trade truce, only
Central Bank of Bahrain specific directives
business. Product and service offerings to our for those to be dashed by waves of tariff
and adhering to the existing policies and
customer base included the ability to avail top- increases, an escalating U.S. - China trade war,
procedures of the Bank. Thus, in 2019, we have
up financing through the BisB portal in less and U.S. threats against Mexico, Canada and
shed our focus on our current procedures and
than four minutes, the first of its kind in Bahrain. Europe. Acrimony between Japan and Korea,
applied segregation of duties to separate the
and the risk of a hard Brexit all conspired to
We introduced contactless debit and credit account opening process from the C&IB team
drag growth to its lowest level since the great
cards. All of our ATMs and Cash Deposit to contribute to stronger risk management
financial crisis a decade ago.
Machines were replaced. The launch of mobile practices within functions and units. We also
banking onboarding through customer ‘Selfies’ seek to distinguish ourselves and keep up with Decelerating economic activity in the second
has simplified further the point of contact the general trend to focus on control of people half of 2019 provided a backdrop for three
experience for our clients. and processes within BisB to avoid an exposure policy rate cuts by the Federal Reserve, as
or risk to our banking practices. several drivers of growth faded. Simultaneously,
We have built alliances with major government
the world witnessed the highest level of
organisations such as BAPCO for the promotion With regard to our training platform, we aim
negative yielding government bonds, totalling
of the Sadeem fuel card, as well as our tie-up in to set the tone at the top by encouraging
USD17 trillion.
a joint alliance with Shukran – AlRashid Group. the behaviour of continuous improvement to
achieve wealth of experience and professional Within the region, GCC economies continued
The thrust of multiple campaigns throughout
knowledge. Likewise, we aim to maintain a their push to diversify from oil. As a result, non-
the year enhanced sales and through-the-door
steep learning curve within the department oil revenue share increased. Oil started the year
acquisition.
through collaboration with our HR training at USD 45 per barrel and reached a high close
Corporate and Financial Institutional Division and development programs and Tamkeen. to USD 70 per barrel. Additionally, geopolitical
Our intended strategy is to focus on digitisation Almost each and every employee in the C&IB tensions caused oil to witness the single
to gain a competitive advantage over large department is engaged in training programs biggest one day surge in more than a decade.
local rivals in the banking industry. We are and professional courses and certification for In Bahrain, progress was seen as the
committed to move forward beyond our personal and career benefits and development. government’s budget pointed to a smoother
core into relevant digital banking methods to The training initiative supports the individuals fiscal adjustment than indicated earlier by
provide our customers with a differentiated within the department to gain clarity in their the GCC sponsored Fiscal Balance Program.
banking experience. We firmly believe that thinking, to challenge and to help other Funding costs remained contained, and as a
adopting digital directions to our products colleagues to change limited beliefs by result, the rating of the Kingdom was affirmed
and services is a trajectory to success in this becoming a source of support in bringing out with a stable outlook.
dynamic ecosystem. BisB pursued the digital the talent and potential of their team.
Despite market conditions, BisB maintained
direction long before other banks, providing us We encounter risk everyday as we pursue our healthy liquidity and continued to focus on
with the advantage of retaining and attracting banking services. However, we have defined reducing the cost of funding by fully repaying
new customers, while capitalising on hurdles clearly the amount of risk we are willing to USD 175 million of repurchase agreements,
during our implementation phase to arrive at accept in pursuit of the value returned. We thereby lowering the costs associated with
our fully-fledged online banking platform, thus can safely say that we have embedded risk its interbank liabilities, while simultaneously
enhancing the Bank’s reputation and image. management as a part of our C&IB culture to improving regulatory metrics, such as Liquidity
The main digital service launched by BisB is balance risks and opportunities in our daily Coverage Ratio and Net Stable Funding Ratio.
the online banking platform. The platform operations. The revised risk appetite has been
mandated to us by the Board to reshape the In terms of portfolio management, the Sukuk
is a disruptive innovation introduced by the
business and risk by adapting to certain events portfolio grew 3% to BHD 214 million with the
Bank to improve the end-user experience
including the overall market conditions and sovereign portfolio constituting more than 95%
through efficient and cost-effective measures
general economic behaviour in the Kingdom of of the Sukuk book.
of instigating banking transactions. Most
importantly, the online banking platform Bahrain. Thus, our intended strategy is related The department also opted to implement a new
eliminates the need to invest in the expensive to the pursuit of yearly objectives, whilst Treasury, ALM and risk management system
physical infrastructure to cater for our products effectively monitoring the process to ensure which helps to meet all the new regulatory and
and services. The online banking platform is proper compliance. international liquidity standards.
currently considered BisB’s core strength to
create sustainable outcomes.
32 Bahrain Islamic Bank - Annual Report 2019

Review on Operations (Cont’d)

We continued to build employee

engagement, employee
experience, and to improve
productivity through focusing
on accountabilities. At the
staff engagement level this
programme is called ‘My Voice’.
Bahrain Islamic Bank - Annual Report 2019 33

Review on Operations (Cont’d)

Human Resources Corporate Communications, Marketing and

Brand
Human capital, without a doubt, remains our
most valuable resource. Recruitment, retention 2019 was a historic year for the Bank. A focal
and development of qualified Bahraini remains point between the past and the future, BisB
at the very top of our people agenda. At over celebrated its 40th anniversary. There couldn’t
93% Bahranisation rate, we are proud that be a more significant time to celebrate the
BisB is one of the highest organizations in the future of the Bank through revealing its new
country recruiting and investing in Bahrainis. brand promise. The Bank invested most of
The year 2019 has seen further intensive 2018 inculcating and embedding that new
investment in our staff and management brand promise, its guiding principles, and most
across the Bank. We continued to build importantly, its values, in the minds and hearts
employee engagement, employee experience, of its staff. In 2019, this new brand architecture
and improve productivity through focusing on was shared with its public and stakeholders.
accountabilities. BisB has truly embraced the idiom of operating
as a technology company offering banking
On staff engagement level, ‘My Voice’ survey
services to its clients. Marketing, corporate
has been launched achieving a participation
communication and content reflected that.
rate of 94%, in which a communication on a
departmental level was initiated an action plan Initiatives through the year were prolific - the
taken to increase the engagement level further. introduction of Dana, our well-received online
virtual employee; the regular placement
Several development initiatives towards
of Thought Leadership/Opinion Pieces on
bridging the gap between Fintech and
LinkedIn: the hashtag #BisB; embracing
innovation were taken place to include sending
Generation Z; and our innovation ambassador
middle and senior managers to Fintech
and social media influencer, ‘Omar Farooq’.
programmes in Georgetown University and the
University of Oxford. Focusing on the financial
mastery of our staff, 76 employees attended
the Finance for non Finance simulation about
business finance and strategy provided by
Zodiak®. As a further development of our
successors and creating a deeper national
talent pool, we participated in CFO Grooming
programme Central Bank of Bahrain’s Waqf
Fund.

Through our online learning portal, BisB

Academy, learning opportunities extended for
all BisB staff, with an opportunity to register in
any of more than 500 tutorials offered. About
300 employees have benefited from the online
courses provided by the academy in various
topics like AML, FATCA, Block Chain, and Trade
Finance.

As we look to invest in future Bahraini talents,

BisB hosted 28 interns during the year, as well
as 14 secondary school trainees under the
Ministry of Education’s Takween Programme.

Remarkable progress in our HR system

automation has been achieved by implementing
the Performance Management System where
all Performances can be retrieved and tracked
at any time. The system allows an interactive
communication between the staff and their
line managers in setting job objectives and
development plans with the ability to monitor
them on a real-time basis.
34 Bahrain Islamic Bank - Annual Report 2019

Risk Management

At the heart of the Bank’s activities is the risk management function,

through which the ongoing identification, measurement, monitoring
and reporting of all of the Bank’s inherent risks is conducted; the
risks considered are identified in the Bank’s risk appetite, alongside
corresponding strategies defined for each risk. The Board of Directors,
under the guidance of the Board Risk Committee, sets the Bank’s risk
appetite framework. These elements foster a sound risk management
culture at the Bank, for which all of the individuals in the institution are
accountable for in their related area of expertise.

The risk culture is effected through appropriate policies, controls, and

risk monitoring systems, and the Board ensures that this is implemented
effectively. This framework includes internal limits for the various types
of risk to which the Bank may be exposed. Moreover, appropriate
management information systems are in place to monitor risk exposures,
and accordingly report the same to the relevant stakeholders. The
fundamental objective of the risk framework is to ensure that the risk
appetite, and the associated returns, are commensurate with the risks
taken, thereby creating and simultaneously preserving shareholder value.
In this light, the Bank’s risk management framework takes into account
the regulations set forth by the Central Bank of Bahrain, in addition to
the provisions of the Basel Accord and industry best practices.

The Bank is primarily exposed to credit risk, liquidity risk, market risk
(including profit rate risk, equity price risk, and foreign exchange risks),
operational risk, reputational and strategic risk, in addition to Shari’a-
compliance risk.
Bahrain Islamic Bank - Annual Report 2019 35

Risk Management (Cont’d)

Risk management philosophy Following the milestones of the previous year, C&RM is well on its way
of upgrading its current risk management infrastructure following the
The risk management philosophy of BisB is to identify, capture, monitor
regulations effected by the Central Bank of Bahrain. The regulations
and manage the various dimensions of risk. The objective is to protect
are related to the Basel III accord, and specifically tackle liquidity risk,
asset values, income streams, and optimize portfolio quality so that the
reputational risk, the Bank’s internal capital adequacy and assessment
interests of the Bank’s stakeholders are safeguarded, while optimising
process, in addition to enhancing the existing stress-testing framework.
shareholders’ returns, and maintaining risk exposure within the
The regulations specifically focus on enterprise-risk management.
parameters set by the Board.
Key developments are detailed below:
The Bank’s risk appetite is embodied through its risk strategy; BisB
reviews and aligns its risk appetite in line with its evolving business • Formation and activation of the Board Risk Committee
plan, and changing economic and market scenarios, in addition to
• Implementing a Bank-wide Risk Appetite Statement that addresses
evolving regulatory requirements. The Bank also assesses its tolerance
the Bank’s material risks, and set Board-approved capacity and
for specific risk categories and its strategy to manage these risks. To
tolerance thresholds for the same
monitor and report exposures to these identified risks, the Bank adopted
a comprehensive enterprise-wide Risk Management Framework that • Revising the ICAAP framework, with special attention paid to
encompasses the risk limit identification, monitoring, and reporting enhanced Pillar II risk identification and calculation
structures.
• Strengthening of the Liquidity Risk Management of the Bank, by
Board Risk Committee means of enhanced monitoring of the Liquidity Coverage Ratio, the
Net Stable Funding Ratio, associated liquidity concentration, and
During 2019, the Bank established the Board Risk Committee (“BRC”),
funding gap metrics
constituting of three seasoned independent Board members. The
Committee’s role is to institute and supervise an effective risk • Implemented more sophisticated stress testing methodologies, and
management framework within the Bank. The Committee also monitors to link the same to the Bank’s business strategy and risk systems
the Bank’s risk profile and its ongoing and potential exposures to various
• Implemented a Bank-wide reputational risk assessment and
types of risks, in order to ensure that all risks are identified, measured,
monitoring framework, and the associated step-in risk assessment
managed, and mitigated.
process as required by the Central Bank of Bahrain and Basel
Risk management framework
• Enhancement in the MIS and the risk reporting to the Board and the
The Bank’s risk management framework embraces all levels of authorities, Management, by instituting the Risk Management Dashboard that
organisational structure, people and systems required for the smooth provides a summarized traffic-light based monitoring mechanism of
functioning of risk management policies within the Bank. key risk indicators linked to the Bank’s risk appetite

During the course of 2019, the Bank has instated the Board Risk • Ensuring the ongoing compliance with the policies of the Bank, in
Committee, the ultimate governing body that is responsible for addition to regulatory requirements, and monitoring the enterprise-
overseeing the Bank’s risk management function. During this brief period, wide risk through various systems and processes
the Board Risk Committee supported the Board of Directors in effecting
Note: Additional information on the Bank’s risk management framework,
turnkey risk deliverables, such as effecting the risk appetite framework
policies, processes and procedures is included in the Notes to the
(and the associated monitoring mechanism) in addition to overseeing
Consolidated Financial Statements and the Risk and Capital Management
risk governance. Such duties were fulfilled under the supervision and
Disclosure sections of this annual report.
approval of the Board of Directors, who retains ultimate responsibility
and authority for all risk matters, including establishing overall policies
and procedures.

The Credit & Risk Management (C&RM) division – headed by the Chief
Risk Officer - has day-to-day responsibility for managing the risks
involved across all areas of the Bank. C&RM provides independent
identification, measurement, monitoring and control of all risk
parameters, while liaising with the business divisions that ultimately
own the risks. C&RM comprises a number of specialist units, including
Risk Management, Corporate and Retail Credit Review & Analysis, and
Credit Administration. The Risk Management umbrella includes critical
functions such as Operational Risk in addition to Market & Liquidity Risk
oversight. C&RM also encompasses critical functions in the Bank, such
as retail collections.
36 Bahrain Islamic Bank - Annual Report 2019

Remuneration
Disclosures
The Bank’s total compensation approach, which includes the variable
remuneration policy and the Share Incentive Scheme, sets out the
Banks’s policy on remuneration for Directors and senior management
and the key factors that are taken into account in setting the policy.

The Bank adopted regulations concerning Sound Remuneration

Practices issued by the Central Bank of Bahrain. The revised policy
framework and incentive components were approved by the Board of
Directors and the policy came into effect as of January 2014.

The key features of the proposed remuneration framework are

summarised below:-

Remuneration strategy

It is the Bank’s basic compensation philosophy to provide a competitive

level of total compensation to attract and retain qualified and competent
employees. The Bank’s variable remuneration policy will be driven primarily
by a performance based culture that aligns employee interests with those
of the shareholders of the Bank.

These elements support the achievement of the Bank’s objectives through

balancing rewards for both short-term results and long-term sustainable
performance. This strategy is designed to share success, and to align
employees’ incentives with the risk framework and risk outcomes.

The quality and long-term commitment of all BisB’s employees is

fundamental to success. The Bank therefore aims to attract, retain and
motivate the very best people who are committed to maintaining a career
with the Bank, and who will perform their role in the long-term interests
of shareholders. The Bank’s reward package comprises the following key
elements:

1. Fixed pay
2. Benefits
3. Annual performance bonus
A robust and effective governance framework ensures that the Bank
operates within clear parameters of its compensation strategy and
policy. All compensation matters, and overall compliance with regulatory
requirements, are overseen by the Board Nomination & Remuneration
Committee(NRC).

The Bank’s remuneration policy in particular, considers the role of each

employee and has set guidance on whether an employee is a Material Risk
Taker and / or an Approved Person in a business line, control or support
function. An Approved Person is an employee whose appointment requires
prior regulatory approval because of the significance of the role within the
Bank; and an employee is considered a Material Risk Taker if they are the
Head of a significant business line or any individuals within their control
who have a material impact on the Bank’s risk profile.

In order to ensure alignment between what BisB pays its people and
the business strategy, individual performance is assessed against annual
and long-term financial and non-financial objectives summarized in the
performance management system. This assessment also takes into account
adherence to the Bank’s values, risks and compliance measures and above
all integrity. Altogether, performance is therefore judged not only on what
is achieved over the short and long-term, but also importantly on how it
is achieved, as the NRC believes the latter contributes to the long-term
sustainability of the business.
Bahrain Islamic Bank - Annual Report 2019 37

Remuneration
Disclosures (Cont’d)
NRC role and focus Scope of application of the remuneration policy
The NRC has oversight of all reward policies for the Bank’s employees. The variable remuneration policy has been adopted on a bank-wide
The NRC is the supervisory and governing body for compensation basis.
policy, practices and plans. It is responsible for determining, reviewing
Board remuneration
and proposing variable remuneration policy for approval by the Board.
It is responsible for setting the principles and governance framework for The Bank’s Board remuneration is determined in line with the provisions
all compensation decisions. The NRC ensures that all persons must be of Article 188 of the Bahrain Commercial Companies Law. The Board
remunerated fairly and responsibly. The remuneration policy is reviewed of Directors’ remuneration will be capped so that total remuneration
on a periodic basis to reflect changes in market practices, the business (excluding sitting fees) does not exceed 10% of the Bank’s net profit
plan and risk profile of the Bank. after all required deductions as outlined in Article 188 of the Bahrain
Commercial Companies Law, in any financial year. Board remuneration
The responsibilities of the NRC with regards to the Bank’s variable
is subject to approval of the shareholders in the Annual General Meeting
remuneration policy, as stated in its mandate, include but are not
as well as Ministry of Commerce, Industry and Tourism. Remuneration of
limited to, the following: -
non-executive Directors does not include performance-related elements
• Approve, monitor and review the remuneration system to ensure the such as grants of shares, share options or other deferred stock-related
system operates as intended. incentive schemes, bonuses or pension benefits.
• Approve the remuneration policy and amounts for each Approved Variable remuneration for staff
Person and Material Risk-Taker, as well as total variable remuneration
Variable remuneration is performance related and consists primarily
to be distributed, taking account of total remuneration including
of the annual performance bonus award. As a part of staff’s variable
salaries, fees, expenses, bonuses and other employee benefits.
remuneration, the annual bonus rewards delivery of operational and
• Ensure remuneration is adjusted for all types of risks and that the financial targets set each year, the individual performance of the
remuneration system takes into consideration employees that earn employees in achieving those targets, and their contribution to delivering
the same short-run profit but take different amounts, of risk on the Bank’s strategic objectives.
behalf of the Bank.
The Bank has adopted a Board approved framework to develop a
• Ensure that for Material Risk-Takers, variable remuneration forms a transparent link between variable remuneration and performance. The
substantial part of their total remuneration. framework is designed on the basis of meeting both satisfactory financial
performance and the achievement of other non-financial factors, that will,
• Review the stress testing and back testing results before approving
all other things being equal, deliver a target bonus pool for employees,
the total variable remuneration to be distributed including salaries,
prior to consideration of any allocation to business lines and employees
fees, expenses, bonuses and other employee benefits.
individually. In the framework adopted for determining the variable
• Carefully evaluate practices by which remuneration is paid for remuneration pool, the NRC aims to balance the distribution of the Bank’s
potential future revenues whose timing and likelihood remain profits between shareholders and employees.
uncertain. The NRC will question payouts for income that cannot be
Key performance metrics at the Bank level include a combination of short
realised or whose likelihood of realisation remains uncertain at the
term and long term measures and include profitability, solvency, liquidity
time of payment.
and growth indicators. The performance management process ensures
• Ensure that for Approved Persons in risk management, internal that all goals are appropriately cascaded down to respective business
audit, operations, financial control and compliance functions, the units and employees.
mix of fixed and variable remuneration is weighted in favour of fixed
In determining the amount of variable remuneration, the Bank starts from
remuneration.
setting specific targets and other qualitative performance measures that
• Recommend Board member remuneration based on their attendance result in a target bonus pool. The bonus pool is then adjusted to take
and performance and in compliance with Article 188 of the Bahrain account of risk via the use of risk-adjusted measures (including forward-
Commercial Companies Law. looking considerations).
• Ensure appropriate compliance mechanisms are in place to The NRC carefully evaluates practices by which remuneration is paid for
ensure that employees commit themselves not to use personal potential future revenues whose timing and likelihood remain uncertain.
hedging strategies or remuneration-and liability-related insurance NRC demonstrates that its decisions are consistent with an assessment of
to undermine the risk alignment effects embedded in their the Bank’s financial condition and future prospects.
remuneration arrangements.
The Bank uses a formalised and transparent process to adjust the bonus
pool for quality of earnings. It is the Bank’s objective to pay out bonuses
out of realised and sustainable profits. If the quality of earnings is not
strong, the profit base could be adjusted based on the discretion of the
NRC.
38 Bahrain Islamic Bank - Annual Report 2019

Remuneration
Disclosures (Cont’d)
For the overall Bank to have any funding for distribution of a bonus
pool, threshold financial targets have to be achieved. The performance
measures ensure that total variable remuneration is generally, considerably
contracted where subdued or negative financial performance of the
Bank occurs. Furthermore, the target bonus pool as determined above
is subject to risk adjustments in line with the risk assessment and linkage
framework.

Remuneration of control functions

The remuneration level of staff in the control and support functions

allows the Bank to employ qualified and experienced personnel in
these functions. The Bank ensures that the mix of fixed and variable
remuneration for control and support function personnel should be
weighted in favour of fixed remuneration. The variable remuneration of
control functions is to be based on function-specific objectives and is
not be determined by the financial performance of the business are as
they monitor.

The Bank’s performance management system plays a major role in

deciding the performance of the support and control units on the basis
of the objectives set for them. Such objectives are more focused on
non-financial targets that include risk, control, compliance and ethical
considerations, as well as the market and regulatory environment apart
from value adding tasks which are specific to each unit.

Variable compensation for business units

The variable remuneration of the business units is primarily determined by

key performance objectives set through the performance management
system of the Bank. Such objectives contain financial and non-financial
targets, including risk control, compliance and ethical considerations as
well as market and regulatory requirements. The consideration of risk
assessments in the performance evaluation of individuals ensures that
any two employees who generate the same short-run profits but take
different amounts of risk on behalf of the Bank are treated differently by
the remuneration system.

Risk assessment framework

The purpose of risk linkages is to align variable remuneration to the risk

profile of the Bank. In its endeavour to do so, the Bank considers both
quantitative measures and qualitative measures in the risk assessment
process. Both quantitative measures and human judgement play a
role in determining any risk adjustments. The risk assessment process
encompasses the need to ensure that the remuneration policy as
designed reduces employees’ incentives to take excessive and undue
risks, is symmetrical with risk outcomes, and delivers an appropriate mix
of remuneration that is risk aligned.

The NRC considers whether the variable remuneration policy is in line

with the Bank’s risk profile, and ensures that through the Bank’s ex-ante
and ex-post risk assessment framework and processes, remuneration
practices where potential future revenues whose timing and likelihood
remain uncertain are carefully evaluated.

Risk adjustments take into account all types of risk, including intangible
and other risks such as reputation risk, liquidity risk and the cost of
capital. The Bank undertakes risk assessments to review financial and
operational performance against business strategy and risk performance
prior to distribution of the annual bonus. The Bank ensures that total
Bahrain Islamic Bank - Annual Report 2019 39

Remuneration
Disclosures (Cont’d)
Risk assessment framework (Cont’d)
variable remuneration does not limit its ability to strengthen its capital The intention is to allow the Bank to respond appropriately if the
base. The extent to which capital needs to be built up is a function of the performance factors on which reward decisions were based turn out not
bank’s current capital position and its ICAAP. to reflect the corresponding performance in the longer term. All deferred
compensation awards contain provisions that enable the Bank to reduce
The bonus pool takes into account the performance of the Bank which is
or cancel the awards of employees whose individual behaviour has
considered within the context of the Bank’s risk management framework.
had a materially detrimental impact on the Bank during the concerned
This ensures that the variable pay pool is shaped by risk considerations
performance year.
and Bank-wide notable events.
Any decision to take back an individual’s award can only be made by the
The size of the variable remuneration pool and its allocation within the
Bank’s Board of Directors.
bank takes into account the full range of current and potential risks,
including: The Bank’s malus and clawback provisions allow the Board to determine
that, if appropriate, vested / unvested elements under the deferred
(a) The cost and quantity of capital required to support the risks taken.
bonus plan can be adjusted / cancelled in certain situations. These
(b) The cost and quantity of the liquidity risk assumed in the conduct of events include the following:
business.
• Reasonable evidence of willful misbehaviour, material error,
(c) Consistency with the timing and likelihood of potential future negligence or incompetence of the employee causing the Bank/
revenues incorporated into current earnings. the employee’s business unit to suffer material loss in its financial
performance, material misstatement of the Bank’s financial
The NRC keeps itself abreast of the Bank’s performance against the
statements, material risk management failure or reputational loss
risk management framework. The NRC will use this information when
or risk due to such employee’s actions, negligence, misbehavior or
considering remuneration to ensure returns, risks and remuneration are
incompetence during the concerned performance year.
aligned.
• The employee deliberately misleads the market and/or shareholders
Risk adjustments
in relation to the financial performance of the Bank during the
The Bank has an ex-post risk assessment framework which is a concerned performance year.
qualitative assessment to back-test actual performance against prior • Clawback can be used if the malus adjustment on the unvested
risk assumptions. portion is insufficient given the nature and magnitude of the issue.
In years where the Bank suffers material losses in its financial performance,
the risk adjustment framework will work as follows: Components of Variable remuneration
Variable remuneration has the following main components:
• There will be considerable contraction of the Bank’s total variable
remuneration. Upfront Cash:

• At an individual level, poor performance by the Bank will mean The portion of the variable compensation that is awarded and paid out in
individual KPIs are not met and hence employee performance ratings cash on conclusion of the performance evaluation process for each year.
will be lower. Deferred Cash:
• Reduction in the value of deferred shares or awards. The portion of variable compensation that is awarded and paid in cash
• Possible changes in vesting periods and additional deferral applied on a pro-rata basis over a period of 3 years.
to unvested rewards. Upfront shares:
• Lastly, if the qualitative and quantitative impact of a loss incident The portion of variable compensation that is awarded and issued in the
is considered significant, a malus or clawback of previous variable form of shares on conclusion of the performance evaluation process for
awards may be considered. each year.
The NRC, with the Board’s approval, can rationalise and make the Deferred shares:
following discretionary decisions:
The portion of variable compensation that is awarded and paid in the
• Increase / reduce the ex-post adjustment. form of shares on a pro-rata basis over a period of 3 years.
• Consider additional deferrals or increase in the quantum of non-cash All deferred awards are subject to malus provisions. All share awards
awards. are released to the benefit of the employee after a six-month retention
• Recovery through malus and clawback arrangements. period from the date of vesting. The number of equity share awards
is linked to the Bank’s share price as per the rules of the Bank’s Share
Malus and Clawback framework Incentive Scheme. Any dividend on these shares is released to the
The Bank’s malus and clawback provisions allow the Board of Directors employee along with the shares (i.e. after the retention period).
to determine that, if appropriate, unvested elements under the deferred
bonus plan can be forfeited / adjusted or the delivered variable
remuneration recovered in certain situations.
40 Bahrain Islamic Bank - Annual Report 2019

Remuneration
Disclosures (Cont’d)
Deferred Compensation

The CEO, his deputies and 5 most highly paid business line employees are subject to the following deferral rules:

Payout
Elements of variable remuneration Vesting period Retention Malus Clawback
percentages

Upfront cash 40% Immediate - - Yes

Deferred cash 10% 3 years - Yes Yes

Deferred share awards 50% 3 years 6 months Yes Yes

All other covered staff, i.e. Assistant General Manager level and above are subject to the following deferral rules:

Payout Vesting
Elements of variable remuneration Retention Malus Clawback
percentages period

Upfront cash 50% Immediate - - Yes

Upfront share awards 10% Immediate 6 months Yes Yes

Deferred share awards 40% 3 years 6 months Yes Yes

The NRC, based on its assessment of the role profile and risk taken by an employee could increase the coverage of employees that will be subject
to deferral arrangements.

Details of remuneration paid

(a) Board of Directors & committees

BD 000’s 2019 2018

Sitting fees *221 *153

Remuneration **282 282

*Includes NRC sitting fees as of 31 December 2019 amounted to BD 12 thousand (2018 : BD 15 thousand).

**Subject to AGM and regulatory approval.

(b) Shari’a’s Supervisory Board

BD 000’s 2019 2018

Remuneration, Fees and Expenses 66 65

Bahrain Islamic Bank - Annual Report 2019 41

Remuneration
Disclosures (Cont’d)
(c) Employee Remuneration

2019

Fixed Sign on Guaranteed Variable remuneration

remuneration bonuses bonuses Upfront Deferred
Number
BD 000’s
of staff
(Cash / (Cash /
Cash Others Cash Shares Cash Shares Others Total
Shares) Shares)

Approved persons

- Business lines 12 1,507 - - - 128 - 26 128 3 1,792

- Control & Support 24 2,176 - - - 152 14 - 57 7 2,406

Other material risk takers - - - - - - - - - - -

Other staff 325 8,069 - - - 983 - - - - 9,052

Total 361 11,752 - - - 1,263 14 26 185 10 *13,250

*Includes end of service compensations & includes staff cost of employees who have left the bank during the year.

2018

Fixed Sign on Guaranteed Variable remuneration

remuneration bonuses bonuses Upfront Deferred
Number
BD 000’s
of staff
(Cash / (Cash /
Cash Others Cash Shares Cash Shares Others Total
Shares) Shares)

Approved persons

- Business lines 6 914 - - - 141 - 34 168 - 1,257

- Control & Support 17 1,463 - - - 177 25 - 100 14 1,779

Other material risk takers - - - - - - - - - - -

Other staff 342 8,816 - - - 848 - - - - 9,664

Total 365 11,193 - - - 1,166 25 34 268 14 *12,700

*Includes end of service compensations.

42 Bahrain Islamic Bank - Annual Report 2019

Remuneration
Disclosures (Cont’d)
Deferred awards disclosures

2019

Shares
BD 000’s Cash
Number BD 000’s Total

Opening balance 91 4,957,743 710 801

Adjustment based on final award price of 2018 - 71,457 - -

Awarded for the year 26 1,662,106 199 225

Paid out / released / pay-back during the year (29) (1,619,257) (215) (244)

Service, performance and risk adjustments - - - -

Corporate action adjustment - - - -

Closing balance 88 5,072,049 694 782

Number of shares for 2019 deferred share awards has been calculated using the year end share price as the award share price in accordance with
the Share plan policy of the Bank will be determined at a later date.

2018

Shares
BD 000’s Cash
Number BD 000’s Total

Opening balance 75 3,730,964 469 544

Awarded for the year 34 2,250,743 293 327

Paid out / released during the year (18) (1,205,294) (162) (180)

Service, performance and risk adjustments - - - -

Corporate action adjustment - 181,330 110 110

Closing balance 91 4,957,743 710 801

Bahrain Islamic Bank - Annual Report 2019 43

Corporate Social
Responsibility
CSR “Jood” Many and varied Jood initiatives were undertaken by the Bank’s
personnel during the year.
Throughout 2019, BisB expanded its participation and activities in
support of its Corporate Social Responsibility (CSR) programmes. On the educational front, in partnership with the Ministry of
Education, BisB sponsored its Iqraa campaign, aimed at motivating
True to our desire to align the CSR with social innovation, we renamed
school children to read. A further alliance with Injaz, conducted two
our CSR programme ‘Jood’ with focus on investment in initiatives
Innovations Camps for BIBF students and the Royal University for
which foster education and innovation in a digital age, creating a
Women.
positive and sustainable impact on our local communities.
Our staff manned road intersections, serving Iftar meal boxes to
Jood is structured as an over-arching umbrella, covering the following:
motorists as they travelled home during the Holy Month of Ramadan.
• Donations We also delivered Iftar meals and maintained houses to needy families
and others. Other support was given to our less fortunate neighbours
• Sponsorships
during the heavy rains period. Through Jood, we also bought Eid
• Volunteering activities clothes for orphaned children.
• Zakat Amounts In medical and care, we supported the Ministry of Health in buying
devices for heart-scanning, and also devoted time for the ’Yoko’
elderly care centre.

Our Islamic affiliation continued in sponsoring the AAIOFI and WIBC

Conferences.

The Bank’s sponsorship to the 26th Annual World Islamic Banking Conference (WIBC)

“Jood” team participation in

providing gifts for labors on the
occasion of Labor Day.

“Jood” team participation in Iftar Campaign

 44 Bahrain Islamic Bank - Annual Report 2019

Corporate
Governance Review
Corporate Governance Framework

Bahrain Islamic Bank B.S.C. (“BisB” or the “Bank”) is committed to

upholding the highest standards of corporate governance by way of
balancing entrepreneurship, regulatory compliance, and industry best
practices, while creating value for all stakeholders. It also involves having
the right checks and balances in place throughout the organization to
ensure that the Bank’s processes are within an adequate, efficient and
robust internal control and governance framework.

Statement of Responsibility

The Board is ultimately accountable to the shareholders for the creation

and delivery of strong sustainable financial performance and long-
term shareholder value through strategic initiatives. The Chairman is
responsible for leading the Board, ensuring its effectiveness, monitoring
the performance of the Executive Management, and maintaining a
dialogue with the Bank’s shareholders. The Board has established the
following Committees to assist it in carrying out its responsibilities:

1. Board Credit Committee (“BCC”);

2. Audit, Compliance & Governance Committee (“ACGC”);

3. Nomination & Remuneration Committee (“NRC”); and

4. Board Risk Committee (“BRC”).

The Board’s Executive Committee has been renamed to BCC during

2019. Moreover, an independent BRC has been established. That, in
addition to the establishment of a Board Independent Committee as per
Central Bank of Bahrain’s (CBB) requirements stipulated in Takeovers,
Mergers & Acquisitions Module of Volume 6, following National Bank of
Bahrain’s (NBB) offer to further raise their shareholding in BisB.

BisB’s corporate governance framework is built on a code of business

conduct, policies, procedures, internal controls, risk management,
Shari’a review and audit, internal and external audit and compliance
functions. The framework is based on effective communications,
transparent disclosures, performance measurement and accountability.
An independent Internal Audit function is established within the Bank
that reports directly functionally to the ACGC.

Code of Business Conduct

BisB conducts its business in accordance with the highest standards

of ethical behavior. A Code of Business Conduct has been developed,
based on the CBB’s Principles of Business regulations, to govern the
personal and professional conduct of the directors and employees of
the Bank. The code is based on the following principles:

1. Integrity
2. Conflicts of Interest
3. Due Skill, Care and Diligence
4. Confidentiality
5. Market Conduct
6. Customer Assets
7. Customer Interest
8. Relations with Regulators
9. Adequate Resources
10. Management, System & Controls
Bahrain Islamic Bank - Annual Report 2019 45

Corporate
Governance Review (Cont’d)
The requirements under each of the above principles are made available Communications
to the Board and employees of the Bank. The Board monitors any
BisB conducts all communications with its stakeholders in a professional,
exceptions to the above principles by way of reviewing formal reports
honest, transparent, understandable, accurate and timely manner. Main
issued to the Board’s ACGC.
communication channels include the annual report, website and regular
Compliance announcements in the appropriate local media.

Compliance is an independent function that reports to the ACGC. The

Compliance function, guided by the Board approved Policies, works
with various business and controlled functions of the Bank to ensure
compliance with the applicable rules and regulations of the CBB.

Given the digital business strategy of the Bank, as well as the expanding
regulatory scrutiny and enforcement, the Compliance & Governance
Department of the Bank is keeping up with the digital advancements
by also taking on an active role in directly participating in the risk
management process.

Governance Structure

Shari’a
Shareholders Supervisory
Board

Shari’a
Board of
Executive
Directors
Committee

Audit, Compliance & Nomination &

Board Risk Board Credit
Governance Remuneration
Committee Committee
Committee Committee

Chief Executive
Officer

Chief
Chief Chief
Compliance &
Internal Audit Risk Officer
Governance

Shari’a
Coordination &
Implementation

Shari’a
Internal Audit

Operational Management Purchasing & Credit &

Provisioning Asset/Liability Zakat & Al Qard Al
Risk Committee Evaluation Investment
Committee Committee Hasan Committee
Committee (MANCO) Committee Committee
46 Bahrain Islamic Bank - Annual Report 2019

Corporate
Governance Review (Cont’d)
Bank’s Structure

Chief Executive
Officer

Shari’a Chief
Shari’a Chief
Coordination & Compliance & BoD Secretary
Internal Audit Internal Audit
Implementation Governance

Chief Strategy Chief Corporate

Chief Retail Chief Corporate & Chief Information Chief Financial Chief Shared
Implementation & Chief Risk Officer Communications &
Banking Institutional Banking Officer Officer Services Officer
Transformation Marketing Officer

Corporate Banking &

Corporate &
Branches Small Medium Internal Control Human Resources
Liquidity Risk
Enterprises

Financial Information General Services & Operational

Priority Banking
Institution Security Properties Risk

Central Retail Credit

Sales Restructuring
Operation Review

Retail Product Treasury Credit Admin

Wealth Transactional Banking &

Retail Collection
Management Business Development Unit

Retail
Segment Unit
Legal Unit

Contact Center Unit

Customer Experience,
Process & Governance Unit
Bahrain Islamic Bank - Annual Report 2019 47

Corporate
Governance Review (Cont’d)
Board of Directors
Composition

No. Director Designation Start Date Term

1 Dr. Esam Abdulla Fakhro Non-Executive & Non-Independent 23rd March 2016 Second

2 Gen. Ebrahim Abdulla Al Mahmood (Until 27th January 2020) Non-Executive & Non-Independent 28th May 2017 Second

3 Mr. Khaled Yusuf AbdulRahman Non-Executive & Non-Independent 23rd March 2016 Second

4 Mr. Talal Ali Al Zain (Until 21st March 2019) Non-Executive & Independent 23rd March 2016 -

5 Mr. Khalil Ebrahim Nooruddin (Until 21st March 2019) Non-Executive & Independent 23rd March 2016 -

6 Mr. Ebrahim Husain Ebrahim Aljassmi (Until 21st March 2019) Non-Executive & Independent 23rd March 2016 -

7 Mr. Othman Ebrahim Naser Al Askar (Until 21st March 2019) Non-Executive & Independent 23rd March 2016 -

8 Mr. Muhammad Zarrug Rajab (Until 30th January 2020) Non-Executive & Non-Independent 23rd March 2016 Third

9 Mr. Khalid Abdulaziz Al Jassim Non-Executive & Independent 21st March 2019 First

10 Mr. Mohammed Abdulla Al Jalahama Non-Executive & Independent 21st March 2019 First

11 Mr. Abdulla Ahmed Kamal (Until 27th January 2020) Non-Executive & Non-Independent 21st March 2019 First

12 Mr. Marwan Khaled Tabbara Non-Executive & Independent 21st March 2019 First

13 Mr. Mohammed Abdulla Nooruddin Non-Executive & Independent 21st March 2019 First

The detailed profiles of the Board members are available on the Bank’s website.

Board of Directors’ Responsibilities a broad spectrum of experience and expertise with a reputation for
integrity. Directors should have had experience in positions with a high
The primary responsibility of the Board of Directors is to provide effective
degree of responsibility, be leaders in the companies or institutions with
governance over the Bank’s affairs for the benefit of its stakeholders,
which they are affiliated and be selected based upon the contributions
and to balance the interests of its diverse constituencies, including
they can make to the Board.
associated concerns, employees and other stakeholders. In all actions
taken by the Board, the Directors are expected to exercise their business The Board may not necessarily carry out all these responsibilities
judgement in what they reasonably believe to be in the best interests of but should ensure that these have been delegated to various board
the Bank. committees or executive management committees to act on their behalf
and communicate periodic reports to the Board for their review.
The Board will approve and oversee the implementation of the Bank’s
strategies and will review and approve the Bank’s strategic plan. As Induction of New Directors
part of its strategic review process, the Board will review major action
The Bank provides an orientation program for new Directors which
and business plans, set performance objectives and oversee major
shall include presentations by senior management on the Bank’s
investments, divestitures and acquisitions. The Board is also ultimately
strategic plans, its significant financial, accounting and risk management
responsible to ensure effective risk management function, regulatory
issues, its compliance programs, its operations, its Code of Conduct,
compliance, adequate internal controls as well as compliance with
its management structure and executive officers and its internal and
Shari’a rulings. Every year, at an annual Board strategy session, the Board
external auditors.
will formally reassess the Bank’s objectives, strategies and plans.

One of the Board’s most important responsibilities is identifying,

evaluating and selecting candidates for the Board of Directors. The Board
will seek members from diverse professional backgrounds who combine
48 Bahrain Islamic Bank - Annual Report 2019

Corporate
Governance Review (Cont’d)
Code of Conduct Membership of the Board of Directors can be terminated in the following
cases:
The Bank adopts a Code of Conduct and other internal policies and
guidelines to comply with the laws, rules and regulations that govern • If a member fails to attend at-least 75% of the meetings without a
the Bank’s business operations. The Code of Conduct applies to all reasonable excuse;
employees of the Bank as well as to Directors.
• If he/she tenders his/her resignation in writing;
Review of Internal Control Processes and Procedures
• If he/she fails to fulfill any related conditions referred to the Bank’s
Audit, Compliance & Governance Committee assists the Board in Memorandum of Association;
fulfilling its oversight responsibility relating to the performance of the
• If he/she is appointed or elected in violation of the provisions of the
internal audit function, which regularly reviews and ensures adherence
CBB Law and/or Bahrain Commercial Companies Law;
to internal control processes and procedures.
• If he/she abuses his/her membership for carrying on other business
Board Membership
that competes with or is detrimental to the company’s business; or
The Board of Directors’ membership term is three years, subject to
• If the shareholder who nominates him/her applied for his/her
renewal. Shareholders owning 10% or more of the share capital can
removal.
nominate a representative on the Board of Directors in proportion to
the number of Board members. A secret ballot is held at the Ordinary
General Meeting for the remaining Board members. The Board of
Directors elect, by a secret ballot, a Chairman and Vice Chairman for a
renewable term of three years.

Board Meetings and Attendance

Minimum Number of Meetings Required = 4

Members 24-Feb 25-Feb 28-Apr 04-May 08-Aug 04-Nov 07-Nov 09-Dec

Dr. Esam Abdulla Fakhro        

Gen. Ebrahim Abdulla Al Mahmood        

Mr. Talal Ali Al Zain (Until 21st March 2019)   - - - - - -

Mr. Khalil Ebrahim Nooruddin (Until 21st March 2019)   - - - - - -

Mr. Ebrahim Husain Ebrahim Aljassmi (Until 21st March 2019)   - - - - - -

Mr. Othman Ebrahim Naser Al Askar (Until 21st March 2019)   - - - - - -

Mr. Khalid Yousif Abdul Rahman        

Mr. Muhammad Zarruq Rajab        

Mr. Abdulla Ahmed Kamal - -      

Mr. Mohamed Abdulla Nooruddin - -      

Mr. Khalid Abdulaziz Al Jassim - -      

Mr. Mohammed Abdulla Al Jalahma - -      

Mr. Marwan Khaled Tabbara - -      

 Participated via phone/video link

Bahrain Islamic Bank - Annual Report 2019 49

Corporate
Governance Review (Cont’d)
Board Committees’ Members

Board Committee Members Objectives

Gen. Ebrahim Abdulla Al Mahmood

Chairman
The BCC reviews and approves/recommends Credit Proposals to
Board Credit Committee (BCC) Members the Board for approval.
• Khalid Yousif Abdul Rahman
• Muhammad Zarrug Rajab

Khalid Abdulaziz Al Jassim

Chairman The ACGC oversights the integrity and reporting of the Bank’s
Audit, Compliance and quarterly and annual financial statements. It also covers
Governance Committee (ACGC) Members review of audit findings, provisions and impairments as well as
• Mohammed Abdulla Al Jalahma compliance with legal and regulatory requirements.
• Abdulla Ahmed Kamal

Dr. Esam Abdulla Fakhro The NRC is responsible for developing and recommending
Chairman changes from time to time in the Bank’s nomination and
Nomination and Remuneration
Members remuneration policy, including the variable payment policy. It is
Committee (NRC)
• Mohamed Abdulla Nooruddin also entrusted to identify and recommend persons occupying
• Marwan Khaled Tabbara senior positions including board members.

Marwan Khaled Tabbara

Chairman
The BRC is formed to assist the Board of Directors in overseeing
Board Risk Committee (BRC) Members the risk management framework of the Bank.
• Mohamed Abdulla Nooruddin
• Khalid Abdulaziz Al Jassim

Board Credit Committee Meetings and Attendance

Minimum Number of Meetings Required = 4

Members 24-Jan 17-Mar 07-Aug 03-Nov

Gen. Ebrahim Abdulla Al Mahmood    

Khaled Yusuf Abdul Rahman    

Khalil Ebrahim Nooruddin (Until 21st March 2019)   - -

Muhammad Zarrug Rajab - -  

Hassan Jarrar    

 Participated via phone/video link

50 Bahrain Islamic Bank - Annual Report 2019

Corporate
Governance Review (Cont’d)
Audit, Compliance & Corporate Governance Committee Meetings and Attendance
Minimum Number of Meetings Required = 4

Members 07-Feb 04-May 20-Jun 07-Aug 29-Sep 03-Nov 08-Dec

Ebrahim Husain Ebrahim Aljassmi

 - - - - - -
(Until 21st March 2019)
Othman Ebrahim Naser Al Askar
 - - - - - -
(Until 21st March 2019)

Muhammad Zarrug Rajab  - - - - - -

Khalid Abdulaziz Al Jassim -      

Mohammed Abdulla Al Jalahma -      

Abdulla Ahmed Kamal -      

 Participated via phone/video link

Nomination & Remuneration Committee Meetings and Attendance

Minimum Number of Meetings Required = 2

Members 06-Feb 26-Jun 25-Sep 02-Dec

Dr. Esam Abdulla Fakhro    

Talal Ali Al Zain (Until 21st March 2019)  - - -

Ebrahim Husain Ebrahim Aljassmi (Until 21st March 2019)  - - -

Mohamed Abdulla Nooruddin -   

Marwan Khaled Tabbara -   

Board Risk Committee Meetings and Attendance

Minimum Number of Meetings Required = 2

Members 20-May 16-Jun 03-Jul 04-Sep 03-Oct 13-Nov 28-Nov 04-Dec

Marwan Khaled Tabbara        

Mohamed Abdulla Nooruddin        

Khalid Abdulaziz Al Jassim        

 Participated via phone/video link

Board Independent Committee Meetings and Attendance

Minimum Number of Meetings Required = N/A

01 19 05 12 26 03 15 21 31 06 18 28 04 26
Members
Aug Aug Sep Sep Sep Oct Oct Oct Oct Nov Nov Nov Dec Dec

Marwan Khaled Tabbara              

Mohamed Abdulla Nooruddin              

Khalid Abdulaziz Al Jassim              

 Participated via phone/video link

Bahrain Islamic Bank - Annual Report 2019 51

Corporate
Governance Review (Cont’d)
Evaluation of the Board and Each Committee Shari’a Supervisory Board
The Nomination and Remuneration Committee carried out an
Objective
evaluation of the Board and its Committees through the distribution of
questionnaires to each Board member, followed by an assessment of The main objective of Shari’a Supervisory Board is to advise the Bank
the Committees and Members. The Committee expressed its satisfaction on any Shari’a matter and to ensure compliance with the Shari’a tenets
with the positive results. and requirements in their operations. The Shari’a Supervisory Board
is entrusted with the duty of directing, reviewing and supervising the
Board of Directors’ Remuneration and Sitting Fees
activities of the Bank in order to ensure that the Bank is in compliance
The Board of Directors are paid an annual remuneration as approved by
with Shari’a rules and AAOIFI. The profiles of the Shari’a Supervisory
the shareholders at the Ordinary General Meeting. While the amount of
Board are listed on page 16 of this annual report.
the remuneration is not directly linked to the performance of the Bank,
factors such as the Bank’s performance, industry comparison and the The Shari’a Supervisory Board has established a Shari’a Coordination &
time and effort committed by the Directors to the Bank, are considered Implementation function to assist the Bank in its day to day management
for determining the total remuneration. In addition, Directors are paid of business. The Shari’a Supervisory Board has also established an
sitting fees for attending the various subcommittees of the Board of independent Internal Shari’a Audit function that reports any exceptions
Directors. Non-resident Directors are also entitled to travel expenses. to the Shari’a fatwas and guidelines.
Further details on the remunerations paid to Board as well as Senior
Management are available under the remuneration disclosures of the
annual report.

Shari’a Supervisory Board Meetings

Members 20-Mar 16-Jun 15-Sep 09-Dec 12-Dec

Sh. Dr. Abdul Latif Al Mahmood     

Sh. Mohammed Al Juffairi     

Sh. Adnan Al Qattan     

Sh. Dr. Nedham Yacoubi     

Sh. Dr. Essam Al Enizi     

Executive Management

The management structure that clearly defines roles, responsibilities and reporting lines, is available in the annual report of the Bank. Within the
management structure there are separate committees responsible to meet on a regular basis to discuss and decide on the various strategic and
tactical issues within their respective areas.

Experience
Name & Designation Profession Qualification
in years

Hassan Amin Jarrar

Banking 31 BSc in Finance from California State University, San Jose.
Chief Executive Officer

MSc (Economics) in Finance and Investment Management

Wesam A.Aziz Baqer from the University of Aberdeen, Scotland.
Banking 18
Chief Corporate & Institutional Banking BSc in Business Administration from the University of Bahrain
Certified Financial Adviser (CeFA).

Dalal Ahmed Al Qais MBA in Finance from AMA University.

Banking 18
Chief Retail Banking BSc in Business Management from the University of Bahrain.

CPA from New Hampshire Board of Accountancy.

Ameer Abdul Ghani Dairi Certified Management Accountant (CMA) licensed by the
Accounting 19
Chief Financial Officer Chartered Institute of Management Accountants, USA.
BSc in Accounting from University of Bahrain.
52 Bahrain Islamic Bank - Annual Report 2019

Corporate
Governance Review (Cont’d)
Executive Management (Cont’d)

Experience
Name & Designation Profession Qualification
in years

Fahim Ahmed Shafiqi MBA from University of Warwick, UK.

Banking 21
Chief Risk Officer Diploma in Islamic Finance (CDIF).

Eman Ali Abdulla Ebrahim

Banking 23 Associate Diploma in Accounting, University of Bahrain.
Head of Central Operations

Hussain Ebrahim Al Banna BSc in Banking & Finance from the University of Bahrain.
Banking 16
Head of Treasury Treasury & Capital Markets Diploma, BIBF.

Dawood Khalil Al Ashhab BS in Public Administration.

Human Resources 20
Chief Shared Services Officer Certified coach from the Gallup University, UK.

Mahmood Qannati MSc in Computer Based Information Systems from the

Chief Marketing & Marketing 19 University of Sunderland.
Corporate Communication BSc in Marketing from the University of Bahrain.

MSc in Information Systems Management from the University

Osama Ali Nasr
Information Technology 22 of Liverpool.
Chief Information Officer
BSc in Computer Science from Al-Isra University, Jordan.

Mazar Rashed Jalal BSc in Accounting from the University of Bahrain.

Chief Compliance & Banking 19 International Compliance Associate Diploma from UK.
Governance Diploma in Islamic Banking and Insurance from UK, Wales.

Masters in Finance from AMA International University.

Mohammed Ayada Mattar
Certified Anti-Money Laundering Specialist.
Money Laundering Banking 15
Diploma in Governance, Risk & Compliance from International
Reporting Officer
Compliance Association.

Masters of Business Communication & Leadership, Jones

Maisa Jawdat Shunnar
International University, Colorado, USA.
Chief Strategy Strategy Implementation &
20 BSc in Business Administration majoring in Computer
Implementation & Transformation
Information Systems from University of Houston
Transformation
(Texas, USA).

Master degree of Shari’a At ALEmam ALAwzaie University in

Hamad Farooq Al- Shaikh Lebanon.
Head of Shari’a Coordination & Banking 15 Chartered Islamic Finance Professional.
Implementation Advanced Diploma in Islamic Commercial Jurisprudence.
Bachelor Degree in Law and Shari’a from Qatar University.

Professional Diploma in Shari’a Auditing – CIBAFI.

CSIA – Certified Specialist in Islamic Accounting – CIBAFI.
Eman Mohammed
CIB – Certified Islamic Banker – CIBAFI.
AlBinghadeer Banking 15
CSAA – Certified Shari’a Adviser and Auditor – AAOIFI.
Head of Internal Shari’a Audit
Diploma in Computing and Business Studies – Bournemouth
University and Technology Centre – UK.

Certified Public Accountant - CPA.

Certified Internal Auditor - CIA.
Khaled Waheeb Al Naser Certified Islamic Professional Accountant - CIPA.
Auditing & Banking 13
Chief Internal Audit BSC Managerial Accounting – NYIT.
CGMA – AICPA/ CIMA.
COSO Internal Control - COSO.
Bahrain Islamic Bank - Annual Report 2019 53

Corporate
Governance Review (Cont’d)
Management Committees

Committee(s) Members Objectives

Hassan Amin Jarrar
Chairman
Members
• Wesam A.Aziz Baqer MANCO is the highest management body that reviews the
• Dalal Ahmed Al Qais Bank’s strategy implementation. In addition, the committee
• Ameer Abdul Ghani Dairi also plays a significant role in establishing the policies,
Management Committee
• Fahim Ahmed Shafiqi procedures and frameworks covering risk management,
(MANCO)
• Eman Ali Abdulla Ebrahim compliance, retail and corporate banking. The Committee also
• Dawood Khalil Al Ashhab monitors the performance of business, support and control
• Osama Ali Nasr functions of the Bank.
• Mazar Rashed Jalal
• Maisa Jawdat Shunnar
• Mahmood Qannati
Ameer Abdul Ghani Dairi
Chairman
Members The purpose of Asset & Liability Committee is to act as a
Asset & Liability • Hassan Amin Jarrar decision making body and guiding force responsible for
Committee (ALCO) • Dalal Ahmed Al Qais balance sheet planning from risk return perspective, including
• Fahim Ahmed Shafiqi strategic management of yield and liquidity risks.
• Hussain Ebrahim Al Banna
• Wesam A.Aziz Baqer
Hassan Amin Jarrar
C&IC determines the Credit & Investment Policy of the Bank
Chairman
and identifies possible risks assumed by the Bank for different
Members
Credit & Investment types of transactions. The C&IC has the authority to make a
• Wesam A.Aziz Baqer
Committee (C&IC) decision on approval or rejection or proposed transactions
• Dalal Ahmed Al Qais
within its authority as well as to monitor the performance and
• Fahim Ahmed Shafiqi (Dissenting Vote)
quality of the Bank’s credit & Investment portfolios.
• Ameer Abdul Ghani Dairi
Hamad Farooq AlShaikh
Chairman
The main objective of Qard Al Hassan, Donation and Zakah
Members
Qard Al Hassan, Committee is to discharge the Group’s social responsibilities
• Khaled Waheeb AlNasser (Until October)
Donation & Zakah toward its society through distributing zakah, charity funds,
• Nada Ishaq Abdul Karim
Committee donations & good faith Qard for marriage, medical treatments,
• Hamad Al Bassam
etc.
• Nayef Nasser Al Nasser (From September)
• Aysha Ali Al Nasser (From October)
Ameer Abdul Ghani Dairi
Chairman
Members Provisioning Committee reviews the Bank’s provisions as well
Provisioning Committee
• Fahim Ahmed Shafiqi as formulates policies with a view to maintain the strategic
(PC)
• Khalid Mahmood (Observer - until June) risk level objectives.
• Khaled Waheeb Al Naser (Observer - from June)
• Salah Yaseen (Voting member)
Fahim Ahmed Shafiqi
Chairman
Members
• Sohail Kabeer The purpose of the Operational Risk Committee is to:
• Wesam A.Aziz Baqer a) Oversee and review the Bank’s operational risk framework.
Operational Risk
• Dalal Ahmed Al Qais b) Assist the management in fulfilling its operational risk
Committee (ORC)
• Ameer Abdul Ghani Dairi management responsibilities as defined by applicable laws
• Eman Ali Abdulla Ebrahim and regulations.
• Dawood Khalil Al Ashhab
• Osama Ali Nasr
• Mazar Rashed Jalal
Hamad Mohammed Al Bassam
Chairman The Bank has formed a Purchasing & Evaluation Committee
Purchasing & Evaluation
Members that independently oversees the vendor management and
Committee*
• Maitha Abdulla Saad Faraj procurement process.
• Aysha Ali AlNasser
*Established in 2019.
54 Bahrain Islamic Bank - Annual Report 2019

Corporate
Governance Review (Cont’d)
Succession Planning
HC-1.4.6 states that the Chairman of the Board
Succession planning in the Bank is driven by our Business strategy
of Directors should be an independent director.
and forward looking approach. The primary objective of the plan is to
The Bank’s Chairman, Dr. Esam Abdulla Fakhro
develop people to meet future demands of the Bank. On an annual basis,
is nominated by the NBB which is a Controller of
the Human Resources Department of the Bank reviews and consults the
HC-1.4.6 the Bank. Accordingly, Dr. Fakhro is reported as a
Board’s Nomination & Remuneration Committee to ensure availability of
Non-Independent Director. The Board is of the view
a practical and executable succession plan.
since BisB has no business transactions with NBB,
Related Party Transactions and Conflict of Interest there exist no conflict of interest and therefore, the
Under the Bahrain Commercial Companies Law and CBB’s regulations, chairmanship of Dr. Fakhro is appropriate.
the Bank is required to disclose potential conflicts as well as refrain
from participating in any conflicted decisions. This includes potential HC-1.8.2 states that the Board should establish
conflicts that may arise when a Director takes up a position with another a Corporate Governance Committee of at least
company or has any material transactions with the Bank. In addition, three independent members and HC-1.8.5 allows
exposures to major shareholder, directors and senior management are combination of committees. The Bank has combined
governed by the regulations of the CBB. the responsibility of the Corporate Governance
HC-1.8.2 Committee with that of the Audit Committee. The
Related party transactions are entered into in compliance with Article Board is of the view that this does not compromise
189 of the Commercial Companies Law. All material service providers are the high standards of corporate governance as the
selected following a satisfactory tendering process which is governed by Audit Committee has sufficient resources and time
the vendor management policy of the Bank. Any director or member of to discharge its duties and holds sufficient number
the senior management conflicted is excluded throughout the decision of meetings to fulfil its responsibilities.
making process. Details of related party transactions, carried out at
arm’s length, are disclosed in Note 26 of the financial statements. HC-5.3.2 states that the Remuneration Committee
should include only independent directors or,
Material Transactions Requiring Board Approval
alternatively, only non-executive directors of whom a
The Board has delegated certain authorities to the Executive Management
majority are independent directors and the chairman
to ensure smooth and effective day to day management, however,
is an independent director. The Remuneration
all material financing transactions, as provided in the delegation of
Committee of the Bank is combined with the
authority matrix of the Bank, are subject to Board approval. Furthermore,
Nomination Committee as allowed under HC-1.8.5.
major decisions such as change in strategy, changes in the organization
HC-5.3.2 The Chairman of the Nomination & Remuneration
structure, capital expenditures, amending policies and hiring executive
Committee, Dr. Esam Abdulla Fakhro, is treated as
management is subject to either Board or relevant Board committees.
Non-Independent on the basis that his nomination is
Exceptions to CBB’s Corporate Governance Regulations through NBB, a Controller of the Bank. The Board is
Banks are required to comply with the High Level Controls (HC) Module of the view that since the remuneration of the Board
of the CBB Rulebook. The HC Module contains both Rules and Guidance; is governed by the Bahrain Commercial Company
Rules must be complied with, but Guidance may either be complied Law, there exist no conflict of interest in Dr. Fakhro
with or non-compliance explained to the shareholders and to the CBB. being the Chairman of the NRC.
Exceptions to guidance are explained as follows:

Reference Explanation Employments of Relatives

HC-1.3.13 states that no one person should hold The Bank has a policy in place on employment of relatives to prevent
more than three directorships in public companies the potential conflict of interest. As a matter of policy, employment of
in the Kingdom of Bahrain, with the provision that relatives is not allowed, however, in case of any exception, the approval
no conflict of interest may exist. Dr. Esam Abdulla of the Board’s Nomination & Remuneration Committee is sought.
Fakhro, the Chairman of the Board, holds more Remuneration of the External Auditors
than three directorships in public companies in the KPMG Fakhro was the Bank’s external auditors for the financial year
HC-1.3.13
Kingdom of Bahrain. The Board is of the opinion that ended 31 December 2019. The details of the audit fee paid to the auditors
this does not impact the effectiveness and efficiency during the year 2019 as well as the details of non-audit services and
of the Board of Directors, as he provides adequate fees paid are held at the Bank’s premises, which is available to eligible
attention to his responsibilities and there is no shareholders upon specific request.
conflict of interest between his other directorships
and that of the Bank.
Bahrain Islamic Bank - Annual Report 2019 55

Corporate
Governance Review (Cont’d)
Information on Products & Services & Availability of Financial Whistleblower Policy
Information The Board has adopted a Whistleblower Policy which provides all
New product information, announcements and information related employees an opportunity to raise any observation regarding unethical
to all stakeholders are made available in a timely manner through and improper practices or any other wrongful conduct of a financial
various channels of communication which may include publications, or legal nature in the Bank and to prohibit managerial personnel from
website, direct mailers, electronic mail and local media. In addition, the taking any adverse action against employees for doing so.
Consolidated Financial Statements of at least past 5 years in addition to
all supplementary disclosures required by CBB regulations, are available
in the Bank’s website.

Customer Complaints
The Quality Assurance Department is responsible for managing
customer complaints. BisB customers may use the Bank’s website or the
call center for lodging a complaint. All complaints are logged, monitored
and reported to the CBB. A user friendly guide is made available to
customers by way of a conspicuous notice and Bank’s website.

Major Shareholders Ownership (5% and above)

Shareholder Nationality Number of Shares Percentage Type of Ownership

NBB Bahraini 309,206,266 29.06% Majority Sovereign

Social Insurance
Bahraini 154,604,587 14.53% Sovereign
Organization - Military Pension Fund

Social Insurance
Bahraini 154,604,585 14.53% Sovereign
Organization

Islamic Development Bank Saudi 153,423,081 14.42% Sovereign

General Council of
Kuwaiti 76,366,321 7.18% Sovereign
Kuwaiti Awqaf

Distribution of Ownership of Shares by Nationality

Country Percentage Number of Shares

Kingdom of Bahrain 72.76% 774,240,213

Kingdom of Saudi Arabia 15.29% 162,712,541

Kuwait 8.73% 92,853,697

United Arab Emirates 2.95% 31,373,681

Qatar 0.13% 1,381,185

Others 0.14% 1,497,270

Total 100.00% 1,064,058,587

56 Bahrain Islamic Bank - Annual Report 2019

Corporate
Governance Review (Cont’d)
Changes in Distribution of Ownership shares of Directors, Shari’a Members and Approved Persons

Shares as of 31st Sold During Acquired During Shares as of 31st

Directors
December 2018 2019 2019 December 2019

Dr. Esam Abdulla Fakhro 52,500 - 300,000 352,500

Muhammad Zarrug Rajab* 140,943 - - 140,943

Khalid Yousif Abdulrahman** - - - -

Mohammed Abdulla Al Jalahma - - - -

Abdulla Ahmed Kamal - - - -

Marwan Khaled Tabbara - - - -

Khalid AbdulAziz Al Jassim - - - -

Mohamed Abdulla Nooruddin - - - -

Gen. Ebrahim Abdulla Al Mahmood - - - -

Talal Ali Al Zain

- - - -
(Until 21st March 2019)

Khalil Ebrahim Nooruddin

- - - -
(Until 21st March 2019)

Ebrahim Husain AlJassmi

201,646 - - 201,646
(Until 21st March 2019)

Othman Ebrahim Al Askar

92,496 92,496 - -
(Until 21st March 2019)

*Muhammad Zarruq Rajab owns 140,943 nominee shares of BisB on behalf of IDB
**Khalid Yousif Abdulrahman owns 32.5% of shares in Yusuf A.Rahman Engineer(Holding) Co.WLL which owns 536,020 number of
shares in BisB

Shares as of 31st Sold During Acquired During Shares as of 31st

Shari’a Supervisory Board
December 2018 2019 2019 December 2019

Shaikh Dr. Abdul Latif Mahmood Al Mahmood 177,580 3,154 - 174,426

Shaikh Dr. Nedham Mohamed Saleh Yacoubi 13,237 - - 13,237

Shaikh Mohammed Jaffar Al Juffairi - - - -

Shaikh Adnan Abdulla Al Qattan - - - -

Shaikh Dr. Essam Khalaf Al Enizi - - - -

Bahrain Islamic Bank - Annual Report 2019 57

Corporate
Governance Review (Cont’d)
Changes in Distribution of Ownership shares of Directors, Shari’a Members and Approved Persons (Cont’d)

Shares as of 31st Sold During Acquired During Shares as of 31st

Approved Persons
December 2018 2019 2019 December 2019

Hassan Amin Jarrar

827,057 100,000 216,901 943,958
Chief Executive Officer

Wesam A.Aziz Baqer

156,528 - 11,992 168,520
Chief Corporate & Institutional Banking

Dalal Ahmed Al Qais

- - - -
Chief Retail Banking

Ameer Abdul Ghani Dairi

- - - -
Chief Financial Officer

Fahim Ahmed Shafiqi

65,936 65,936 - -
Chief Risk Officer

Dawood Khalil Al Ashhab

- - - -
Chief Shared Services Officer

Eman Ali Abdulla

- - - -
Head of Central Operations

Hamad Farooq AlShaikh

- - - -
Head of Shari’a Coordination & Implementation

Eman Mohammed AlBinghadeer

- - - -
Head of Shari’a Internal Audit

Mahmood Qannati
4,500 - - 4,500
Chief Marketing & Corporate Communications

Hussain Ebrahim Al Banna

- - - -
Head of Treasury

Osama Ali Nasr

12,675 - - 12,675
Chief Information Officer

Maisa Jawdat Shunnar

- - - -
Chief Strategy Implementation & Transformation

Khaled Waheeb AlNasser

- - - -
Chief Internal Audit

Nayef Naser Yusuf

14,383 - - 14,383
Acting Head of Special Assets

Mazar Jalal
- - - -
Chief Compliance & Governance

Mohammed Ayada Matar

- - - -
Money Laundering Reporting Officer

Hamad Hussain Al Qattan

- - - -
Deputy Money Laundering Reporting Officer
58 Bahrain Islamic Bank - Annual Report 2019

Corporate
Governance Review (Cont’d)
Changes in Distribution of Ownership shares of Directors, Shari’a Members and Approved Persons (Cont’d)

Mohamed Jamal Aish

- - - -
Deputy Money Laundering Reporting Officer

Salman Mazen Matar

- - - -
Head of Internal Control

Ali Yousif Al Aradi

- - - -
Head of Branches

Ammar Fuad Alsabah

- - - -
Head of Financial Institution

Faisal Al Abdulla
- - - -
Head of Priority Banking

Hussain Ali Bahram

- - - -
Head of Wealth Management

Mohammed Shawqi Albinmohammed

- - - -
Head of Sales

Mohammed A.Rahman Alabbasi

- - - -
Head of Retail Collection

Sohail Kabiruddin
- - - -
Head of Operational Risk

Siddharth Kumar
- - - -
Head of Corporate & Liquidity Risk

Salah Dawood Alansari

- - - -
Head of Credit Administration

Saleh Isa Almehri

- - - -
Head of Retail Credit Review

Afnan Ahmed Saleh

- - - -
Head of Human Resources

Mohammed Isa Hammad

- - - -
Head of Information Security

Hamad Mohamed Albassam

- - - -
Head of General Services

As of 31st December 2019, the total number of shares held by Board of Directors, Shari’a Supervisory Board members and the Approved
Persons of the Bank are 1,825,142 which represents 0.17% of the total issued shares of the Bank. The shares held by the Approved Persons
includes shares granted by the Bank under the Share Incentive Scheme.
Bahrain Islamic Bank - Annual Report 2019 59

Shari’a Supervisory Board Report

For the year ended on 31/12/2019

In The Name of Allah, most Gracious, Most Merciful Peace and Blessings Be Upon His Messenger.

To the shareholders of Bahrain Islamic Bank B.S.C. Third: Shari’a Governance

Assalam Alaykum Wa Rahmatu Allah Wa Barakatoh. The Shari’a Supervisory Board reviewed the Bank's Management report on
Shari’a Compliance and Governance, which shows the proper functioning
The Shari’a Board hereby present the following report on its activities in of the supervision procedures related to compliance structures and
supervising the Bank’s finances and investments from a Shari’a perspective Shari’a governance in the Bank, and the Management's assertion on the
for the financial year ending on 31st December 2019, in fulfillment to the effectiveness of the mechanism and operation of supervision procedures.
mandate conferred upon it by BisB’s Articles of Association:
The Shari’a Supervisory Board affirms that it has fulfilled all the
First: Supervision and Revision of the Bank's Business requirements of Shari’a Governance issued by the Central Bank of Bahrain
In coordination with the Shari’a Coordination and implementation, the with the Shari’a Coordination and Implementation Department and the
Shari’a Supervisory Board has monitored the implementation on the Bank’s Internal Shari’a Audit Department.
products and its applicable fees and the relevant policies and procedures,
in addition to advising and providing fatwas in regards to the finance Fourth: Shari’a Supervisory Board Operations
agreements up to 31st December 2019 to ensure the Bank’s adherence to The Shari’a Board and its Committees held (16) meetings during the year
the provisions and principles of Islamic Shari’a. and issued (160) decisions and fatwas, and approved (91) contracts.
The Shari’a Supervisory Board believes that ensuring the conformity of Fifth: Financial Statements and Zakat Calculation Methods
Bank’s activities and investments with the provisions of Islamic Shari’a is the The Shari’a Board has reviewed the financial Statements for the year ended
sole responsibility of the Management while the Shari’a Supervisory Board on 31st December 2019, the income statement, the attached notes and the
is only responsible for expressing an independent opinion and preparing a Zakat calculation methods.
report to you.
Based on the above, the Shari’a Supervisoy Board decides that:
Second: Shari’a Audit of the Bank’s Business
1. All the Financial Statements inspected by the Shari’a Board conform to
1) Shari’a Internal Audit what has been approved by the Board, and to the standards issued by
We planned with the Shari’a Internal Audit department to carry out the Accounting & Auditing Organization for Islamic Financial Institutions
monitoring functions by obtaining all the information and clarifications AAOIFI.
that were deemed necessary to confirm that the Bank did not violate the
2. Contracts, and transactions conducted by the Bank throughout were
principles and provisions of Islamic Shari’a and Fatwas and decisions of the
in accordance with the standard contracts pre-approved by the Shari’a
Shari’a Board.
Supervisory Board.
Our supervision constituted of inspection, documenting of policies followed
3. The distribution of profit and allocation of losses on investment
by the Bank on the basis of examining each kind of operation either directly
accounts was in line with the basis and principles approved by the
or indirectly by the internal Shari’a Department in conformity with the Plan
Shari’a Supervisory Board and in accordance to Islamic Shari’a.
and methodology approved by the Shari’a Board.
4. Any gains resulted from sources or means prohibited by the provisions
The Shari’a Internal Audit department performed its mission of auditing the
and principles of Islamic Shari’a, have been directed to the Charity and
transactions executed by the Bank and submitted its periodic reports to
Donations Fund.
the Shari’a Supervisory Board, which confirmed the Bank’s adherence in its
dealings and investments with the Shari’a Board’s fatwas and decisions. 5. Zakah was calculated according to the provisions and principles of
Islamic Shari’a, by the net invested assets method. And the shareholders
The 14 reports submitted by Internal Shari’a Audit Department to the Shari’a
should pay their portion of Zakah on their shares as stated in the
Supervisory Board included results of auditing the files, contracts, executed
financial report.
deals in fulfillment to the Shari’a Board annual approved audit plan. The
Shari’a Board obtained the requested information and explanations from the 6. The Bank was committed to the provisions and principles of Shari’a as
departments it deemed necessary to confirm that the Bank did not violate per Shari’a standards issued by the Accounting & Auditing Organization
the Shari’a principles and Fatwas and decisions of the Shari’a Board. for Islamic Financial Institutions (AAOIFI).
2) Independent External Shari’a Compliance Audit We pray that Allah may grant all of us further success and prosperity.
The Shari’a Supervisory Board reviewed the audit report provided by Wassalam Alaykum Wa Rahmatu Allah Wa Barakatoh
the Independent External Shari’a Auditor on the Bank’s activities and the
progress of work in the Shari’a Departments, which demonstrated that the
Bank’s operations, transactions and services have been implemented based
on appropriate procedures that confirms its compliance with the Islamic
Shari'a rules, principles and provisions, and that they have went through the
Bank's necessary administrative channels from Senior Management, Internal
Audit and Shari'a Supervisory Board.

Shaikh. Dr. A. Latif Mahmood Al Mahmood Shaikh. Mohammed Jaffar Al Juffairi Shaikh. Adnan Abdulla Al Qattan
Chairman Vice Chairman Member

Shaikh. Dr. Nedham M. Saleh Yacoubi Shaikh. Dr. Essam Khalaf Al Onazi
Member Member
60 Bahrain Islamic Bank - Annual Report 2019

Contents

61 Independent Auditors’ Report

62 Consolidated Statement of Financial Position
63 Consolidated Statement of Income
64 Consolidated Statement of Cash Flows
65 Consolidated Statement of Changes in Owners’ Equity
66 Consolidated Statement of Sources and Uses of Good Faith Qard Fund
67 Consolidated Statement of Sources and Uses of Zakah and Charity Fund
68 Notes to the Consolidated Financial Statements
Bahrain Islamic Bank - Annual Report 2019 61

Independent Auditors’ Report

To the Shareholders of Bahrain Islamic Bank B.S.C.
Manama, Kingdom of Bahrain

Report on the consolidated financial statements Report on other regulatory requirements

We have audited the accompanying consolidated financial As required by the Commercial Companies Law and Volume 2 of the
statements of Bahrain Islamic Bank B.S.C. (the “Bank”) and its Central Bank of Bahrain (CBB) Rule Book, we report that:
subsidiaries (together the “Group”) which comprise the consolidated a) the Bank has maintained proper accounting records and the
statement of financial position as at 31 December 2019, the consolidated financial statements are in agreement therewith;
consolidated statements of income, cash flows, changes in owners’
equity, sources and uses of good faith qard fund and sources and b) the financial information contained in the directors’ report is
uses of zakah and charity fund for the year then ended, and a consistent with the consolidated financial statements;
summary of significant accounting policies and other explanatory c) we are not aware of any violations during the year of the
notes. Commercial Companies Law, the CBB and Financial Institutions
Law No. 64 of 2006 (as amended), the CBB Rule Book (Volume
Respective responsibilities of board of directors and auditors 2, applicable provisions of Volume 6 and CBB directives), the
CBB Capital Markets Regulations and associated resolutions, the
These consolidated financial statements and the Group’s Bahrain Bourse rules and procedures or the terms of the Bank’s
undertaking to operate in accordance with Islamic Shari’a rules and memorandum and articles of association that would have had
principles are the responsibility of the board of directors of the Bank. a material adverse effect on the business of the Bank or on its
Our responsibility is to express an opinion on these consolidated financial position; and
financial statements based on our audit.
d) satisfactory explanations and information have been provided to
us by management in response to all our requests.
Basis of opinion
We conducted our audit in accordance with Auditing Standards
for Islamic Financial Institutions issued by Accounting and Auditing
Organisation for Islamic Financial Institutions. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a KPMG Fakhro
test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing Partner Registration No. 213
the accounting principles used and significant estimates made by 11 February 2020
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.

Opinion
In our opinion, the consolidated financial statements give a true
and fair view of the consolidated financial position of the Group as
at 31 December 2019, and of its consolidated results of operations,
its consolidated cash flows, its consolidated changes in owners’
equity, its consolidated sources and uses of good faith qard fund,
and its consolidated sources and uses of zakah and charity fund
for the year then ended in accordance with Financial Accounting
Standards issued by the Accounting and Auditing Organisation for
Islamic Financial Institutions and the Shari’a rules and principles as
determined by the Shari’a Supervisory Board of the Bank.
62 Bahrain Islamic Bank - Annual Report 2019

Consolidated Statement of Financial Position

As at 31 December 2019

2019 2018
Note BD'000 BD'000

ASSETS
Cash and balances with banks and Central Bank 3 61,629 65,437
Placements with financial institutions 4 76,068 137,450
Financing assets 5 574,851 580,076
Investment securities 6 246,213 240,053
Ijarah Muntahia Bittamleek 8 179,857 165,730
Ijarah rental receivables 8 24,546 21,141
Investment in associates 7 18,750 21,643
Investment in real estate 10 18,756 24,284
Property and equipment 9 13,591 13,641
Other assets 11 9,299 11,062
TOTAL ASSETS 1,223,560 1,280,517

LIABILITIES, EQUITY OF INVESTMENT ACCOUNTHOLDERS AND OWNERS' EQUITY

Liabilities
Placements from financial institutions 188,551 114,744
Placements from non-financial institutions and individuals 253,610 36,234
Borrowings from financial institutions 12 29,566 96,386
Customers’ current accounts 181,692 133,244
Other liabilities 13 21,516 25,148
Total Liabilities 674,935 405,756
Equity of Investment Accountholders 14 427,702 757,012

Owners' Equity
Share capital 15 106,406 106,406
Treasury shares 15 (892) (892)
Shares under employee share incentive scheme (281) (391)
Share premium 180 120
Reserves 15,510 12,506
Total Owners' Equity 120,923 117,749
TOTAL LIABILITIES, EQUITY OF INVESTMENT ACCOUNTHOLDERS AND OWNERS' EQUITY 1,223,560 1,280,517

The consolidated financial statements were approved by the Board of Directors on 11 February 2020 and signed on its behalf by:

Dr. Esam Abdulla Fakhro Khalid Yousif Abdul Rahman Hassan Amin Jarrar
Chairman Vice Chairman Chief Executive Officer

The attached notes 1 to 34 form an integral part of these consolidated financial statements.
Bahrain Islamic Bank - Annual Report 2019 63

CONSOLIDATED STATEMENT of income

For the year ended 31 December 2019

2019 2018
Note BD'000 BD'000

INCOME
Income from financing 18 45,464 43,110
Income from investment in Sukuk 11,932 10,829
Total income from jointly financed assets 57,396 53,939
Return on equity of investment accountholders (33,071) (40,440)
Group's share as Mudarib 23,001 27,223
Net return on equity of investment accountholders 14.5 (10,070) (13,217)
Group's share of income from jointly financed assets (both as mudarib and investor) 47,326 40,722
Expense on placements from financial institutions (4,315) (2,043)
Expense on placements from non-financial institutions and individuals (5,944) (779)
Expense on borrowings from financial institutions (2,386) (4,034)
Fee and commission income, net 5,916 5,394
Income from investment securities 19 613 216
Income from investment in real estate 20 (274) (556)
Share of results of associates, net 7 (133) 86
Other income 21 1,491 4,372
Total income 42,294 43,378

EXPENSES
Staff costs 14,119 12,588
Depreciation 9 1,353 1,473
Other expenses 22 9,610 9,041
Total expenses 25,082 23,102
Profit before impairment allowances 17,212 20,276
Impairment allowance, net 23 (10,998) (8,895)
PROFIT FOR THE YEAR 6,214 11,381
BASIC AND DILUTED EARNINGS PER SHARE (fils) 25 5.91 10.83

Dr. Esam Abdulla Fakhro Khalid Yousif Abdul Rahman Hassan Amin Jarrar
Chairman Vice Chairman Chief Executive Officer

The attached notes 1 to 34 form an integral part of these consolidated financial statements.
64 Bahrain Islamic Bank - Annual Report 2019

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2019

2019 2018
Note BD'000 BD'000
OPERATING ACTIVITIES
Profit for the year 6,214 11,381
Adjustments for non-cash items:
Depreciation 9 1,353 1,473
Impairment allowance, net 23 10,998 8,895
Impairment on investment in real estate 20 484 204
(Gain) / Loss on sale of investment in real estate 20 (63) 531
(Gain) / Loss on foreign exchange revaluation (5) 29
Recoveries from written off accounts – (3,472)
Share of results of associates, net 7 133 (86)
Operating profit before changes in operating assets and liabilities 19,114 18,955
Working capital adjustments:
Mandatory reserve with Central Bank of Bahrain (410) 100
Financing assets (2,061) (34,485)
Ijarah Muntahia Bittamleek (18,780) (8,359)
Other assets 1,565 (693)
Customers’ current accounts 48,448 1,578
Other liabilities (3,744) 11,729
Placements from financial institutions 75,960 44,719
Placements from non-financial institutions and individuals 217,376 7,255
Equity of investment accountholders (329,310) (7,765)
Net cash from operating activities 8,158 33,034

INVESTING ACTIVITIES
Disposal of investment in real estate 2,308 3,480
Redemption of investment in associates 887 –
Purchase of investment securities (36,059) (75,590)
Purchase of property and equipment (1,303) (844)
Proceeds from disposal of investment securities 29,511 95,504
Net cash (used in) / from investing activities (4,656) 22,550

FINANCING ACTIVITIES
Purchase of treasury shares (121) –
Repayment of borrowings from financial institutions (66,820) (5,190)
Dividends paid (7) (72)
Net cash used in financing activities (66,948) (5,262)
NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS (63,446) 50,322
Cash and cash equivalents at 1 January 163,116 112,794
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 99,670 163,116
Cash and cash equivalents comprise of:
Cash on hand 3 16,221 15,318
Balances with CBB, excluding mandatory reserve deposits 3 465 242
Balances with banks and other financial institutions excluding restricted balances 3 6,916 10,106
Placements with financial institutions with original maturities less than 90 days 4 76,068 137,450
99,670 163,116

The attached notes 1 to 34 form an integral part of these consolidated financial statements.
Bahrain Islamic Bank - Annual Report 2019 65

CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITY

For the year ended 31 December 2019

Reserves
Shares
under
employee Investment
share Real estate securities Total
Share Treasury incentive Share Statutory fair value fair value Retained Total owners'
capital shares scheme premium reserve reserve reserve earnings reserves equity
2019 BD'000 BD'000 BD'000 BD'000 BD'000 BD'000 BD'000 BD'000 BD'000 BD'000

Balance at 1 January 2019 106,406 (892) (391) 120 4,115 4,830 718 2,843 12,506 117,749
Profit for the year – – – – – – – 6,214 6,214 6,214
Zakah approved – – – – – – – (179) (179) (179)
Donations approved – – – – – – – (250) (250) (250)
Shares allocated to staff during
the year – – 231 60 – – – – – 291
Purchase of treasury shares – (121) – – – – – – – (121)
Transfer to shares under employee
share incentive scheme – 121 (121) – – – – – – –
Net movement in real estate fair
value reserve – – – – – (2,781) – – (2,781) (2,781)
Transfer to statutory reserve – – – – 621 – – (621) – –
Balance at 31 December 2019 106,406 (892) (281) 180 4,736 2,049 718 8,007 15,510 120,923

2018
Balance at 1 January 2018 101,339 (864) (498) 98 2,977 6,145 745 12,328 22,195 122,270
Impact of adopting FAS 30 – – – – – – – (13,943) (13,943) (13,943)
Impact of adopting FAS 30 by
associate – – – – – – – (350) (350) (350)
Balance at 1 January 2018
(restated) 101,339 (864) (498) 98 2,977 6,145 745 (1,965) 7,902 107,977
Profit for the year – – – – – – – 11,381 11,381 11,381
Bonus shares declared for 2017 5,067 (28) (34) (35) – – – (4,970) (4,970) –
Zakah approved – – – – – – – (265) (265) (265)
Donations approved – – – – – – – (200) (200) (200)
Shares allocated to staff during
the year – – 141 57 – – – – – 198
Net movement in investment
securities fair value reserve – – – – – – (27) – (27) (27)
Net movement in real estate fair
value reserve – – – – – (1,315) – – (1,315) (1,315)
Transfer to statutory reserve – – – – 1,138 – – (1,138) – –
Balance at 31 December 2018 106,406 (892) (391) 120 4,115 4,830 718 2,843 12,506 117,749

The attached notes 1 to 34 form an integral part of these consolidated financial statements.
66 Bahrain Islamic Bank - Annual Report 2019

CONSOLIDATED STATEMENT OF SOURCES AND USES OF

GOOD FAITH QARD FUND
For the year ended 31 December 2019

Funds
Qard Hasan available for
receivables Qard Hasan Total
BD'000 BD'000 BD'000
Balance at 1 January 2019 71 57 128
Sources of Qard Fund
Non-Islamic income – 89 89
Repayments (37) 37 –
Total sources during the year (37) 126 89
Uses of Qard fund
Marriage 14 (14) –
Others (Waqf) 9 (9) –
Total uses during the year 23 (23) –
Balance at 31 December 2019 57 160 217

Balance at 1 January 2018 71 57 128

Sources of Qard Fund
Repayments (36) 36 –
Total sources during the year (36) 36 –
Uses of Qard fund
Marriage 10 (10) –
Others (Waqf) 26 (26) –
Total uses during the year 36 (36) –
Balance at 31 December 2018 71 57 128

2019 2018
BD'000 BD'000
Sources of Qard fund
Contribution by the Bank 125 125
Donation 3 3
Non-Islamic income 89 –
217 128

The attached notes 1 to 34 form an integral part of these consolidated financial statements.
Bahrain Islamic Bank - Annual Report 2019 67

CONSOLIDATED STATEMENT OF SOURCES AND USES OF

ZAKAH AND CHARITY FUND
For the year ended 31 December 2019

2019 2018
BD'000 BD'000

Sources of zakah and charity funds

Undistributed zakah and charity funds at the beginning of the year 314 259
Non-Islamic income / late payment fee 580 374
Contributions by the Bank for zakah 192 265
Contributions by the Bank for donations 250 200
Total sources of zakah and charity funds during the year 1,336 1,098

Uses of zakah and charity funds

Philanthropic societies 334 366
Aid to needy families 527 381
Islamic events – 37
Others 74 –
Total uses of funds during the year 935 784
Undistributed zakah and charity funds at the end of the year 401 314

The attached notes 1 to 34 form an integral part of these consolidated financial statements.
68 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

1. REPORTING ENTITY
Bahrain Islamic Bank B.S.C. (the "Bank”) was incorporated in the Kingdom of Bahrain in 1979 by Amiri Decree No.2 of 1979 and
registered with the Ministry of Industry and Commerce ("MOIC") under Commercial Registration (CR) number 9900, to carry out
banking and other financial trading activities in accordance with the teachings of Islam (Shari’a). The Bank operates under an
Islamic retail banking license issued by the Central Bank of Bahrain ("CBB"). The Bank’s Shari’a Supervisory Board is entrusted
to ensure the Bank’s adherence to Shari’a rules and principles in its transactions and activities. The Bank is listed on the Bahrain
Bourse.

The Bank’s registered office is at Building 722, Road 1708, Block 317, Manama, Kingdom of Bahrain.

The Bank has nine branches (2018: nine), all operating in the Kingdom of Bahrain.

The consolidated financial statements include the results of the Bank and its wholly owned subsidiaries (together the "Group").
The Bank holds 100% of the share capital of Abaad Real Estate Company SPC.

Abaad Real Estate Company SPC ("Abaad")

Abaad was incorporated in the Kingdom of Bahrain on 8 April 2003 with an authorised and fully paid-up share capital of
BD 25 million. Abaad started operations in 2007. The main activity of Abaad is investment in real estate (in accordance with the
Islamic Shari'a rules and principles).

The consolidated financial statements were authorised for issue in accordance with a resolution of the Board of Directors issued on
11 February 2020.

a. Basis of preparation
The consolidated financial statements have been prepared on a historical cost basis, except for "investment in real estate" and
"equity type instruments carried at fair value through equity" that have been measured at fair value.

The preparation of consolidated financial statements requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group’s accounting policies. Estimates and underlying
assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the
estimate is revised and in any future periods affected. Management believes that the underlying assumptions are appropriate
and the Group’s consolidated financial statements therefore present the financial position and results fairly. The areas involving a
higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial
statements, are disclosed in note 2. bb.

The consolidated financial statements have been presented in Bahraini Dinars ("BD"), which is also the functional currency of the
Group’s operations. All the values are rounded to the nearest BD thousand except when otherwise indicated.

b. Statement of Compliance
The consolidated financial statements are prepared in accordance with the Financial Accounting Standards ("FAS") issued by
the Accounting and Auditing Organisation for Islamic Financial Institutions ("AAOIFI") and the Commercial Companies Law. In
accordance with the requirements of AAOIFI, for matters for which no AAOIFI standard exists, the Group uses guidance from the
relevant International Financial Reporting Standards ("IFRS") issued by International Accounting Standards Board.

2. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting polices applied in the preparation of these consolidated financial statements are set out below. These
accounting policies have been consistently applied by the Group and are consistent with those used in the previous years.

a. New standards, amendments, and interpretations

i) New standards, amendments, and interpretations issued and effective:

There are no AAOIFI accounting standards or interpretations that are effective for the first time for the financial year beginning on
or after 1 January 2019 that would be expected to have a material impact on the Group.

ii) New standards, amendments and interpretations issued but not yet effective:
The following new standards and amendments to standards are effective for financial year beginning after 1 January 2020 with an
option to early adopt. However, the Bank has not early adopted any of these standards.
Bahrain Islamic Bank - Annual Report 2019 69

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

a. New standards, amendments, and interpretations (Continued)
ii) New standards, amendments and interpretations issued but not yet effective: (Continued)

(i) FAS 31 – Investment Agency (Al-Wakala Bi Al-Istithmar)

The objective of this standard is to establish the principles of accounting and financial reporting for the investment agency (Al-
Wakala Bi Al-Istithmar) instruments and the related assets and obligations, as applicable, for the Islamic financial institutions from
both perspectives i.e. the principal (investor) and the agent.

Principal (Investor)
The standard requires the principal either to follow the Pass through approach (as a preferred option) or the Wakala venture
approach.

Pass through approach

A pass-through investment is an investment in which the involvement of the agent, as well as, the options for transferability of
the instrument are limited and the investor principally takes a direct exposure on the underlying assets. There is a rebuttable
assumption that in all investment agency arrangements, the investor takes direct exposure on the underlying assets (including
a business) at the back end. As a result, the investor shall account for the assets (including the business) in its books directly,
according to appropriate accounting policies applicable on such assets (or business) in line with respective FAS or the generally
accepted accounting principles in absence of a specific FAS on the subject.

Wakala venture approach

Wakala venture approach can be adopted when the investment agency contracts meet the conditions of the instrument being
transferable and the investment is subject to frequent changes at the discretion of the agent. In case of this approach, the principal
accounts for the investment in Wakala venture by applying the equity method of accounting.

Agent
The standard requires the agent either to follow the off – balance sheet approach or the on – balance sheet approach (only on
exceptions by virtue of additional considerations attached to the investment agency contract).

Off-balance sheet approach

At inception of the transaction, the agent shall recognize an agency arrangement under off-balance sheet approach whereby the
agent does not control the related assets / business and hence does not record the assets and related income and expenditure
in its books of account. The agent shall not recognize the assets and / or liabilities owned by the investor(s) / (principal(s)) in its
books of account.

If the agent previously owned such assets directly or through on-balance sheet equity of investment accountholders or similar
instruments, the agent shall de-recognize the assets (and liabilities) from its books of account.

On-balance sheet approach

An agent may maintain multi-level investment arrangements based on independent permissible transactions with the agent itself.
Notwithstanding the requirements of this standard with regard to investment agency arrangements, such secondary transactions
shall be accounted for in line with the requirements of respective FAS in the books of the agent.

The agent shall consider the investment agency arrangement as a quasi-equity instrument for accounting purposes, if the
investment agency instrument, by virtue of additional considerations attached to the instrument, is subordinated to all liabilities of
the agent.

This standard shall be effective for the financial periods beginning on or after 1 January 2020. Early adoption is permitted.

Transitional provisions
An entity may opt not to apply this standard only on such transactions:

 which were already executed before the adoption date of this standard for the entity; and

 their original maturity falls no later than 12 months after the adoption date of this standard for the entity.

The adoption of this amendment will not have a significant impact on the consolidated financial statements.
70 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

a. New standards, amendments, and interpretations (Continued)
ii) New standards, amendments and interpretations issued but not yet effective: (Continued)

(ii) FAS 33 – Investment in Sukuk, shares and similar instruments

The objective of this standard is to set out the principles for the classification, recognition, measurement, presentation and
disclosure of investment in Sukuk, shares and other similar instruments made by Islamic financial institutions. This standard shall
apply to an institutions investments whether in the form of debt or equity securities. This standard replaces FAS 25 Investment in
Sukuk, shares and similar instruments and produces revised guidance for classification and measurement of investments to align
with international practices.

Investments can be classified and measured at amortized cost, fair value through equity or fair value through the consolidated
statement of income. Classification categories are now driven by business model tests and reclassification will be permitted only
on change of a business model and will be applied prospectively.

The standard classifies investments into equity type, debt type and other investment instruments. Investments in equity
instruments must be at fair value and will not be subject to impairment allowance as per FAS 30 "Impairment, Credit Losses and
Onerous Commitments". In limited circumstances, where the institution is not able to determine a reliable measure of fair value of
equity investments, cost may be deemed to be best approximation of fair value.

This standard shall be effective from the financial periods beginning on or after 1 January 2020. Early adoption is permitted.

Transitional provisions
The standard shall be applicable on a retrospective basis. However, the cumulative effect, if any, attributable to profit and loss
taking stakeholders, including investment accountholders related to previous periods, shall be adjusted with the investments fair
value reserve pertaining to such class of stakeholders.

The Bank is still in the process of estimating the impact of adoption of this standard on the consolidated financial statements.

(iii) FAS 34 – Financial Reporting for Sukuk-holders

The objective of this standard is to establish the principles of accounting and financial reporting for assets and business underlying
the Sukuk to ensure transparent and fair reporting to all relevant stakeholders particularly Sukuk-holders.

This standard shall apply to Sukuk in accordance with Shari’ah principles and rules issued by an IFI or other institution (called
“originator”), directly or through the use of a Special Purpose Vehicle (SPV) or similar mechanism. In respect of Sukuk which are
kept on-balance sheet by the originator in line with requirements of FAS 29 “Sukuk in the books of the originator”, the originator
may opt not to apply this standard.

The standard classifies Sukuk as Business Sukuk and Non-Business Sukuk and lays down accounting treatment for Business and
Non – Business Sukuk.

This standard shall be effective from the financial periods beginning on or after 1 January 2020. Early adoption is permitted.

Transitional provisions
An entity may opt not to apply this standard only on such transactions:

 which were already executed before the adoption date of this standard for the entity; and

 their original maturity falls no later than 12 months after the adoption date of this standard for the entity.

The adoption of this amendment will not have a significant impact on the consolidated financial statements.

b. Basis of consolidation
Subsidiaries are all entities (including special purpose entities) controlled by the Group. Control exists when the Group has
the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its
activities. Subsidiaries are consolidated from the date on which control is transferred to the Group to the date that control seizes.

The financial statements of the subsidiaries are prepared for the same reporting year as the Group, using consistent accounting
policies.

All intra-group balances, income, expenses and unrealised gains and losses resulting from intra-group transactions are eliminated
in full.
Bahrain Islamic Bank - Annual Report 2019 71

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

c. Cash and cash equivalents

For the purpose of the consolidated cash flows statement, "cash and cash equivalents" consist of cash on hand, balances with
the Central Bank of Bahrain excluding mandatory reserve deposits, balances with banks and other financial institutions excluding
restricted balances and placements with financial institutions with original maturities less than 90 days when acquired.

d. Placements with and borrowings from financial institutions

i) Placements with financial institutions
Placements with financial institutions comprise commodity Murabaha receivables and Wakala receivables. Commodity Murabaha
receivables are stated at amortised cost net of deferred profits and provision for impairment, if any. Wakala receivables are stated at
amortised cost less provision for impairment, if any.

ii) Borrowings from financial institutions

Borrowings from financial institutions comprise borrowings obtained through murabaha contract recognized on the origination
date and carried at amortized cost.

e. Financing assets
Financing assets comprise Shari’a compliant financing contracts with fixed or determinable payments. These include financing
provided through Murabaha and Musharaka contracts. Financing assets are recognised on the date at which they are originated
and carried at their amortised cost less impairment allowance, if any.

f. Murabaha financing
Murabaha financing consist mainly of deferred sales transactions which are stated net of deferred profits and provision for
impairment, if any.

Murabaha financing are sales on deferred terms. The Group arranges a Murabaha transaction by buying a commodity (which
represents the object of the Murabaha) and then resells this commodity to a Murabeh (beneficiary) after computing a margin of
profit over cost. The sale price (cost plus profit margin) is repaid in instalments by the Murabeh over the agreed period.

g. Musharaka financing
Musharaka financing are stated at the fair value of consideration given less provision for impairment, if any.

Musharaka financing are a form of capital partnership. Musharaka financing capital provided by the Group at inception in kind (if
other than cash) is measured at the fair value of the assets. If the valuation of the assets results in a difference between fair value
and book value, such difference is recognised as profit or loss to the Group.

h. Investment securities
Investment securities comprise debt type instruments carried at amortised cost and equity type instruments carried at fair value
through equity.

All investments securities, are initially recognised at fair value, being the value of the consideration given including transaction
costs directly attributable to the acquisition.

i) Debt type instruments carried at amortised cost

These are investments which have fixed or determinable payments of profit and capital. Subsequent to initial recognition, these are
measured at amortised cost using the effective profit rate method less provision for impairment, if any. Any gain or loss on such
instruments is recognised in the consolidated statement of income when the instruments are de-recognised or impaired.

ii) Equity type instruments carried at fair value through equity

Equity-type instruments are investments that do not exhibit features of debt-type instruments and include instruments that evidence
residual interest in the assets of entity after reducing all its liabilities. On initial recognition, equity-type instruments that are not
designated to fair value through consolidated statement of income are classified as investments at fair value through equity.

Subsequent to acquisition, these are remeasured at fair value, with unrealised gains and losses recognised in a separate component of
equity until the investment is derecognised or the investment is considered as impaired. On derecognition or impairment, the cumulative
gain or loss previously recorded in equity is recognised in the consolidated statement of income for the year.

Impairment losses on equity type instruments carried at fair value through equity are not reversed through the consolidated statement
of income and increases in their fair value after impairment are recognised directly in owners' equity.
72 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

i. Measurement principles

i) Fair value measurement

For investments traded in organised financial markets, fair value is determined by reference to quoted market bid prices at the
close of business on the reporting date.

For investments where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to the
current market value of another instrument, which is substantially the same or is based on the assessment of future cash flows. The
cash equivalent values are determined by the Group at current profit rates for contracts with similar terms and risk characteristics.

Investments classified at fair value through equity where there is no quoted price or the Group is unable to determine a reliable
measure of fair value on a continuing basis are stated at cost less impairment allowance, if any.

ii) Amortised cost

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial
recognition, minus capital repayments, plus or minus the cumulative amortisation using the effective profit method of any
difference between the initial amount recognised and the maturity amount, minus any reduction (directly or through use of an
allowance account) for impairment or uncollectability. The calculation of the effective profit rate includes all fees and points paid
or received that are an integral part of the effective profit rate.

j. Investment in associates
Associates are all entities in which the Group holds, between 20% and 50% of the voting rights and exercises significant influence,
but not control or joint control, over the financial and operating policies of the entities. Investment in associates are accounted for
using the equity method of accounting.

Investments in associates are initially recognised at cost and the carrying amount is increased or decreased to recognise the
investor’s share of the profit or loss of the investee after the date of acquisition. Distributions received from an investee reduce
the carrying amount of the investment. Adjustments to the carrying amount may also be necessary for changes in the investor’s
proportionate interest in the investee arising from the changes in the investee’s equity. When the Group’s share of losses exceeds
its interest in an associate, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued, except
to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

The Group determines at each reporting date whether there is any objective evidence that the investments in associates are
impaired. If this is the case the Group calculates the amount of impairment as being the difference between the recoverable
amount of the associates and the carrying value and recognises this amount in the consolidated statement of income.

Accounting policies of the associates are consistent with the policies adopted by the Group.

k. Ijarah Muntahia Bittamleek

Ijarah Muntahia Bittamleek are stated at cost less accumulated depreciation and any impairment in value. Under the terms of
lease, the legal title of the asset passes to the lessee at the end of the lease term, provided that all lease installments are settled.
Depreciation is calculated on a straight line basis at rates that systematically reduce the cost of the leased assets over the period
of the lease. The Group assesses at each reporting date whether there is objective evidence that the assets acquired for leasing
are impaired. Impairment losses are measured as the difference between the carrying amount of the asset (including ijarah rental
receivables) and the estimated recoverable amount. Impairment losses, if any, are recognised in the consolidated statement of
income.

l. Investment in real estate

Properties held for rental, or for capital appreciation purposes, or both, are classified as investment in real estate. Investments in
real estate are initially recorded at cost, being the fair value of the consideration given and acquisition charges associated with the
property. Subsequent to initial recognition, investments in real estate are re-measured to fair value and changes in fair value (only
gains) are recognised in a property fair value reserve in the consolidated statement of changes in owners' equity.

Losses arising from changes in the fair values of investment in real estate are firstly adjusted against the property fair value reserve
to the extent of the available balance and then the remaining losses are recognised in the consolidated statement of income.
If there are unrealised losses that have been recognised in the consolidated statement of income in previous financial periods,
the current period unrealised gain shall be recognised in the consolidated statement of income to the extent of crediting back
such previous losses in the consolidated statement of income. When the property is disposed of, the cumulative gain previously
transferred to the property fair value reserve, is transferred to the consolidated statement of income.
Bahrain Islamic Bank - Annual Report 2019 73

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

m. Property and equipment

Property and equipment are recognised at cost. The cost of additions and major improvements are capitalised; maintenance and
repairs are charged to the consolidated statement of income as incurred. Depreciation is provided on the straight-line basis over
the estimated useful lives of the assets as follows:

Buildings 25 to 35 years

Fixtures and fittings 5 years

Equipment 5 years

Furniture 5 years

n. Equity of investment accountholders

Equity of investment accountholders are funds held by the Group in unrestricted investment accounts, which it can invest at
its own discretion. The investment account holder authorises the Group to invest the account holders’ funds in a manner which
the Group deems appropriate without laying down any restrictions as to where, how and for what purpose the funds should be
invested. The Group charges management fee (Mudarib fees) to investment account holders. Of the total income from investment
accounts, the income attributable to customers is allocated to investment accounts after setting aside provisions, reserves (profit
equalisation reserve and investment risk reserve) and deducting the Group’s share of income as a Mudarib. The allocation of
income is determined by the management of the Group within the allowed profit sharing limits as per the terms and conditions
of the investment accounts. Administrative expenses incurred in connection with the management of the funds are borne directly
by the Group and are not charged separately to investment accounts. Only profits earned on pool of assets funded from equity of
investment accountholders are allocated between the owners’ equity and equity of investment accountholders.

Investment accounts are carried at their book values and include amounts retained towards profit equalisation and investment risk
reserves, if any. Profit equalisation reserve is the amount appropriated by the Group out of the Mudaraba income, before allocating
the Mudarib share, in order to maintain a certain level of return to the deposit holders on the investments. Investment risk reserve
is the amount appropriated by the Group out of the income of investment account holders, after allocating the Mudarib share, in
order to cater against future losses for investment account holders. Creation of any of these reserves results in an increase in the
liability towards the pool of unrestricted investment accounts.

o. Investment risk reserve

Investment risk reserves are amounts appropriated out of the income of equity of investment accountholders, after allocating the
Mudarib share, in order to cater for future losses for equity of investment accountholders.

p. Profit equalisation reserve

The Group appropriates a certain amount in excess of the profit to be distributed to equity of investment accountholders after
taking into consideration the Mudarib share of income. This is used to maintain a certain level of return on investment for equity of
investment accountholders.

q. Zakah
Zakah is calculated on the Zakah base of the Group in accordance with FAS 9 issued by AAOIFI using the net invested funds
method. Zakah is paid by the Group based on the consolidated figures of statutory reserve, general reserve and retained earning
balances at the beginning of the year. The remaining Zakah is payable by individual shareholders. Payment of Zakah on equity of
investment accountholders and other accounts is the responsibility of investment accountholders.

r. Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) arising from a past event and it is
probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable
estimate can be made of the amount of obligation.

s. Dividends
Dividends are recognised as liabilities in the year in which they are declared / approved by the shareholders.
74 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

t. Derecognition of financial assets and liabilities

i) Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:

 the right to receive cash flows from the asset has expired;

 the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks
and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the assets, but has
transferred control of the asset; or

 the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without
material delay to a third party under a 'pass through' arrangement.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement,
and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the
asset is recognised to the extent of the Group's continuing involvement in the asset.

ii) Financial liabilities

A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled, or expired.

u. Treasury shares
These are own equity instruments of the Group which are reacquired through its own broker. Treasury shares are deducted from
equity and accounted for at weighted average cost. Consideration paid or received on the purchase or sale of the Group’s own
equity instruments is recognised directly in equity. No gain or loss is recognised in consolidated statement of income on the
purchase, sale, issue, or cancellation of own equity instruments.

v. Earnings prohibited by Shari'a

The Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, all non-Islamic income
is credited to a charity fund where the Group uses these funds for social welfare activities.

w. Offsetting
Financial assets and financial liabilities are only offset and the net amount is reported in the consolidated statement of financial
position, when there is a legal or religious enforceable right to set off the recognised amounts and the Group intends to either
settle on a net basis, or to realise the asset and settle the liability simultaneously.

x. Income recognition

i) Murabaha and Wakala

Income from Murabaha and Wakala contracts is recognised on a time-apportioned basis over the period of the contract using the
effective profit rate method.

ii) Musharaka
Profit or losses in respect of the Group’s share in Musharaka financing transaction that commence and end during a single financial
period is recognised in the consolidated statement of income at the time of liquidation (closure of the contract). Where the
Musharaka financing continues for more than one financial period, profit is recognised to the extent that such profits are being
distributed during that period in accordance with profit sharing ratio as stipulated in the Musharaka agreement.

iii) Sukuk
Income from Sukuk is recognised using the effective profit rate over the term of the instrument.

iv) Placements with financial institutions

Income on placements with financial institutions is recognised proportionately over the period of the contract based on the
principal amounts outstanding and the profit agreed with clients.

v) Ijarah Muntahia Bittamleek

Income from Ijarah Muntahia Bittamleek is recognised proportionately over the lease term.
Bahrain Islamic Bank - Annual Report 2019 75

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

x. Income recognition (Continued)

vi) Dividend income

Dividend is recognised when the right to receive payment is established.

vii) Fee and commission income

Fee and commission income that are integral to the effective profit rate on a financial asset carried at amortised cost are included
in the measurement of the effective profit rate of the financial asset. Other fees and commission income, including account
servicing fees, sales commission, management fees, placement and arrangement fees and syndication fees, are recognised as the
related services are performed.

y. Foreign currencies
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are retranslated into Bahraini Dinars on the rate of exchange ruling on the consolidated
statement of financial position date. All differences are taken to the consolidated statement of income.

Translation gains or losses on non-monetary items carried at fair value are included in owners' equity as part of the fair value
adjustment.

z. Impairment of exposures subject to credit risk

The Group recognizes expected credit losses (ECLs) on the following:

 Bank balances and placements with banks;

 Financing assets;

 Ijarah Muntahia Bittamleek and ijarah rental receivables;

 Investment in Sukuk – debt type securities at amortised cost;

 Financial guarantee contracts issued; and

 Commitments to finance.

The Group measures loss allowances at an amount equal to lifetime ECLs, except for the following, which are measured at
12-month ECLs:

 Debt-type securities that are determined to have low credit risk at the reporting date; and

 Other debt-type securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the
financial instrument) has not increased significantly since initial recognition.

When determining whether the credit risk of an exposure subject to credit risk has increased significantly since initial
recognition when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available
without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s
historical experience and informed credit assessment including forward-looking information.

The Group assumes that the credit risk on an exposure subject to credit risk has increased significantly if it is more than 30
days past due.

The Group considers an exposure subject to credit risk to be in default when:

 the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as
realising security, if any is held; or

 the financial asset is more than 90 days past due

The Group considers a debt security to have low credit risk when its credit risk rating is equivalent to the globally understood
definition of ‘investment grade’. The Group considers this to be BBB – or higher per S&P.
76 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

z. Impairment of exposures subject to credit risk (Continued)

The Group applies a three-stage approach to measuring ECL on exposures subject to credit risk. Exposures migrate through the
following three stages based on the change in credit quality since initial recognition:

Stage 1: 12-months ECL

Stage 1 includes exposures subject to credit risk on initial recognition and that do not have a significant increase in credit risk since
initial recognition or that have low credit risk. 12-month ECL is the expected credit losses that arise from default events that are
possible within 12 months after the reporting date. It is not the expected cash shortfalls over the 12-month period but the entire
credit loss on an asset weighted by the probability that the loss will occur in the next 12-months.

Stage 2: Lifetime ECL – not credit impaired

Stage 2 includes exposures subject to credit risk that have had a significant increase in credit risk since initial recognition but that
do not have objective evidence of impairment. For these assets, lifetime ECL is recognised. Lifetime ECL is the expected credit
losses that result from all possible default events over the expected life of the financial instrument. Expected credit losses are the
weighted average of credit losses the life-time probability of default (‘PD’).

Stage 3: Lifetime ECL – credit impaired

Stage 3 includes exposures subject to credit risk that have objective evidence of impairment at the reporting date in accordance
with the indicators specified in the CBB rule book. For these assets, lifetime ECL is recognised. The maximum period considered
when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk.

i) Measurement of ECL
ECL is a probability-weighted estimate of credit losses. It is measured as follows:

 Exposures subject to credit risk that are not credit-impaired at the reporting date: as the present value of all cash shortfalls
(i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group
expects to receive);
 Exposures subject to credit risk that are credit-impaired at the reporting date: as the difference between the gross carrying
amount and the present value of estimated future cash flows;
 Undrawn commitments to finance: as the present value of the difference between the contractual cash flows that are due to the
Group if the commitment is drawn down and the cash flows that the Group expects to receive; and
 Financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects to
recover.

ii) Restructured exposures

If the terms of an exposure subject to credit risk are renegotiated or modified or an existing exposure subject to credit risk is
replaced with a new one due to financial difficulties of the borrower, the exposure subject to credit risk should be derecognized
and ECL is calculated using the cash shortfalls from the existing exposures subject to credit risk that are discounted from the
expected date of derecognition to the reporting date using the original effective profit rate of the existing exposures subject to
credit risk.

iii) Credit-impaired exposures

At each reporting date, the Group assesses whether exposures subject to credit risk are credit-impaired. An exposure subject to
credit risk is 'credit-impaired' when one or more events that have detrimental impact on the estimated future cash flows of the
exposures have occurred.

Evidence that an exposure subject to credit risk is credit-impaired includes the following observable data:

 significant financial difficulty of the borrower or issuer;

 a breach of contract such as a default;
 the restructuring of a financing facility by the Group on terms that the Group would not consider otherwise; or
 it is becoming probable that the borrower will enter bankruptcy or other financial reorganization.

iv) Presentation of allowance for ECL in the statement of financial position

Loss allowances for ECL are presented in the statement of financial position as a deduction from gross carrying amount of
exposures subject to credit risk.
Bahrain Islamic Bank - Annual Report 2019 77

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

z. Impairment of exposures subject to credit risk (Continued)

v) Write-off
Exposures subject to credit risk are written off either partially or in their entirety. If the amount to be written off is greater than the
accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross
carrying amount. Any subsequent recoveries are credited to other income.

aa. Equity investments classified at Fair Value Through Equity (FVTE)

For equity-type securities carried at fair value through equity, a significant or prolonged decline in fair value below its cost is an
objective evidence of impairment. If such evidence exists, impairment is measured as the difference between acquisition cost and
current fair value, less any impairment loss previously recognised in the consolidated statement of income.

For equity type instruments carried at fair value through equity, impairment losses recognised in the consolidated statement of
income are subsequently reversed through equity.

For investments classified at fair value through equity but carried at cost less impairment due to the absence of reliable fair value,
the Group makes an assessment of whether there is an objective evidence of impairment for each investment by assessment of
financial and other operating and economic indicators. Impairment is recognised if the estimated recoverable amount is assessed
to be below the carried value of the investment.

bb. Use of estimates and judgements in preparation of the consolidated financial statements
In the process of applying the Group’s accounting policies, management has made estimates and judgements in determining the
amounts recognised in the consolidated financial statements. The most significant use of judgements and estimates are as follows:

i) Impairment of exposures subject to credit risk

 Establishing the criteria for determining whether credit risk on exposures subject to credit risk has increased significantly since
initial recognition, determining methodology for incorporating forward looking information into measurement of ECL, and
selection and approval of models used to measure ECL is set out in note 2. z and note 27.
 Impairment on Ijarah rental receivables: key assumptions used in estimating recoverable cash flows is set out in note 2. z.
 Determining inputs into ECL measurement model including incorporation of forward looking information is set out in note 2. z
and note 27.

ii) Going concern

The Group's management has made an assessment of the Group's ability to continue as a going concern and is satisfied that the
Group has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any
material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern. Therefore, the financial
statements continue to be prepared on the going concern basis.

iii) Classification of investments

In the process of applying the Group’s accounting policies, management decides on acquisition of an investment whether it should be
classified as debt type instruments carried at fair value through equity or amortised cost, or equity-type instruments carried at fair value
through equity or fair value through consolidated statement of income. The classification of each investment reflects the management’s
intention in relation to each investment and is subject to different accounting treatments based on such classification [refer note 2.h].

iv) Impairment of equity investments

The Group determines that equity securities carried at fair value through equity are impaired when there is a significant or prolonged
decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment.

In case of quoted equity securities, the Group considers a decline of more than 30% in the fair value below cost to be significant and
considers a decline below cost which persists for more than 9 months as prolonged.

For unquoted equity investments carried at cost, the Group makes an assessment of whether there is an objective evidence of
impairment for each investment by assessment of financial and other operating and economic indicators. Impairment is recognised if
the estimated recoverable amount is assessed to be below the cost of the investment. In making this judgment, the Group evaluates
among other factors, evidence of a deterioration in the financial health of the investee, and operational and financing cash flows. It is
reasonably possible, based on existing knowledge, that the current assessment of impairment could require a material adjustment to
the carrying amount of the investments within the next financial year due to significant changes in the assumptions underlying such
assessments.
78 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

cc. Trade date accounting

All “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to
purchase or sell the asset.

dd. Customers’ current accounts

Balances in current (non-investment) accounts are recognised when received by the Group. The transactions are measured at the
cash equivalent amount received by the Group. At the end of the accounting period, the accounts are measured at their book
value.

ee. Employees’ benefits

i) Short-term benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is
provided. A provision is recognised for the amount expected to be paid under short-term cash bonus as profit sharing plans if the
Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and
the obligation can be estimated reliably.

ii) Post-employment benefits

Pension and other benefits for Bahraini employees are covered by Social Insurance Organisation Scheme, which is a "defined
contribution scheme" in nature, and to which employees and employers contribute monthly on a fixed percentage of salaries basis.
Contributions by the Group are recognised as an expense in the consolidated statement of income when they are due.

Expatriate employees on fixed contracts are entitled to leaving indemnities payable under Bahraini labour law, based on length of
service and final remuneration. Provision for this unfunded commitment has been made by calculating the notional liability had all
employees left at the reporting date.

These benefits are in the nature of "defined benefits scheme" and any increase or decrease in the benefit obligation is recognised
in the consolidated statement of income.

The Group also operates a voluntary employee saving scheme under which the Group and the employee contribute monthly on a
fixed percentage of salaries basis. The scheme is managed and administered by the bank. The scheme is in the nature of defined
contribution scheme and contributions by the Group are recognised as an expense in the consolidated statement of income when
they are due.

iii) Share based employee incentive scheme

The grant-date fair value of equity settled share-based payment arrangements granted to employees is generally recognised as an
expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognised as an expense is
adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be
met, such that the amount ultimately recognised is based on the number of awards that meet the related service and non-market
performance conditions at the vesting date. For share based awards with non-vesting conditions, the grant-date fair value of the
share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual
outcomes.

ff. Financial guarantees

Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs
because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial
guarantee contract is recognised from the date of its issue. The liability arising from a financial guarantee contract is recognised at
the present value of any expected payment, when a payment under the guarantee has become probable.

gg. Repossessed assets

In certain circumstances, property is repossessed following the foreclosure of financing facilities that are in default. Repossessed
properties are measured at the lower of carrying amount and fair value less costs to sell and reported within ‘other assets’.

hh. Statutory reserve

The Commercial Companies Law requires that 10 percent of the annual net profit be appropriated to a statutory reserve which is
normally distributable only on dissolution. Appropriations may cease when the reserve reaches 50 percent of the paid up share
capital.
Bahrain Islamic Bank - Annual Report 2019 79

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

ii. URIA protection scheme

Investment accounts held within the Group's Bahrain operations are covered by the regulation protecting URIA issued by the
Central Bank of Bahrain in accordance with Resolution No (34) of 2010. The scheme applies to all eligible accounts held with
Bahrain offices of the Bank subject to specific exclusions, maximum total amount entitled and other regulations governing the
establishment of a URIA Protection Scheme and a URIA Protection Board.

3. CASH AND BALANCES WITH BANKS AND CENTRAL BANK

2019 2018
BD'000 BD'000
Cash on hand 16,221 15,318
Balances with CBB, excluding mandatory reserve deposits 465 242
Balances with banks and other financial institutions 9,428 14,772
26,114 30,332
Mandatory reserve with CBB 35,515 35,105
61,629 65,437

The mandatory reserve with CBB is not available for use in the day-to-day operations.

Balances with banks and other financial institutions include an amount of BD 2,512 thousand (2018: BD 4,666 thousand) which is
not available for use in the day-to-day operations.

4. PLACEMENTS WITH FINANCIAL INSTITUTIONS

2019 2018
BD'000 BD'000
Commodity Murabaha 51,147 54,975
Deferred profits (5) (6)
51,142 54,969
Wakala 24,929 82,486
76,071 137,455
Impairment allowance (3) (5)
76,068 137,450
80 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

5. FINANCING ASSETS

2019 2018
BD'000 BD'000
Murabaha (note 5.1) 481,429 482,735
Musharaka (note 5.2) 93,422 97,341
574,851 580,076

5.1 Murabaha

2019 2018
BD'000 BD'000
Tasheel 243,190 217,622
Tawarooq 196,291 214,778
Altamweel Almaren 86,701 82,128
Letters of credit refinance 23,925 32,819
Motor vehicles Murabaha 5,904 7,858
Credit cards 20,191 19,719
Others 36 46
576,238 574,970
Qard fund 57 71
Gross receivables 576,295 575,041
Deferred profits (68,288) (65,253)
Impairment allowance (26,578) (27,053)
481,429 482,735

Non-performing Murabaha financing outstanding as of 31 December 2019 amounted to BD 91,180 thousand (2018: BD 71,265
thousand).

The Group considers the promise made in the Murabaha to the purchase orderer as obligatory.

The composition of the Murabaha financing portfolio net of deferred profit and before provision for impairment by sector is as
follows:

2019 2018
BD'000 BD'000
Commercial 133,671 120,762
Financial institutions 22,895 26,310
Others including retail 351,441 362,716
508,007 509,788

The Group exposures of Murabaha financing portfolio is concentrated in the Middle East.
Bahrain Islamic Bank - Annual Report 2019 81

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

5. FINANCING ASSETS (Continued)

5.2 Musharaka

2019 2018
BD'000 BD'000
Musharaka in real estate 96,314 100,127
Provision for impairment (2,892) (2,786)
93,422 97,341

Non-performing Musharaka financing outstanding as of 31 December 2019 amounted to BD 6,530 thousand (2018: BD 4,920
thousand).

5.3 The movement on impairment allowances is as follows:

Stage 1 Stage 2 Stage 3 Total

2019 BD'000 BD'000 BD'000 BD'000
At 1 January 2019 2,157 3,146 24,536 29,839
Net movement between stages 205 (286) 81 –
Net charge for the year (747) (1,303) 9,465 7,415
Write-off – – (7,784) (7,784)
At 31 December 2019 1,615 1,557 26,298 29,470

Stage 1 Stage 2 Stage 3 Total

2018 BD'000 BD'000 BD'000 BD'000
At 1 January 2018 2,367 9,486 15,345 27,198
Net movement between stages 1,302 (4,304) 3,002 –
Net charge for the year (1,512) (2,036) 9,295 5,747
Write-off – – (3,106) (3,106)
At 31 December 2018 2,157 3,146 24,536 29,839
82 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

6. INVESTMENT SECURITIES

a. Debt type instruments*

2019 2018
BD'000 BD'000
Quoted Sukuk – carried at amortised cost
Gross balance at beginning of the year 160,727 176,806
Acquisitions 35,999 41,891
Disposals and redemptions (6,253) (57,970)
Gross balance at the end of the year 190,473 160,727
Impairment allowance (7) (23)
Net balance at the end of the year 190,466 160,704

Unquoted Sukuk – carried at amortised cost

Gross balance at beginning of the year 58,725 62,581
Acquisitions 60 33,699
Disposals and redemptions (23,258) (37,534)
Foreign currency translation changes 7 (21)
Gross balance at the end of the year 35,534 58,725
Impairment allowance (12,187) (12,196)
Net balance at the end of the year 23,347 46,529

b. Equity type instruments

Unquoted shares – at cost less impairment

Gross balance 28,436 28,436
Impairment allowance (10,204) (9,784)
Net balance at the end of the year 18,232 18,652

Unquoted managed funds – at cost less impairment

Gross balance 14,168 14,168
Impairment allowance – –
Net balance at the end of the year 14,168 14,168
Total net investment securities 246,213 240,053

* As of 31 December 2019, debt type instruments includes Sukuk of BD 38,800 thousand (2018: BD 134,895 thousand) pledged
against borrowings from financial institutions of BD 29,566 thousand (2018: BD 96,386 thousand). (note 12)
Bahrain Islamic Bank - Annual Report 2019 83

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

6. INVESTMENT SECURITIES (Continued)

The movement on impairment allowances on debt type instruments (Sukuk) is as follows:

Stage 1 Stage 2 Stage 3 Total

2019 BD'000 BD'000 BD'000 BD'000
At 1 January 2019 52 – 12,167 12,219
Net charge for the year (32) – – (32)
Foreign exchange movement – – 7 7
At 31 December 2019 20 – 12,174 12,194

Stage 1 Stage 2 Stage 3 Total

2018 BD'000 BD'000 BD'000 BD'000
At 1 January 2018 96 – 11,481 11,577
Net charge for the year (44) – 707 663
Foreign exchange movement – – (21) (21)
At 31 December 2018 52 – 12,167 12,219

During the year impairment of BD 419 thousand (2018: BD 1,147 thousand) was provided on equity investments.

7. INVESTMENT IN ASSOCIATES

2019 2018
BD'000 BD'000
At 1 January 21,643 23,739
Share of results of associates, net (133) 86
Share of changes in investee's equity – (27)
Redemption of investment in associates (887) –
Impact of adopting FAS 30 – (350)
Foreign currency translation changes 4 (29)
Impairment allowance (1,877) (1,776)
At 31 December 18,750 21,643

Summarised financial information of associates that have been equity accounted in these consolidated financial statements, not
adjusted for percentage of ownership held by the Group:

2019 2018
BD'000 BD'000
Total assets 163,932 196,652
Total liabilities 46,183 77,726
Total revenues 3,186 4,508
Total net loss (2,555) (1,373)
84 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

7. INVESTMENT IN ASSOCIATES (Continued)

Investment in associates comprise of:

Ownership Country of
Name of associate % incorporation Nature of business

Liquidity Management 25.00% Bahrain Liquidity Management Centre B.S.C. (c) was incorporated in 2002 as a
Centre B.S.C. (c) bank, licensed and regulated by the Central Bank of Bahrain to facilitate
the creation of an Islamic inter-bank market that allow Islamic financial
services institutions to effectively manage their assets and liabilities.

Arabian C Real Estate 19.00% Kuwait Arabian C Real Estate Company is a Kuwaiti Shareholding Company
Company incorporated in accordance with the Kuwaiti Commercial Companies
law. The company’s activity focuses on real estate development and
the overall management of a variety of strategic investments in the real
estate and infrastructure sectors in GCC/MENA region.

Al Dur Energy Investment 29.41% Bahrain Al Dur Energy Investment Company is an exempt company with limited
Company liability incorporated in the Cayman Islands on 10 June 2009 and
operates under registration number 227032. The company operates in
the Kingdom of Bahrain with the sole purpose of holding a 15% indirect
interest in a power and water plant project company, Al Dur Power and
Water Company B.S.C.(c), in the Kingdom of Bahrain.

8. IJARAH MUNTAHIA BITTAMLEEK

2019 2018
Aviation Aviation
related related
Properties assets Total Properties assets Total
BD'000 BD'000 BD'000 BD'000 BD'000 BD'000
Cost:
At 1 January 217,412 7,540 224,952 204,063 7,540 211,603
Additions 64,202 – 64,202 41,541 – 41,541
Settlements /adjustments (39,643) – (39,643) (28,192) – (28,192)
At 31 December 241,971 7,540 249,511 217,412 7,540 224,952

Accumulated depreciation:
At 1 January 57,222 2,000 59,222 46,093 1,113 47,206
Charge for the year 24,787 887 25,674 20,931 887 21,818
Settlements /adjustments (15,242) – (15,242) (9,802) – (9,802)
At 31 December 66,767 2,887 69,654 57,222 2,000 59,222
Net Book Value 175,204 4,653 179,857 160,190 5,540 165,730

Ijarah Muntahia Bittamleek and Ijarah rental receivables of BD 204,403 thousand (2018: BD 186,871 thousand) is net of impairment
allowance of BD 14,791 thousand (2018: BD 13,543 thousand) refer note 27 (e). During the year, an impairment charge of BD 1,248
thousand (2018: release of BD 774 thousand) was provided on Ijarah rental receivables (refer note 23).
Bahrain Islamic Bank - Annual Report 2019 85

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

9. PROPERTY AND EQUIPMENT

2019

Fixture Work in
Lands Buildings and fitting Equipment Furniture progress Total
BD'000 BD'000 BD'000 BD'000 BD'000 BD'000 BD'000
Cost:
At 1 January 5,521 7,651 4,164 12,312 894 186 30,728
Additions / Transfers – – 26 941 6 330 1,303
At 31 December 5,521 7,651 4,190 13,253 900 516 32,031

Depreciation:
At 1 January – 2,483 3,547 10,210 847 – 17,087
Charge for the year – 254 213 858 28 – 1,353
At 31 December – 2,737 3,760 11,068 875 – 18,440
Net Book Value 5,521 4,914 430 2,185 25 516 13,591

2018
Fixture Work in
Lands Buildings and fitting Equipment Furniture progress Total
BD'000 BD'000 BD'000 BD'000 BD'000 BD'000 BD'000
Cost:
At 1 January 5,521 7,651 3,837 11,519 890 569 29,987
Additions / Transfers – – 401 817 10 (383) 845
Disposals – – (74) (24) (6) – (104)
At 31 December 5,521 7,651 4,164 12,312 894 186 30,728

Depreciation:
At 1 January – 2,223 3,404 9,287 803 – 15,717
Charge for the year – 260 217 946 50 – 1,473
Relating to disposed assets – – (74) (23) (6) – (103)
At 31 December – 2,483 3,547 10,210 847 – 17,087
Net Book Value 5,521 5,168 617 2,102 47 186 13,641

86 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

10. INVESTMENT IN REAL ESTATE

2019 2018
BD'000 BD'000
Land 18,675 23,966
Buildings 81 318
18,756 24,284

2019 2018
BD'000 BD'000
Movement in investment in real estate:
At 1 January 24,284 29,831
Disposal (2,263) (4,028)
Fair value changes (3,265) (1,519)
At 31 December 18,756 24,284

Investment in real estate comprises of properties located in the Kingdom of Bahrain and the United Arab Emirates.

Investment in real estate is stated at fair value, which has been determined based on valuations performed by independent third
party property valuers who have the qualification and experience of valuing similar properties in the same location. Fair value of
investments in real estate is classified as category 2 of fair value hierarchy.

11. OTHER ASSETS

2019 2018
BD'000 BD'000
Repossessed assets* 5,103 5,103
Receivables** 1,453 3,224
Staff advances 1,697 1,717
Prepaid expenses 486 803
Other 560 215
9,299 11,062

*Repossessed assets are net of impairment allowance of BD 585 thousand (2018: BD 585 thousand).

**Impairment on receivables includes Stage 1 BD Nil thousand, Stage 2 BD Nil thousand and Stage 3 BD 333 thousand (2018: Stage
1 BD 5 thousand, Stage 2 BD 127 thousand and Stage 3 BD 101 thousand). During the year, impairment charge of BD 202 thousand
was provided (2018:BD 173 thousand) representing release of BD 5 thousand (stage 1), and charge of BD 207 thousand (stage 3)
(2018: BD 5 thousand (stage 1), BD 67 thousand (stage 2) and BD 101 thousand (stage 3).

12. BORROWINGS FROM FINANCIAL INSTITUTIONS

Represents term murabaha facilities of BD 29,566 thousand (2018: BD 96,386 thousand) secured by pledge over Sukuk of
BD 38,800 thousand (2018: BD 134,895 thousand) maturing within 1 month from year end. The average rate of borrowings is 3.49%
(note 6).
Bahrain Islamic Bank - Annual Report 2019 87

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

13. OTHER LIABILITIES

2019 2018
BD'000 BD'000
Managers’ cheques 4,382 3,560
Payable to vendors 6,846 3,874
Accrued expenses 3,792 3,551
Dividends payable 921 928
Zakah and charity fund 401 314
Other 5,174 12,921
21,516 25,148

14. EQUITY OF INVESTMENT ACCOUNTHOLDERS

The Group comingles the Investment Account Holders’ (IAH) funds with the owners’ equity. In line with its policy, the Group utilizes
the funds from IAH to finance assets.

14.1 Equity of investment accountholders balances

2019 2018
BD'000 BD'000
Type of Equity of Investment Accountholders
Customer investment accounts
Balances on demand 295,096 296,140
Contractual basis 132,606 460,872
427,702 757,012

14.2 Assets in which IAH funds were invested

Assets in which IAH funds were invested as at 31 December are as follows:

2019 2018
BD'000 BD'000
Asset
Cash and balances with banks and Central Bank 21,564 43,334
Financing assets, net 235,099 424,627
Ijarah Muntahia Bittamleek and ijarah rental receivables, net 83,595 137,057
Investment securities, net 87,444 151,994
427,702 757,012

The Bank proportionately allocates non-performing assets (past due greater than 90 days) to the IAH pool of assets. The ECL
charge is also allocated to the IAH pool, in proportion of the non-performing assets financed by IAH to the total non-performing
assets. Amounts recovered from these non-performing assets shall be subject to allocation between IAH and owners’ equity.
During the year, the Bank allocated BD 23,089 thousand of ECL (2018: ECL of BD 42,351 thousand) to the IAH.

During the year, the Bank did not charge any administration expenses to investment accounts.
88 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

14. EQUITY OF INVESTMENT ACCOUNTHOLDERS (Continued)

14.3 Profit distribution by account type

Following is the average percentage of profit allocation between the owner’s accounts applied during the year for each type of
IAH account as agreed contractually with the customers:

2019 2018
Utilization Mudarib Share Profit to IAH Utilization Mudarib Share Profit to IAH
Account type
Tejoori 90% 97.88% 2.12% 90% 97.49% 2.51%
Savings 90% 97.87% 2.13% 90% 97.47% 2.53%
Vevo 90% 97.89% 2.11% 90% 97.41% 2.59%
IQRA 100% 77.46% 22.54% 100% 72.99% 27.01%
Time deposits 100% 50.18% 49.82% 100% 45.50% 54.50%

During the year, the Group did not increase its percentage of profits as mudarib. Further, the Group did not receive any incentive
from profits of investment account holders.

The Group does not share profits with IAH resulting from investing current accounts and other funds received on the basis other
than mudaraba contract.

Funds from IAH are invested in assets on a priority basis.

14.4 Equity of Investment Accountholders Reserves

2019 Movement 2018

BD'000 BD'000 BD'000
Profit equalisation reserve 1,245 – 1,245
Investment risk reserve – (1,177) 1,177

14.5 Return on equity of investment accountholders

2019 2018
BD'000 BD'000
Gross return to equity of investment accountholders 31,894 40,440
Group's share as a Mudarib (23,001) (27,223)
Utilisation of investment risk reserve 1,177 –
Net return on equity of investment accountholders 10,070 13,217
Bahrain Islamic Bank - Annual Report 2019 89

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

15. OWNERS' EQUITY

a. Share capital

2019 2018
BD'000 BD'000
i.Authorised
2,000,000,000 shares (2018: 2,000,000,000 shares) of BD 0.100 each 200,000 200,000

ii. Issued and fully paid up

1,064,058,587 shares (2018: 1,064,058,587 shares) of BD 0.100 each 106,406 106,406

b. Treasury Shares

2019 2018
Number of Shares BD'000 BD'000
At 31 December 5,855,358 892 892

2019
BD'000
Cost of treasury shares, excluding shares under employee share incentive scheme 892
Market value of treasury shares 703

The treasury shares as a percentage of total shares in issue is 0.55%

Owners' equity instruments which are reacquired are deducted from equity. No gain or loss is recognised in the consolidated
statement of income on the purchase, sale, issue or cancellation of the Group’s own equity instruments.

c. Reserves

i) Statutory reserve
During the year the Bank has appropriated BD 621 thousand (2018: 1,138 thousand) to the statutory reserve representing 10% of
the profit for the year BD 6,214 thousand (2018: 11,381 thousand). The reserve is not distributable except in such circumstances as
stipulated in the Bahrain Commercial Companies Law and following the approval of CBB.

ii) General reserve

The general reserve is established in accordance with the articles of association of the Bank and is distributable following a
resolution of shareholders at a general meeting and the approval of CBB. The Group may transfer any amount to the general
reserve, as approved by the shareholders at a general meeting, out of the profit for the year after appropriating statutory reserve.
90 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

15. OWNERS' EQUITY (Continued)

c. Reserves (Continued)

iii) Real estate fair value reserve

This represents cumulative unrealised revaluation gains on investment in real estate. This reserve is transferred to the consolidated
statement of income upon sale of the investment in real estate.

iv) Investment fair value reserve

This represents the net unrealised gains or losses on equity investments relating to self financed investments.

d. Additional information on shareholding pattern

i. Names and nationalities of the major shareholders and the number of shares in which they have an interest of 5% or more of
outstanding shares:

2019 2018
Number of Number of
Names Nationality shares % holding shares % holding
National Bank of Bahrain Bahraini 309,206,266 29.06% 309,206,266 29.06%
Social Insurance Organisation Bahraini 154,604,585 14.53% 154,604,585 14.53%
Social Insurance Organisation Military Pension Fund Bahraini 154,604,587 14.53% 154,604,587 14.53%
Islamic Development Bank Saudi 153,423,081 14.42% 153,423,081 14.42%
General Council of Kuwaiti Awqaf Kuwaiti 76,366,321 7.18% 76,366,321 7.18%

See subsequent event note 33.

ii. The Group has only one class of shares and the holders of these shares have equal voting rights.

iii. Distribution schedule of shares, setting out the number and percentage of holders in the following categories:

2019 2018
% of total % of total
Number of Number of outstanding Number of Number of outstanding
shares shareholders shares shares shareholders shares
Less than 1% 123,447,266 3,226 11.60% 136,999,164 3,241 12.87%
1% and less than 5% 92,406,481 5 8.68% 78,854,583 4 7.41%
5% and less than 10% 76,366,321 1 7.18% 76,366,321 1 7.18%
10% and less than 50% 771,838,519 4 72.54% 771,838,519 4 72.54%
1,064,058,587 3,236 100.00% 1,064,058,587 3,250 100.00%

Details of Directors’ interests in the Group’s shares as at the end of the year were:

Categories:

2019 2018
Number of Number of Number of Number of
shares directors shares directors
Less than 1% 493,443 2 487,535 4
Bahrain Islamic Bank - Annual Report 2019 91

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

15. OWNERS' EQUITY (Continued)

d. Additional information on shareholding pattern (Continued)

The following is the number of shares, and percentage of shareholding of Directors, Shari'a supervisory members and senior
management (Assistant General Managers and above who are part of the management committee):

2019 2018
Number of Percentage of Number of Percentage of
shares Shareholding shares Shareholding
Directors 493,443 0.046% 487,535 0.046%
Shari'a supervisory members 187,663 0.018% 190,817 0.018%
Senior management 1,125,153 0.106% 1,202,534 0.113%
1,806,259 0.170% 1,880,886 0.177%

e. Proposed appropriations
The Board of Directors propose the appropriation for zakah of BD 328 thousand in 2019 (2018: BD 179 thousand), charitable
donations of BD 250 thousand in 2019 (2018: BD 250 thousandl) and dividends amounting to BD Nil thousand (2018: BD Nil
thousand) which are subject to regulatory and shareholders’ approval in the ensuing Annual General Meeting.

16. COMMITMENTS AND CONTINGENT LIABILITIES

Credit related commitments

These include commitments to enter into financing contracts which are designed to meet the requirements of the Group's
customers.

Letters of credit and guarantees commit the Group to make payments on behalf of customers.

The Group has the following credit related commitments and contingent liabilities on behalf of customers:

2019 2018
BD'000 BD'000
Letters of credit and acceptances 7,448 6,166
Guarantees 63,324 66,316
Credit cards 34,638 34,048
Altamweel Almaren 23,113 15,405
Operating lease commitments * 268 327
Commitments to finance 39,202 35,422
167,993 157,684

* The Group has entered into commercial leases for certain branches. The remaining average period of these leases ranges
between 1 month and 3 years with renewal terms included in the contracts. Renewals are at the option of the Bank. There are no
restrictions placed upon the lessee by entering into these leases.
92 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

16. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

Credit related commitments (Continued)

Future minimum rentals payable under non-cancellable operating leases as at 31 December are as follows:

2019 2018
BD'000 BD'000
Within one year 171 182
After one year but not more than five years 97 145
268 327

17. CAPITAL ADEQUACY

The Group 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 Group may adjust the amount of dividend
payment to shareholders, return capital to shareholders or issue Sukuk etc. No changes were made in the objectives, policies and
processes from the previous years.

The Group's capital structure primarily consists of its paid-up capital, including share premium and reserves. From a regulatory
perspective, a significant amount of the Group's capital is classified as Tier 1 as defined by the CBB, i.e. most of the capital is of a
permanent nature.

The Group's capital adequacy policy is to maintain a strong capital base to support the development and growth of the business.
Current and future capital requirements are determined on the basis of financing facilities growth expectations for each business
group, expected growth in off-balance sheet facilities, and future sources and uses of funds.

The Central Bank of Bahrain issued the final regulation to give effect to the Basel III framework which came into effect on 1 January
2015. The Basel III framework significantly revises the definition of regulatory capital. The framework emphasises on common
equity as the predominant component of tier 1 capital by adding a minimum Common Equity Tier 1 (CET 1) capital ratio. The Basel
III rules also require institutions to hold capital buffers. For the purpose of calculating CET 1 capital, the regulatory adjustments
(deductions) including amounts above the aggregate limit for significant investments in financial institutions, mortgage servicing
rights, and deferred tax assets from temporary differences, will be deducted from CET1 over a phased manner to be fully deducted
by 1 January 2019. The Bank’s current capital position is sufficient to meet the new regulatory capital requirements.

The classification of the Group's capital in accordance with the regulatory requirements is as follows:

2019 2018
BD'000 BD'000
CET 1 Capital before regulatory adjustments 118,874 112,919
Less: regulatory adjustments – –
CET 1 Capital after regulatory adjustments 118,874 112,919
T 2 Capital adjustments 8,294 12,559
Regulatory Capital 127,168 125,478
Bahrain Islamic Bank - Annual Report 2019 93

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

17. CAPITAL ADEQUACY (Continued)

To assess its capital adequacy requirements in accordance with the CBB requirements, the Group adopts the Standardised
Approach for its Credit Risk, Basic Indicator Approach for its Operational Risk and Standardised Approach for its Market Risk. The
capital requirements for these risks are as follows:

2019 2018
BD'000 BD'000
Risk weighted exposure:
Total Credit Risk Weighted Assets 741,068 618,293
Total Market Risk Weighted Assets 1,263 11,891
Total Operational Risk Weighted Assets 114,095 103,812
Total Regulatory Risk Weighted Assets 856,426 733,996
Investment risk reserve (30% only) – 353
Profit equalization reserve (30% only) 374 374
Total Adjusted Risk Weighted Exposures 856,052 733,269
Capital Adequacy Ratio 14.86% 17.11%
Tier 1 Capital Adequacy Ratio 13.89% 15.40%
Minimum requirement 12.5% 12.5%

18. INCOME FROM FINANCING

2019 2018
BD'000 BD'000
Income from Murabaha financing 27,135 25,755
Income from Ijarah Muntahia Bittamleek 10,770 9,529
Income from Musharaka financing 5,312 5,923
Income from placements with financial institutions 2,247 1,903
45,464 43,110

19. INCOME FROM INVESTMENT SECURITIES

2019 2018
BD'000 BD'000
Dividend income 613 216
613 216
94 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

20. INCOME FROM INVESTMENT IN REAL ESTATE

2019 2018
BD'000 BD'000
Gain / (Loss) on sale 63 (531)
Rental income 147 179
Impairment charge (484) (204)
(274) (556)

21. OTHER INCOME

2019 2018
BD'000 BD'000
Recoveries from previously written off financing 651 4,491
Foreign exchange gain / (loss) 138 (123)
Others 702 4
1,491 4,372

22. OTHER OPERATING EXPENSES

2019 2018
BD'000 BD'000
Marketing and advertisement expenses 2,374 2,224
Professional services 2,175 1,442
Information technology related expenses 1,138 1,032
Premises and equipment expenses 857 918
Communication expenses 573 662
Board remuneration 79 266
Board of directors sitting fees 221 153
Shari’a committee fees & expenses 66 65
Others 2,127 2,279
9,610 9,041
Bahrain Islamic Bank - Annual Report 2019 95

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

23. IMPAIRMENT ALLOWANCE, NET

2019 2018
BD'000 BD'000
Financing assets (note 5.3) 7,415 5,747
Ijarah rental receivables (note 8) 1,248 (774)
Investments in Sukuk (note 6) (32) 663
Investments at fair value through equity (note 6) 419 1,147
Investment in associates (note 7) 1,877 1,776
Placements with financial institutions (2) 3
Other assets 202 758
Commitments (129) (425)
10,998 8,895

24. ZAKAH
The total Zakah payable as of 31 December 2019 amounted to BD 2,207 thousand (2018: BD 1,961 thousand) of which the Bank has
BD 328 thousand Zakah payable (2018: BD 179 thousand) based on the statutory reserve, general reserve and retained earning as
at 1 January 2020. The Zakah balance amounting to BD 1,878 thousand or 1.8 fils per share (2018: BD BD 1,782 thousand or 1.7 fils
per share) is due and payable by the shareholders.

25. EARNINGS PER SHARE

Basic and diluted earnings per share is calculated by dividing the net profit or loss for the year by the weighted average number of
shares during the year as follows:

2019 2018
Profit for the year in BD'000 6,214 11,381
Weighted average number of shares 1,052,254 1,051,093
Basic and diluted earnings per share (fils) 5.91 10.83

Basic and diluted earnings per share are the same since the Group has not issued any instruments that would have a dilutive effect.
96 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

26. RELATED PARTY TRANSACTIONS

Related parties comprise of major shareholders, directors of the Bank, senior management, close members of their families, entities
owned or controlled by them and companies affiliated by virtue of common ownership or directors with that of the Bank. The
transactions with these parties were made on commercial terms.

The significant balances and transactions with related parties at 31 December were as follows:

2019

Associates Directors
and joint and related Senior
Shareholders ventures entities management Total
BD'000 BD'000 BD'000 BD'000 BD'000
Assets
Financing assets – – 1,261 – 1,261
Investment in associates – 18,750 – – 18,750
Other assets – – – 266 266

Liabilities and Equity of investment accountholders

Customers’ current accounts – 1,857 390 109 2,356
Other liabilities – – 297 – 297
Equity of investment accountholders – – 959 1,159 2,118
Placements from non-financial institutions and individuals 44,930 – 50 – 44,980

Income
Income from financing – – 103 – 103
Income from investment in real estate – – – (72) (72)
Share of results of associates, net – (133) – – (133)

Return on equity of investment accountholders (1,113) – (1) (51) (1,165)

Expense on placements from non-financial institutions
and individuals (470) – – – (470)

Expenses
Other expenses – – (366) – (366)
Staff costs – – – (1,552) (1,552)
Bahrain Islamic Bank - Annual Report 2019 97

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

26. RELATED PARTY TRANSACTIONS (Continued)

2018

Associates Directors
and joint and related Senior
Shareholders ventures entities management Total
BD'000 BD'000 BD'000 BD'000 BD'000
Assets
Financing assets – – 1,615 – 1,615
Investment in associates – 21,643 – – 21,643
Other assets – – – 285 285

Liabilities and Equity of investment accountholders

Borrowings from financial institutions – – – – –
Customers’ current accounts – 177 425 77 679
Other liabilities – – 500 – 500
Equity of investment accountholders 48,972 – 695 980 50,647

Income
Income from financing – – 105 – 105
Share of results of associates, net – 86 – – 86

Return on equity of investment accountholders (1,512) – (33) (35) (1,580)

Expense on borrowings from financial institutions (532) – – – (532)

Expenses
Other expenses – – (484) – (484)
Staff costs – – – (1,405) (1,405)

Compensation of the key management personnel is as follows:

2019 2018
BD'000 BD'000
Short term employee benefits 1,244 1,143
Other long term benefits 308 262
1,552 1,405

Key management personnel includes staff at the grade of assistant general manager or above and part of management committee.
98 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT

a. Introduction
Risk is inherent in the Group's activities but it is managed through a process of ongoing identification, measurement and
monitoring, subject to risk limits and other controls. This process of risk management is critical to the Group’s continuing
profitability and each individual within the Group is accountable for the risk exposures relating to his or her responsibilities. The
risks and the processes to mitigate these risks have not significantly changed from the previous year.

The Bank is primarily exposed to credit risk, liquidity risk, market risk (including profit rate risk, equity price risk, and foreign
exchange risks), operational risk, reputational risk, and Sharia’a-compliance risk.

b. Risk management objectives

The risk management philosophy of the Group is to identify, monitor, and manage the various dimensions of risk with the objective
of protecting asset values and income streams such that the interest of the Group's shareholders (and others to whom the
Group owes a liability) are safeguarded, while maximising the returns intended to optimise the Group's shareholder return while
maintaining it’s risk exposure within self-imposed parameters.

The Bank’s risk appetite is embodied through its risk strategy; BisB reviews and aligns its risk appetite in line with its evolving
business plan, and changing economic and market scenarios, in addition to evolving regulatory requirements. The Bank also
assesses its tolerance for specific risk categories and its strategy to manage these risks. To monitor and report exposures to these
identified risks, the Bank adopted a comprehensive enterprise-wide Risk Management Framework that encompasses the risk limit,
monitoring, and reporting structures.

c. Structure and Organization of the Risk Management Function

Risk management structure includes all levels of authorities, organizational structure, people and systems required for the effective
functioning of risk management processes in the Group. The responsibilities associated with each level of the risk management
structure and authorities include the following:

The Board retains ultimate responsibility and authority for all risk matters, including:

i. Establishing overall policies and procedures; and

ii. Delegating authority to the Board Risk Committee, the Board Credit Committee, the Credit and Investment Committee, the
Chief Executive Officer and further delegation to the management to approve and review.

The Board Risk Committee is comprised of three independent members of the Board of Directors. They are responsible for
overseeing the Bank's risk management governance, specificially in relation to identifying, measuring, monitoring, and reporting
the risks critical to the Bank's operations.

The Board Credit Committee comprises of three designated members of the Board of Directors. The Board Credit Committee has
delegated authority by the Board to manage the ongoing credit activities of the Group. Decisions are taken by the Board Credit
Committee either at periodic meetings or if the need arises, by circulation.

Credit and Investment Committee (CIC): The CIC oversees the Credit & Investment Policy of the bank, identifies possible risk
assumed by the bank for different transactions. The CIC has the authority to make final decision on approval or rejection of
proposed transactions within its delegated authority as well as to monitor the performance and quailty of the bank's credit and
investment portfolio. The purpose of CIC is to assist managment in fulfilling its oversight responsibiliites relating to the credit &
investment objectives, policies, controls, procedures and related activities, including but not limited to the review of the bank's
investment and credit exposures, credit, investment, per party, concentration and group limits.

The Credit & Risk Management (C&RM) division – headed by the Chief Risk Officer – has day-to-day responsibility for managing
the risks involved across all areas of the Bank. C&RM provides independent identification, measurement, monitoring and control of
all risk parameters, while liaising with the business divisions that ultimately own the risks. C&RM comprises a number of specialist
units, including Risk Management, Credit Review & Analysis, and Credit Administration.

d. Risk Measurement and Reporting Systems

Based on the risk appetite, the Group has put in place various limits. These limits have been approved by the Board. Any limit
breach is reported by the Credit & Risk Management Department (C&RM) to the relevant management/Board-level committee. The
limits are reviewed and revised periodically, as required by the relevant policy and regulatory requirements.
Bahrain Islamic Bank - Annual Report 2019 99

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

e. Credit Risk
Credit risk is considered to be the most significant and pervasive risk for the Group. The Group takes on exposure to credit risk,
which is the risk that the counter-party to a financial transaction will fail to discharge an obligation causing the Group to incur a
financial loss. Credit risk arises principally from financing (credit facilities provided to customers), investment in Sukuk and from
cash and deposits held with other banks. Further, there is credit risk in certain off-balance sheet financial instruments, including
guarantees relating to purchase and sale of foreign currencies, letters of credit, acceptances and commitments to extend credit.
Credit risk monitoring and control is performed by the Credit and Risk Management Department which sets parameters and
thresholds for the Group's financing activities.

i) ECL – Significant increase in credit risk (SICR)

To determine whether credit risk has significantly increased since initial recognition, the Group will compare the risk of default at
the assessment date with the risk of default at initial recognition. This assessment is to be carried out at each assessment date.

For the Corporate portfolio, the Group's assessment for significant increase in credit risk (SICR) is done at a counterparty level by
assigning and reviewing the movement in internal rating.

For the Retail portfolio, the Group's assessment for SICR is done at a facility level using days past due as the primary criteria.

ii) Generating the term structure of Probablity of Default (PD)

Credit risk grades are a primary input into the determination of the term structure of PD for exposures. The Group collects
performance and default information about its credit risk exposures analyzed by type of product and borrower as well as by credit
risk grading.

The Group employs statistical models to analyze the data collected and generate estimates of the remaining lifetime PD of
exposures and how these are expected to change as a result of the passage of time.

This analysis includes the identification and calibration of relationships between changes in default rates and macro-economic
factors as well as in-depth analysis of the impact of certain other factors (e.g. forbearance experience) on the risk of default. The
macro economic factors used in this analysis are shortlisted from the list given below:

(i) Gross domestic product, constant prices;

(ii) Total investments;

(iii) Gross national savings;

(iv) Inflation, average consumer prices;

(v) Volume of imports of goods and services;

(vi) Volume of exports of goods and services (including oil);

(vii) Population;

(viii) General government revenue;

(ix) General government total expenditure;

(x) General government net lending / borrowing; and

(xi) General government net debt.

Based on consideration of a variety of external actual and forecasted information, the Group formulates a 'base case' view of
the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios (i.e. on
incorporation of forward-looking information). The Group then uses these forecasts to adjust its estimates of PDs.

For Corporate portfolio, through the yearly review of the corporate portfolio, the Group observes yearly performances to compute a
count based PD over the one year horizon for the past 5 years. These PDs are grouped as per internal risk ratings (i.e. from 1 to 7).
An average default rate of the 5 yearly observed default provides the through the cycle PDs.
100 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

e. Credit Risk (Continued)
ii) Generating the term structure of PD (Continued)

In relation to the retail portfolio, the portfolio is segmented by product, as demonstrated below:

(i) Auto finance;

(ii) Mortgage finance;

(iii) Tasheel Finance and Others; and

(iv) Credit cards.

PDs for each segment are measured using Observed Default Estimation and thus PD is calculated based on Days Past Due (DPD)
bucket level for each segment separately. Under this analysis, the delinquency status of accounts is tracked at an interval of one
year with a moving month cycle. A minimum of 5 year DPD data is considered.

iii) Determining whether credit risk has increased significantly

In determining whether credit risk has increased significantly since initial recognition, the Group uses its internal credit risk grading
system, external risk ratings, delinquency status of accounts, restructuring, expert credit judgement and, where possible, relevant
historical experience.

Using its expert credit judgment and, where possible, relevant historical experience, the Group may determine that an exposure
has undergone a significant increase in credit risk based on particular qualitative indicators that it considers are indicative of such
and whose effect may not otherwise be fully reflected in its quantitative analysis on a timely basis.

As a backstop, the Group considers that a significant increase in credit risk occurs no later than when an asset is more than 30
days past due. Days past due are determined by counting the number of days since the earliest elapsed due date in respect of
which full payment has not been received. Due dates are determined without considering any grace period that might be available
to the borrower.

The Group monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews and
validations:

The Group classifies its financial instruments into stage 1, stage 2 and stage 3, based on the applied impairment methodology, as
described below:-

Stage 1 (12 months ECL): for exposures subject to credit risk where there has not been a significant increase in credit risk since
initial recognition and that are not credit-impaired on origination, the Group recognises an allowance based on the 12-month ECL.
All accounts at origination would be classified as Stage 1. Only exceptions are Purchased or Originated Credit Impaired (POCI)
assets.

Stage 2 (lifetime ECL not credit impaired): for exposures subject to credit risk where there has been a significant increase in
credit risk since initial recognition but they are not credit-impaired, the Group recognises an allowance for the lifetime ECL for
all exposures categorized in this stage based on the actual / expected maturity profile including restructuring or rescheduling of
exposures.

Stage 3 (lifetime ECL credit impaired): for credit-impaired exposures subject to credit risk, the Group recognises the lifetime ECL.
Default identification process i.e. DPD of 90 or more is used as stage 3.

iv) Definition of ‘Default’

The Group's definition of default is aligned with regulatory guidelines and internal credit risk management practices. Defaulted
assets will fall under Stage 3. In general, a counterparty is considered in default and hence relevant exposure or a group of
exposures is impaired if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after
the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows
of the exposure or group of exposures that can be reliably estimated. It may not be possible to identify a single, discrete event that
caused the impairment; rather the combined effect of several events may have caused the impairment losses expected as a result
of future events, no matter how likely, are not recognised. Objective evidence that an exposure or group of exposures is impaired
includes observable data that comes to the attention of the holder of the exposure.

In general, counterparties with facilities exceeding 90 days past dues are considered in default.
Bahrain Islamic Bank - Annual Report 2019 101

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

e. Credit Risk (Continued)

v) Incorporation of forward looking information

The Group incorporates forward-looking information into both its assessment of whether the credit risk of an exposure has
increased significantly since its initial recognition and its measurement of ECL. The Group annually sources macro-economic
forecast data for eleven variables from the International Monetary Fund (IMF) database for Bahrain.

Macro-economic variables are checked for correlation with the probability of default for the past five years and only those
variables for which the movement can be explained are used. Management judgement is exercised when assessing the
macroeconomic variables.

vi) Measurement of ECL

The Group measures an ECL at an individual instrument level taking into account the projected cash flows, PD, LGD, Credit
Conversion Factor (CCF) and discount rate. For portfolios wherein instrument level information is not available, the Group carries
out ECL estimation on a collective basis.

The key inputs into the measurement of ECL are the term structure of the following variables:

(i) Probability of Default (PD);

(ii) Loss Given Default (LGD); and

(iii) Exposure At Default (EAD).

These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to
reflect forward-looking information as described above.

Corporate PD estimates are calculated based on statistical rating models, and assessed using rating tools tailored to various
categories of counterparties and exposures. These statistical models are based on internally compiled data comprising both
quantitative and qualitative factors. If a counterparty or exposure migrates between ratings classes, then this will lead to a change
in the estimate of the associated PD.

Retail PD estimates are measured using Observed Default Estimation at the segment level and thus PD will be calculated at DPD
bucket level for each segment separately. Under this analysis, the delinquency status of accounts will be tracked at an interval of
one year with a moving month cycle.

Debt type instruments portfolio, nostro and interbank placements portfolio is assessed for SICR using external ratings. The Group
obtains PD estimates from Moody’s / Standard & Poor’s (S&P) / Fitch or any other external ratings.

LGD is the magnitude of the likely loss if there is a default. The Group estimates LGD parameters based on the history of recovery
rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim,
counterparty industry and recovery costs of any collateral that is integral to the financial asset.

EAD represents the expected exposure in the event of a default. The Group derives the EAD from the current exposure to the
counterparty and potential changes to the current amount allowed under the contract including amortization. The EAD of a
financial asset is its gross carrying amount. For financing commitments and financial guarantees, the EAD includes the amount
drawn, as well as potential future amounts that may be drawn under the contract, which are estimated based on historical
observations and forward-looking forecasts.

The period of exposure limits the period over which possible defaults are considered and thus affects the determination of PDs and
measurement of ECLs (especially for Stage 2 accounts with lifetime ECL).

Subject to using a maximum of a 12-month PD for exposures subject to credit risk for which credit risk has not significantly
increased, the Group measures ECL considering the risk of default over the maximum contractual period (including any borrower's
extension options) over which it is exposed to credit risk, even if, for risk management purposes, the Group considers a longer
period. The maximum contractual period extends to the date at which the Group has the right to require repayment of an advance
or terminate a financing commitment or guarantee.
102 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

e. Credit Risk (Continued)

vii) Modified exposures subject to credit risk

The contractual terms of exposures subject to credit risk may be modified for a number of reasons, including changing market
conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer.

When the terms of an exposure are modified and the modification does not result in derecognition, the determination of whether
the asset's credit risk has increased significantly reflects comparison of:

• Its remaining lifetime PD at the reporting date based on the modified terms; with

• The remaining lifetime PD estimated based on data at initial recognition and the original contractual terms.

The Group renegotiates exposures to customers in financial difficulties (referred to as 'forbearance activities’) to maximise
collection opportunities and minimise the risk of default. Under the Group's forbearance policy, forbearance of exposures is
granted on a selective basis if the debtor is currently in default on its debt or if there is a high risk of default, there is evidence that
the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet
the revised terms.

The revised terms usually include extending the maturity, changing the timing of profit payments, and amending the terms of
financing covenants. Both retail and corporate financing exposures are subject to the forbearance policy.

For exposures modified as part of the Group's forbearance policy, the estimate of PD reflects whether the modification has
improved or restored the Group's ability to collect profit and principal and the Group's previous experience of similar forbearance
action. As part of this process, the Group evaluates the borrower's payment performance against the modified contractual terms
and considers various behavioural indicators.

Generally, forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may
constitute evidence that an exposure is credit-impaired / in default. A customer needs to demonstrate consistently good payment
behaviour over a period of time (12 months) before the exposure is no longer considered to be credit-impaired/ in default or the
PD is considered to have decreased such that the loss allowance reverts to being measured at an amount equal to 12-month ECL.

viii) Credit Risk Mitigation

Credit risk mitigation refers to the use of a number of techniques, such as obtaining collateral and guarantees to mitigate the
credit risks that the Group is exposed to. Credit risk mitigants reduce the credit risk by allowing the Group to protect against
counterparty non-performance of credit contracts through collaterals, netting agreements and guarantees.

Generally, the Group extends credit facilities only where supported by adequate tangible collateral security and/or audited
financial statements. Facilities may be considered without adequate tangible collateral security when audited financial statements
reveal satisfactory financial position/repayment ability and the facilities are properly structured and supported by assignments,
guarantees, etc. as appropriate.

Personal guarantees of the partners/promoters/directors of the borrowing entity may be obtained in support of credit facilities. In
all cases, a statement of net worth of the guarantor is compiled by the Account Officer, so that adequate information is available at
a future date in case the guarantees need to be enforced.
Bahrain Islamic Bank - Annual Report 2019 103

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

e. Credit Risk (Continued)
viii) Credit Risk Mitigation (Continued)

Collateral coverage by type of credit exposure:

Properties Others Total

2019 BD'000 BD'000 BD'000
Financing assets 533,564 28,011 561,575
Ijarah Muntahia Bittamleek & ijarah rental receivables 273,044 27,690 300,734
806,608 55,701 862,309

Properties Others Total

2018 BD'000 BD'000 BD'000
Financing assets 650,819 52,924 703,743
Ijarah Muntahia Bittamleek & ijarah rental receivables 221,745 27,647 249,392
872,564 80,571 953,135

The fair value of collateral that the Group holds relating to non performing facilities at 31 December 2019 amounts to BD 148,855
thousand (31 December 2018: BD 192,505 thousand). The collateral consists of cash, securities and properties. The utilisation of the
above collaterals will be on a customer by customer basis and will be limited to the customer's total exposure.

ix) Gross maximum exposure to credit risk

The market value of tangible collateral security is properly evaluated by the Group approved surveyors (for properties) or based on
publicly available quotations. Only the amount of such security equivalent to the exposure is taken into account while considering
credit facilities.

The table below shows the gross maximum exposure to credit risk for the components of the consolidated statement of financial
position, including credit related commitments. The figures represent gross exposure of any collateral held or other credit
enhancements.

2019 2018
BD'000 BD'000
Balances with banks and Central Bank 45,408 50,119
Placements with financial institutions 76,068 137,450
Financing assets 574,851 578,953
Ijarah Muntahia Bittamleek and ijarah rental receivables 204,403 186,871
Debt type investment instruments 213,813 207,233
1,114,543 1,160,626
Letters of credit, guarantees and acceptances 70,772 72,482
104 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

e. Credit Risk (Continued)

x) Risk concentrations of the maximum exposure to credit risk

Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the
same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be
similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity
of the Group’s performance to developments affecting a particular industry or geographic location. The Group seeks to manage its
credit risk exposure through diversification of financing activities to avoid undue concentrations of risks with individuals or groups
of customers in specific locations or businesses.

The distribution of the Group's assets, liabilities, equity of investment accountholders, commitments and contingent liabilities by
geographic region and industry sector is as follows:

Liabilities and equity Commitments and

Assets of investment accountholders contingent liabilities

31 December 31 December 31 December 31 December 31 December 31 December

2019 2018 2019 2018 2019 2018
BD'000 BD'000 BD'000 BD'000 BD'000 BD'000
Geographical region
Middle East 1,209,632 1,261,461 1,099,707 1,154,492 167,993 157,684
North America 4,591 5,751 2,128 258 – –
Europe 9,315 13,285 165 7,265 – –
Other 22 20 637 753 – –
1,223,560 1,280,517 1,102,637 1,162,768 167,993 157,684

Industry sector
Trading and Manufacturing 126,011 124,846 27,384 46,076 27,363 39,771
Aviation – – 143 129 – –
Real Estate 154,318 173,360 70,571 79,832 37,470 40,790
Banks and Financial Institutions 128,343 206,594 154,377 249,184 2,060 1,403
Personal / Consumer Finance 456,862 431,497 548,970 528,079 35,004 34,935
Governmental Organizations 299,387 273,518 143,835 157,989 51,930 20,159
Others 58,639 70,702 157,357 101,479 14,166 20,626
1,223,560 1,280,517 1,102,637 1,162,768 167,993 157,684
Bahrain Islamic Bank - Annual Report 2019 105

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

e. Credit Risk (Continued)

xi) Credit quality of exposures subject to credit risk

(i) The following table sets out information about the credit quality of exposures subject to credit risk, unless specifically indicated:

31 December 2019
Stage 1 Stage 2 Stage 3* Total
BD'000 BD'000 BD'000 BD'000
Financing assets (Funded exposure)
Low risks 394,602 6,010 – 400,612
Acceptable risks 78,756 23,295 – 102,051
Watch list 235 3,713 – 3,948
Non performing – – 97,710 97,710
Gross exposure 473,593 33,018 97,710 604,321
Less: ECL (1,615) (1,557) (26,298) (29,470)
Financing assets carrying amount 471,978 31,461 71,412 574,851

Ijarah Muntahia Bittamleek & Ijarah rental receivables

Low risks 162,208 2,023 – 164,231
Acceptable risks 5,791 9,426 – 15,217
Watch list – 9,384 – 9,384
Non performing – – 30,362 30,362
Gross exposure 167,999 20,833 30,362 219,194
Less: ECL (208) (2,786) (11,797) (14,791)
Ijarah Muntahia Bittamleek & Ijarah rental receivables carrying amount 167,791 18,047 18,565 204,403

Investment in Sukuk
Low risks 204,351 – – 204,351
Acceptable risks 9,093 – – 9,093
Watch list – – – –
Non performing – – 12,563 12,563
Gross exposure 213,444 – 12,563 226,007
Less: ECL (20) – (12,174) (12,194)
Investment in Sukuk carrying amount 213,424 – 389 213,813

Placements with financial institutions

Low risks 76,071 – – 76,071
Acceptable risks – – – –
Watch list – – – –
Non performing – – – –
Gross exposure 76,071 – – 76,071
Less: ECL (3) – – (3)
Placements with financial institutions carrying amount 76,068 – – 76,068
106 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

e. Credit Risk (Continued)
xi) Credit quality of exposures subject to credit risk (Continued)

31 December 2019
Stage 1 Stage 2 Stage 3* Total
BD'000 BD'000 BD'000 BD'000
Balances with Banks
Low risks 9,893 – – 9,893
Acceptable risks – – – –
Watch list – – – –
Non performing – – – –
Gross exposure 9,893 – – 9,893
Less: ECL – – – –
Balances with Banks carrying amount 9,893 – – 9,893

Other Receivables
Low risks – – – –
Acceptable risks – – – –
Watch list – – – –
Non performing – – 1,666 1,666
Gross exposure – – 1,666 1,666
Less: ECL – – (333) (333)
Other Receivables carrying amount – – 1,333 1,333
Total funded exposures subject to credit risk carrying amount 939,154 49,508 91,699 1,080,361

Commitments
Gross exposure 45,882 194 1,228 47,304
Less: ECL (56) (1) – (57)
Commitments carrying amount 45,826 193 1,228 47,247
*This includes BD 35,265 thousand of gross on-balance sheet exposures in the cooling off period.

(ii) The following table shows the movement in ECL in various stages:

31 December 2019
Stage 1 Stage 2 Stage 3 Total
BD'000 BD'000 BD'000 BD'000
At 1 January 2019 2,789 5,596 47,639 56,024
Transfer to Stage 1 503 (268) (235) –
Transfer to Stage 2 (277) 1,314 (1,037) –
Transfer to Stage 3 (119) (1,315) 1,434 –
Net movement between stages 107 (269) 162 –
Charge for the year (net) (994) (983) 10,679 8,702
Write-off – – (7,885) (7,885)
Foreign exchange movement – – 7 7
At 31 December 2019 1,902 4,344 50,602 56,848
Bahrain Islamic Bank - Annual Report 2019 107

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

e. Credit Risk (Continued)
xi) Credit quality of exposures subject to credit risk (Continued)

(iii) The following table sets out information about the credit quality of exposures subject to credit risk, unless specifically
indicated:
31 December 2018
Stage 1 Stage 2 Stage 3* Total
BD'000 BD'000 BD'000 BD'000
Financing assets (Funded exposure)
Low risks 358,750 22,913 – 381,663
Acceptable risks 113,067 31,572 – 144,639
Watch list 344 7,084 – 7,428
Non performing – – 76,185 76,185
Gross exposure 472,161 61,569 76,185 609,915
Less: ECL (2,157) (3,146) (24,536) (29,839)
Financing assets carrying amount 470,004 58,423 51,649 580,076

Ijarah Muntahia Bittamleek & Ijarah rental receivables

Low risks 157,789 1,469 – 159,258
Acceptable risks 11,723 927 – 12,650
Watch list – 9,653 – 9,653
Non performing – – 18,853 18,853
Gross exposure 169,512 12,049 18,853 200,414
Less: ECL (399) (2,320) (10,824) (13,543)
Ijarah Muntahia Bittamleek & Ijarah rental receivables carrying amount 169,113 9,729 8,029 186,871

Investment in Sukuk
Low risks 199,326 – – 199,326
Acceptable risks 7,583 – – 7,583
Watch list – – – –
Non performing – – 12,543 12,543
Gross exposure 206,909 – 12,543 219,452
Less: ECL (52) – (12,167) (12,219)
Investment in Sukuk carrying amount 206,857 – 376 207,233

Placements with financial institutions

Low risks 137,455 – – 137,455
Acceptable risks – – – –
Watch list – – – –
Non performing – – – –
Gross exposure 137,455 – – 137,455
Less: ECL (5) – – (5)
Placements with financial institutions carrying amount 137,450 – – 137,450
108 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

e. Credit Risk (Continued)
xi) Credit quality of exposures subject to credit risk (Continued)

31 December 2018
Stage 1 Stage 2 Stage 3* Total
BD'000 BD'000 BD'000 BD'000

Balances with Banks

Low risks 15,014 – – 15,014
Acceptable risks – – – –
Watch list – – – –
Non performing – – – –
Gross exposure 15,014 – – 15,014
Less: ECL – – – –
Balances with Banks carrying amount 15,014 – – 15,014

Other Receivables
Low risks – – – –
Acceptable risks 1,423 1,802 – 3,225
Watch list – – – –
Non performing – – 101 101
Gross exposure 1,423 1,802 101 3,326
Less: ECL (5) (127) (101) (233)
Other Receivables carrying amount 1,418 1,675 – 3,093
Total funded exposures subject to credit risk carrying amount 999,856 69,827 60,054 1,129,737

Commitments
Gross exposure 40,820 405 159 41,384
Less: ECL (171) (3) (11) (185)
Commitments carrying amount 40,649 402 148 41,199

*This includes BD 37,829 thousand of gross on-balance sheet exposures in the cooling off period.

(iv) The following table shows the movement in ECL in various stages:

31 December 2018
Stage 1 Stage 2 Stage 3 Total
BD'000 BD'000 BD'000 BD'000

At 1 January 2018 3,012 11,184 39,570 53,766

Transfer to Stage 1 2,471 (1,323) (1,148) –
Transfer to Stage 2 (111) 2,708 (2,597) –
Transfer to Stage 3 (27) (4,837) 4,864 –
Net movement between stages 2,333 (3,452) 1,119 –
Charge for the year (net) (2,556) (2,136) 10,077 5,385
Write-off – – (3,106) (3,106)
Foreign exchange movement – – (21) (21)
At 31 December 2018 2,789 5,596 47,639 56,024
Bahrain Islamic Bank - Annual Report 2019 109

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

f. Liquidity Risk
Liquidity risk is the risk that the Group will be unable to meet its obligations when they fall due. Liquidity risk can be caused by
market disruptions or credit downgrades which may cause certain sources of funding to cease immediately. To guard against this
risk, the Group has a large customer base and assets managed with liquidity in mind, maintaining a healthy balance of cash, cash
equivalents, commodity Murabaha, Wakala receivables, credit lines and quoted investments.

i) Maturity profile of Group's assets and liabilities

The table below summarises the maturity profile of the Group’s assets and liabilities. The contractual maturities of assets and
liabilities have been determined on the basis of the remaining period from the consolidated statement of financial position date to
the contractual maturity date and do not take account of the effective maturities as indicated by the Group’s retention history of
its equity of investment accountholders.

The maturity profile of assets, liabilities and equity of investment accountholders at 31 December 2019 was as follows:

Up to 1 to 3 3 to 6 6 months 1 to 3 Over No fixed

1 month months months to 1 year years 3 years maturity Total
BD'000 BD'000 BD'000 BD'000 BD'000 BD'000 BD'000 BD'000
ASSETS
Cash and balances with the banks
and Central Bank 26,114 – – – – – 35,515 61,629
Placements with financial institutions 76,068 – – – – – – 76,068
Financing assets 32,808 20,362 31,917 42,826 183,732 263,206 – 574,851
Ijarah Muntahia Bittamleek and ijarah
rental receivables 10,102 1,681 2,242 5,219 23,478 161,681 – 204,403
Investment securities – – 11,647 13,377 29,961 158,828 32,400 246,213
Investment in associates – – – – – – 18,750 18,750
Investment in real estate – – – – – – 18,756 18,756
Property and equipment – – – – – – 13,591 13,591
Other assets 102 748 692 173 539 514 6,531 9,299
Total assets 145,194 22,791 46,498 61,595 237,710 584,229 125,543 1,223,560

LIABILITIES AND EQUITY OF

INVESTMENT ACCOUNTHOLDERS
Placements from financial institutions 84,172 55,576 18,125 21,528 9,150 – – 188,551
Placements from non-financial
institutions and individuals 36,058 75,170 68,579 53,748 20,055 – – 253,610
Borrowings from financial institutions 29,566 – – – – – – 29,566
Customers’ current accounts 36,338 – – – – 145,354 – 181,692
Other liabilities 21,516 – – – – – – 21,516
Equity of investment accountholders 116,830 28,410 22,431 16,462 6,974 236,595 – 427,702
Total liabilities and equity of
investment accountholders 324,480 159,156 109,135 91,738 36,179 381,949 – 1,102,637
Liquidity gap (179,286) (136,365) (62,637) (30,143) 201,531 202,280 125,543 120,923

Cumulative liquidity gap (179,286) (315,651) (378,288) (408,431) (206,900) (4,620) 120,923 –
110 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

f. Liquidity Risk (Continued)
i) Maturity profile of Group's assets and liabilities (Continued)

The maturity profile of assets, liabilities and equity of investment accountholders at 31 December 2018 was as follows:

Up to 1 to 3 3 to 6 6 months 1 to 3 Over No fixed

1 month months months to 1 year years 3 years maturity Total
BD '000 BD '000 BD '000 BD '000 BD '000 BD '000 BD '000 BD '000
ASSETS
Cash and balances with the banks
and Central Bank 30,332 – – – – – 35,105 65,437
Placements with financial institutions 129,809 – – 7,641 – – – 137,450
Financing assets 39,662 33,252 37,585 52,871 190,771 225,935 – 580,076
Ijarah Muntahia Bittamleek and ijarah
rental receivables 661 14,592 2,015 3,505 21,351 144,747 – 186,871
Investments securities – 5,774 20,069 1,611 50,017 129,763 32,819 240,053
Investment in associates – – – – – – 21,643 21,643
Investment in real estate – – – – – – 24,284 24,284
Property and equipment – – – – – – 13,641 13,641
Other assets 2 771 520 595 642 1,765 6,767 11,062
Total assets 200,466 54,389 60,189 66,223 262,781 502,210 134,259 1,280,517

LIABILITIES AND EQUITY OF

INVESTMENT ACCOUNTHOLDERS
Placements from financial institutions 84,681 11,643 – 9,184 9,236 – – 114,744
Placements from non-financial
institutions and individuals – – – 13,922 22,312 – – 36,234
Borrowings from financial institutions 36,799 14,343 – 45,244 – – – 96,386
Customers’ current accounts 26,648 – – – – 106,596 – 133,244
Other liabilities 25,148 – – – – – – 25,148
Equity of investment accountholders 184,394 125,390 87,384 112,826 7,679 239,339 – 757,012
Total liabilities and equity of
investment accountholders 357,670 151,376 87,384 181,176 39,227 345,935 – 1,162,768
Liquidity gap (157,204) (96,987) (27,195) (114,953) 223,554 156,275 134,259 117,749
Cumulative liquidity gap (157,204) (254,191) (281,386) (396,339) (172,785) (16,510) 117,749 –

The Central Bank of Bahrain introduced Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) during 2019.

LCR has been developed to promote short-term resilience of a bank’s liquidity risk profile. The LCR requirements aim to ensure that
a bank has an adequate stock of unencumbered high quality liquidity assets (HQLA) that consists of assets that can be converted
into cash immediately to meet its liquidity needs for a 30 calendar day stressed liquidity period. The stock of unencumbered HQLA
should enable the Bank to survive until day 30 of the stress scenario, by which time appropriate corrective actions would have
been taken by management to find the necessary solutions to the liquidity crisis.

LCR is computed as a ratio of Stock of HQLA over the Net cash outflows over the next 30 calendar days. Effective from 30 June
2019, the Bank is required to maintain LCR greater than 100%.
Bahrain Islamic Bank - Annual Report 2019 111

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

f. Liquidity Risk (Continued)

NSFR is to promote the resilience of banks’ liquidity risk profiles and to incentivise a more resilient banking sector over a longer
time horizon. The NSFR will require banks to maintain a stable funding profile in relation to the composition of their assets and
off-balance sheet activities. A sustainable funding structure is intended to reduce the likelihood that disruptions to a bank’s regular
sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader
systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk
across all on-balance sheet and off-balance sheet items and promotes funding stability.

NSFR as a percentage is calculated as “Available stable funding” divided by “Required stable funding”. Effective from 31 December
2019, the Bank is required to maintain NSFR ratio greater than 100%. As of 31 December 2019 the Group had NSFR ratio of 113%.

g. Market Risk
The Group has accepted the definition of market risk as defined by CBB as “the risk of losses in on and off balance sheet positions
arising from movements in market prices".

i) Profit rate risk

Profit rate risk is the sensitivity of financial products to changes in the profit rates. Profit rate risk arises from the possibility that
changes in profit rates will affect future profitability or the fair values of financial instruments. The Group's management believe
that the Group is not exposed to material profit rate risk as a result of mismatches of profit rate repricing of assets, liabilities, and
equity of investment accountholders as the repricing of assets, liabilities and equity of investment accountholders occur at similar
intervals. The profit distribution to equity of investment accountholders is based on profit sharing agreements. Therefore, the
Group is not subject to any significant profit rate risk.

However, the profit sharing agreements will result in displaced commercial risk when the Group's results do not allow the Group to
distribute profits inline with the market rates.

A fundamental review and reform of major profit rate benchmarks is being undertaken globally. There is uncertainty as to the
timing and the methods of transition for replacing existing benchmark InterBank Offered Rates (IBORs) with alternative rates.

As a result of these uncertainties, there could be an impact on the values of financial contracts entered by the Bank. While the
IBOR continues to be used as a reference rate in financial markets and is used in the valuation of instruments with maturities
that exceed the expected end date for IBOR, the Bank will have to assess the impact. As at 31 December 2019, the Bank is in the
process of assessing the impact on its financial instruments which are maturing after the expected end date for IBOR.

ii) Equity price risk

Equity price risk is the sensitivity of financial products to the changes in equity prices. Equity risk arises from holding open
positions in equities or equity based instruments, thereby creating exposure to a change in the market price of the equity. In
addition to Group performance expectations, equity prices are also susceptible to general economic data and sector performance
expectations.

As at the consolidated statement of financial position date, the Group has unquoted (equities and Sukuk) of BD 56 million
(31 December 2018: BD 79 million). The impact of changes in the value of these unquoted equities and Sukuk and the related
impact on equity will only be reflected when the financial instrument is sold or deemed to be impaired.
112 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

27. RISK MANAGEMENT (Continued)

g. Market Risk (Continued)

iii) Foreign exchange risk

Foreign exchange risk is the sensitivity of financial products to changes in spot foreign exchange rates. The value of the Group’s
portfolio which is denominated in a number of currencies may be exposed to these risks when converted back to the Group’s base
currency.

The Group had the following significant net exposures denominated in foreign currencies as of 31 December:

Equivalent Equivalent
long long
(short) (short)
2019 2018
BD '000 BD '000
Currency
Pound Sterling 98 20
Euro 140 89
CAD 5 50
JPY 7 15
Kuwaiti Dinars (1,257) 7,109

As the Bahraini Dinar is pegged to the US Dollar, positions in US Dollars are not considered to represent significant foreign
exchange risk.

Moreover, as the Group does not have significant exposures in other currencies, movement of the currency exchange rates against
the Bahraini Dinar with other variables held constant will have an immaterial impact on the consolidated statement of income and
owners' equity.

iv) Commodity risk

Commodity risk is defined as inherent risk in financial products arising from their sensitivity to changes in commodity prices. Since
prices in commodity markets are determined by fundamental factors (i.e. supply and demand of the underlying commodity) these
markets may be strongly correlated within a particular sector and less correlated across sectors.

h. Operational Risk
Operational risk is the risk of loss arising from system failure, human error, fraud or external events. When controls fail to perform,
operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Group cannot
expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risks,
the Group is able to manage the risks. Controls include effective segregation of duties, access, authorisation and reconciliation
procedures, staff education and assessment processes, including the use of internal audit.

28. SEGMENTAL INFORMATION

For management purposes, the Group is organized into three major business segments;

Corporate Principally handling equity of corporate investment accountholders', corporate current accounts, and providing
Islamic financing facilities to corporate customers.

Retail Principally handling equity of individual retail customers' investment accountholders', retail current accounts, and
providing Islamic financing facilities to individual customers.

Investment Principally handling equity of banks' and financial institutions' investment accountholders, providing money market,
trading and treasury services as well as the management of the Group’s investment activities. Investment activities
involve handling investments in local and international markets and investment in properties.
Bahrain Islamic Bank - Annual Report 2019 113

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

28. SEGMENTAL INFORMATION (Continued)

These segments are the basis on which the Group reports its primary segment information. Transactions between segments are
conducted at estimated market rates on an arm’s length basis. Transfer charges are based on a pool rate which approximates the
cost of funds.

Segment information is disclosed as follows:

31 December 2019
Corporate Retail Investment Total
BD'000 BD'000 BD'000 BD'000
Total income 10,297 21,252 10,745 42,294
Total expenses (5,929) (17,192) (1,961) (25,082)
Provision for impairment (7,356) (1,179) (2,463) (10,998)
Profit/(Loss) for the year (2,988) 2,881 6,321 6,214

Other information
Segment assets 334,932 510,689 377,939 1,223,560
Segment liabilities and equity 417,266 564,368 241,926 1,223,560

31 December 2018
Corporate Retail Investment Total
BD'000 BD'000 BD'000 BD'000
Total income 10,139 21,458 11,781 43,378
Total expenses (5,157) (15,761) (2,184) (23,102)
Provision for impairment (3,808) (740) (4,347) (8,895)
Profit for the year 1,174 4,957 5,250 11,381

Other information
Segment assets 365,325 466,958 448,234 1,280,517
Segment liabilities and equity 410,663 545,823 324,031 1,280,517

The Group operates solely in the Kingdom of Bahrain and, as such, no geographical segment information is presented.

29. FINANCIAL INSTRUMENTS

Fair value hierarchy

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable and willing parties in
an arm’s length transaction.

Fair values of quoted securities / Sukuk are derived from quoted market prices in active markets, if available. In case of financing
assets and Ijarah Muntahia Bittamleek, the average profit rate of the portfolio is in line with current market rates for similar facilities
and hence after consideration of adjustment for prepayment risk and impairment charges, it is expected that the current value
would not be materially different from fair value of these assets. None of the Group's financial instruments are at fair value.

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation
technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either
directly or indirectly; and
Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable
market data.
114 Bahrain Islamic Bank - Annual Report 2019

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2019

30. EARNINGS AND EXPENSES PROHIBITED BY SHARI’A

The Group is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, all non-Islamic income
is credited to a Qard fund account where the Group uses these funds for various charitable purposes. The movements in these
funds is shown in the consolidated statement of sources and uses of good faith Qard fund. The non-Islamic income includes the
penalties charged on late repayments for Islamic facilities.

31. SHARI'A SUPERVISORY BOARD

The Group's Shari'a Supervisory Board consists of five Islamic scholars who review the Group's compliance with general Shari'a
principles and specific Fatwas, rulings and guidelines issued. Their review includes examination of evidence relating to the
documentation and procedures adopted by the Group to ensure that its activities are conducted in accordance with Islamic Shari'a
principles.

32. SOCIAL RESPONSIBILITY

The Group discharges its social responsibilities through Zakah and charity fund's expenditures and donations to good faith Qard
fund for marriage, refurbishment, medical treatments, etc.

33. SUBSEQUENT EVENTS

During the year one of the significant shareholders, National Bank of Bahrain (NBB) made a voluntary offer to acquire additional
issued and paid up ordinary shares of the Bank. NBB is a licensed retail bank regulated by the Central Bank of Bahrain and listed on
the Bahrain Bourse.

The acquisition offer included a cash or share exchange option at the preference of each shareholder of the Bank. On 22 January
2020, this offer was closed and after settlement with the shareholders of the Bank, NBB’s shareholding in the Bank increased from
29.06% as reported at 31 December 2019 to 78.81%.

Following is the updated list of Names and nationalities of the major shareholders and the number of shares in which they have an
interest of 5% or more of outstanding shares as of 22 January 2020:

January 2020
Number of
Names Nationality shares % holding
National Bank of Bahrain Bahraini 838,630,728 78.81%
Social Insurance Organisation Bahraini – 0.00%
Social Insurance Organisation – Military Pension Fund Bahraini – 0.00%
Islamic Development Bank Saudi – 0.00%
General Council of Kuwaiti Awqaf Kuwaiti 76,366,321 7.18%

34. COMPARATIVE FIGURES

Certain prior year's figures have been reclassified to conform to the presentation adopted in the current year. Such reclassification
did not affect previously reported profit for the year or total owners' equity.
Bahrain Islamic Bank - Annual Report 2019 115

Risk and Capital Management Disclosure

Contents

116 Background
116 Statement of Financial Position under the Regulatory Scope of Consolidation
118 Capital Adequacy
122 Risk Management

4.1 Group-wide Risk Management Objectives 122

4.2 Strategies, Processes and Internal Controls 122
4.3 Structure and Organisation of Risk Management Function 123
4.4 Risk Measurement and Reporting Systems 123
4.5 Credit Risk 124
4.6 Market Risk 136
4.7 Operational Risk 138
4.8 Equity Position in the Banking Book 140
4.9 Equity of Investment Accountholders 141
4.10 Liquidity Risk 146
4.11 Profit Rate Risk 147
4.12 CBB Penalties 150

151 Glossary of Terms

116 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

1. Background

The Public Disclosures under this section have been prepared in accordance with the Central Bank of Bahrain (“CBB”)
requirements outlined in its Public Disclosure Module (“PD”), Section PD-1: Annual Disclosure requirements, CBB Rule Book,
Volume 2 for Islamic Banks. Rules concerning the disclosures under this section are applicable to Bahrain Islamic Bank B.S.C.
(the "Bank”) being a locally incorporated Bank with an Islamic retail banking license, and its subsidiaries together known as (the
"Group”).

The Board of Directors seeks to optimise the Group’s performance by enabling the various Group business units to realise the
Group’s business strategy and to meet the agreed business performance targets by operating within the agreed capital and risk
parameters and the Group risk policy framework.

2. Statement of Financial Position Under the Regulatory Scope of Consolidation

The table below shows the reconciliation between the statement of financial position in the published financial statements and the
regulatory statement of financial position.

Table – 1. Statement of Financial Position (PD- 1.3.14)

Statement of Financial
position as per Statement of Financial
published financial position as per
statements Regulatory Reporting
31 December 2019 31 December 2019
BD'000 BD'000 Reference
ASSETS
Cash and balances with banks and Central Bank 61,629 61,629
Gross placements with financial institutions 76,071 76,071
Less: Expected credit loss (stage 3) - -
Less: Expected credit loss (stage 1 and stage 2) (3) -
Net placements with financial institutions 76,068 76,071
Gross financing assets 604,321 604,321
Less: Expected credit loss (stage 3) (26,298) (26,298)
Less: Expected credit loss (stage 1 and stage 2) (3,172) -
Net financing assets 574,851 578,023
Gross investment securities 268,610 268,610
Less: Expected credit loss (stage 3) (22,377) (22,377)
Less: Expected credit loss (stage 1 and stage 2) (20) -
Net investment securities 246,213 246,233
Ijarah Muntahia Bittamleek 179,857 179,857
Gross ijarah rental receivables 39,337 39,337
Less: Expected credit loss (stage 3) (11,797) (11,797)
Less: Expected credit loss (stage 1 and stage 2) (2,994) -
Net ijarah rental receivables 24,546 27,540
Investment in associates 18,750 18,750
Investment in real estate 18,756 18,756
Property and equipment 13,591 13,591
Gross other assets 9,632 9,632
Less: Expected credit loss (stage 3) (333) (333)
Less: Expected credit loss (stage 1 and stage 2) - -
Net other assets 9,299 9,299
TOTAL ASSETS 1,223,560 1,229,749
Bahrain Islamic Bank - Annual Report 2019 117

Risk and Capital Management Disclosure

For the year ended 31 December 2019

2. Statement of Financial Position Under the Regulatory Scope of Consolidation (Continued)

Table – 1. Statement of Financial Position (PD- 1.3.14) (Continued)

Statement of Financial
position as per Statement of Financial
published financial position as per
statements Regulatory Reporting
31 December 2019 31 December 2019
BD'000 BD'000 Reference
LIABILITIES, EQUITY OF INVESTMENT
ACCOUNTHOLDERS AND OWNERS' EQUITY
Liabilities
Placements from financial institutions 188,551 188,551
Placements from non-financial institutions and individuals 253,610 253,610
Borrowings from financial institutions 29,566 29,566
Customers’ current accounts 181,692 181,692
Other liabilities 21,516 21,459
of which: Expected credit loss - Off balance sheet
exposures (stage 3) - -
of which: Expected credit loss - Off balance sheet
exposures (stage 1 and stage 2) 57 -
of which: Other liabilities 21,459 21,459
Total Liabilities 674,935 674,878
Equity of Investment Accountholders 427,702 427,702

Owners' Equity
Share capital 106,406 106,406 a
Treasury shares (892) (892) b
Shares under employee share incentive scheme (281) (281) c
Share premium 180 180 d
Statutory reserve 4,736 4,736 e
Real estate fair value reserve 2,049 2,049 f
Investment securities fair value reserve 718 718 g
Expected credit loss - 6,246 h
of which: amount eligible for Tier 2 capital subject to a
maximum of 1.25% of credit risk weighted assets - 6,246 i
of which: amount ineligible for Tier 2 capital - - j
Profit for the year 6,214 6,214 k
Retained earnings brought forward 1,793 1,793 l
Total Owners' Equity 120,923 127,169
TOTAL LIABILITIES, EQUITY OF INVESTMENT
ACCOUNTHOLDERS AND OWNERS' EQUITY 1,223,560 1,229,749
118 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

3. Capital Adequacy

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

The Group 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 Group may adjust the amount of dividend
payment to shareholders, return capital to shareholders, issue Sukuk etc.

The Group's capital structure is primarily made up of its paid-up capital, and including reserves. From a regulatory perspective, the
significant amount of the Group's capital is in Tier 1 form as defined by the CBB, i.e., most of the capital is of a permanent nature.

The Group's capital adequacy policy is to maintain a strong capital base to support the development and growth of the business.
Current and future capital requirements are determined on the basis of financing facilities growth expectations for each business
group, expected growth in off-balance sheet facilities, and future sources and uses of funds. To assess its capital adequacy
requirements in accordance with CBB requirements, the Group adopts the Standardised Approach for its Credit Risk, Basic
Indicator Approach for its Operational Risk, and Standardised Approach for its Market Risk. Allocation of assets between equity
shareholders and profit sharing investment accounts are based on the profit distribution on equity investment accountholders
policy approved by the Board.

All transfer of funds or regulatory capital within the Group is carried out after proper approval process.

For the purposes of guidance, every table was cross referenced with the relevant paragraph number of the Central Bank of
Bahrain’s Public Disclosures Module.
Bahrain Islamic Bank - Annual Report 2019 119

Risk and Capital Management Disclosure

For the year ended 31 December 2019

3. Capital Adequacy (Continued)

Table – 2. Capital Structure (PD-1.3.13, and 1.3.14)

The following table summarises the eligible capital as of 31 December 2019 after deductions for Capital Adequacy Ratio (CAR)
calculation:

Source based on reference

letters of the statement of
financial position under
CET 1 T2 the regulatory scope of
BD’000 BD’000 consolidation
Components of capital
Issued and fully paid ordinary shares 106,406 - a
General reserves - -
Legal / statutory reserves 4,736 - e
Share premium 180 - d
Retained earnings brought forward 1,793 - l
Current year profits 6,214 k
Unrealized gains and losses on available for sale financial instruments 718 - g
Less:
Employee stock incentive program funded by the bank (outstanding) 281 - c
Treasury shares 892 - b
Total Common Equity Tier 1 capital after the regulatory
adjustments above (CET1 d) 118,874 -
Assets revaluation reserve - property, plant, and equipment 2,049 f
Expected credit loss (ECL) - stages 1 & 2 6,246 i
Total Available AT1 & T2 Capital 8,295
Total Capital 127,169

Amount of exposures
BD’000
Total Credit Risk Weighted Assets 741,068
Total Market Risk Weighted Assets 1,263
Total Operational Risk Weighted Assets 114,095
Total Regulatory Risk Weighted Assets 856,426
Investment risk reserve (30% only) -
Profit equalization reserve (30% only) 374
Total Adjusted Risk Weighted Exposures 856,052
TOTAL CAPITAL ADEQUACY RATIO 14.86%
Minimum requirements:
CET 1 ratio 9.0%
Tier 1 ratio 10.5%
Total Capital ratio 12.5%

Amounts below the thresholds for dededuction

i) Non-significant investment in capital of financial entities 5,650
ii) Significant investment in capital of financial entities 4,906
10,556
120 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

3. Capital Adequacy (Continued)

Table – 3. Capital requirements by type of Islamic financing contracts (PD-1.3.17)

The following table summarises the amount of exposures as of 31 December 2019 subject to standardised approach of credit risk
and related capital requirements by type of Islamic financing contracts:

Exposure Risk Weighted Assets* Capital Requirements

Self- Self- Self-
Financed IAH Total Financed IAH(3) Total Financed IAH Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Credit Risk Weighted Assets
Funded
Cash and balances with
banks and Central Bank 40,065 21,564 61,629 4,793 - 4,793 599 - 599
Murabaha and Wakala
receivables - interbank 76,071 - 76,071 25,679 - 25,679 3,210 - 3,210
Murabaha receivables* 286,145 198,005 484,150 249,122 51,716 300,838 31,140 6,465 37,605
Musharaka receivables* 55,481 38,392 93,873 46,975 9,752 56,727 5,872 1,219 7,091
Investment in Sukuk 126,381 87,452 213,833 8,628 1,791 10,419 1,079 224 1,303
Investment in equity and
funds 32,400 - 32,400 114,040 - 114,040 14,255 - 14,255
Ijarah Muntahia Bittamleek
and ijarah rental
receivables* 122,577 84,820 207,397 79,047 16,409 95,456 9,881 2,051 11,932
Investment in associates 18,750 - 18,750 38,948 - 38,948 4,869 - 4,869
Investment in real estate 18,756 - 18,756 37,512 - 37,512 4,689 - 4,689
Property and equipment 13,591 - 13,591 13,591 - 13,591 1,699 - 1,699
Other assets 9,299 - 9,299 14,402 - 14,402 1,800 - 1,800
799,516 430,233 1,229,749 632,737 79,668 712,405 79,093 9,959 89,052
Unfunded
Commitments and
contingent liabilities 167,993 - 167,993 28,663 - 28,663 3,583 - 3,583
Total Credit Risk Weighted
Assets 967,509 430,233 1,397,742 661,400 79,668 741,068 82,676 9,959 92,635
Total Market Risk Weighted
Assets 1,263 - 1,263 1,263 - 1,263 158 - 158
Total Operational Risk
Weighted Assets 114,095 - 114,095 114,095 - 114,095 14,262 - 14,262
Total Risk Weighted Assets 1,082,867 (1)
430,233 (2)
1,513,100 776,758 79,668 856,426 97,096 9,959 107,055
* The risk weighted assets are net of credit risk mitigant.
(1)
The exposure is gross of expected credit loss Stages 1 & 2 of BD 3,658 thousand.
(2)
The exposure is gross of expected credit loss Stages 1 & 2 of BD 2,531 thousand.
(3)
For assets funded through IAH only 30% of exposure is considered.
Bahrain Islamic Bank - Annual Report 2019 121

Risk and Capital Management Disclosure

For the year ended 31 December 2019

3. Capital Adequacy (Continued)

Table – 4. Capital requirements for market risk (PD-1.3.18)

The following table summarises the amount of exposures as of 31 December 2019 subject to standardised approach of market risk
and related capital requirements:

Market Risk - Standardised Approach

Foreign exchange risk (BD'000) 101
Total of Market Risk - Standardised Approach 101
Multiplier 12.5
Risk Weighted Exposures for CAR Calculation (BD'000) 1,263
Total Market Risk Exposures (BD'000) 1,263
Total Market Risk Exposures - Capital Requirement (BD'000) 158

Table – 5. Capital requirements for operational risk (PD-1.3.30 (a & b) and PD-1.3.19)
The following table summarises the amount of exposures as of 31 December 2019 subject to basic indicator approach of
operational risk and related capital requirements:

Indicators of operational risk

Average Gross income (BD'000) 60,851
Multiplier 12.5
760,632
Eligible Portion for the purpose of the calculation 15%
Total Operational Risk Exposure (BD'000) 114,095
Total Operational Risk Exposures - Capital Requirement (BD'000) 14,262

Table – 6. Capital Adequacy Ratios (PD-1.3.20)

The following are Capital Adequacy Ratios as of 31 December 2019 for total capital and CET 1 capital:

Total capital CET 1 capital

ratio ratio
Top consolidated level 14.86% 13.89%
122 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management

4.1 Group-wide Risk Management Objectives

The risk management philosophy of the Group is to identify, capture, monitor and manage the various dimensions of risk with the
objective of protecting asset values and income streams such that the interest of the Group's shareholders (and others to whom
the Group owes a liability) are safeguarded, while maximising the returns intended to optimise the Group's shareholder return and
maintaining it’s risk exposure within self-imposed parameters.

In addition to satisfying the minimum regulatory capital requirements of CBB, the Group seeks to constantly identify and quantify,
to the extent possible, the various risks that are inherent in the normal course of its business.

The Group’s risk appetite is embodied through its risk strategy; BisB reviews and aligns its risk appetite in line with its evolving
business plan, and changing economic and market scenarios, in addition to evolving regulatory requirements. The Group also
assesses its tolerance for specific risk categories and its strategy to manage these risks. To monitor and report exposures to these
identified risks, the Group adopted a comprehensive enterprise-wide Risk Management Framework that encompasses the risk limit,
monitoring, and reporting structures.

4.2 Strategies, Processes and Internal Controls

4.2.1 Group’s risk strategy

The Group maintains a risk strategy document that is reviewed on an annual basis. It also maintains a comprehensive Risk
Management Framework that is approved by the Board. These are also supported by appropriate limit structures. These policies
provide an enterprise-wide integrated risk management framework for the Group.

The Risk Management Framework identifies risk objectives, policies, strategies, and risk governance both at the Board and
management level. With regards to capital management, the Group aims to ensure financial stability by allocating enough capital
to cover unexpected losses.

Limit structures serve as key components in articulating risk strategy in quantifiable risk appetite. They are further supported by a
comprehensive framework for various risk silos with its own policies and methodology documents.

There are appropriate internal controls in place to ensure that integrity of the risk management identification, monitoring and
reporting systems. This is conducted through periodic internal audit, in addition to external validation, when required.

4.2.2 Credit risk

The Group manages its credit risk exposure by evaluating each new product/activity with respect to the credit risk introduced by
it, in addition to ongoing review of existing credit risk exposures. The Group has established a limit structure to avoid concentration
of risks for counterparty, sector, and geography.

4.2.3 Market risk

The Group proactively measures and monitors the market risk in its portfolio using appropriate measurement techniques such
as limits on its foreign exchange open positions. The Group periodically carries out stress testing to assess the impact of adverse
market conditions on its market risk sensitive portfolio.

The Group has established a limit structure to monitor and control the market risk in its trading portfolio. These limits include
maximum Stop-loss limits and position limits. As at 31 December 2019, the group did not have any trading portfolio.

4.2.4 Operational risk

The Group has carried out Risk Control Self-Assessment (“RCSA”) exercises on a regular basis to record potential risks, controls
and events on a continuous basis across different business and support functions. Operational risk key risk indicators are
monitored and reported on a periodic basis to all relevant stakeholders in the Group.

The Group has established clear segregation of duties, through documentation and implementation of policies and procedures.
This ensures objectivity, security, and avoids conflicts of interest. Maker checker concept and dual eye principles are applied across
the Group, where possible.

4.2.5 Equity price risk

Equity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of equity indices and the
value of individual stocks. The equity price risk exposure arises from the investment portfolio. Currently, acquiring additional equity
investments are off-strategy.
Bahrain Islamic Bank - Annual Report 2019 123

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.2 Strategies, Processes and Internal Controls (Continued)

4.2.6 Profit rate risk

Profit rate risk arises from the possibility that changes in profit rates will affect future profitability or the fair values of financial
instruments. The profit distribution to investment accountholders is based on profit sharing agreements.

However, the profit sharing agreements will result in displaced commercial risk when the Group's results do not allow the Group to
distribute profits in line with market rates.

4.2.7 Displaced Commercial Risk

Displaced commercial risk (“DCR”) refers to the market pressure to pay returns that exceed the rate that has been earned on the
assets financed by the liabilities, when the return on assets is underperforming as compared with rates affected by its competitors.

The Group manages its Displaced Commercial Risk by placing gap limits between the returns paid to investors and market
expected returns.

The Group manages its Displaced Commercial Risk as outlined in the Group's Profit Distribution On Equity of Investment
Accountholders Policy. The Group may forego its mudarib fee in case displaced commercial risk arises. The Group benchmarks its
rates with other leading banks in the market.

All the above strategies used have been effective throughout the reporting year.

4.3 Structure and Organisation of Risk Management Function

Risk Management Structure includes all levels of authorities (including Board level Risk committee), organisational structure,
people, and systems required for the smooth functioning of risk management processes in the Group. The responsibilities
associated with each level of risk management structure and authorities include the following:

CEO Board Risk Committee

CRO

Corporate
Retail
Operational Risk Market & Credit Retail
Credit Legal
Risk Analytics Liquidity Administration Collections
Unit
Risk

The board retains ultimate responsibility and authority for all risk matters, including:

a. Establishing overall policies and procedures; and

b. Delegating authority to Board Risk Committee, Board Credit Committee, Credit and Investment Management Committee, the
Chief Executive Officer and further delegation to management to approve and review.

4.4 Risk Measurement and Reporting Systems

Based on risk appetite of the Group, the Group has put in place various limits. These limits have been approved by the Board of
Directors. Any limit breaches are reported to the respective senior management committees and the Board by the Credit and Risk
Management Department (“CRMD”). The limits are reviewed and revised at least on an annual basis or when is deemed required.

The Group has developed a risk measurement and reporting system that generates various types of reports which has enhanced
the monitoring process of the Group.
124 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk

4.5.1 Introduction
Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally
from financing (credit facilities provided to customers), investment in Sukuk and from cash and deposits held with other banks.
Further, there is credit risk in certain off-balance sheet financial instruments, including guarantees relating to purchase and sale of
foreign currencies, letters of credit, acceptances and commitments to extend credit. The Group controls credit risk by monitoring
credit exposures, and continually assessing the creditworthiness of counterparties. Financing contracts are secured by suitable
tangible collateral whereever deemed necessary.

The Group manages and controls credit risk by setting limits on the amount of risk it is willing to accept in terms of counterparties,
product types, geographical area, and industry sector. The Group has established a credit quality review process to provide
early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Corporate
counterparties are regularly assessed by the use of a credit risk classification system. Counterparty limits are established by the
use of a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision
by the Credit Review Unit (“CRU”). Any changes to the Credit Risk Policy will be approved by the Board.

All credit proposals undergo a comprehensive risk assessment examining the customer’s financial condition, trading performance,
nature of the business, quality of management, and market position, etc. In addition, the Group has been using Moody's Risk
Analyst system since 2016 which has multiple rating models and generates ratings at obligor level after taking into consideration
quantitative and qualitative factors. This has further strengthened the approval process. The credit approval decision is made
based on such ratings and terms and conditions are decided.

Exposure limits are based on the aggregate exposure to counterparty and any connected entities across the Group. Corporate
contracts/facilities are reviewed on an annual basis by CRU, or more frequently based on the client's credit condition.

Retail credit is assessed by the Retail Credit Unit prior to booking against the Bank's approved retail financing credit criteria.

4.5.2 Types of credit risk

Exposures subject to credit risk comprise of due from banks and financial institutions, murabaha financing, musharaka financing,
Ijarah Muntahia Bittamleek, investment in Sukuk, commitments to finance and financial instruments resulting in contingencies
(guarantees relating to purchase and sale of foreign currencies, letters of credit, acceptances and commitments to extend credit)
and other assets.

Due from banks and financial institutions

Due from banks and financial institutions comprise commodity murabaha receivables and wakala receivables.

Murabaha financing
The Group finances these transactions through buying the commodity which represents the object of the Murabaha contract
and then reselling this commodity to the Murabeh (beneficiary) at a profit. The sale price (cost plus profit margin) is repaid in
installments by the Murabeh over the agreed period. The transactions are secured either by the object of the Murabaha contract (in
case of real estate finance) or by a total collateral package securing the facilities given to the Murabeh.

Musharaka financing
Musharaka is a form of partnership between the Group and its clients whereby each party contributes to the capital of partnership
in equal or varying degrees to establish a new project or share in an existing one, whereby each of the parties becomes an owner
of the capital on a permanent or declining basis. Profits are shared in an agreed ratio, but losses are shared in proportion to the
amount of capital contributed.

Ijarah Muntahia Bittamleek

The legal title of the assets under Ijarah Muntahia Bittamleek only passes to the lessee at the end of the Ijarah term, through gift,
consideration, or gradual sale, provided that all Ijarah installments are settled.

4.5.3 Credit impaired exposures

The Group defines facilities as credit impaired facilities which are overdue for a period of 90 days or more, any exposure against
which specific impairment provision is held irrespective of whether the customer is currently in arrears or not, and customers
which are classified in stage 3 and are in cooling off period in line with CBB guidelines. It is a Group policy to classify all facilities of
a counterparty as credit impaired if one or more facilities meets the conditions for credit impaired facilities.

As a policy, the Group places any facility where there is reasonable doubt about the collectability of the receivable on a non-
accrual basis, irrespective of whether the customer concerned is currently in arrears or not. In such cases, income is recognised to
the extent that it is actually received.
Bahrain Islamic Bank - Annual Report 2019 125

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)
4.5.3 Credit impaired exposures (Continued)

For general and specific impairment assessments, The Group classifies its credit exposures into Stage 1, Stage 2 and Stage 3, based
on impairment methodology followed, as described below:-

Stage 1 (12 months ECL): for exposures subject to credit risk where there has not been a significant increase in credit risk since
initial recognition and that are not credit-impaired on origination, the Group recognises an allowance based on the 12-month ECL.
All accounts at origination would be classified as Stage 1 with the exception of Purchased or Originated Credit Impaired (POCI)
assets.

Stage 2 (lifetime ECL not credit impaired): for exposures subject to credit risk where there has been a significant increase in
credit risk since initial recognition but they are not credit-impaired, the Group recognises an allowance for the lifetime ECL for all
exposures classified in this stage based on the actual / expected maturity profile including restructured or rescheduled exposures.

Stage 3 (lifetime ECL credit impaired): for credit-impaired exposures, the Group recognises the lifetime ECL. Default identification
process such as DPD of 90 more is used as Stage 3.

Measurement of ECL
The key inputs into the measurement of ECL are the term structure of the following variables:
(i) probability of default (PD);
(ii) loss given default (LGD); and
(iii) exposure at default (EAD).
These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to
reflect forward-looking information.

Corporate PD estimates are calculated based on statistical rating models, and assessed using rating tools tailored to various
categories of counterparties and exposures. These statistical models are based on internally compiled data comprising both
quantitative and qualitative factors. If a counterparty or exposure migrates between rating classes, then this will lead to a change
in the estimate of the associated PD.

Retail PD estimates are measured using Observed Default Estimation at the segment level and thus PD is calculated based at DPD
bucket level for each segment separately. Under this analysis, the delinquency status of accounts will be tracked at an interval of
one year with a moving month cycle.

Debt type instruments portfolio, nostro and interbank placements portfolio is assessed for SICR using external ratings. The Group
obtains PD estimates from Moody’s / Standard & Poor’s (S&P) / Fitch or any other external ratings.

LGD is the magnitude of the likely loss if there is a default. The Group estimates LGD parameters based on the history of recovery
rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, relevant
industry and recovery costs of any collateral that is integral to the exposures.

EAD represents the expected exposure in the event of a default. The Group derives the EAD from the current exposure to the
counterparty and potential changes to the current amount allowed under the contract including amortization. The EAD of funded
exposures is the gross carrying amount. For financing commitments and financial guarantees, the EAD includes the amount drawn,
as well as potential future amounts that may be drawn under the contract, which are estimated based on historical observations
and forward-looking forecasts.

4.5.4 External credit assessment institutions

The Group relies on external ratings for rated corporate customers and counterparties. The Group uses Standard & Poor’s, Fitch,
Moody’s and Capital Intelligence to provide ratings for such counterparties. In case of unrated counterparties, the Group will assess
the credit risk on the basis of defined parameters. These ratings are used for risk assessment and calculation of risk weighted
equivalents. The Group's policy has the mapping of the external ratings with the internal ratings used by the Group and the
corresponding internal rating is allocated to the exposure accordingly to transfer it in the Group's banking book.

4.5.5 Definition of Geographical distribution

The geographic distribution of the credit exposures is monitored on an ongoing basis by the Group’s Risk Management
Department and reported to the Board on a quarterly basis. The Group’s classification of geographical area is according to its
business needs and the distribution of its portfolios.
126 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)

4.5.6 Concentration risk

Concentration risk is the credit risk stemming from not having a well diversified credit portfolio, i.e. being overexposed to a single
customer, industry sector, or geographic region. As per CBB’s single obligor regulations, banks incorporated in Bahrain are required
to obtain the CBB’s prior approval for any planned exposure to a single unconnected counterparty, or group of closely related
counterparties, exceeding 15% of the bank's consolidated total capital. Also, banks are required to obtain the CBB’s prior approval
for any planned exposure to connected counterparties exceeding 25% of their consolidated total capital at an aggregate level.

In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specific guidelines to focus on
maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.

4.5.7 Credit risk mitigation

Credit risk mitigation refers to the use of a number of techniques, like collaterals and guarantees to mitigate the credit risks that
the Group is exposed to. Credit risk mitigants reduce the credit risk by allowing the Group to protect against counterparty non-
compliance with credit contracts, through sale of collaterals, netting agreements, and guarantees. The Group uses on-balance
sheet netting as a credit risk mitigation technique only if there is a well-founded legal basis for concluding that the netting or
offsetting agreement is enforceable, and is able to determine at any time those assets and liabilities with the same counterparty
that are subject to the netting agreement.

Generally, the Group extends credit facilities only where supported by adequate tangible collateral security and/or audited
financial statements. Facilities may be considered without adequate tangible collateral security, when audited financial statements
reveal satisfactory financial position/repayment ability and the facilities are properly structured and supported by assignments,
guarantees, etc. as appropriate.

In general, personal guarantees of the partners/promoters/directors of the borrowing entity may be obtained in support of
credit facilities. In all cases, a statement of net worth of the guarantor is to be compiled by the Account Officer, so that adequate
information is available at a future date in case the guarantees need to be enforced.

The market value of tangible collateral security is properly evaluated by the Group's approved valuers (for properties) or as per the
suitable valuation methodology as outlined in the Bank's Credit Risk Mitigation Policy. The value of such security is considered only
to the extent of the outstanding exposure of relevant credit facilities.

Financing to value percentage of securities and list of acceptable securities to the bank are governed through Board approved
policies.

From time to time, the Credit and Investment Committee reviews and approves the financing to value percentage of securities. It
has also approved a list of acceptable securities.

The majority of the Group’s current credit portfolio is secured through mortgage of real estate properties. The Group may dispose
off the assets as a last resort after carrying out due legal process.

4.5.7.1 General policy guidelines of collateral management

Acceptable Collateral: The Group has developed guidelines for acceptable collateral. Assets offered by customers must meet the
following criteria to qualify as acceptable collateral:

a. Assets must be maintaining their value, at the level prevalent at inception, until maturity date of the facility granted;

b. Such assets should be easily convertible into cash, if required (liquidity);

c. There should be a reasonable market for the assets (marketability); and

d. The Group should be able to enforce its rights over the asset if necessary (enforceability).

Ownership: Prior to valuation or further follow up on the offered collateral, Credit Administration ensures satisfactory evidence of
the borrower’s ownership of the assets.
Bahrain Islamic Bank - Annual Report 2019 127

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)
4.5.7 Credit risk mitigation (Continued)
4.5.7.1 General policy guidelines of collateral management (Continued)

Valuation: All assets offered as collateral are valued by an appropriate source either in-house (through another department in the
Group) or by an external appraiser (real estate related collateral). The Group maintains a list of independent appraisers, approved
by management.

a. Valuation of shares and financial securities: The Group performs in-house valuation on the following types of securities:

• For shares listed in active markets, quoted bid prices are utilized;

• For unquoted shares and stakes in collective investment undertakings (CIUs), valuation is determined based on (i) present
value of future cashflows and/or (ii) net asset value as and when financials are available; and

• For sukuk, collateral is valued based on net realizable value.

b. Valuation of real estate: Besides assets mentioned above, the valuation of following securities are also conducted with the help
of external valuers:

• Real Estate; and

• Equipment and machinery.

The Credit Administration requests the concerned department to arrange for the valuation from approved valuators. In the case of
real estate, re-evaluations are conducted at least annually.

The following additional guidelines are also followed by the Group:

a. No facility should be disbursed until credit documentation is properly signed and security/guarantees required have been
signed and registered, where required. Exceptional cases can be considered by sanctioning authorities; and

b. All documents received as security or support for credit facilities should be lodged in the safe custody through the Credit
Administration and should be kept under dual control. The Group must ascertain that collateral providers are authorised and
acting within their capacity.

4.5.7.2 Guarantees
In cases where a letter of guarantee from a parent company or a third party is accepted as a credit risk mitigant, the Group ensures
that all guarantees are irrevocable, legal opinion has been obtained from a legal counsellor domiciled in the country of guarantor
(overseas) regarding the enforceability of the guarantee, if the guarantor / prime obligor is domiciled outside Bahrain and all
guarantees should be valid until full settlement of the facilities. Also no maturity (negative) mismatch is permissible between the
guarantee and exposure.

4.5.7.3 Custody / collateral management

The assets, or title to the asset, will be maintained in the Group’s custody or with custodians approved by the Group. Adequate
systems and controls exist to confirm the assets held with each custodian.

The release of collateral without full repayment of all related financial obligations can be done only if the approved level of
security coverage is maintained post the release otherwise it requires authorisation of the same level that originally approved and
sanctioned the facility. Substitution of collateral is permitted if the new collateral would further minimise the Group’s risk exposure.

When collateral is released to the customer, the Head of Credit Administration obtains and maintains in his records
acknowledgement of receipt from the customer or his/her authorised representative.
128 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)

4.5.8 Counterparty credit risk

The Group has adopted the Standardised Approach to allocate capital for counterparty credit risk. The Group has put in place an
internal counterparty limit structure which is based on internal / external ratings for different types of counterparties. The Group
has also set concentration limits as a percentage of its capital based on internal and external grades. In case of a counterparty
rating downgrade / deterioration, the Group may require further collateral or advise the counterparty to reduce its exposure on a
case by case basis.

4.5.8.1 Exposure
The measure of exposure reflects the maximum loss that the Group may suffer in case a counterparty fails to fulfill its
commitments. Exposure shall always be calculated on the basis of approved limits or actual outstanding exposure (Financing
facilities, Investments or others), whichever is higher.

4.5.8.2 Counterparty
A counterparty is defined as an obligor (individual/company/other legal entity), a guarantor of an obligor, or a person receiving
funds from the Group, the issuer of a security in case of a security held by the Group, or a party with whom a contract is made by
the Group for financial transactions.

4.5.8.3 Group exposure

Group exposure is defined as the total exposure to all counterparties closely related or connected to each other. For this purpose,
a Group is two or more counterparties related in such a way that financial soundness of one may affect the financial soundness of
the other(s) and one of them has a direct or indirect control over the other(s).

4.5.8.4 Connected counterparties

Connected counterparties’ includes companies or persons connected with the Group, including, in particular; controllers of the
Group (and their appointed board representatives); subsidiaries, associates and related parties of the Group; holders of controlled
functions in the Group and their close family members; and members of the Shari’a Supervisory Board.

4.5.8.5 Large exposure

Large exposure is any exposure whether direct, indirect, or funded by equity of investment accountholders to a counterparty or a
group of closely related counterparties which is greater than or equal to 10% of the Group’s capital base.

Prior written approval from the CBB is required in the following cases:

a. If any unconnected counterparty (single/group) exposure exceeds 15% of Group’s Capital Base;

b. If any facility (new/extended) to any connected counterparty exceeds 25% of the consolidated total capital at an aggregate level

4.5.8.6 Maximum exposure

The Group has set an internal maximum exposure limit in the light of CBB guidelines.

4.5.8.7 Reporting
The Group reports large counterparty exposures (as defined above) to CBB on a periodic basis. The Group reports the exposures
on a gross basis without any set-off. However, debit balances on accounts may be offset against credit balances where both are
related to the same counterparty, provided the Group has a legally enforceable right to do so.

4.5.8.8 Other matters

As a Group's strategy, exposure to connected counterparties may be undertaken only when negotiated and agreed based on
commercial terms.

4.5.9 Related party transactions

The disclosure relating to related party transactions has been made in the consolidated financial statements as of 31 December
2019. All related party transactions have been made on commercial terms.
Bahrain Islamic Bank - Annual Report 2019 129

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)

Table – 7. Credit Risk Exposure (PD-1.3.23(a))

The following table summarises the amount of gross funded and unfunded credit exposure (before deducting credit risk mitigant)
as of 31 December 2019 and average gross funded and unfunded exposures over the year ended 31 December 2019:

*Average
gross credit
Total gross exposure
credit over the
exposure year
BD’000 BD’000
Funded
Cash and balances with banks and Central Bank 61,629 65,398
Placements with financial institutions 76,068 95,991
Financing assets 574,851 575,165
Investment in Sukuk 213,813 232,748
Investment in equity and funds 32,400 32,399
Ijarah Muntahia Bittamleek and ijarah rental receivables 204,403 199,096
Investment in associates 18,750 20,389
Investment in real estate 18,756 21,320
Property and equipment 13,591 13,527
Other assets 9,299 9,941
Total 1,223,560 1,265,974
Unfunded
Commitments and contingent liabilities 167,993 148,455
Total 1,391,553 1,414,429
*Average balances are computed based on quarter end balances.
130 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)

Table – 8. Credit Risk – Geographic Breakdown (PD-1.3.23(b))

The following table summarises the geographic distribution of exposures as of 31 December 2019, broken down into significant
areas by major types of credit exposure:

North Middle
America Europe East Other Total
BD’000 BD’000 BD’000 BD’000 BD’000
Cash and balances with banks and Central Bank 4,579 312 56,716 22 61,629
Placements with financial institutions - - 76,068 - 76,068
Financing assets - 8,613 566,238 - 574,851
Investment in Sukuk - 390 213,423 - 213,813
Investment in equity and funds - - 32,400 - 32,400
Ijarah Muntahia Bittamleek and ijarah rental
receivables - - 204,403 - 204,403
Investment in associates - - 18,750 - 18,750
Investment in real estate - - 18,756 - 18,756
Property and equipment - - 13,591 - 13,591
Other assets 12 - 9,287 - 9,299
Total 4,591 9,315 1,209,632 22 1,223,560
Unfunded
Commitments and contingent liabilities - - 167,993 - 167,993
Total 4,591 9,315 1,377,625 22 1,391,553

*Geographical distribution of exposure into significant areas by major type of credit exposure is based on counterparty's country of incorporation.
Bahrain Islamic Bank - Annual Report 2019 131

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)

Table – 9. Credit Risk – Industry Sector Breakdown (PD-1.3.23(c))

The following table summarises the distribution of funded and unfunded exposures as of 31 December 2019 by industry, broken
down into major types of credit exposure:

Trading Banks and Personal &

and Financial Real Consumer Governmental
Manufacturing Institutions Estate Finance Organisation Others Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Funded
Cash and balances with banks and
Central Bank - 25,649 - - 35,980 - 61,629
Placements with financial institutions - 68,568 - - 7,500 - 76,068
Financing assets 125,966 21,351 64,853 313,537 16,681 32,463 574,851
Investment in Sukuk - 390 5,295 - 208,126 2 213,813
Investment in equity and funds - 6,354 26,046 - - - 32,400
Ijarah Muntahia Bittamleek
and ijarah rental receivables 46 - 31,766 141,628 30,817 146 204,403
Investment in associates - 4,579 2,498 - - 11,673 18,750
Investment in real estate - - 18,756 - - - 18,756
Property and equipment - - - - - 13,591 13,591
Other assets - 1,452 5,103 1,697 282 765 9,299
Total 126,012 128,343 154,317 456,862 299,386 58,640 1,223,560
Unfunded
Commitments and contingent
liabilities 27,364 2,060 37,470 35,004 51,930 14,165 167,993
Total 153,376 130,403 191,787 491,866 351,316 72,805 1,391,553
132 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)

Table – 10. Credit Risk – Financing Facilities to Highly Leveraged or Other High Risk Counterparties (PD-1.3.23(e))
The following balances represent the financing facilities to highly leveraged or other high risk counterparties as of 31 December
2019:

Gross Stage 3 ECL Net*

BD’000 BD’000 BD’000
Counterparties
Counterparty # 1 11,199 941 10,258
Counterparty # 2 10,756 2,143 8,613
Counterparty # 3 7,273 1,455 5,818
Counterparty # 4 6,077 989 5,088
Counterparty # 5 3,724 3,335 389
39,029 8,863 30,166
*Gross of expected credit loss stage 1 and 2 of BD 158 thousand.

Table – 11. Credit Risk – Concentration of Risk (PD-1.3.23(f))

The Bank has the following exposures that are in excess of the individual obligor limit of 15% of the Bank's capital as of
31 December 2019

Gross Stage 3 ECL Net**

BD’000 BD’000 BD’000
Counterparties*
Counterparty # 1 186,004 - 186,004
Counterparty # 2 43,481 - 43,481
Counterparty # 3 33,453 - 33,453
Counterparty # 4 30,209 - 30,209
Counterparty # 5 24,456 - 24,456
Counterparty # 6 19,122 - 19,122
336,725 - 336,725
*Represents exempted large exposures.
**Gross of expected credit loss stage 1 and 2 of BD 58 thousand.
Bahrain Islamic Bank - Annual Report 2019 133

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)

Table – 12. Credit Risk – Residual Contractual Maturity Breakdown (PD-1.3.23(g) PD-1.3.38)
The following table summarises the maturity profile of the total assets based on contractual maturities as at 31 December 2019. All
the assets with no fixed contractual maturities are disclosed under no fixed maturity:

Up to
One 1-3 3-6 6-12 1-3 3-5 5-10 10-20 Over 20 No fixed
month months months months years years years years years maturity Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000

Assets
Cash and balances with
banks and Central Bank 26,114 - - - - - - - - 35,515 61,629
Placements with financial
institutions 76,068 - - - - - - - - - 76,068
Financing assets 32,808 20,362 31,917 42,826 183,732 172,595 62,902 24,518 3,191 - 574,851
Investment in Sukuk - - 11,647 13,377 29,961 57,794 101,034 - - - 213,813
Investment in equity
and funds - - - - - - - - - 32,400 32,400
Ijarah Muntahia Bittamleek
and ijarah rental
receivables 10,102 1,681 2,242 5,219 23,478 45,003 47,259 58,617 10,802 - 204,403
Investment in associates - - - - - - - - - 18,750 18,750
Investment real estate - - - - - - - - - 18,756 18,756
Property and equipment - - - - - - - - - 13,591 13,591
Other assets 102 748 692 173 539 514 - - - 6,531 9,299
Total Assets 145,194 22,791 46,498 61,595 237,710 275,906 211,195 83,135 13,993 125,543 1,223,560
134 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)

Table – 13. Credit Risk – Credit Impaired Exposures, Past Due Exposures, and Impairment Allowances by industry sector
(PD-1.3.23(h) PD-1.3.24(b) PD-1.3.24(d))
The following table summarises the credit impaired facilities, past due facilities, and impairment allowances disclosed by major
industry sector as of 31 December 2019:

Aging of credit impaired or past

due
Credit
Islamic financing contracts Stage 3 ECL * Stage 1 & 2 ECL
impaired
or past Write- Balance
due Less 3 Balance Charge offs Balance at the Charge Balance
Islamic than months at the for the during at the beginning for the at the
financing 3 to 1 to 3 Over 3 beginning year the the end of the year the end
contracts months 1 year years years of the year (net) year* of year year (net) of year
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000 BD’000

Trading and Manufacturing 73,492 62,040 10,982 234 236 9,094 6,680 6,464 9,310 1,532 (780) 752

Real Estate 60,976 33,988 1,942 450 24,596 13,055 285 1,095 12,245 3,132 258 3,390

Banks and Financial Institutions 16,906 9,626 7,273 7 - 43 1,451 - 1,494 561 (511) 50

Personal / Consumer Finance 33,165 22,088 3,813 3,535 3,729 9,045 1,762 113 10,694 2,239 (741) 1,498

Others 11,895 4,702 603 2,137 4,453 4,123 341 112 4,352 558 (82) 476

Total 196,434 132,444 24,613 6,363 33,014 35,360 10,519 7,784 38,095 8,022 (1,856) 6,166

*Net of transfers between stages.

Table – 14. Credit Risk – Credit Impaired Exposures, Past Due Exposures, and Impairment Allowances (by geographic area)
(PD-1.3.23(i) PD-1.3.24(c))
The following table summarises the credit impaired facilities, past due facilities, and impairment allowances by geographical area
as of 31 December 2019:

Credit impaired
or past due
or impaired
Islamic
financing Stage 3 Stage 1 & 2
contracts ECL ECL
BD’000 BD’000 BD’000
Middle East 185,678 35,952 6,166
Europe 10,756 2,143 -
Total 196,434 38,095 6,166
Bahrain Islamic Bank - Annual Report 2019 135

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)

Table – 15. Credit Risk – Restructured Financing Facilities (PD-1.3.23(j))

The following table summarises the aggregate amount of restructured corporate financing facilities during the year as of 31
December 2019:

Gross
Outstanding Stage 3 ECL Net
BD’000 BD’000 BD’000
Total islamic financing (1) 823,515 38,095 785,420
Restructured financing facilities* (2)
19,742 863 18,879
Percentage 2.40% 2.27% 2.40%
*Excludes facilities restructured during the year amounting to BD 25,210 thousand (net of stage 3 ECL of BD 3,002 thousand) which are past due as
of 31 December 2019.
(1)
Gross of expected credit loss Stages 1 and 2 of BD 6,166 thousand.
(2)
Gross of expected credit loss Stages 1 and 2 of BD 154 thousand.

Table – 16. Credit Risk Mitigation (PD-1.3.25 (b) and (c))

The following table summarises the exposure as of 31 December 2019 by type of Islamic financing contract covered by collateral
eligible as per CA module of volume 2 of the CBB Rule Book:

Total exposure
covered by
Tamkeen
Guarantee Others
BD’000 BD’000
Financing assets 8,662 63,993
Ijarah Muntahia Bittamleek and ijarah rental receivables - 24,543
Total 8,662 88,536
136 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.5 Credit Risk (Continued)

Table – 17. Counterparty Credit (PD-1.3.26 (b))

The following table summarises the counterparty credit risk exposure covered by collateral after the application of haircuts as of 31
December 2019:

Ijarah
Muntahia
Bittamleek
Financing and rental
assets receivables Total
BD’000 BD’000 BD’000
Exposures:
Secured* 72,655 24,543 97,198
Unsecured* 502,196 179,860 682,056
Total 574,851 204,403 779,254

Collateral held:
- Cash 12,676 128 12,804
- Guarantees 3,288 - 3,288
- Shares 3,542 - 3,542
- Real Estate 4,058 15,879 19,937
Total 23,564 16,007 39,571
Collateral as a percentage of secured exposure 32.43% 65.22% 40.71%

A haircut of 30% is applied on the Real Estate collateral.

*The financing assets and Ijarah Muntahia Bittamleek exposures are net of ECL.

4.6 Market Risk

4.6.1 Introduction
The Group has accepted the definition of market risk as defined by CBB as the risk of losses in on and off-balance sheet positions
arising from movements in market prices.

4.6.2 Sources of market risk

For the Group, market risk may arise from movements in profit rates, foreign exchange markets, equity markets, or commodity
markets. A single transaction or financial product may be subject to any number of these risks.

Profit rate risk is the sensitivity of financial products to changes in the profit rates. Profit rate risk arises from the possibility that
changes in profit rates will affect future profitability or the fair values of financial instruments. The profit distribution to equity of
investment accountholders is based on profit sharing agreements.

Foreign exchange risk is the sensitivity of financial products to changes in spot foreign exchange rates. The value of the Group’s
portfolio which is denominated in a number of currencies may be exposed to these risks when converted back to the Group’s base
currency.

Equity price risk is the sensitivity of financial products to the changes in equity prices. Equity risk arises from holding open
positions in equities or equity based instruments, thereby creating exposure to a change in the market price of the equity. The
Group has established a limit structure to monitor and control the market risk in its equity type instruments portfolio. These
limits include maximum Stop-loss limits and position limits. As at 31 December 2019, the group did not have any trading portfolio.
Currently, any new equity investments are off-strategy.
Bahrain Islamic Bank - Annual Report 2019 137

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.6 Market Risk (Continued)
4.6.2 Sources of market risk (Continued)

Commodity risk is defined as inherent risk in financial products arising from their sensitivity to changes in commodity prices. Since
prices in commodity markets are determined by fundamental factors (i.e. supply and demand of the underlying commodity) these
markets may be strongly correlated within a particular sector and less correlated across sectors.

4.6.3 Market risk strategy

The Group’s Board is responsible for approving and reviewing (at least annually) the risk strategy and significant amendments to
the risk policies. The Group's senior management is responsible for implementing the risk strategy approved by the Board, and
continually enhancing the policies and procedures for identifying, measuring, monitoring, and controlling risks.

In line with the Group’s risk management objectives and risk tolerance levels, the specific strategies for market risk management
include:

a. The Group will proactively measure and continually monitor the market risk in its portfolio;

b. The Group will at all time hold sufficient capital in line with the CBB Pillar 1 regulatory capital requirements;

c. The Group will establish a limit structure to monitor and control the market risk in its portfolio. These limits will include position
limits, and maximum/stop loss limits;

d. The Group will carry out stress testing periodically using the worst case scenarios to assess the effects of changes in the
market value due to changing market conditions; and

e. The Group will clearly identify the foreign currencies in which it wishes to deal in and actively manage its market risk in all
foreign currencies in which it has significant exposures.

4.6.4 Market risk measurement methodology

Market risk measurement techniques include the use of a number of techniques for market risk measurement. The risk
measurement techniques mentioned in this section are used for measuring market risk in both trading book as well as banking
book.

The various techniques which are used by the Group for the measurement, monitoring and control of market risk are as follows:

a. Overnight open positions;

b. Stop loss limits;

c. Stress testing; and

d. Profit rate risk gap analysis.

4.6.5 Market risk monitoring and limits structure

The Board is responsible for approving the overall tolerance for market risk. Based on these tolerances, Risk Unit and Treasury
Department have established appropriate risk limits that maintain the Group’s exposure within the strategic risk tolerances over a
range of possible changes in market prices and rates.

4.6.6 Limits monitoring

The Treasury Department and Risk Unit monitor the risk limits for each transaction, ensure that the limits are well within set
parameters, and report periodically to top management on the same.

4.6.7 Breach of limits

In case a limit is breached, the escalation and approval process will follow the Board-approved delegated authority limits. The
limits are revised at least annually or when deemed required.
138 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.6 Market Risk (Continued)

4.6.8 Portfolio review process

On a monthly basis, Risk Unit reviews the Group’s assets and liabilities portfolio to evaluate the overall exposure to market risk.
As part of the review, Risk Unit also monitors the Group’s overall market exposure against the risk tolerance limits set by the
Board. Risk Unit also reviews the adherence to approved limits to control the market risk. Changes, if any, in market risk limits are
communicated to business units after review by the CRO/CEO and approval by ALCO or BRC, as per the delegated authorities
approved by the Board.

4.6.9 Reporting
Risk Unit generates market risk management reports at regular periodic intervals. These reports aim to provide the Group’s senior
management with an up-to-date view of its market risk exposure.

4.6.10 Stress testing

Stress tests produce information summarising the Group’s exposure to extreme, but possible, circumstances and offer a way of
measuring and monitoring the portfolio against extreme price movements of this type. The Group's Risk Unit employs different
stress categories: profit rates and foreign exchange rates. For each stress category, the worst possible stress shocks that might
realistically occur in the market are defined.

4.6.11 Foreign subsidiary

The Group does not have any foreign subsidiary.

Table – 18. Market Risk Capital Requirements (PD-1.3.27 (b))

The following table summarises the maximum and minimum capital requirement for foreign exchange risk for the year:

Foreign exchange risk

BD’000
Maximum value capital requirement 158
Minimum value capital requirement 101

4.7 Operational Risk

4.7.1 Introduction
Operational risk is the risk of loss arising from system failure, human error, fraud, or external events. When controls fail to perform,
operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Group cannot
expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risks,
the Group is able to manage the risks. Controls include effective segregation of duties, access, authorisation and reconciliation
procedures, staff education and assessment processes, including the use of internal audit.

4.7.2 Sources of operational risk

The different sources of operational risks faced by the Group can be classified broadly into the following categories:

a. People risk: which arises due to staffing inadequacy, unattractive remuneration structure, lack in staff development policies,
lack in procedures for appointment, unhealthy professional working relationship, and unethical environment;

b. Processes risk: which arises due to inadequate general controls, inadequate application controls, improper business and market
practices and procedures, inappropriate/inadequate monitoring and reporting;

c. Systems (Technology) risk: which arises due to integrity of information - lacking in timeliness of information, omission and
duplication of data, hardware failures due to power surge, obsolescence or low quality;

d. External risk: which arises due to natural or non-natural (man made) disasters; and

e. Legal risk: which arises due to contractual obligations.

Bahrain Islamic Bank - Annual Report 2019 139

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.7 Operational Risk (Continued)

4.7.3 Operational risk management strategy

As a strategy, the Group will identify the sources of operational risks in coordination with each business unit. The Group carries out
Risk Control Self-Assessments (“RCSA”), and plans to do a continuous and on-going exercise to identify the operational risks it is
exposed to.

The Group on a continuous basis will:

a. assess the effectiveness of controls associated with identified risks;

b. regularly monitor operational risk profiles and material exposures to losses / loss events;

c. identify stress events and scenarios to which it is vulnerable and assess their potential impact, and the probability of aggregated
losses from a single event leading to other risks;

d. monitoring and reporting of operational risk is through the Operational Risk Management Forum (ORMF), a management-level
committee responsible for monitoring and discussing the operational risks emanating from the group's activities; and

e. effecting appropriate contingency and business continuity planning that takes into account the operational risks facing the
Group, and providing training on the same to ensure that this is fostered across the organization.

4.7.4 Operational risk monitoring and reporting

The internal monitoring and reporting process ensures a consistent approach for providing pertinent information to senior
management for the quick detection and correction of deficiencies in the policies, processes, and procedures for managing
operational risk through ongoing, periodic reviews.

The objective of the reporting process is to ensure relevant information is provided to senior management and the Board to enable
the proactive management of operational risk. The process ensures a consistent approach for providing information that enables
appropriate decision making and action taking.

The group has a legal department dedicated to monitor any legal risk arising out of contracts / agreements entered into by the
group on a day to day basis. The department also liaises with external lawyers for legal cases filed by the group against delinquent
accounts for recovery or any legal cases filed against the group.

4.7.5 Operational risk mitigation and control

The business units, in consultation with Risk Units will determine all material operational risks and decide the appropriate
procedures to be used to control and/or mitigate the risks.

For those risks that cannot be controlled, the business units in conjunction with Risk Unit will decide whether to accept the
risks, reduce the level of business activity involved, transfer the risk outside the Group, or withdraw from the associated activity
completely. Risk Unit facilitates the business units in co-developing the mitigation plans. The group deals with the pending legal
cases through internal and external lawyers depending upon the severity of the cases.

As of 31 December 2019, the Group did not have any material legal contingency from pending legal actions. Based on management
estimates there is no potential liability arising from these pending legal actions.
140 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.7 Operational Risk (Continued)
4.7.5 Operational risk mitigation and control (Continued)

Table - 19. Operational Risk Exposure (PD-1.3.30 (a) & (b))

The following table summarises the amounts subject to basic indicator approach of operational risk and related capital
requirements:

Gross income
2018 2017 2016
BD'000 BD'000 BD'000
Total Gross Income 67,905 60,654 53,993
Indicators of operational risk
Average Gross income (BD'000) 60,851
Multiplier 12.5
760,632
Eligible Portion for the purpose of the calculation 15%
TOTAL OPERATIONAL RISK WEIGHTED EXPOSURE (BD'000) 114,095

4.8 Equity Position in the Banking Book

Equity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of equity indices and the
value of individual stocks. The equity price risk exposure arises from the Group’s investment portfolio. To date, the Bank does not
carry significant equity position risk in its banking book.

The accounting policies, including valuation methodologies and their related key assumptions, are consistent with those disclosed
in the consolidated financial statements as of 31 December 2019. Equity type instruments carried at fair value through equity and
investment properties are kept for capital gain purposes. All other investments including investments in associates are kept for
strategic long term holdings.

Table – 20. Equity Position Risk in Banking Book (PD-1.3.31 (b), (c) & (g))
The following table summarises the amount of total and average gross exposure of equity investments and funds as of
31 December 2019:

Total Average Risk

gross gross Publicly Privately weighted Capital
exposure (1) exposure (2) traded held assets Requirements
BD'000 BD'000 BD'000 BD'000 BD'000 BD'000
Equity investments 28,436 28,436 - 28,436 58,313 7,289
Funds 14,168 14,168 - 14,168 55,727 6,966
Total 42,604 42,604 - 42,604 114,040 14,255
(1)
Balances are gross of provision of BD 10,204 thousand.
(2)
Average balances are computed based on quarter end balances.
Bahrain Islamic Bank - Annual Report 2019 141

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.8 Equity Position in the Banking Book (Continued)

Table – 21. Equity Gains or Losses in Banking Book (PD-1.3.31 (d), (e) & (f))
The following table summarises the cumulative realised and unrealised gains or (losses) during the year ended 31 December 2019:

BD’000
Cumulative realised gain arising from sales or liquidations in the reporting year -
Total unrealised losses recognised in the consolidated statement of financial position but not through
consolidated statement of income -
Unrealised gains included in CET 1 Capital 718
Unrealised gains included in Tier 2 Capital -

4.9 Equity of Investment Accountholders ("IAH")

The Group may require to decrease or increase losses or profits on certain IAH accounts for the purpose of income smoothing.
Thus the Group is exposed to some of the price risk on assets funded by equity of Investment Accountholders (“IAH”). The CBB
requires the Group to maintain capital to cover the price risk arising from 30% of assets funded by IAH on a pro-rata basis.

The Group is authorised by the IAH to invest the account holder’s funds on the basis of Mudaraba contract in a manner which
the Group deems appropriate without laying down any restrictions as to where, how, and for what purpose the funds should be
invested. Under this arrangement the Group can commingle the equity of investment accountholders investment funds with its
own funds (owner’s equity) or with other funds the Group has the right to use (e.g. current accounts or any other funds which
the Group does not receive on the basis of Mudaraba contract). The IAH and the Group generally participate in the returns on
the invested funds; however, the Group does not share profits with IAH resulting from investing current accounts and other funds
received on the basis other than mudaraba contracts. In such type of contract, the Group is not liable for any losses incurred on the
joint pool other than the loss resulting from gross negligence or wilful misconduct on the part of the Group or due to the Group’s
violation of the terms and conditions as agreed between the Group and the IAH. During the year, the Group waived 25% of profit
from mudarib fees in order to maintain a competitive profit distribution to IAH.

The amount received from the customer on account of equity of investment accountholders is not invested completely in the
portfolio of selected investments as the Group is required to maintain a cash reserve with CBB. In addition, the Group requires
to set aside certain amount to meet operational requirements. The income allocated to the equity of investment accountholders
deposits being received is in accordance with the utilisation of such funds. The utilisation rate is determined by the ALCO with the
approval of Shari’a Supervisory Board.

Proposal for new products is initiated by the business lines within the Group and ALCO review such proposal to ensure that the
new product is in line with the Group’s business and risk strategy. All new products require the approval of the Shari’a Supervisory
Board of the Bank. The business lines of the Group have expertise in creating high end value added products offering a wide range
of products, expected return, tenors, and risk profile. Information on new products or any change in the existing products will be
placed on the Group’s website or published in the media.

These accounts are made available to customers through Retail Banking (including Thuraya Banking segment), in addition to the
Group's Corporate and Institutional Banking division. The Group has designed the Customer Experience and Process Governance
Unit which reports to Chief Retail Banking. The complaints are investigated by personnel not directly related to the subject matter
of the complaints.

The Group offers equity of investment accountholders in different currencies for maturity periods ranging from 1 month, 3 months,
6 months, 9 months, 12 months, and 36 months. The customer signs a written contract covering all terms and conditions of the
investment, including tenor, basis of profit allocation, and early withdrawal. This is made available to both retail and corporate
customers.

Because equity of investment accountholders is a significant funding source for the Group, the Group regularly monitors rate of
return offered by competitors to evaluate the expectation of its IAH. The Group’s policy provide whole or partial waiver of the
mudarib share of income from investment in order to provide a reasonable return to its investors.

The Group has written policies and procedures applicable to its portfolio of Equity of investment accountholders. Equity of
investment accountholders funds are invested and managed in accordance with Shari’a requirements.
142 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.9 Equity of Investment Accountholders ("IAH") (Continued)

Profits of an investment jointly financed by the Group and the equity of investment accountholders shall be allocated between
them according to the contribution of each of the Group and the IAH in the jointly financed investment. Operating expenses
incurred by the Group are not charged to investment account. In case of the loss resulting from the transactions in a jointly
financed investment, such loss shall first be deducted from undistributed profits, if any. Any excess of such loss shall be deducted
from Investment Risk Reserve (IRR). Any remaining of such loss shall be deducted from the total balance of fund available in the
Joint pool, as at that date, in the respective ratio of the Group’s and IAH’s respective contribution to the comingled pool. The
Group proportionately allocates non-performing assets (past due greater than 90 days) to the IAH pool of assets. The ECL charge
is also allocated to the IAH pool, in proportion of the non-performing assets financed by IAH to the total non-performing assets.
Amounts recovered from these non-performing assets shall be subject to allocation between IAH and owners’ equity.

In case of early withdrawal of IAH fund before completion of the term, the effective utilisation method will be applied.

In case of term deposits, the IAH can withdraw funds on a premature basis by paying a nominal amount of fees / penalty.

Additional disclosures such as the below are disclosed in the Bank's website:

a. Characteristics of investors for whom investment account may be appropriate;

b. Purchase redemption and distribution procedures; and

c. Product information and the manner in which the products are made available to investors.

Governance of IAH
a. Shariah review of allocation of assets and resultant income;

b. Disclosure of profit rates on deposit products and mudaraba fees either in the branch or website; and

c. ALCO discusses the profit rate to be offered to URIA accounts. Any exceptional profit rates offered to customers are subject to
approval by the relevant authority.

Table – 22. Equity of Investment Accountholders by Type (PD-1.3.33 (a))

The following table summarises the breakdown of equity of investment accountholders accounts as of 31 December 2019:

BD’000
Banks and financial institutions 24,091
Individuals and non-financial institutions 403,611
Total 427,702

Table – 23. Equity of Investment Accountholders Ratios (PD-1.3.33 (d) & (f))
The following table summarises the return on average assets and mudarib share as a percentage of the total investment profit for
the year ended 31 December 2019:

Profit Paid on Average IAH Assets* 1.89%

Mudarib Fee to Total income from jointly financed assets 40.07%
*Average assets funded by IAH have been calculated using month end balances.
Bahrain Islamic Bank - Annual Report 2019 143

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.9 Equity of Investment Accountholders ("IAH") (Continued)

Table – 24. Equity of Investment Accountholders Ratios (PD-1.3.33 (e) & (g))
The following table summarises the profit distributed to IAH and financing ratios to the total of IAH by type of investment for the
year ended 31 December 2019:

Proportion of Proportion
Average total profit of IAH
declared rate distributed by investments
of return type of IAH to total IAH

Saving accounts (including VEVO) 0.13% 1.19% 25.26%

Defined accounts - 1 month 0.80% 0.26% 0.72%
Defined accounts - 3 months 0.80% 0.08% 0.23%
Defined accounts - 6 months 0.85% 0.16% 0.41%
Defined accounts - 9 months 0.95% 0.00% 0.01%
Defined accounts - 1 year 1.00% 0.99% 2.21%
Investment certificates 3.50% 0.00% 0.00%
IQRA 1.50% 0.59% 0.82%
Tejoori 0.13% 1.35% 27.81%
Customer special deposits 2.03% 95.38% 42.52%
100% 100%

The calculation and distribution of profits was based on quarterly average balances.

Table – 25. Equity of Investment Accountholders to Total Financing (PD-1.3.33 (h) & (i))
The following table summarises the percentage of counterparty type to total financing for each type of Shari’a-compliant contract
to total financing as of 31 December 2019:

Percentage of Counterparty Type to Total Financing

Self Financed IAH Total
BD’000 % BD’000 % BD’000 %
Gross financing assets*
Murabaha 286,145 59.10% 198,005 40.90% 484,150 100.00%
Corporate 154,997 59.10% 107,254 40.90% 262,251 100.00%
Retail 131,148 59.10% 90,751 40.90% 221,899 100.00%
Musharakah 55,481 59.10% 38,392 40.90% 93,873 100.00%
Corporate 3,403 59.10% 2,355 40.90% 5,758 100.00%
Retail 52,078 59.10% 36,037 40.90% 88,115 100.00%
Total 341,626 59.10% 236,397 40.90% 578,023 100.00%
Gross Ijarah Muntahia Bittamleek and
ijarah rental receivables**
Corporate 38,451 59.10% 26,607 40.90% 65,058 100.00%
Retail 84,126 59.10% 58,213 40.90% 142,339 100.00%
Total 122,577 59.10% 84,820 40.90% 207,397 100.00%
ECL Stage 1 and 2 (3,644) 59.10% (2,522) 40.90% (6,166) 100.00%
Total 460,559 59.10% 318,695 40.90% 779,254 100.00%
*Net of expected credit loss (Stage 3) of BD 26,298 thousand.
**Net of expected credit loss (Stage 3) of BD 11,797 thousand.
144 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.9 Equity of Investment Accountholders ("IAH") (Continued)

Table – 26. Equity of Investment Accountholders Share of Profit by account type (PD-1.3.33 (l) (m) & (n))

Gross return Transfer to Profit

on equity equalization Average Mudarib Release from paid
of IAH reserve mudaraba fees IRR to IAH
BD’000 BD’000 % BD’000 BD’000 BD’000
Account Type A B C D (A-B-C+D)
Tejoori 6,659 - 97.88% 6,523 237 373
Saving 5,241 - 97.87% 5,133 187 295
Vevo 593 - 97.89% 581 21 33
IQRA Deposits 273 - 77.46% 214 10 69
Defined deposit 20,305 - 50.18% 10,550 722 10,477
33,071 - 23,001 1,177 11,247

Table – 27. Equity of Investment Accountholders Share of Profit (PD-1.3.33 (l) (m) & (n))
The following table summarises the share of profits earned by and paid out to profit sharing investment accounts and the Group as
Mudarib for the year ended 31 December 2019:

Share of profit allocated to IAH before transfer to/from reserves - BD '000 33,071
Percentage share of profit earned by IAH before transfer to/from reserves 7.73%
Net return on equity of IAH - BD '000 10,070
Release of IRR - BD '000 1,177
Share of profit paid to IAH after transfer to/from reserves - BD '000 11,247
Percentage share of profit paid to IAH after transfer to/from reserves 2.63%
Share of profit paid to Bank as mudarib - BD '000 23,001

Table – 28. Equity of Investment Accountholders Percentage Return to Profit Rate of Return (PD-1.3.33 (q))
The following table summarises the average distributed rate of return or profit rate on profit sharing investment accounts for the
year ended 31 December 2019:

3 months 6 months 12 months 36 months

Percentage of average distributed rate of return to IAH 1.87% 2.48% 1.58% 2.79%

Table – 29. Equity of Investment Accountholders Type of Assets (PD-1.3.33 (r ) & (s))
The following table summarises the types of assets in which the funds are invested and the actual allocation among various types
of assets for the year ended 31 December 2019:

As of Movement As of
30 June 19 during the year 31 December 19
BD’000 BD’000 BD’000
Cash and balances with banks and Central Bank 15,408 6,156 21,564
Gross financing assets* 331,816 (95,419) 236,397
Gross Ijarah Muntahia Bittamleek and ijarah rental receivables* 113,639 (28,819) 84,820
Investment securities 140,119 (52,667) 87,452
Expected credit loss (4,364) 1,833 (2,531)
Total 596,618 (168,916) 427,702
* Net of ECL stage 3.
Bahrain Islamic Bank - Annual Report 2019 145

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.9 Equity of Investment Accountholders ("IAH") (Continued)

Table – 30. Equity of Investment Accountholders Profit Earned and Paid (PD-1.3.33 (w))
The following table summarises the amount and rate of return of profits earned by the Group and paid out to equity of investment
accountholders over the past five years:

Profit Earned Profit Paid to

(jointly financed) (IAH)
BD’000 % BD’000 %
2019 57,396 5.37% 11,247 2.63%
2018 53,939 4.86% 13,939 1.77%
2017 47,315 4.51% 11,364 1.43%
2016 38,977 4.51% 8,356 0.97%
2015 37,188 4.78% 5,733 0.74%

Table – 31. Treatment of assets financed by IAH (PD-1.3.33 (v))

RWA for
Capital Adequacy Capital
Assets RWA Purposes Requirements
BD’000 BD’000 BD’000 BD’000
Cash and balances with banks and Central Bank 21,564 - - -
Financing assets (1) 236,397 204,893 61,468 7,684
Investment in Sukuk (2) 87,452 5,970 1,791 224
Ijarah Muntahia Bittamleek (1)
84,820 54,697 16,409 2,051
430,233 265,560 79,668 9,959
(1)
The exposure is gross of ECL stage 1 and 2 of BD 2,522 thousand.
(2)
The exposure is gross of ECL stage 1 and 2 of BD 9 thousand.
146 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.10 Liquidity Risk
4.10.1 Introduction
Liquidity risk is defined as “the risk that the Group will be unable to meet its obligations as they come due because of an inability
to obtain adequate funding or to liquidate assets”.

4.10.2 Sources of liquidity risk

The sources of liquidity risk can broadly be categorised in the following:
a. Funding risk is the risk of not being able to fund net outflows due to unanticipated withdrawal of capital or deposits;
b. Call risk is the risk of crystallisation of a contingent liability; and
c. Event risk is the risk of rating downgrades or other negative public news leading to a loss of market confidence in the Group.

4.10.3 Bank’s funding strategy

The Board reviews the funding strategy on an annual basis and amends the existing strategy, as deemed necessary. For this
purpose, all business units advise the Treasurer of their projected liquidity requirements and contributions at the start of each year
as part of annual budgeting process.
The funding strategy highlights any anticipated liquidity shortfalls, the funding requirements to finance these shortfalls and their
impact on the statement of financial position. The Group's Liquidity Risk Management Policy addresses the liquidity contingency
plan to deal with stressed scenarios and outline an action plan that can be taken in the event of a liquidity stress situation.

4.10.4 Liquidity risk strategy

The Group monitors the liquidity position by comparing maturing assets and liabilities over various time buckets to include short
term, medium term, and long-term buckets. The Group carries out stress testing periodically using the worst case scenarios
to assess the effects of changes in market conditions on the liquidity of the Group. As a strategy the Group maintains a large
customer base and good customer relationships.
The Risk Unit periodically reviews/updates (at least annually) the liquidity risk strategy which is evaluated by ALCO before
presenting to the BRC and the Board for approval.
The bank manages funding requirements through the following sources: current accounts, savings accounts, other URIA accounts,
interbank lines, and borrowing by leverage of Sukuk portfolio. Appropriate thresholds are set for attaining funding from each
source in the Bank's Risk Appetite Framework.
In fulfilment of Basel III and regulatory requirements, the Bank reports the Liquidity Coverage Ratio ("LCR") and the Net Stable
Funding Ratio ("NSFR") on a monthly and quarterly basis, respectively. In efforts to maintain both metrics above the regulatory
and internal limits, the Bank adopts the following strategies:

LCR: The Bank intends on maintaining its LCR within the prescribed regulatory and internal limits through the gradual build up of
its customer deposit base and uncumbered High Quality Liquid Assets ("HQLA"), predominantly through sovereign bonds and
high grade fixed income assets.

NSFR: The Bank intends on building a stable funding profile by maintaining a balanced trade-off between available and required
stable funding, specifically focusing on building its retail deposit base and build up of capital, with particular focus on stable
funding to build its longer-term liquidity.

4.10.5 Liquidity risk measurement tools

The Group is monitoring the liquidity risk through ALCO.

4.10.6 Liquidity risk monitoring

The Group has set the tolerance for liquidity risk which are communicated to the Risk Unit and Treasury Department. Based on
these tolerances, Risk Unit and Treasury have established appropriate risk limits that maintain the Group’s exposure within the
strategic risk tolerances over a range of possible changes in liquidity situations due to cash flows in current accounts, and IAH
accounts.

4.10.7 Liquidity limits structure

The Group uses a combination of different limits to ensure that liquidity is managed and controlled in an optimal manner. The
Group has set the following limits for monitoring liquidity risks:
a. Liquidity Gap limits; and
b. Liquidity Ratio limits.

4.10.8 Liquidity risk stress testing

To evaluate whether the Group is sufficiently liquid, behavior of the Group’s cash flows under different conditions are observed.
Bahrain Islamic Bank - Annual Report 2019 147

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.10 Liquidity Risk (Continued)

4.10.9 Contingency funding plan

The Group does contingency funding exercises which details procedures to be followed by the Group, in the event of a liquidity
crisis or a situation where the Group faces stressed liquidity conditions. The contingency funding plan will be an extension of day
to day liquidity management and involves maintenance of an adequate amount of liquid assets and management of access to
funding resources. The ALCO members discuss and monitor the situation over regular time-intervals to ensure sufficient liquidity in
the Group.

Table – 32. Liquidity Ratios (PD-1.3.37)

The following table summarises the liquidity ratios for the past five years:

2019 2018 2017 2016 2015

Due from banks and financial institutions / Total Assets 6.22% 10.74% 6.58% 6.12% 7.49%
Islamic Financing / Customer Deposits (1)
80.92% 83.31% 80.04% 85.13% 80.53%
Customer Deposits (1) / Total Assets 78.71% 71.85% 75.32% 77.43% 77.50%
Short term assets (2)
/ Short term liabilities (3)
16.59% 22.97% 20.35% 18.53% 22.38%
Liquid Assets (4)
/ Total Assets 8.15% 13.11% 9.38% 8.95% 10.26%
Growth in Customer Deposits 3.00% (0.67%) 17.62% 6.64% 7.48%
Leverage ratio 12.00% 14.30% 15.91% 17.63% 17.10%
(1)
Customer deposits include customer current accounts, commodity murabaha deposits from financial institutions, placements from non-financial
institutions and individuals and IAH.
(2)
Short term assets includes cash and balances with banks and placements with financial institutions (maturing in a year).
(3)
Short term liabilities includes customer current accounts, other liabilities, placements from financial institutions (maturing within one year) and
IAH (maturing within one year).
(4)
Liquid assets includes cash and balances with banks and Central Bank (exluding CBB reserve) and placements with financial institutions (maturing
in a year).
4.11 Profit Rate Risk
Profit rate risk is the potential impact of the mismatch between the rate of return on assets and the expected rate of funding due
to the sources of finance.
A fundamental review and reform of major profit rate benchmarks is being undertaken globally. There is uncertainty as to the
timing and the methods of transition for replacing existing benchmark InterBank Offered Rates (IBORs) with alternative rates.
As a result of these uncertainties, there could be an impact on the values of financial contracts entered by the Bank. While the
IBOR continues to be used as a reference rate in financial markets and is used in the valuation of instruments with maturities
that exceed the expected end date for IBOR, the Bank will have to assess the impact. As at 31 December 2019, the Bank is in the
process of assessing the impact on its financial instruments which are maturing after the expected end date for IBOR.
Senior management identifies the sources of profit rate risk exposures based upon the current as well as forecasted balance sheet
structure of the Group. The profit rate risk in the Group may arise due to the following transactions:
a. Murabaha transactions;
b. Wakala transactions;
c. Ijarah Muntahia Bittamleek;
d. Sukuk; and
e. Musharaka investments.
The profit distribution to equity of investment accountholders is based on profit sharing agreements. Therefore, the Group is not
subject to any significant profit rate risk.
148 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.11 Profit Rate Risk (Continued)

4.11.1 Sources of Profit Rate Risk

The different profit rate risks faced by the Group can be classified broadly into the following categories:
a. Re-pricing risk which arises from timing differences in the maturity (for fixed rate) and re-pricing (for floating rate) of assets,
liabilities and off balance sheet positions. As profit rates vary, these re-pricing mismatches expose the Group’s income and
underlying economic value to unanticipated fluctuations;
b. Yield curve risk which arises when unanticipated shifts of the yield curve have adverse effects on the Group’s income and/or
underlying economic value;
c. Basis risk which arises from imperfect correlation in the adjustment in the rate earned on products priced and the rate paid on
different instruments with otherwise similar re-pricing characteristics. When profit rates change, these differences can give rise
to unexpected changes in the cash flows and earnings spread between assets, liabilities, and off balance sheet instruments of
similar maturities or re-pricing frequencies; and
d. Displaced Commercial Risk refers to the market pressure to pay returns that exceeds the rate that has been earned on the
assets financed by the liabilities, when the return on assets is under performing as compared with competitors rates.

4.11.2 Profit rate risk strategy

The Group is subject to profit rate risk on its financial assets and financial liabilities. The Group recognises income on certain of its
financial assets on a time-apportioned basis. As a strategy the Group:
a. has identified the profit rate sensitive products and activities it wishes to engage in;
b. has established a structure to monitor and control the profit rate risk of the Group;
c. measures profit rate risk through establishing maturity/re-pricing schedule that distributes profit rate sensitive assets, liabilities
and off-balance sheet items in pre-defined time bands according to their maturity; and
d. makes efforts to match the amount of floating rate assets with floating rate liabilities in the banking book.

4.11.3 Profit rate risk measurement tools

The Group uses the following tools for profit rate risk measurement in the banking book:
a. Re-pricing gap analysis which measures the arithmetic difference between the profit-sensitive assets and liabilities of the
banking book in absolute terms; and
b. Basis Point Value (“BPV”) analysis which is the sensitivity measure for all profit rate priced products and positions. The BPV is
the change in net present value of a position arising from basis point shift in the yield curve. This quantifies the sensitivity of
the position or portfolio to changes in profit rates.
Bahrain Islamic Bank - Annual Report 2019 149

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.11 Profit Rate Risk (Continued)

4.11.4 Profit rate risk monitoring and reporting

The Group has implemented information systems for monitoring, controlling and reporting profit rate risk. Reports are provided on
a timely basis to all relevant stakeholders in the Group on a periodic basis.

Table – 33. Profit Rate Risk in Banking Book (PD-1.3.40 (b))

The following table summarises the profit rate gap position as of 31 December 2019:

Up to 3 3-6 6-12 1-3 Over 3

months months months years years Total
BD’000 BD’000 BD’000 BD’000 BD’000 BD’000
Assets
Placements with financial institutions 76,068 - - - - 76,068
Financing assets 53,170 31,917 42,826 183,732 263,206 574,851
Ijarah Muntahia Bittamleek and ijarah rental
receivables 11,783 2,242 5,219 23,478 161,681 204,403
Investment in Sukuk - 11,647 13,377 29,961 158,828 213,813
Total profit rate sensitive assets 141,021 45,806 61,422 237,171 583,715 1,069,135

Liabilities And Equity Of Investment

Accountholders
Placements from financial institutions* 139,748 18,125 21,528 9,150 - 188,551
Placements from non-financial institutions and
individuals 111,228 68,579 53,747 20,056 - 253,610
Borrowings from financial institutions 29,566 - - - - 29,566
Equity of investment accountholders** 145,240 22,431 16,462 6,974 236,595 427,702
Total profit rate sensitive liabilities and IAH 425,782 109,135 91,737 36,180 236,595 899,429
Profit rate gap (284,761) (63,329) (30,315) 200,991 347,120 169,706

*Placements from financial institutions excludes frozen accounts of BD 9,099 thousand.

**The Bank uses expected withdrawal pattern to classify its saving accounts into different maturity buckets. The remaining IAH balances are
disclosed on a contractual basis.

The following table summarises the effect on the value of assets, liabilities and economic capital for a benchmark change of 200
bp in profit rates as of 31 December 2019:
Effect on
Effect on Effect on value of
value of value of Economic
Asset Liability Capital
BD’000 BD’000 BD’000
Upward rate shocks (4,031) 9,590 5,559
Downward rate shocks 4,031 (9,590) (5,559)
150 Bahrain Islamic Bank - Annual Report 2019

Risk and Capital Management Disclosure

For the year ended 31 December 2019

4. Risk Management (Continued)

4.11 Profit Rate Risk (Continued)

Table – 34. Quantitative Indicators of Financial Performance and Position (PD-1.3.9 (b) PD-1.3.33 (d))
The following table summarises the basic quantitative indicators of financial performance for the past 5 years:

2019 2018 2017 2016 2015

Return on average equity 5.21% 9.48% 8.50% 7.45% 11.88%
Return on average assets 0.50% 0.91% 0.90% 0.83% 1.21%
Cost to Income Ratio 59.30% 55.47% 61.92% 56.44% 51.68%

Table – 35. The following table summarises the historical data over the past five years in relation to Profit Sharing Investment
Accounts (PD-1.3.41):
The details of income distribution to Profit Sharing Investment Accounts (PSIA) for the last five years:

2019 2018 2017 2016 2015

Allocated income to IAH 33,071 41,162 36,010 29,301 29,961
Distributed profit 11,247 13,939 11,364 7,131 5,187
Mudarib fees 23,001 27,223 24,646 22,170 24,774

2019 2018 2017 2016 2015

Balances (BD '000s):
Profit Equalization Reserve (PER) 1,245 1,245 1,245 1,245 995
Investment Risk Reserve (IRR) - 1,177 1,177 757 227
PER Movement - - - 250 600
IRR Movement (1,177) - 420 530 124
Ratios (%):
Income allocated to IAH / Mudarabah assets % 3.09% 3.71% 3.43% 3.39% 3.85%
Mudarabah fees / Mudarabah assets % 2.15% 2.45% 2.35% 2.57% 3.18%
Distributed profit / Mudarabah assets % 1.05% 1.26% 1.08% 0.83% 0.67%
Rate of Return on average IAH % 1.70% 1.76% 1.57% 1.15% 0.86%
Profit Equalization Reserve / IAH % 0.29% 0.16% 0.16% 0.19% 0.17%
Investment Risk Reserve / IAH % 0.00% 0.15% 0.15% 0.12% 0.04%

4.12 CBB Penalties (PD 1.3.44)

The CBB penalties imposed upon the Bank amounted to BD 16,250 during the year regarding CBB Directives on EFTS.
Bahrain Islamic Bank - Annual Report 2019 151

Risk and Capital Management Disclosure

For the year ended 31 December 2019

5. Glossary of Terms
ALCO Assets and Liabilities Committee
BCP Business Continuity Plan
BisB Bahrain Islamic Bank B.S.C.
BPV Basis Point Value
BRC Board Risk Committee
CA Module Capital Adequacy Module
CAR Capital Adequacy Ratio
CBB Central Bank of Bahrain
CRMD Credit and Risk Management Department
CR & AD Credit Review and Analysis Department
C&IC Credit and Investment Committee
DCR Displaced Commercial Risk
Excom Executive Committee
CBB Central Bank of Bahrain
FX Foreign Exchange
GM-C&RM General Manager-Credit and Risk Management
Group Bahraini Islamic Bank B.S.C. and its subsidiaries
HR Committee Human Resource Committee
IAH Investment Account Holder
ICAAP Internal Capital Adequacy Assessment Process
IFRS International Financial Reporting Standards
IT Committee Information Technology Committee
IRR investment Risk Reserve
MLG Minimum Liquidity Guidelines
PCD Prudential Consolidation and Deduction Requirements Module
PD Public Disclosure
PER Profit Equalisation Reserve
PSIA Profit Sharing Investment Account
RCSA Risk and Control Self-Assessment
RMC Risk Management Committee
RWE Risk Weighted Exposures
VaR Value-at-Risk
L/C Letter of Credit
L/G Letter of Guarantee
ECL Expected Credit Losses
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OvervieW COnsOlidated FinanCial statements

4 Corporate Profile 61 Independent Auditors’ Report
5 Our Brand Promise 62 Consolidated Statement of Financial Position
6 Our Guiding Principles 63 Consolidated Statement of Income
7 Brand Values 64 Consolidated Statement of Cash Flows
8 Financial Highlights 65 Consolidated Statement of Changes in Owners’ Equity
9 Operational Highlights 66 Consolidated Statement of Sources and Uses of Good Faith Qard Fund
67 Consolidated Statement of Sources and Uses of Zakah and Charity Fund
Business revieW 68 Notes to the Consolidated Financial Statements
10 Board of Directors Report
12 Board of Directors risk and Capital management disClOsure
16 Shari’a Supervisory Board 116 Background
20 Chief Executive Officer Report 116 Statement of Financial Position under the Regulatory Scope of Consolidation
22 Executive Management 118 Capital Adequacy
30 Review on Operations 122 Risk Management
34 Risk Management 151 Glossary of Terms
36 Remuneration Disclosures
43 Corporate Social Responsibility
44 Corporate Governance Review
59 Shari’a Supervisory Board Report

Bahrain islamic Bank B.s.C.

Diplomatic Area
P.O. Box 5240, Manama, Kingdom of Bahrain
Tel: (+973) 17 515 151
Fax: (+973) 17 535 808
Email: contactcentre@bisb.com

Licensed as an Islamic Retail Bank by the Central Bank of Bahrain

www.bisb.com