al yusr islamic banking window report and financial ... › uploadsall › pdf › al yusr -...

AL YUSR – ISLAMIC BANKING WINDOW

Report and financial statements

for the year ended 31 December 2018


Report and financial statements for the year ended 31 December 2018

Page

Independent auditor’s report 1

Statement of financial position 2

Statement of comprehensive income 3

Statement of changes in equity 4

Statement of cash flows 5

Statement of sources and uses of charity fund 6

Notes to the financial statements 7-53

(

AL YUSR - ISLAMIC BANKING WINDOW

STATEMENT OF FINANCIAL POSITION

As at 31 December 2018

Assets Cash and balance with the Central Bank of Oman Due from banks Financing contracts with customers Investments Property and equipment Intangible assets Other assets Total assets

Liabilities, equity of unrestricted investment account holders and owners' equity

Liabilities Current and margin accounts Wakalah acceptances from customers Wakalah acceptances from the Bank Other liabilities

Total liabilities

Unrestricted investment accounts

Owner's equity Allocated share capital Special reserve Accumulated losses

Total owner's equity

Total liabilities, equity of unrestricted investment

account holders and owners' equity

Contingencies and commitments

Notes

4 5 6 7 8 9

10

11 12

13

14

15 16

17

2018 2017 RO '000' RO '000'

22,134 18,393 199 414

121,240 82,168 -1,103 1,142

267 448 59 113

1,228 800 146,230 103,478

55,769 14,680 62,646 72,008

6,000 2,797 2,238

127,212 88,926

3,733 3,219

17,000 14,000 78 52

(1,793) (2,719)

15,285 11,333

146,230 103,478

44,015 16,889

The fina ial statements were authorised for issue by the Boarc! of Directors on 28 January 2019 and signed by:

Rashad Muhammed Al Zubair Chairman

Rashad A -Musafir Chief Executive Officer

I

The attached notes 1 to 28 form part of these financial statements.

2


STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2018

3

Notes 2018 2017

RO '000' RO '000'

Income from financing contracts with customers 18 5,186 3,758

Less: Return on unrestricted investments accounts

before Al Yusr’s share as Mudarib (119) (141)

Al Yusr’s share as Mudarib 92 107

Return on unrestricted investment accounts (27) (34)

Return on Wakalah acceptances (3,212) (2,480)

Al Yusr’s share in income from investment as a Mudarib

and RabalMal 1,947 1,244

Income from self-financed investments 36 47

Income from Wakalah placements 30 4

Fees, commission and other income 19 1,044 707

Total operating income 3,057 2,002

Staff cost 20 (1,050) (1,071)

Depreciation 8 (189) (203)

Amortization 9 (59) (83)

Impairment losses/reversal against financing contracts (Net) 6 (190) 32

Other expenses 21 (499) (524)

Total operating expenses (1,987) (1,849)

Profit for the year 1,070 153



STATEMENT OF CHANGES IN OWNER’S EQUITY For the year ended 31 December 2018

4

Allocated

share capital

Special

reserve

Accumulated

losses

Total

RO '000' RO '000' RO '000' RO '000'

At 1 January 2017 14,000 - (2,820) 11,180

Transfer to special reserve - 52 (52) -

Profit for the year - - 153 153

At 1 January 2018 14,000 52 (2,719) 11,333

Impact of adopting IFRS 9 at 1

January (note 2.30) - - (118) (118)

Restated opening balance 14,000 52 (2,837) 11,215

Capital allocated by the Bank

(note 15) 3,000 - - 3,000

Transfer to special reserve - 26 (26) -

Profit for the year - - 1,070 1,070

At 31 December 2018 17,000 78 (1,793) 15,285



STATEMENT OF CASH FLOWS For the year ended 31 December 2018

5

Notes 2018 2017

RO '000' RO '000'

Operating activities

Profit for the year 1,070 153

Adjustments for:

Depreciation 8 189 203

Amortization 9 59 83

Impairment losses/reversal against financing contracts (net) 6 190 (32)

Operating income before changes in operating assets and liabilities 1,508 407

Net changes in operating assets and liabilities:

Financing contracts with customers (39,380) (17,106)

Other assets (428) (195)

Current and margin accounts 41,089 7,568

Wakalah acceptances from customers (9,362) 13,846

Wakalah acceptances from the Bank 6,000 -

Other liabilities 559 (794)

Net cash flows (used in) / from operating activities (14) 3,726

Investing activities

Purchase of investments 39 -

Purchase of property and equipment 8 (8) (9)

Purchase of intangible assets 9 (5) (32)

Net cash flows from/(used in) in investing activities 26 (41)

Financing activities

Equity of unrestricted investment account holders 514 733

Capital allocated by the Bank 3,000 -

3,514 733

Net changes in the cash and cash equivalents 3,526 4,418

Cash and cash equivalents at the beginning of the year 18,807 14,389

Cash and cash equivalents at the end of the year 22 22,333 18,807



STATEMENT OF SOURCES AND USES OF CHARITY FUND For the year ended 31 December 2018

6

2018 2017

RO '000' RO '000'

Undistributed charity fund at the beginning of the year 8 4

Sources of charity fund

Late payment fee collected during the year 3 6

Total sources of charity fund during the year 11 10

Uses of charity fund (5) (2)

Undistributed charity fund at the end of the year 6 8



NOTES TO THE FINANCIAL STATEMENTS At 31 December 2018

7

1. Legal status and principal activities

Al Yusr – Islamic Banking Window (“the Window”) is the Islamic Window of Oman Arab Bank SAOC (“the Bank”).

The Window offers a full range of Islamic banking services and products. The activities of the Window include accepting

Shari’a money placements/deposits, managing Shari’a profit sharing investment accounts, offering Shari’a compliant

financing products and services, dealing in Shari’a compliant financial instruments as principal / agent, managing Shari’a

compliant financial instruments and other activities permitted under the Central Bank of Oman (CBO)’s regulated Islamic

Banking Services as defined in the licensing framework.

The Window is not a separate legal entity, the separate financial statements of the Window has been prepared to comply

with the requirements of Articles 1.5.1.2 to 1.5.1.4 of Title 2 'General Obligations and Governance' of IBRF issued by the

CBO.

2. Summary of significant accounting policies

2.1 Basis of preparation

The financial statements are prepared under historical cost basis convention except for the measurement at fair value

of certain instrument(s) carried at fair value.

2.2 Statement of compliance

In accordance with the requirements of Section 1.2 of Title 3 of the IBRF issued by CBO, the financial statements

are prepared in accordance with Financial Accounting Standards (FAS) issued by Accounting and Auditing

Organisation for Islamic Financial Institutions (AAOIFI), the Shari’a Rules and Principles as determined by the

Shari’a Supervisory Board of the Window and other applicable requirements of CBO. In accordance with the

requirements of AAOIFI, for matters which are not covered by AAOIFI and other directives, the Window uses the

relevant International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board

(IASB).

The preparation of financial statements in conformity with FAS requires the use of certain critical accounting

estimates. It also requires management to exercise its judgment in the process of applying the accounting policies.

The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are

significant to the financial statements are disclosed in note 3.

These are the first set of annual financial statements in which IFRS 9 has been applied. Changes to significant

accounting policies are described in note 2.29 and the related transition impact is set out in note 2.30.

2.3 Functional and presentation currency

The financial statements are presented in Rial Omani (RO), which is the Window’s functional and presentation

currency. All financial information presented in RO has been rounded to the nearest thousands, unless otherwise

stated.

2.4 Cash and cash equivalent

For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less than three

months’ maturity from the date of acquisition, including: cash, non-restricted balances with the Central Bank of Oman

and amounts due from other banks.



8

2. Summary of significant accounting policies (continued)

2.5 Due from banks

Due from banks comprise of receivables under Wakalah contracts and Nostro balances. Wakalah contracts are

recognised at fair value of consideration paid less amounts settled, if any. Profits on Wakalah balances are received

as per the respective agreement. Nostro balances are current accounts of Window with other financial institutions.

2.6 Contracts with customers

Murabaha to the Purchase Orderer

Murabaha to the purchase orderer represents the sale of goods at cost plus an agreed profit. Murabaha receivables

consist of deferred sales transaction agreements and are stated net of deferred profits, any amounts written off and

provision for impairment, if any. Promise made in the Murabaha to the purchase orderer is not obligatory upon the

customer.

Ijarah Muntahia Bittamleek

Ijarah Muntahia Bittamleek is a lease whereby the ownership of the leased asset passes to the lessee at the end of the

Ijarah (lease term), provided that all Ijarah rentals are settled. Assets under Ijarah Muntahia Bittamleek are initially

recorded at cost and subsequently depreciated over the period of the lease term.

Musharaka

Musharaka contracts represents a partnership between the Window and a customer whereby each party contributes to

the capital in equal or varying proportions to establish a new project or share in an existing one, and whereby each of

the parties becomes an owner of the capital on a permanent or declining basis and shall have a share of profits or

losses. These are stated at the fair value of consideration given less any amounts written off and provision for

impairment, if any.

Diminishing Musharaka

Diminishing Musharaka is a form of partnership where two or more persons jointly own a tangible asset in an agreed

proportion and one of the partners undertakes to buy the ownership rights of other partner by way of periodical

payments till the title of such tangible assets completely transferred to the purchasing partner.

Mudaraba

A contract between two parties, whereby one party provides the funds (Rab Al Mal) and the other party (the Mudarib)

invest the funds in an asset, project or particular activity and any generated profits are distributed between the parties

according to the profit shares that were pre-agreed upon in the contract. The Mudarib is responsible for losses caused

by his misconduct, negligence or violation of the terms and conditions of the Mudarib; otherwise, losses are borne by

Rab Al Mal. The capital of Mudaraba is paid to the Mudarib or placed under his disposition.

Wakalah

A contract between two parties whereby one party (the principal: Muwakkil) appoints the other party (the agent:

Wakil) to invest certain funds according to terms and conditions of the Wakalah for a fixed fee in addition to any

profit exceeding the expected profits as an incentive for the Wakil for the good performance. Any losses as a result

of the misconduct or negligence or violation of the terms and conditions of the Wakalah are borne by the Wakil;

otherwise, they are borne by the principal.



9


2.6 Contracts with customers (continued)

Qard Hassan

A non-profit bearing loan enables the borrower to use the borrowed amounts for a specific period of time, at the end

of which the same borrowed amounts would be repaid free of any charges of profits.

2.7 Investments

Investments comprise of debt type instruments carried at amortised cost, equity type instruments carried at fair value

through equity and equity type instruments carried at fair value through statement of income.

All investments, are initially recognised at cost, being the fair value of the consideration given including acquisition

charges associated with the investment, except in the case of investments carried at fair value through statement of

income.

Debt type instruments carried at amortised cost (Applicable to 2017)

Investments which have fixed or determinable payments and where the Window has both the intent and ability to

hold to maturity are classified as debt type instruments carried at amortised cost. Such investments are carried at

amortised cost, less provision for impairment in value. Amortised cost is calculated by taking into account any

premium or discount on acquisition. Any gain or loss on such instruments is recognised in the statement of

comprehensive income when the instruments are de-recognised or impaired.

Debt instruments at FVTE (IFRS 9: FVOCI) (policy applicable from 1 January 2018)

The Window applies the new category under IFRS 9 of debt instruments measured at FVTE when both of the

following conditions are met:

- The instrument is held within a business model, the objective of which is achieved by both collecting

contractual cash flows and selling financial assets

- The contractual terms of the financial asset meet the SPPI test

For debt securities measured at FVTE, gains and losses are recognised in equity and upon sale realized through Profit

and Loss.

When debt security measured at FVTE is derecognised, the cumulative gain or loss previously recognised in fair

value reserve is reclassified from equity to profit or loss.

Equity type instruments carried at fair value through equity (Applicable to 2017)

Subsequent to acquisition, equity type instruments 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 determined to

be impaired. On derecognition or impairment, the cumulative gain or loss previously recorded in equity is recognised

in the statement of comprehensive income for the year.

Impairment losses on equity type instruments carried at fair value through equity are not reversed through the

statement of comprehensive income and increases in their fair value after impairment are recognised directly in

owners’ equity.

Equity instruments at FVTE (IFRS 9:FVOCI) (Policy applicable from 1 January 2018)

Upon initial recognition, the Window occasionally elects to classify irrevocably some of its equity investments as

equity instruments at FVTE when they meet the definition of definition of Equity under IAS 32 Financial Instruments:

Presentation and are not held for trading. Such classification is determined on an instrument-by-instrument basis.



10


2.7 Investments (continued)

Gains and losses on these equity instruments are never recycled to profit. Dividends are recognised in profit or loss

as other operating income when the right of the payment has been established, except when the Window benefits

from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in

equity. Equity instruments at FVOCI are not subject to an impairment assessment.

Equity type instruments carried at fair value through statement of income (Applicable to 2017)

These are subsequently re-measured at fair value. All related realised and unrealised gains or losses are included in

the statement of comprehensive income.

2.8 Property and equipment

Property and equipment are initially recorded at cost and are subsequently carried at cost less accumulated

depreciation and accumulated impairment losses, if any. Depreciation on the assets is calculated using the straight-

line basis to allocate their cost over the estimated useful lives, as follows:

2.8 Property and equipment (continued)

Years

Buildings 25

Computer equipment 5

Equipment, furniture and fixtures 5

Motor vehicles 5

The assets’ residual values and useful lives are reviewed at each reporting date to assess whether they are recorded in

excess of their recoverable amount, and where carrying values exceed this recoverable amount, assets are written

down to their recoverable amount. Gains and losses on disposal of property and equipment are determined by

reference to their carrying amount and are taken into account in determining operating profit. Repairs and renewals

are charged to the statement of comprehensive income when the expense is incurred. Subsequent expenditure is

capitalised only when it increases the future economic benefits embodied in the item of property and equipment. All

other expenditure is recognised in the statement of comprehensive income as an expense as incurred.

2.9 Intangible assets

Intangible assets comprise computer softwares and licenses acquired by the Window and are stated at cost less

accumulated amortisation and accumulated impairment losses, if any. The intangible assets are amortised on a

straight-line basis over 5 years, being the estimated useful life of the assets.

2.10 Derecognition of financial assets and financial liabilities

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 where:

- the rights to receive cash flows from the asset have expired; or

- the Window retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in

full without material delay to a third party under a “pass-through” arrangement; or

- the Window has transferred its rights to receive cash flows from the asset and either: (a) has transferred

substantially all the risks and rewards of the assets, or (b) has neither transferred nor retained substantially all the

risks and rewards of the asset, but has transferred control of the asset.



11


2.10 Derecognition of financial assets and financial liabilities (continued)

When the Window has transferred its rights to receive cash flows from an asset and has neither transferred nor retained

substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the

extent of the Window’s continuing involvement in the asset.

Financial liabilities

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

2.11 Identification and measurement of impairment of non-financial assets

At each reporting date, the Window reviews the carrying amounts of its assets to determine whether there is any

indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of

the asset is estimated in order to determine the extent of impairment loss. Recoverable amount is the greater of net

selling price and value in use.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset

is reduced to its recoverable amount. Impairment loss is recognised as an expense immediately in the statement of

comprehensive income.

2.12 Offsetting financial instruments

Financial assets and financial liabilities are only offset and the net amount reported in the statement of financial

position when there is a legal or religious enforceable right to set off the recognised amounts and Window intends to

either settle on a net basis, or to realise the asset and settle the liability simultaneously.

2.13 Fair values

Fair value is determined for each financial asset individually in accordance with the valuation policies set out below:

(i) For investments that are traded in organised financial markets, fair value is determined by reference to the quoted

market bid prices prevailing on the statement of financial position date.

(ii) For unquoted investments, fair value is determined by reference to recent significant buy or sell transactions with

third parties that are either completed or are in progress. Where no recent significant transactions have been completed

or are in progress, fair value is determined by reference to the current market value of similar investments. For others,

the fair value is based on the net present value of estimated future cash flows, or other relevant valuation methods.

(iii) For investments that have fixed or determinable cash flows, fair value is based on the net present value of

estimated future cash flows determined by the Window using current profit rates for investments with similar terms

and risk characteristics.

(iv) Investments which cannot be remeasured to fair value using any of the above techniques are carried at cost, less

accumulated impairment, if any.

2.14 End of service benefits

Contributions to a defined contribution retirement plan, for Omani employees, in accordance with the Oman Social

Insurance Scheme, are recognised as expense in the statement of income when accrued. Window’s obligation in

respect of non-Omani terminal benefits, which is an unfunded defined benefit retirement plan, is the amount of future

benefit that such employees have earned in return for their service in current and prior periods. This amount is accrued

and recognised as an expense in the statement of comprehensive income.



12


2.15 Provisions

Provisions are recognised when Window 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. 2.16 Foreign currencies Transactions in foreign currencies are translated into Rial Omani at exchange rates ruling at the value dates of the

transactions. Monetary assets and liabilities denominated in foreign currencies are translated into Rial Omani at

exchange rates ruling at the reporting date. Foreign exchange gains and losses resulting from the settlement of such

transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in

foreign currencies are recognised in the statement of income.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the

exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency

are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on

translation of non-monetary items measured at fair value is treated in line with the recognition of gain or loss on

change in fair value of the item.

2.17 Income recognition

Murabaha

Where the income is quantifiable and contractually determined at the commencement of the contract, income is

recognised on a time-apportioned basis over the period of the contract based on the principal amounts outstanding.

Accrual of income is suspended when the Window believes that the recovery of these amounts may be doubtful.

Ijarah Muntahia Bittamleek

Ijarah income is recognised on a time-apportioned basis, net of depreciation, over the Ijarah term. Accrual of income

is suspended when the Window believes that the recovery of these amounts may be doubtful.

Musharaka

Income on Musharaka contracts is recognised when the right to receive payment is established or on distribution by

the partner (Musharek).

Wakalah

Estimated income from Wakalah is recognised on an accrual basis over the period, adjusted by actual income when

received. Losses are accounted for on the date of declaration by the agent.

Windows’s share as a Mudarib

The Window’s share as a Mudarib for managing the equity of investment account holders is accrued based on the

terms and conditions of the related Mudaraba agreements whereas, for off balance sheet equity of investment account

holders, Mudarib share is recognised when distributed.



13


2.17 Income recognition (continued)

Fees and commission income

Fees and commission income is recognised when earned. Commission on letters of credit and letters of guarantee are

recognised as income over the period of the transaction.

Fees for structuring and arrangement of financing transactions for and on behalf of other parties are recognised when

the Window has fulfilled all its obligations in connection with the related transaction.

2.18 Income from investment

Income from investments at amortised cost is recognised on a time-proportionate basis based on underlying rate of

return. Dividend income is recognised when the Al Yusr’s right to receive the payment is established.

2.19 Return on equity of investment account holders

Investor’s share of income is calculated based on income generated from joint investment accounts after deducting

profit equalisation reserve, the Window’s share as Mudarib and investment risk reserve. The investors' share of

income is distributed to the investors based on average participation balance in the Mudaraba pool.

2.20 Profit equalisation reserve

Profit equalisation reserve is the amount appropriated by the Window out of return on equity of investment account

holders and is utilised to maintain suitable and competitive return to investors in case of certain unanticipated

extraordinary circumstances depressing the return.

2.21 Investment risk reserve

Investment risk reserve is the amount appropriated by the Window out of return on equity of investment account

holders after allocating profit equalization reserve and the Window’s share as Mudarib, in order to cushion the effects

of the risk of future investment losses.

The terms and conditions whereby investment risk reserve can be set aside and utilized are determined and approved

by the Shari’a Supervisory Board of the Bank.

2.22 Earnings prohibited by Shari’a

The Window is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, all

non-Islamic income is transferred to charity.

2.23 Taxation

Al Yusr is Islamic Banking Window of the Bank, hence it is not taxable on a stand-alone basis as per prevailing tax

law basis. Accordingly, no current and deferred tax has been accounted for in these financial statements.

Taxation is calculated and paid by the Bank on an overall basis.



14


2.24 Zakah

In accordance with the instructions of the Shari’a Supervisory Board of the Bank, payment of Zakah is the responsibility of the investment account holders. Accordingly, no Zakah has been charged to these financial statements.

2.25 Joint and self-financed

Assets that are jointly owned by Window and the equity of investment account holders are classified under the caption

"jointly financed" in the financial statements. Assets that are financed solely by Window, if any, are classified under

"self-financed".

2.26 Trade date accounting

All “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Window

commits to purchase or sell the asset.

2.27 Commingling of funds

The funds of Window are not commingled with the funds of conventional operations of the Bank.

2.28 Shari’a supervisory board

The Window’s business activities are subject to the supervision of a Shari’a Supervisory Board consisting of three

members appointed by the general assembly.

2.29 IFRS 9 - Financial Instruments

The Window has adopted IFRS 9 as issued by the IASB in July 2014 with a date of transition of 1 January 2018,

which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial

statements as of and for the year ended 31 December 2017.

As permitted by the transitional provisions of IFRS 9, the Window elected not to restate comparative figures. Any

adjustments to the carrying amounts of financial assets and liabilities at the date of transition were recognised in the

opening retained earnings and the opening balance of fair value reserve of the current period.

The adoption of IFRS 9 has resulted in changes in the accounting policies for recognition, classification and

measurement of financial assets and financial liabilities and impairment of financial assets. IFRS 9 also significantly

amends other standards dealing with financial instruments such as IFRS 7 “Financial Instruments: Disclosures”.

The CBO has issued guidelines relating to implementation of IFRS 9. The relevant requirements relating to transition

are set out below:

- Should the existing loan loss impairment computed in accordance with the requirements of IAS 39 and CBO

guidelines be higher than the impairment allowance computed under IFRS 9, the related difference (net of

tax) be transferred to a loan loss impairment reserve from retained earnings as of 1 January 2018.

- In the subsequent years, where the allowance for loan loss impairment computed in accordance with CBO

requirements is higher than the allowance for loan loss impairment loss computed under IFRS 9, the

difference (net of tax) should be transferred to the aforementioned loan loss impairment reserve from

retained earnings. The related impairment reserve will not be available for dividend distribution or for

inclusion in the regulatory capital. Any subsequent utilisation of the impairment reserve would require prior

approval of the CBO.

Difference between provisions held as per IFRS 9 and the CBO norms is not recognised as impairment reserve, as

the Window is not a separate legal entity and the requirement is assessed at overall Bank basis.



15


2.29 IFRS 9 - Financial Instruments(continued)

Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as

described below:

- Comparative periods have not been restated. Differences in the carrying amounts of financial assets and

financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as

at 1 January 2018. Accordingly, the information presented for 2017 does not reflect the requirements of

IFRS 9 and therefore is not comparable to the information presented for 2018 under IFRS 9.

- The following assessments have been made on the basis of the facts and circumstances that existed at the

date of initial application.

a) The determination of the business model within which a financial asset is held.

b) The designation and revocation of previous designations of certain financial assets and financial

liabilities as measured at FVTPL

c) The designation of certain investments in equity instruments not held for trading as at FVTE (IFRS 9:

FVOCI).

If a debt security had low credit risk at the date of initial application of IFRS 9, then the Window has assumed that

credit risk on the asset had not increased significantly since its initial recognition.

The key changes to the Window’s accounting policies resulting from its adoption of IFRS 9 are summarised below:

2.29.1 Classification of financial assets

From 1 January 2018, the Window has applied IFRS 9 and classifies its financial assets in the following measurement

categories:

a) Fair value through equity (FVTE) which is IFRS 9: FVOCI; or

b) Amortised cost.

c) Fair value through profit or loss (FVTPL);

A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at

FVTPL:

a) The asset is held within a business model whose objective is to hold assets to collect contractual cash flows;

and

b) The contractual terms of the financial asset give rise on specified dates to cash flows that are solely

payments of principal and profit.

A debt instrument is measured at FVTE only if it meets both of the following conditions and is not designated as at

FVTPL:

a) The asset is held within a business model whose objective is achieved by both collecting contractual cash

flows and selling financial assets; and

b) The contractual terms of the financial asset give rise on specified dates to cash flows that are solely

payments of principal and profit.

On initial recognition of an equity investment that is not held for trading, the Window may irrevocably elect to present

subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis. All other

financial assets are classified as measured at FVTPL.

In addition, on initial recognition, the Window may irrevocably designate a financial asset that otherwise meets the

requirements to be measured at amortised cost or at FVTE as at FVTPL if doing so eliminates or significantly reduces

an accounting mismatch that would otherwise arise.



16


2.29.2 Business model assessment

The Window makes an assessment of the objective of a business model in which an asset is held at a portfolio level

because this best reflects the way the business is managed and information is provided to management. The

information considered includes:

a) The stated policies and objectives for the portfolio and the operation of those policies in practice. In

particular, whether management’s strategy focuses on earning contractual profits, maintaining a particular

profit rate profile, matching the duration of the financial assets to the duration of the liabilities that are

funding those assets or realising cash flows through the sale of the assets;

b) How the performance of the portfolio is evaluated and reported to the Window’s management;

c) the risks that affect the performance of the business model (and the financial assets held within that

business model) and how those risks are managed;

d) how managers of the business are compensated – e.g. whether compensation is based on the fair value of

the assets managed or the contractual cash flows collected; and

e) The frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations

about future sales activity. However, information about sales activity is not considered in isolation, but as

part of an overall assessment of how the Window’s stated objective for managing the financial assets is

achieved and how cash flows are realised.

The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case’

scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Window's

original expectations, the Window does not change the classification of the remaining financial assets held in that

business model, but incorporates such information when assessing newly originated or newly purchased financial assets

going forward.

Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are

measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual

cash flows and to sell financial assets.

2.29.3 Assessment whether contractual cash flows are solely payments of principal and profits (‘SPPP’)

In assessing whether the contractual cash flows are solely payments of principal and profit, the Window considers the

contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that

could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the

assessment, the Window considers:

a) contingent events that would change the amount and timing of cash flows;

b) leverage features;

c) prepayment and extension terms;

d) terms that limit the Window’s claim to cash flows from specified assets (e.g. non-recourse asset

arrangements); and

e) features that modify the profit rates based on the given circumstances.

Contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that

are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of

principal and profit on the amount outstanding. In such cases, the financial asset is required to be measured at FVPL.


Investment securities

The ‘investments’ caption in the statement of financial position includes:

a) debt investment securities measured at amortised cost; these are initially measured at fair value plus

incremental direct transaction costs, and subsequently at their amortised cost using the effective profit

method;

b) equity investment securities designated as at FVTE.



17



Investment securities (continued) The Window elects to present in OCI changes in the fair value of certain investments in equity instruments that are not

held for trading. The election is made on an instrument-by-instrument basis on initial recognition and is irrevocable.

Gains and losses on such equity instruments are never reclassified to profit or loss and no impairment is recognised in

profit or loss. Dividends are recognised in profit or loss unless they clearly represent a recovery of part of the cost of the

investment, in which case they are recognised in fair value reserve. Cumulative gains and losses recognised in fair value

reserve are transferred to retained earnings on disposal of an investment.

2.29.4 Reclassifications

Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Window changes

its business model for managing financial assets.

2.29.5 Impairment

Policies applicable from 01 January 2018

The Window recognises loss allowances for ECL on the following financial instruments that are not measured at FVTPL:

a) financial assets that are debt instruments;

b) financial guarantee contracts issued; and

c) financing commitments issued.

No impairment loss is recognised on equity investments. The Window measures loss allowances at an amount equal to

lifetime ECL, except for the following, for which they are measured as 12-month ECL:

a) debt investment securities that are determined to have low credit risk at the reporting date; and

b) other financial instruments (other than lease receivables) on which credit risk has not increased significantly

since their initial recognition.

Credit-impaired financial assets

At each reporting date, the Window assesses whether financial assets carried at amortised cost and debt financial assets

carried at FVTE are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a

detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset

is credit-impaired includes the following observable data:

a) significant financial difficulty of the borrower or issuer;

b) a breach of contract such as a default or past due event;

c) the restructuring of a financing or advance by the Window on the terms that the Window would not consider

otherwise;

d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or

e) the disappearance of an active market for a security because of financial difficulties.

A financing that has been renegotiated due to a deterioration in the borrower’s condition is usually considered to be

credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly

and there are no other indicators of impairment. In addition, a retail financing exposure that is overdue for 90 days or

more is considered impaired.



18


2.29.5 Impairment(continued)

Credit-impaired financial assets In making an assessment of whether an investment in sovereign debt is credit-impaired, the Window considers the

following factors.

a) The market’s assessment of creditworthiness as reflected in the Sukuk yields.

b) The rating agencies’ assessments of creditworthiness.

c) The country’s ability to access the capital markets for new debt issuance.

d) The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory

debt forgiveness.

e) The international support mechanisms in place to provide the necessary support as ‘lender of last resort’ to that

country, as well as the intention, reflected in public statements, of governments and agencies to use those

mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political

intent, whether there is the capacity to fulfil the required criteria.

Calculation of expected credit loss (ECL)

Changes to the assumptions and estimate on uncertainties that have a significant impact on ECL for the year ended 31

December 2018 pertain to the changes introduced as a result of adoption of IFRS 9: Financial instruments. The impact

is mainly driven by inputs, assumptions and techniques used for ECL calculation under IFRS 9 methodology.

Inputs, assumptions and techniques used for ECL calculation – IFRS 9 Methodology

Key concepts in IFRS 9 that have the most significant impact and require a high level of judgment, as considered by the

Window while determining the impact assessment, are:

Assessment of Significant Increase in Credit Risk

The assessment of a significant increase in credit risk is done on a relative basis. To assess whether the credit risk on a

financial asset has increased significantly since origination, the Window compares the risk of default occurring over the

expected life of the financial asset at the reporting date to the corresponding risk of default at origination, using key risk

indicators that are used in the Window’s existing risk management processes.

Macroeconomic Factors, Forward Looking Information (FLI) and Multiple Scenarios

The measurement of ECL for each stage and the assessment of significant increases in credit risk considers information

about past events and current conditions as well as reasonable and supportable forecasts of future events and economic

conditions. The estimation and application of forward-looking information requires significant judgment.

Probability of Default (PD), Loss Given Default (LGD) and Exposure At Default (EAD) inputs used to estimate Stage

1 and Stage 2 credit loss allowances are modelled based on the macroeconomic variables (or changes in macroeconomic

variables), that are closely correlated with credit losses in the relevant portfolio.

Definition of default

The definition of default used in the measurement of ECL and the assessment to determine movement between stages is

consistent with the definition of default used for internal credit risk management purposes. IFRS 9 does not define

default, but contains a rebuttable presumption that default has occurred when an exposure is greater than 90 days past

due.

Expected life

When measuring ECL, the Window must consider the maximum contractual period over which the Window is

exposed to credit risk. All applicable contractual terms are considered when determining the expected life, including

prepayment options and extension and rollover options. For certain revolving credit facilities that do not have a fixed

maturity, the expected life is estimated based on the period over which the Window is exposed to credit risk and

where the credit losses would not be mitigated by management actions.



19



Overview of the ECL principles

The adoption of IFRS 9 has fundamentally changed the Window’s financing loss impairment method by replacing

incurred loss approach with a forward-looking ECL approach. From 1 January 2018, the Window has been recording

the allowance for expected credit losses for all financing exposure and other debt financial assets not held at FVPL,

together with financing commitments and financial guarantee contracts. Equity instruments are not subject to

impairment under IFRS 9.

The ECL allowance is based on the credit losses expected to arise over the life of the asset (the lifetime expected

credit loss (LTECL), unless there has been no significant increase in credit risk since origination, in which case, the

allowance is based on the 12 months’ expected credit loss (12-month ECL).

The 12-month ECL is the portion of LTECLs that represent the ECLs that result from default events on a financial

instrument that are possible within the 12 months after the reporting date.

Both LTECLs and 12mECLs are calculated on either an individual basis or a collective basis, depending on the nature

of the underlying portfolio of financial instruments.

The Window has established a policy to perform an assessment, at the end of each reporting period, of whether a

financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in

the risk of default occurring over the remaining life of the financial instrument.

Based on the above process, the Window groups its financing exposure into Stage 1, Stage 2, and Stage 3, as described

below:

Stage 1

When financing are first recognised, the Window recognises an allowance based on 12 month ECLs. Stage 1

financing exposure also include facilities where the credit risk has improved and the financing exposure has been

reclassified from Stage 2. The Window considers the local currency exposures with Government of Oman or CBO

as low credit risk.

Stage 2

When a financing exposure has shown a significant increase in credit risk since origination, the Window records an

allowance for the LTECLs. Stage 2 financing exposure also include facilities, where the credit risk has improved and

the financing exposure has been reclassified from Stage 3.

Stage 3

Financing exposure considered credit-impaired. The Window records an allowance for the LTECLs.

At initial recognition of a financial asset, the Window recognises a loss allowance equal to 12-month expected credit

losses. After initial recognition, the three stages under the proposals would be applied as follows:

Stage 1

Credit risk has not increased significantly since initial recognition – recognise 12-month expected credit losses

Stage 2

Credit risk has increased significantly since initial recognition – recognise lifetime expected losses (this is recognising

a provision earlier than under IAS 39 Financial assets: Recognition and Measurement) with revenue being calculated

based on the gross amount of the asset

Stage 3

There is objective evidence of impairment as at the reporting date to recognise lifetime expected losses, with revenue

being based on the net amount of the asset (that is, based on the impaired amount of the asset).



20



Purchased or originated credit impaired (POCI) assets are financial assets that are credit impaired on initial

recognition. POCI assets are recorded at fair value at original recognition and profit is subsequently recognised based

on a credit-adjusted effective profit rate (EPR). ECLs are only recognised or released to the extent that there is a

subsequent change in the expected credit losses.

For financial assets for which the Window has no reasonable expectations of recovering either the entire outstanding

amount, or a proportion thereof, the gross carrying amount of the financial asset is reduced. This is considered a

(partial) derecognition of the financial asset.

The calculation of ECLs

The Window calculates ECLs based on a two probability-weighted scenarios to measure the expected cash shortfalls,

discounted at an approximation to the EPR. A cash shortfall is the difference between the cash flows that are due to

an entity in accordance with the contract and the cash flows that the entity expects to receive.

The mechanics of the ECL calculations are outlined below and the key elements are, as follows:

- PD – The Probability of Default is an estimate of the likelihood of default over a given time horizon. A

default may only happen at a certain time over the assessed period, if the facility has not been previously

derecognised and is still in the portfolio.

- EAD – The Exposure at Default is an estimate of the exposure at a future default date, taking into account

expected changes in the exposure after the reporting date, including repayments of principal and profit,

whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued profit

from missed payments.

LGD - The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time. It

is based on the difference between the contractual cash flows due and those that the Bank would expect to receive,

including from the realisation of any collateral, if any. It is usually expressed as a percentage of the EAD. The

Window has applied a LGD of 0% on Government Sukuk issued by Government of Oman which are classified as

investments under amortised cost.

2.30 Impact of adopting IFRS 9

The impact of adopting IFRS 9 as at 1 January 2018 has been increasing accumulated losses by RO 118 thousand.

Accumulated

losses

RO’000

Closing balance (31 December 2017) (2,719)

Impact on recognition of Expected Credit Losses

Expected credit losses under IFRS 9 for financing contracts at amortised cost including

undrawn portion of financing contracts and financial guarantees (118)

Estimated adjusted opening balance on date of initial application of 1 January 2018 (2,837)



21


2.30 Impact of adopting IFRS 9 (continued)

Expected credit loss / Impairment allowances

The following table reconciles the closing impairment allowance for financial assets in accordance with IAS 39 as at

31 December 2017 to the opening ECL allowance determined in accordance with IFRS 9 as at 1 January 2018:

31 December 2017 Re-measurement 1 January 2018

RO’000 RO’000 RO’000

Financing contracts with customers 971 84 1,055

Undrawn portion of financing contracts and

financial guarantees - 34 34

971 118 1,089

Classification and Measurement of Financial Instruments

The Window performed a detailed analysis of its business models for managing financial assets as well as

analysing their cash flow characteristics. The below table reconciles the original measurement categories

and carrying amounts of financial assets in accordance with IAS 39 and the new measurement categories

under IFRS 9 as at 31 December 2017.

Impact of IFRS 9

Original

classification under

IAS 39

New

classification

under IFRS 9

Original

carrying

amount

Re-

measure-

ment

Re-

classifica

-tion

New

carrying

amount

RO’000 RO’000 RO’000 RO’000

Financial assets

Cash and balances with central

bank

Loans and

receivables

Amortised

cost 18,393

- - 18,393

Due from banks Loans and

receivables

Amortised

cost 414

- - 414

Financing contracts with

customers

Loans and

receivables

Amortised

cost 82,168

(118) - 82,050

Investment securities – debt Held-to-maturity Amortised

cost 637 - - 637

Investment securities – equity Available-for-sale FVOCI 505 - - 505

Others Loans and

receivables

Amortised

cost 800 - - 800

Adoption of IFRS 9 did not result in any change in classification or measurement of financial liabilities.



22


2.31 New standards, amendments and interpretations

There are no new standards issued by AAOIFI during the year which may impact the financial statements of the Bank.

Standard issued but not yet effective

FAS 28 Murabaha and Other Deferred Payment Sales

AAOIFI has issued FAS 28 Murabaha and Other Deferred Payment Sales in 2017. FAS 28 supersedes the earlier FAS

No. 2 "Murabaha and Murabaha to the Purchase Orderer" and FAS No. 20 "Deferred Payment Sale". The objective

of this standard is to prescribe the appropriate accounting and reporting principles for recognition, measurement and

disclosures in relation to Murabaha and other deferred payment sales transactions for the sellers and buyers, for such

transactions. This standard shall be effective for the financial periods beginning on or after 1 January 2019 with early

adoption permitted.

The Window is currently evaluating the impact of this standard.

FAS 31 Investment Agency (Al-Wakala Bi Al-lstithmar)

AAOIFI has issued FAS 31 Investment Agency (Al-Wakala Bi Al-lstithmar) in 2018. 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 from both the principal (investor) and the agent

perspectives. This standard shall be effective for the financial periods beginning on or after 1 January 2020 with early

adoption permitted. The Window is currently evaluating the impact of this standard.

FAS 35 Risk Reserves

AAOIFI has issued FAS 35 “Risk Reserves” in 2018. This standard along with FAS 30 ‘Impairment, Credit losses

and onerous commitments’ supersede the earlier FAS 11 “Provisions and reserves”.

The objective of this standard is to establish the principles of accounting and financial reporting for risk reserves

established to mitigate various risks faced by stakeholders, mainly the profit and loss taking investors, of Islamic

financial institutions (IFIs/ the institutions). This standard shall be effective for the financial periods beginning on or

after 1 January 2021 with early adoption permitted only if the Group early adopts FAS 30 “Impairment, Credit losses

and onerous commitments”.

The Bank is currently evaluating the impact of this standard.

FAS 30 Impairment, Credit losses and onerous commitments

In November 2017, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) issued

Financial Accounting Standard (FAS) 30 - Impairment, credit losses and onerous commitments, the standard

supersedes the earlier FAS 11 “Provisions and Reserves” effective from the financial periods beginning on or after 1

January 2020, with early adoption permitted.

However, during the year 2017, the CBO has issued a circular BM 1149 dated 13 April 2017 governing

implementation of IFRS 9 Financial Instruments (IFRS 9) for all the banks, which also apply to Islamic

banks/windows subject to any specific instructions by the Central Bank for Islamic Banking entities on IFRS 9 if, as

and when instructions are issued.



23


2.31 New standards, amendments and interpretations (continued)

FAS 30 Impairment, Credit losses and onerous commitments (continued)

The Window adopted IFRS 9 on 1 January 2018 and did not restate the comparative information in accordance with

relevant requirements of IFRS 9. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and

introduces new requirements for the classification and measurement of financial assets and financial liabilities, a new

model based on expected credit losses for recognising loan loss provisions more closely with risk management

methodology.

The key changes to the bank’s accounting policies resulting from its adoption of IFRS 9 are summarised below.

(i) Classification and measurement

IFRS 9 contains classification and measurement approach for financial assets that reflects the business model in

which financial assets are managed and the underlying cash flow characteristics. IFRS 9 contains three principal

classification categories for financial assets: (a) measured at Amortised Cost (AC), Fair Value through Other

Comprehensive Income (FVOCI) and Fair Value through Profit or Loss (FVPL). Under IFRS 9, derivatives

embedded in contracts where the host is a financial asset are never bifurcated. Instead, the hybrid financial instrument

as a whole is assessed for classification.

(ii) Expected credit losses

IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (ECL) model. The

new impairment model will apply to financial assets measured at amortised cost or FVOCI, except for investments

in equity instruments. A number of significant judgements are also required in applying the accounting requirements

for measuring ECL, such as:

Determining criteria for significant increase in credit risk (SICR);

Choosing appropriate models and assumptions for the measurement of ECL;

Establishing the number and relative weightings of forward-looking scenarios for each type of

product/market and the associated ECL; and

Establishing groups of similar financial assets for the purposes of measuring ECL.

The Central Bank of Oman (CBO) has issued guidelines relating to implementation of IFRS 9. The relevant

requirements relating to transition are set out below:

Should the existing financing loss impairment computed in accordance with the requirements of

IAS 39 and CBO guidelines be higher than the impairment allowance computed under IFRS 9, the

related difference (net of tax) be transferred to a financing loss impairment reserve from retained

earnings as of 1 January 2018.

ln the subsequent years, where the allowance for financing loss impairment computed in accordance

with CBO requirements is higher than the allowance for financing loss impairment loss computed

under IFRS 9, the difference (net of tax) should be transferred to the aforementioned financing loss

impairment reserve from retained earnings.

The related impairment reserve will not be available for dividend distribution or for inclusion in the

regulatory capital. Any subsequent utilisation of the impairment reserve would require prior

approval of the CBO.

(iii) Financial liabilities

Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward

unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own

credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income.

As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, the Bank does not

expect a significant impact as a result of applying IFRS 9.



24

3. Critical accounting estimates and judgments in applying accounting policies

The preparation of the Window’s financial statements requires management to make judgments, estimates and

assumptions that affect the amounts reported in the financial statements. The most significant uses of judgments and

estimates are as follows:

Impairment provisions against financing contracts with customers (applicable to 2017)

Window reviews its financing contracts at each reporting date to assess whether an impairment provision should be

recorded in the financial statements. In particular, judgment by management is required in the estimation of the

amount and timing of future cash flows when determining the level of provision required. Such estimates are based

on assumptions about factors involving varying degrees of judgments and uncertainty. Actual results may differ due

to changes in the underlying facts.

In addition to specific provisions against individually significant financing contracts, Window also makes a collective

impairment provision against exposures which, although not specifically identified as requiring a specific provision,

have a greater risk of default than when originally granted. This takes into consideration, factors such as any

deterioration in country risk, industry, and technological obsolescence, as well as identified structural weaknesses or

deterioration in cash flows.

Impairment losses on financial assets (applicable to 2018 only)

The measurement of impairment losses under IFRS 9 across all categories of financial assets requires judgement, in

particular, the estimation of the amount and timing of future cash flows and collateral values when determining

impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by number of

factors, changes in which can result in different levels of allowances.

The Window's ECL calculations are outputs of complex models with number of underlying assumptions regarding

the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting

judgements and estimates include:

- The Window's internal credit grading model

- The Window's criteria for assessing if there has been a significant increase in credit risk and so

allowances for financial assets should be measured on a Lifetime Expected Credit Losses (LTECL)

basis and the qualitative assessment

- The segmentation of financial assets when their ECL is assessed on a collective basis

- Development of ECL models, including the various formulas and the choice of inputs

- Determination of associations between macroeconomic scenarios and, economic inputs, such as

unemployment levels and collateral values, and the effect on Probability of Default (PD), Exposure

At Default (EAD) and Loss Given Default (LGD)

- Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive

the economic inputs into the ECL models.

Classification of financial assets (applicable to 2018 only)

Classification of financial assets in the appropriate category depends upon the business model and SPPI test.

Determining the appropriate business model and assessing whether the cash flows generated by the financial asset

meet the SPPI test is complex and requires significant judgements by management. The Window applies judgement

while carrying out SPPI test and considers relevant factors such as the currency in which the financial asset is

denominated, and the period for which the interest rate is set.

Classification of investments (applicable to 2017)

Management decides on acquisition of a financial asset whether it should be classified as equity type instrument

carried at fair value through equity, equity type instrument carried at fair through statement of comprehensive income

or debt type instrument carried at amortised cost.



25

3. Critical accounting estimates and judgments in applying accounting policies(continued)

Fair valuation of investments (applicable to 2017 and 2018)

The determination of fair values of unquoted investments requires management to make estimates and assumptions

that may affect the reported amount of assets at the date of the financial statements. The valuation of such investments

is based on the fair value criteria explained in note 2.13.

Nonetheless, the actual amount that is realised in a future transaction may differ from the current estimate of fair

value and may still be outside management estimates, given the inherent uncertainty surrounding valuation of

unquoted investments.

4. Cash and balance with the Central Bank of Oman

2018 2017

RO '000' RO '000'

Cash in hand 842 914

Balance with the Central Bank of Oman 21,292 17,479

22,134 18,393

5. Due from banks

2018 2017

RO '000' RO '000'

Current accounts 199 414

199 414

Due from banks include RO Nil (2017: RO 70 thousand) current account balance with head office.



26

6. Financing contracts with customers

Retail

Corporate,

SME and

Commercial

Jointly financed

with unrestricted

investment

accounts

Jointly

financed with

unrestricted

investment

accounts

Total

2018 2018 2018

RO '000' RO '000' RO '000'

Murabaha 6,019 15,655 21,674

Deferred profits (711) (478) (1,189)

5,308 15,177 20,485

Ijarah Muntahia Bittamleek (note 6.1) 4,511 29,754 34,265

Musharaka 26,743 31,910 58,653

Wakala - 9,156 9,156

36,562 85,997 122,559

Allowance for credit losses and contractual profit

not recognized (387) (932) (1,319)

Total 36,175 85,065 121,240


Retail

Corporate,

SME and

commercial

Jointly financed with

unrestricted investment

accounts

Jointly financed

with

unrestricted

investment

accounts

Total

2017 2017 2017

RO ‘000 RO ‘000 RO ‘000

Murabaha 5,268 8,678 13,946

Deferred profits (610) (536) (1,146)

4,658 8,142 12,800

Ijarah Muntahia Bittamleek (note 6.1) 3,525 13,410 16,935

Musharaka 24,851 22,384 47,235

Wakala - 6,183 6,183

33,034 50,119 83,153

Allowance for credit losses and contractual

profit not recognized (408) (577) (985)

Total financing contracts with customers 32,626 49,542 82,168



27


Note 6.1

Investments in Ijarah assets as of the reporting date were as follows:

Buildings Equipment Vehicles Total

RO RO RO RO

Cost 16,024 13,631 8,060 37,715

Accumulated depreciation (1,500) (260) (1,690) (3,450)

Carrying value at 31 December 2018 14,524 13,371 6,370 34,265

Cost 8,823 9,208 882 18,913

Accumulated depreciation (1,141) (235) (602) (1,978)

Carrying value at 31 December 2017 7,682 8,973 280 16,935

The following table shows a reconciliation of the specific and collective impairment provisions for losses on financing

contracts with customers:

2018 Contractual

Allowance for interest not

credit losses recognised Total

RO’ 000 RO’ 000 RO’ 000

At 1 January 2017 998 5 1,003

Reserved profit charged to financing contracts with

customers

-

13

13

Charge for the year 275 - 275

Recovery/reversal for the year (302) (4) (306)

At 31 December 2017 971 14 985

Impact of IFRS 9 adoption (note 2.30) 118 - 118

At 1 January 2018 1,089 14 1,103

Reserved profit charged to financing contracts with

customers

-

26

26

Charge for the year 244 - 244

Recovery/reversal for the year (54) - (54)

────── ────── ──────

At 31 December 2018 1,279 40 1,319

══════ ══════ ══════



28

6. Financing contracts with customers (continued)

Comparison of provision held as per IFRS 9 and required as per CBO guidelines

Asset Classification as per

CBO Norms

Asset

Classification

as per IFRS 9

Gross

Amount

Provision

required as per

CBO Norms

Provision held as

per IFRS 9

Difference between CBO

provision required and

provision held

Net Amount as

per CBO

norms*

Net Amount as

per IFRS 9

Interest recognised in

P&L as per IFRS 9

Reserve interest

as per CBO

norms

RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000 RO 000

(1) (2) (3) (4) (5) (6) = (4)-(5) (7)=(3)-(4)-(10) (8) = (3)-(5) (9) (10)

Standard

Stage 1 114,683 1,085 819 266 113,598 113,864 Stage 2 7,017 66 184 (118) 6,951 6,833

Stage 3 - - -

121,700 1,151 1,003 148 120,549 120,697 - -

Special Mention

Stage 1 - - - - - -

Stage 2 2,339 22 194 (172) 2,317 2,145

Stage 3 - - - - - -

2,339 22 194 (172) 2,317 2,145 - -

Substandard

Stage 1 - - - - - -

Stage 2 - - - - - - Stage 3 452 113 2 111 331 450 8

452 113 2 111 331 450 - 8

Doubtful

Stage 1 - - - - - -

Stage 2 - - - - - -

Stage 3 307 109 40 69 186 267 12 307 109 40 69 186 267 - 12

Loss

Stage 1 - - - - - -

Stage 2 - - - - - - Stage 3 272 141 33 108 112 239 20

272 141 33 108 112 239 - 20

Other items not covered under CBO circular BM 977

and related instructions

Stage 1 8,886 - 1 (1) 8,886 8,885 Stage 2 35,794 - 7 (7) 35,794 35,787

Stage 3 - - - - - -

44,680 - 8 (8) 44,680 44,672 - -

Total

Stage 1 123,569 1,085 820 265 122,484 122,749 - -

Stage 2 45,150 88 385 (297) 45,061 44,765 - -

Stage 3 1,031 363 75 288 629 956 - 40

Total 169,750 1,536 1,280 256 168,175 168,470 - 40



29


Restructured loans

RO 000

Asset

Classification as

per CBO Norms

Asset

Classifi

cation

as per

IFRS 9 Gross

Carrying

Amount

Provision

required

as per

CBO

Norms

Provision

held as

per IFRS

9

Difference

between

CBO

provision

required

and

provision

held

Net

Carrying

Amount as

per CBO

norms*

Net

Carrying

Amount

as per

IFRS 9

Interest

recognised

in P&L as

per IFRS

9

Reserve

interest

as per

CBO

norms

(1) (2) (3) (4) (5)

(6) = (4)-

(5)

(7)=(3)-(4)-

(10)

(8) = (3)-

(5) (9) (10)

Classified as

performing

Stage 1 - - - - - - - - Stage 2 495 - - - 495 495 - - Stage 3 - - - - - - - -

495 - - - - - - -

Classified as non-

performing

Stage 1 - - - - - - - - Stage 2 - - - - - - - - Stage 3 - - - - - - - -

- - - - - - - -

Total

Stage 1 - - - - - - - - Stage 2 495 - - - 495 495 - - Stage 3 - - - - - - - - Total 495 - - - 495 495 - -



30


Movement in Expected credit losses (ECL)

Stage 1 Stage 2 Stage 3 Total

RO 000 RO 000 RO 000 RO 000

Exposure subject to ECL

- Financing contracts with customers 114,114 9,356 1,031 124,501

- Investment Securities (Debt) - - - -

- Unutilized portion of financing contracts and Financial

Guarantees

44,680

-

-

44,680

- Due from banks, Central Bank and Other Financial Assets 569 - - 569

159,363 9,356 1,031 169,750

Opening Balance (Day 1 impact) - as at 1 January 2018

- Financing contracts with customers 459 589 7 1,055

- Loan Commitments and Financial Guarantees 32 2 - 34

491 591 7 1,089

Net transfer between stages

- Financing contracts with customers (299) 284 15 -

(299) 284 15 -

Charge for the Period (net)

- Financing contracts with customers 634 (493) 53 194


Guarantees

(6)

3

-

(3)

628 (490) 53 191

Closing Balance - as at 31 December 2018

- Financing contracts with customers

794

380

75

1,249

- Investment Securities (Debt)

-

- - -


Guarantees

26

5

-

31

- Due from banks, Central Bank and Other Financial Assets - - - -

820 385 75 1,280



31


Impairment charge and provisions held

RO 000

As per CBO

Norms As per IFRS 9 Difference

Impairment loss charged to profit and loss account (190) (190) -

Provisions required as per CBO norms/held as per IFRS 9 1,536 1,280 256

Gross NPL ratio 0.84% 0.84% -

Net NPL ratio 0.54% 0.78% -

Difference between provisions held as per IFRS 9 and the CBO norms amounting to RO 256 K is not recognized as

impairment reserve, as the Window is not a separate legal entity and the requirement is assessed at overall Bank basis.

7. Investments

Equity investments measured at FVTE:

Carrying

value Carrying value

2018 2017

RO’000 RO’000

Unquoted investments

Service sector – Level 3 466 -

Total FVTE– Equity investments 466 -

Carrying


2018 2017

RO’000 RO’000

Available for sale

Unquoted investments

Service sector – Level 3 - 505

Total available for sale - 505

Carrying


2018 2017

RO’000 RO’000

Investment Held to collect (Amortized Cost)

Quoted investments- Oman

Government Sukuk 637 -

Total Held to collect (Amortised cost) 637 -

Held to Maturity

Quoted investments- Oman -

Government Sukuk - 637

Total Held to collect - 637

Total Investments 1,103 1,142



32

7. Investments (continued)

The Bank has designated its equity investments previously classified as available-for-sale as equity investments at

FVTE on the basis that these are not held for trading.

During the year ended 31 December 2018, there were no transfers between Level 1 and Level 2 fair value

measurements, and no transfers into and out of Level 3 fair value measurements.

The investment represents an investment in sovereign Sukuk issued by the Government of Oman. These Sukuks are

listed on Muscat Securities Market. The fair value of the investment is RO 637 thousand.

8. Property and equipment

Equipment,

furniture and

fixtures

Capital work-

in-progress

Computer

equipment

Total

RO '000' RO '000' RO '000' RO '000'

Cost

At 1 January 2017 20 989 3 1,012

Additions - 9 - 9

Transfers - 1 (1) -

At 1 January 2018 20 999 2 1,021

Additions 1 6 1 8

At 31 December 2018 21 1,005 3 1,029

Depreciation

At 1 January 2017 9 361 - 370

Charge for the year 3 200 - 203

At 1 January 2018 12 561 - 573

Charge for the year 4 185 - 189

At 31 December 2018 16 746 -

762

Carrying value

At 31 December 2018 5 259 3 267

At 31 December 2017 8 438 2 448



33

9. Intangible assets

2018 2017

RO '000' RO '000'

Cost

At 1 January 436 404

Additions 5 32

At 31 December 441 436

Amortization

At 1 January 323 240

Charge for the year 59 83

At 31 December 382 323

Carrying value at 31 December 59 113

10. Other assets

2018 2017

RO '000' RO '000'

Profit receivable from financing contracts 1,092 717

Profit accrued on self-financed investments 44 31

Prepayments 92 52

1,228 800

11. Current and margin accounts

2018

2017

RO '000' RO '000'

Current accounts

Individuals 6,572 3,308

Corporate 46,883 10,662

53,455 13,970

Margin accounts 2,314 710

55,769 14,680



34

12. Wakalah acceptances from customers

2018 2017

RO '000' RO '000'

Domestic:

Financial institutions 33,500 33,500

Non-financial institutions 29,146 38,508

62,646 72,008

13. Other liabilities

2018 2017

RO '000' RO '000'

Pay orders issued not presented 48 114

Staff end of service benefits 59 44

Profit payable on Wakalah acceptances 1,825 1,523

Charity fund 6 8

Accrued expenses and other payables 859 549

2,797 2,238

14. Equity of unrestricted investment account holders

2018 2017

RO '000' RO '000'

Saving accounts retail 3,531 3,074

Saving accounts corporate 15 4

Term deposit accounts retail 169 129

Profit payable on equity of investment account holders 4 1

Profit equalization reserve (note 14.1) 13 10

Investment risk reserve (note 14.2) 1 1

3,733 3,219

Unrestricted investment accounts represent funds invested by the Investment Account Holders under Mudaraba to

form a pool of funds. Investment accountholder’s funds are commingled with the Window’s funds for Shari’a

compliant financing.

Term deposits are time-bound deposits that can be withdrawn with no loss of capital subject to certain conditions.

Al Yusr’s share, as Mudarib, in the profit generated from the pool of investments is up to a maximum of 80% (2017:

80%) as per the terms of investment account holder agreements.



35

14. Equity of investment account holders (continued)

During the year, the Al Yusr has not charged any administrative expense to the pool.

Product Participation factor Average rate earned

Saving Accounts 80 0.70%

Term Deposits - 1 Month 70 0.74%

Term Deposits - 3 Months 70 0.89%




Note 14.1

Movement during the year in profit equalisation reserve was as follows:

2018 2017

RO ‘000 RO ‘000

At 1 January 10 5

Apportionment from income allocable to equity of investment account

holders

4

5

14 10

Note 14.2

Movement during the year in investment risk reserve was as follows:

Apportionment from income allocable to equity of investment account

holders

1

1

At the reporting date, Al Yusr has maintained investment risk reserve of RO 1 thousand (2017: RO 1 thousand)

15. Allocated share capital

2018 2017

RO ‘000 RO ‘000

Allocated share capital: 17,000 14,000

In 2018, RO 3 Million additional capital was injected (RO nil in 2017).

16. Special reserve

On 20 June 2017, the CBO issued a circular in relation to the reserve requirements for restructured accounts. In

accordance with the circular, a reserve should be computed at 10% for 2017 and 15% for 2018 on accounts, which

were restructured after issuance of the circular. Accordingly, the Window has transferred an amount of RO 26

thousand (2017: RO 52 thousand) to special reserve. The Central Bank of Oman has abolished the creation of special

reserve on financing contracts restructured after the November 2018.



36

17. Contingencies and commitments

The Window is a party to financial instrument with off-balance sheet credit risk in the normal course of business to

meet the financing needs of its customers. These financial instruments include standby letters of credit, financial

guarantees to third parties, commitments to extend credit and others. The Window’s exposure to credit loss in the

event of non-performance by the other party to such financial instruments is represented by the contract value or the

notional amount of the instrument. However, generally the credit risk on these transactions is lower than the contract

value or the notional amount.

The risk involved is essentially the same as the credit risk involved in extending loan facilities and therefore these

transactions are subject to the same credit organisation, portfolio maintenance and collateral requirements for

customers applying for loans and advances.

The outstanding contract value or the notional amounts of these instruments at 31 December were as follows:

2018 2017

RO’000 RO’000

Guarantees 40,756 14,848

Letters of credit 3,259 2,041

────── ──────

44,015 16,889

══════ ══════

At the reporting date, outstanding undrawn portion of financing contracts with customers amounted to RO 10,463

thousand (2017: RO 5,593 thousand).

The allowances for credit losses for commitments and financial guarantees is included under note 6.

The table below analyses the concentration of contingent liabilities by economic sector:

2018 2017

RO’000 RO’000

Construction 39,494 90% 14,933 88%

Utilities - 0% - 0%

Export trade - 0% - 0%

Government - 0% - 0%

Import trade 31 0% 260 2%

Transportation - 0% 14 0%

Wholesale and retail trade 1,179 3% 1,192 7%

Services 1,240 3% 218 1%

Manufacturing 525 1% 216 1%

Mining & Quarrying 1,546 4% 56 0%

────── ──────

44,015 100% 16,889 100%

══════ ══════



37

17. Contingencies and commitments (continued)

Credit-related financial instruments include unutilised commitments to extend credit, standby letters of credit and

guarantees which are designed to meet the financing requirements of customers. The credit risk on these transactions

is generally less than the contractual amount. The notional principal amounts of outstanding credit-related contingent

items and the risk-weighted exposures calculated were as follows:

31-Dec-18

Notional principal amount Risk-weighted exposure

Guarantees 40,756 19,360

Letters of credit 3,259 1,567

Unutilised credit of facilities 10,463 3,519

54,478 24,446

18. Income from financing contracts with customers

2018 2017

RO '000' RO '000'

Income from Murabaha receivables 938 772

Income from Ijarah on leased assets, net of depreciation 1,229 756

Income from Diminishing Musharaka 2,529 2,114

Income from Wakala financing 490 116

5,186 3,758

19. Fees, commission and other income

2018 2017

RO '000' RO '000'

Fees and commission income 703 537

Guarantees 231 112

Exchange gain 110 58

1,044 707

20. Staff cost

2018 2017

RO '000' RO '000'

Salaries 684 706

Allowances 247 250

Social security costs 75 79

End of service benefits 15 12

Other costs 29 24

1,050 1,071



38

21. Other expenses

2018 2017

RO '000' RO '000'

Fee and consultancy charges 66 75

Marketing and advertisement 22 28

Office expenses 241 271

IT expenses 86 78

Others 84 72

499 524

22. Cash and cash equivalents

Cash and cash equivalents for the purpose of statement of cash flows comprise of the following amounts:

2018 2017

RO '000' RO '000'

Cash and balance with the Central Bank of Oman 22,134 18,393

Due from banks 199 414

22,333 18,807

23. Related party transactions and balances

Related parties represent associated companies of the Bank, the Bank and its major shareholders, directors and key

management personnel of the Window / Bank and entities controlled, jointly controlled or significantly influenced by

such parties, the Bank’s Shari’a Supervisory Board members and external auditors. Transactions with related parties

arise from the ordinary course of business. Pricing policies and terms of these transactions are approved by the

Window’s management. Outstanding balances at the year end, excluding financing contracts with customers, are

unsecured.

The following table provides the total amount of transactions that have been entered into with related parties for the

relevant financial period.

Transactions with related parties included in the statement of comprehensive income were as follows:

31 December 2018

Head office

Shari’a

supervisory

board

Total

2018 2018 2018

RO ‘000 RO ‘000 RO ‘000

Sitting fees (note 23.1) - 35 35

Other expenses 33 4 37

33 39 72



39

23. Related party transactions and balances (continued)

31 December 2017

Head office

Shari’a

supervisory board

Total

2017 2017 2017

RO ‘000 RO ‘000 RO ‘000

Sitting fees (note 23.1) - 35 35

Other expenses 27 - 27

27 35 62

Note 23.1

Sitting fees of each member of Shari’a supervisory board was as follows:

2018 2017

RO ‘000 RO ‘000

Dr. Esam Khalaf Al Enzi 13 13

Dr. Ahmed Sobhi Ahmed Al Ayyadi 11 11

Dr. Abdulaziz Khalifa Al Qassar 11 11

35 35

Note 23.2

Shari’a supervisory board meetings held during the year and attendance of each member was as follows:

2018 2017

No. No.

Meetings held during the year 4 4

Meetings attended:

Dr. Esam Khalaf Al Enzi 3 4

Dr. Ahmed Sobhi Ahmed Al Ayyadi 4 4

Dr. Abdulaziz Khalifa Al Qassar 4 3

Compensation of key management personnel included in the statement of comprehensive income is as follows:

2018 2017

RO ‘000 RO ‘000

Short term employee benefits 96 96

End of service benefits - -

96 96



40

23. Related party transactions and balances (continued)

Balances due to / from related parties are as follows:

2018 2017

RO ‘000 RO ‘000

Due from:

Oman Arab Bank SAOC – due from banks - 70

Due to:

Oman Arab Bank SAOC – due to the Bank 6,000 -

Shari’a Supervisory Board members - -

Other related parties – current accounts - -

Outstanding balances at the statement of financial position date arise in the normal course of business. For the year

ended 31 December 2018, the Window has not recorded any impairment of amounts owed by related parties.



41

24. Maturity analysis

The table below shows an analysis of assets, liabilities and unrestricted investment accounts analysed according to when they are expected to be recovered or settled.

31 December 2018 Upto 3 months 3 months to 1 year 1 to 3 years 3 to 5 years Over 5 years Total

RO ‘000 RO ‘000 RO ‘000 RO ‘000 RO ‘000 RO ‘000

Assets

Cash and balance with Windows and Central Bank of Oman 17,261 2,369 1,173 59 1,272 22,134

Due from banks 199 - - - - 199

Financing contracts with customers 9,289 24,968 26,337 20,216 40,430 121,240

Investments 466 - - 637 - 1,103

Property and equipment - - - - 267 267

Intangible assets - - - - 59 59

Other assets 734 480 - - 14 1,228

Total assets 27,949 27,817 27,510 20,912 42,042 146,230

Unrestricted investment accounts 439 600 910 890 894 3,733

Current and margin accounts 21,382 21,022 - - 13,365 55,769

Wakalah acceptances from customers 2,866 25,753 22,542 280 11,205 62,646

Wakalah acceptances from the Bank 6,000 - - - - 6,000

Other liabilities 787 914 587 4 505 2,797

Special reserve - - - - 78 78

Owners' equity - - - - 15,207 15,207

Total liabilities and accountholders and Owner’s equity 31,474 48,289 24,039 1,174 41,254 146,230

Gap (3,524) (20,472) 3,471 19,738 787 -

Cumulative gap (3,524) (23,996) (20,525) (787) - -

Off-balance sheet items:

Letter of credits 2,226 1,033 - - - 3,259

Guarantees 2,441 2,102 35,932 281 - 40,756

Total off balance sheet items 4,667 3,135 35,932 281 - 44,015



42

24. Maturity analysis (continued)

31 December 2017 Upto 3 months 3 months to 1 year 1 to 3 years 3 to 5 years Over 5 years Total

RO ‘000 RO ‘000 RO ‘000 RO ‘000 RO ‘000 RO ‘000

Assets

Cash and balance with Windows and Central Bank of Oman 14,561 1,762 1,221 113 736 18,393

Due from bansk 414 - - - - 414

Financing contracts with customers 4,383 15,220 20,269 12,914 29,382 82,168

Investments 505 - - 637 - 1,142

Property and equipment - - - - 448 448

Intangible assets - - - - 113 113

Other assets 419 363 - - 18 800

Total assets 20,282 17,345 21,490 13,664 30,697 103,478

Unrestricted investment accounts 352 551 772 772 772 3,219

Current and margin accounts 5,588 5,599 - - 3,493 14,680

Wakalah acceptances from customers 7,352 29,077 23,653 1,478 10,448 72,008


Owner’s equity - - - - 11,333 11,333

Total liabilities and accountholders and Owner’s equity 13,792 35,804 25,045 2,307 26,530 103,478

Gap 6,490 (18,459) (3,555) 11,357 4,167 -

Cumulative gap 6,490 (11,969) (15,524) (4,167) - -

Off-balance sheet items:

Letter of credits 2,041 - - - - 2,041

Guarantees 2,109 2,001 10,738 - - 14,848

Total off balance sheet items 4,150 2,001 10,738 - - 16,889



43

25. Risk management

Introduction

Risk is inherent in the Window’s activities but it is managed through a process of ongoing identification, measurement

and monitoring of material risks. The Window manages its exposure to risks within the approved risk limits. The

process of risk management is critical to the Window’s continuing profitability and each business unit within the

Window is accountable for the risk exposures relating to its responsibilities. The Window is mainly exposed to credit

risk, liquidity risk and market risk, the latter being subdivided into trading and non-trading risks. The Window is also

subject to operational risk.

The independent risk control process does not include business risks such as changes in the environment, technology

and industry. These are monitored through the Window’s strategic planning process.

Risk management structure

The Board of Directors of the Window is ultimately responsible for identifying and controlling risks; however, there

are the Window’s board committees responsible for managing and monitoring risks.

Board of Directors

The Board of Directors of the Window is accountable to the shareholders of the Window. The Board’s specific

responsibilities include:

- ensuring our business is conducted ethically and transparently;

- providing strategic direction and approving corporate strategies;

- ensuring maintenance of adequate risk management controls and reporting mechanisms;

- monitoring management and financial performance

- reviewing and approving the Window’s financial reports;

- approving the business plan and budgets;

- selecting and evaluating the Chief Executive Officer (CEO) and senior management;

- planning for executive succession; and

Board Executive Committee

The Board Executive Committee:

- reviews and approves policies with regard to credit risk limits and controls;

- reviews and approves credit facilities above the executive management’s approval limits;

- reviews and approves expenses or capital expenditures above executive management’s approval limits; and

- considers matters of special importance as delegated by the Board.

Board Audit and Risk Management Committee

The Board Audit and Risk Management Committee oversees all matters concerning:

- integrity of the financial statements;

- compliance with legal and regulatory requirement;

- ensuring that the Window has an effective risk management system and clear policies and procedures for reporting,

taking action and documenting breaches of laws including fraud and theft;

- reviewing and recommending risk management policies and controls to Board;

- review and recommendation to the Board the terms of engagement of our external auditors; and

- performance of the internal audit function.

Shari’a Supervisory Board

The Window’s Shari’a Supervisory Board is entrusted with the responsibility of ensuring the Window’s adherence to

Shari’a rules and principles in its transactions and activities.



44

25. Risk management

Introduction (continued)

Risk Management Department

The Risk Management Department is responsible for implementing and maintaining risk related procedures to ensure

an independent control process. The department is also responsible for the independent control of risks, including

monitoring the risk of exposures against limits and the assessment of risks of new products and structured transactions.

This department also ensures the complete capture of the risks in risk measurement and reporting systems and

performs stress tests on the various portfolios of the Window.

Credit risk

Credit risk is the risk that a customer or counterparty will be unable or unwilling to meet a commitment made with

the Window. It arises from financing, trade finance, treasury and other activities undertaken by the Window. The

Window has put in place standards, policies and procedures for the control and monitoring of all such risks.

Concentration of credit risk arises when a number of counterparties are engaged in similar business activities or

activities in the same geographic region, or have similar economic features that would cause their ability to meet

contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentration

of credit risk indicates the relative sensitivity of the Window’s performance to developments affecting a particular

industry or geographical location.

The Window seeks to manage its credit risks exposure through diversification of financing activities to avoid undue

concentrations of risks with individuals or groups of customers in specific businesses. It also obtains adequate

collateral/security when appropriate.

With the recent adoption of IFRS 9 standards, credit risk management has been enhanced further where more

attributes have been taken into consideration, including but not limited, identifying existing emerging key risks related

to industry, economics, transaction structure, terms and condition of the payments etc in assessment of ECL.

Incorporating forward looking information increases the level of judgement as to how changes in these

macroeconomic factors will affect the Expected Credit Loss (ECL) applicable to the stage 1 and stage 2 exposures

which are considered as performing. The methodologies and assumptions involved, including any forecasts of future

economic conditions, are reviewed periodically. The assessment of significant increase in credit risk and the

calculation of ECL both incorporate forward-looking information.

The following tables set out the key drivers of expected loss and the assumptions used for the Window’s base case

estimate, ECLs based on the base case, plus the effect of the use of multiple economic scenarios as at 31 December

2018.



45

25. Risk management (continued)

Credit risk (continued)

Key drivers ECL scenario

and assigned

weightage

2019 2020 2021 2022 2023

GDP growth (%

change)

Base (66.6%) 2.05% 3.60% 2.95% 3.41% 3.85%

Upside (16.7%) 5.63% 3.91% 4.00% 4.10% 4.21%

Downside(16.7%) 2.06% 2.06% 2.09% 2.83% 3.57%

Oil revenue

(%GDP)

Base (66.6%) 24.26% 24.71% 27.84% 29.65% 31.42%

Upside (16.7%) 38.49% 31.63% 32.02% 32.41% 32.84%

Downside (16.7) 24.30% 24.30% 24.43% 27.36% 30.30%

As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent

uncertainty and therefore the actual outcomes may be significantly different to those projected. The Window considers

these forecasts to represent its best estimate of the possible outcomes and has analysed the non-linearities and

asymmetries within the Window’s different portfolios to establish that the chosen scenarios are appropriately

representative of the range of possible scenarios. 'Other forward-looking considerations not otherwise incorporated

within the above scenarios, such as the impact of any regulatory, legislative or political changes, have also been

considered, but are not deemed to have a material impact and therefore no adjustment has been made to the ECL for

such factors. This is reviewed and monitored for appropriateness on a quarterly basis.

The table below shows the maximum exposure to credit risk for the components of the statement of financial position.

The maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral

agreements.

Gross maximum exposure

2018 2017

RO '000' RO '000'

Balances with Central Bank of Oman 21,292 17,479

Due from banks 199 414

Financing contracts with customers 122,559 83,153

Investments 1,103 1,142

Other assets 1,137 748

Total 146,290 102,936

Contingent liabilities and commitments 44,015 16,889

Total credit risk exposure 190,305 119,825

Where financial instruments are recorded at fair value the amounts shown above represent the current credit risk

exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.



46


Risk concentrations of the maximum exposure to credit risk

The Window’s financial assets having credit risk, before taking into account any collateral held can be analysed by

the following geographical regions:

31 December 2018

Sultanate

of Oman

Other

GCC

countries Europe

United

States of

America Others

Total

2018

RO '000'

Balance with Central Bank of Oman 21,292 - - - - 21,292

Due from banks - 108 4 76 11 199

Financing contracts with customers 122,559 - - - - 122,559

Investments 637 - - - 466 1,103

Other assets (excluding

prepayments) 1,137 - - - - 1,137

Contingent liabilities and

commitments 43,259 - 343 56 357 44,015

Total 188,884 108 347 132 834 190,305

31 December 2017 Sultanate

of Oman

Other GCC

countries Europe

United

States of

America

Others Total

2017

RO ‘000

Balance with Central Bank of Oman

17,479

-

-

-

-

17,479

Due from banks 70 23 41 276 4 414

Financing contracts with customers 83,153 - - - - 83,153

Investments 637 - - - 505 1,142


prepayments)

748

-

-

-

-

748

Contingent liabilities and

commitments

16,133

-

343

56

357

16,889

Total 118,220 23 384 332 866 119,825



47



Risk concentrations of the maximum exposure to credit risk (continued)

An industry sector analysis of the Window’s financial assets having credit risk, before taking into account collateral

held or other credit enhancements, is as follows :

31 December 2018

Trading and

manufacturing

Construction

and real

estate Personal Other Total

RO '000' RO '000' RO '000' RO '000' RO '000'

Balance with Central Bank of Oman - - - 21,292 21,292

Due from banks - - - 199 199

Financing contracts with customers 9,132 31,591 33,034 48,802 122,559

Investments - - - 1,103 1,103

Other assets (excluding prepayments) - - - 1,137 1,137

Contingent liabilities and commitments 1,704 39,494 - 2,817 44,015

Total 10,836 71,085 33,034 75,350 190,305

31 December 2017

Trading

and

manufacturing

Construction

and real estate Personal Other Total

RO ‘000 RO ‘000 RO ‘000 RO ‘000 RO ‘000

Balance with Central Bank of Oman - - - 17,479 17,479

Due from banks - - - 414 414


Investments - - - 1,142 1,142

Other assets (excluding prepayments) - - - 748 748

Contingencies and commitments 1,668 14,933 - 288 16,889

Total 10,800 46,524 33,034 29,467 119,825



48



Collateral and other credit enhancements

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines

are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of

collateral obtained by the Window are as follows:

- For corporate financing: lien over investment accounts, charges over real estate properties, inventory, plant and

equipment, trade and rent receivables, Shari’a compliant equities and other assets; and

- For retail and consumer financing: assignment of salary and terminal benefits and mortgages over the related assets.

The Window also obtains personal guarantees from companies owners for corporate financing. Management monitors

the market value of collateral, requests additional collateral in accordance with the underlying agreement, and

monitors the market value of collateral obtained periodically during its review of the adequacy of the allowance for

impairment losses.

Credit quality per class of financial assets

31 December 2018

Neither

past due

nor

impaired

Past due

but not

impaired

Sub-

standard Doubtfull Loss Total

RO '000' RO '000' RO '000' RO '000'

RO

'000' RO '000'

Balance with Central Bank of Oman 21,292 - - - - 21,292


Financing contracts with customers 105,772 15,756 452 307 272 122,559

Investments 1,103 - - - - 1,103


prepayments) 1,137 - - - - 1,137

Total 129,503 15,756 452 307 272 146,290

31 December 2017

Balance with Central Bank of Oman

17,479

-

-

-

-

17,479



customers

58,188

24,441

362

137

25

83,153

Investments 1,142 - - - - 1,142


prepayments)

748

-

-

-

-

748

Total 77,971 24,441 362 137 25 102,936

It is the Window’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates

focused management of the applicable risks and the comparison of credit exposures across all lines of business,

geographical regions and products. The rating system is supported by a variety of financial analytics, combined with

processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk

ratings are tailored to the various categories and are derived in accordance with the Window’s rating policy. The

attributable risk ratings are assessed and updated regularly for corporate customers.



49



Aging analysis of past due but not impaired receivables per class of financial assets:

Less than

30 days

31 to 60

days

61 to 90

days

More than

90 days

Total

RO ‘000 RO ‘000 RO ‘000 RO ‘000 RO ‘000

31 December 2018


Other receivables - - - - -

- - - - -

31 December 2017


customers

17,388 2,639 4,414 524 24,965

Other receivables 50 24 37 14 125

17,438 2,663 4,451 538 25,090

Impairment assessment (Applicable to 2017)

Impairment provisions are recognised for financial reporting purposes only for losses that have been incurred at the

statement of financial position date based on objective evidence of impairment. Objective evidence that a financial

asset or group of assets is impaired includes observable data that comes to the attention of the Window about the loss

events such as delays in repayment of contracted amounts by counterparties as well as considering the guidelines

issued by the CBO.

Individually assessed provisions (Applicable to 2017)

The Window’s credit policy requires the review of individual financial assets on a regular basis or when individual

circumstances require. Impairment provision on individually assessed accounts are determined by an evaluation of

the incurred loss at the statement of financial position date on a case-by-case basis, and are applied to all individually

significant financing contracts. The assessment normally encompasses collateral held (including re-confirmation of

its enforceability) and the anticipated receipts for that individual financing contract.

Collectively assessed provisions (Applicable to 2017)

Collectively assessed provision is provided for: (i) portfolios of homogenous assets that are individually not

significant; and (ii) losses that have been incurred but have not yet been identified, by using the available historical

experience, experienced judgment and peer statistics.

Liquidity risk and funding management

Liquidity risk is the risk that the Window will be unable to meet its funding requirements. Liquidity risk arises from

fluctuations in cash flows due to market disruptions or credit downgrades, which may cause certain sources of

funding to cease immediately.



50


Liquidity risk and funding management (continued)

The liquidity position is assessed under a variety of scenarios, giving due consideration to stress factors relating to

both the market in general and specifically to the Window. The Window maintains limits on the ratio of net liquid

assets to customer liabilities, set to reflect market conditions. Net liquid assets consist of cash, short-term Window

deposits and liquid securities available for immediate sale less deposits for Windows and other issued Shari’a

compliant securities and financings due to mature within the next three months. Minimum ratios of liquid assets to

customer deposits are established and monitored regularly.

The Window manages the liquidity risk based on estimated maturities using the guidelines provided by the Central

Window of Oman for the estimates. The table below represents liabilities payable by the Window based on estimated

remaining maturities at the statement of financial position date.

On

demand or

less than 3

months

3 to 12

months

1 to 3

years

3 to 5

years

Over 5

years Total

RO '000' RO '000' RO '000' RO '000' RO '000' RO '000'

At 31 December 2018

Current and margin

accounts 21,382 21,022 - - 13,365 55,769

Unrestricted investment

accounts 439 600 910 890 894 3,733

Wakalah acceptances from

customers 2,866 25,753 22,542 280 11,205 62,646


the Bank 6,000 - - - - 6,000


31,474 48,289 24,039 1,174 25,969 130,945

31 December 2017

Current and margin

accounts

5,588

5,599

-

-

3,493

14,680

Unrestricted investment

accounts

352

551

772

772

772

3,219


customers 7,352 29,077 23,653 1,478 10,448 72,008


Total 13,792 35,804 25,045 2,307 15,197 92,145



51


Liquidity risk and funding management (continued)

Contingent liabilities and commitments

These include commitments to enter into contracts which are designed to meet the requirements of the Window’s

customers. Commitments represent contractual commitments under Murabaha, Musharaka and Ijarah Muntahia

Bittamleek contracts. Commitments generally have fixed expiration dates, or other termination clauses. Since

commitments may expire without being exercised, the total contract amounts do not necessarily represent future cash

flow requirements.

Letters of credit and guarantees (including standby letters of credit) commit the Window to make payments on behalf

of customers contingent upon the failure of the customer to perform under the terms of the contract.

Market risk

Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in

market variables such foreign exchange rates, and equity prices. The Window manages and monitors the positions

using sensitivity analysis. Market risk includes currency risk, profit rate risk and other price risk.

Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange

rates. The Window takes exposure to the effect of fluctuation in prevailing foreign currency exchange rate on its

financial position. The Window has a set of limits on the level of currency exposure, which are monitored on regular

basis.

The Window has the following net exposures denominated in foreign currencies at statement of financial position

date:

2018 2017

RO ‘000 RO ‘000

Currency

Japanese Yen 11 3

UAE Dirham 51 (176)

GBP 3 2

US Dollar 516 743

Jordanian Dinar - 1

Saudi Riyal 4 7

Euro - 1

Kuwati Dinar 3 12

Qatari Riyal 7 -

595 593

Profit rate risk

Profit rate risk arises due to differences in timing of re-pricing of the assets and liabilities.

The Window is not exposed to a significant profit rate risk at statement of financial position date.



52


Operational risk

Operational risk refers to the loss resulting from inadequate or failed internal processes, people and systems or from

external events.

The Window endeavours to minimize operational losses by ensuring that effective infrastructure, controls, systems

and individuals are in place throughout the organization. Regulatory, legal and reputation risks are controlled through

a set of internal policies and procedures. External legal advice is obtained from lawyers to confirm legal and regulatory

requirements, wherever required.

Other risk

Other risks to which the Window is exposed are regulatory risk, legal risk and reputation risk.

Regulatory risk is controlled through a framework of compliance policies and procedures. Legal risk is managed

through the effective use of internal and external legal advisers. Reputation risk is controlled through the regular

examination of issues that are considered to have reputation repercussions for Al Yusr, with guidelines and policies

being issued as appropriate.

26. Capital management

The primary objectives of the Window’s capital management are to ensure that the Window complies with externally

imposed capital requirements and that the Window maintains healthy capital ratios in order to support its business

and to maximise shareholders’ value.

The Window 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 Window may adjust

the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities.



53

26. Capital management (continued)

Regulatory capital and risk-weighted assets

The regulatory capital and risk-weighted assets have been calculated in accordance with Basel II as adopted by the

CBO.

2018 2017

RO ‘000 RO ‘000

Capital

Tier 1 15,148 11,168

Tier 2 837 837

Total regulatory capital 15,985 12,005

Risk weighted assets

Credit risk 125,251 75,016

Operational risk weighted assets 4,475 3,413

129,726 78,429

Capital adequacy ratio % 12.32% 15.31%

Minimum requirement % 11% 12%

Tier 1 capital comprises allocated share capital and retained earnings less accumulated losses, and unrealised loss

arising from fair valuing equities net of deductions.

Tier 2 capital comprises collective impairment provision and asset revaluation reserves net of deductions. Certain

adjustments are made to AAOIFI-based results and reserves, as prescribed by the Central Window of Oman.

27. Earnings and expenses prohibited by Shari’a

The Window did not receive any significant income or incur significant expenses which were prohibited by the

Shari’a.

28. Reclassification and rearrangement

Certain reclassifications and rearrangements have been made in comparative amounts to conform current year

presentation.

al yusr islamic banking window report and financial ... › uploadsall › pdf › al yusr -...

Documents