Bahrain Islamic Bank B S C : Basel III, Pillar III Disclosures - 30 June 2023

Risk and Capital Management Disclosure

for the period ended 30 June 2023

Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

For the year ended 30 June 2023

		Content	Page
1	Background	3
2	Statement of Financial Position Under the Regulatory Scope of Consolidation	3
3	Capital Adequacy	4
4	Risk Management
	4.1	Group-wide Risk Management Objectives	9
	4.2	Strategies, Processes and Internal Controls	9
	4.3	Structure and Organisation of Risk Management Function	11
	4.4	Risk Measurement and Reporting Systems	12
	4.5	Credit Risk	12
	4.6	Market Risk	25
	4.7	Operational Risk	28
	4.8	Equity Position in the Banking Book	30
	4.9	Equity of Investment Accountholders ("IAH")	31
	4.10	Liquidity Risk	35
	4.11	Profit Rate Risk	38
	4.12	CBB Penalties	40
5	GLOSSARY OF TERMS	41

Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

For the period ended 30 June 2023

1 Background

The Public Disclosures under this section have been prepared in accordance with the Central Bank of Bahrain ("CBB") requirements outlined in its Public Disclosure Module ("PD"), Section PD-1: Annual Disclosure requirements and PD-3.1.6Semi-annual Disclosures, CBB Rule Book, Volume 2 for Islamic Banks. Rules concerning the disclosures under this section are applicable to Bahrain Islamic Bank B.S.C. (the "Bank") being a locally incorporated Bank with a retail banking license, and its subsidiaries together known as (the "Group").

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

2 Statement of Financial Position Under the Regulatory Scope of Consolidation

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

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

ASSETS

Cash and balances with banks and Central Bank Gross placements with financial institutions

Less: Expected credit loss (stage 3)

Less: Expected credit loss (stage 1 and stage 2) Net placements with financial institutions

Gross financing assets

Less: Expected credit loss (stage 3)

Less: Expected credit loss (stage 1 and stage 2) Net financing assets

Gross investment securities

Less: Expected credit loss (stage 3)

Less: Expected credit loss (stage 1 and stage 2) Net investment securities

Ijarah Muntahia Bittamleek

Less: Expected credit loss (stage 3)

Less: Expected credit loss (stage 1 and stage 2) Net Ijarah Muntahia Bittamleek

Investment in associates

Investment in real estate

Property and equipment

Other assets

TOTAL ASSETS

Statement
of Financial
position as	Statement of
per	Financial	Reference
published	position as per
financial	Regulatory
statements	Reporting
30 June 2023	30 June 2023
BD'000	BD'000

60,22460,224

41,14841,148

(3,686)(3,686)

1. -
   37,45937,462

666,273666,273

(21,081)(21,081)

(12,077)-

633,115645,192

303,449303,449

(26,794)(26,794)

1. -
   276,507276,655
   313,402313,402
   (1,617)(1,617)
   (1,864)-

309,921	311,785
8,115	8,115
16,176	16,176
13,679	13,679
15,465	15,465
1,370,661	1,384,753

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Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

For the period ended 30 June 2023

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

LIABILITIES, EQUITY OF INVESTMENT ACCOUNTHOLDERS
AND OWNERS' EQUITY					Reference
Liabilities
Placements from financial institutions	143,252	143,252
Placements from non-financial institutions and individuals	282,203	282,203
Financing from financial institutions	110,236	110,236
Customers' current accounts	208,386	208,386
Other liabilities	44,316	44,161
of which: Expected credit loss - Off balance sheet exposures (stage 3)	1,310	1,310
of which: Expected credit loss - Off balance sheet exposures
(stage 1 and stage 2)	155	-
of which: Other liabilities	42,851	42,851
Total Liabilities	788,393		788,238
Total Equity of Investment Accountholders	442,709	442,709
Owners' Equity
Share capital	106,406	106,406		a
Treasury shares	(892)	(892)		b
Shares under employee share incentive scheme	(169)	(169)		c
Share premium	206	206		d
Statutory reserve	6,606	6,606		e
Real estate fair value reserve	1,320	1,320		f
Investment securities fair value reserve	1,585	1,585		g
Expected credit loss	-	14,247		h
of which: amount eligible for Tier 2 capital subject to a maximum of 1.25%					i
of credit risk weighted assets	-	8,883
of which: amount ineligible for Tier 2 capital	-	5,364		j
Profit for the period	6,035	6,035		k
Retained earnings brought forward	(6,538)	(6,538)		l
of which: Retained earnings as of 1 January 2023	(4,217)	(4,217)
of which: Zakah and donations approved	(420)	(420)
of which: Profit distribution on AT1 Capital	(1,901)	(1,901)
Equity Attributable to Parent's Shareholders	114,559		128,806
Subordinated Mudaraba (AT1)	25,000	25,000		m
Total Owners' Equity	139,559	153,806
TOTAL LIABILITIES, EQUITY OF INVESTMENT
ACCOUNTHOLDERS AND OWNERS' EQUITY	1,370,661	1,384,753

3 Capital Adequacy

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

The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders, issue sukuk etc.

The Group's capital structure is primarily made up of its paid-up capital, AT1 instruments and reserves. From a regulatory perspective, the significant amount of the Group's capital is in Tier 1 form as defined by the CBB, i.e., most of the capital is of a permanent nature.

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

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

For the purposes of guidance, every table was cross referenced with the relevant paragraph number of the Central Bank of Bahrain's Public Disclosures Module.

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Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

For the period ended 30 June 2023

3 Capital Adequacy (continued)

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

The following table summarises the eligible capital as of 30 June 2023 after deductions for Capital Adequacy Ratio (CAR) calculation:

					Source based on
					reference letters of
					the statement of
					financial position
					under the regulatory
					scope of
	CET 1		AT1 & T2		consolidation
	BD'000		BD'000
Components of capital
Issued and fully paid ordinary shares	106,406	-		a
General reserves	-	-
Statutory reserves	6,606	-		e
Share premium	206	-		d
Retained earnings brought forward	(6,538)	-		l
COVID-19 concessionary measures adjustments*:
Modification loss and Government subsidy, net	12,897
Aggregate ECL provision relating to stage 1 and 2	4,258
Less: amortization of modification loss and government subsidy	(2,859)
Current period profits	6,035				k
Unrealized gains and losses on available for sale financial instruments	1,585	-		g
Less:
Employee stock incentive program funded by the bank (outstanding)	169	-		c
Treasury shares	892	-		b
Total Common Equity Tier 1 capital after the regulatory adjustments
127,535	-
above (CET1)
Instruments issued by parent company (AT1 Subordinated Mudaraba)
	25,000		m
Assets revaluation reserve - property, plant, and equipment		1,320		f
Expected credit loss (ECL) - stages 1 & 2		8,883		i
Total Available AT1 & T2 Capital		35,203
Total Capital
	162,738

As per the CBB circular OG/226/2020 the aggregate of modification loss and ECL provision, amount must be deducted on an annual basis from CET1 in equal proportions over a three-year period from 1 January 2022 to 31 December 2024. Further, as per the CBB circular OG/417 /2021 the benefit of amortization of modification loss was extended until 30 June 2022. Further, CBB in its circular ODG/28/2022, communicated that the amortization of modification loss and 2020 ECL (management overlay) must be amortized starting from 1 January 2023. During the period, out of the modification loss of BD 17,155, an amount BD 2,859 thousand representing modification loss net of government subsidy was deducted from CET1 for the period ended 30 June 2023.

			Amount of
			exposures
			BD'000
Total Credit Risk Weighted Assets	710,621
Total Market Risk Weighted Assets	411
Total Operational Risk Weighted Assets	119,149
Total Regulatory Risk Weighted Assets	830,181
Investment risk reserve (30% only)
-
Profit equalization reserve (30% only)	11
Total Adjusted Risk Weighted Exposures	830,170
TOTAL CAPITAL ADEQUACY RATIO	19.60%
Minimum requirement
12.5%
CET 1 ratio	9.0%
Tier 1 ratio	10.5%
Total Capital ratio	12.5%

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Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

For the period ended 30 June 2023

3 Capital Adequacy (continued)

AT1 Subordinated Mudaraba

In 2021, the Bank issued a Subordinated Mudaraba Sukuk (Basel III compliant Additional Tier 1 capital securities) of BD 25 million to meet minimum regulatory requirements relating to total equity as prescribed by Central bank of Bahrain. The issue was at par and was fully subscribed for and paid in cash by the Parent.

Summary of key terms and conditions of this issue are as follows:

a. Profits on these securities shall be distributed on a semi-annual basis subject to and in accordance with terms and conditions on the outstanding par value of the securities at an expected rate of 7.5% p.a.

b. Security holder will not have a right to claim the profits and such event will not be considered as an event of default. c. Subordinated Mudaraba is invested in a general mudaraba pool of assets on an unrestricted comingled basis.

d. In the event of non-viability, the Sukuk certificates will be converted either in full or in part in accordance with the conversion rules and procedures.

e. The Sukuk certificates carry a call option after 5 years from the date of issue.

The Subordinated Mudaraba is recognized under the condensed consolidated statement of changes in owners' equity and the profits paid to rab al-maal (security holder) will be accounted for as appropriation of profits.

During 2023, an amount of BD 1,901 thousand (2022: BD 1,901 thousand) were paid to AT1 holders as profit distributions.

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Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

For the period ended 30 June 2023

3 Capital Adequacy (continued)

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

The following table summarises the amount of exposures as of 30 June 2023 subject to standardised approach of credit risk and related capital requirements by type of Islamic financing contracts:

			Exposure			Risk Weighted Assets*		Capital Requirements
	Self-						Self-						Self-
	Financed		IAH	Total		Financed		IAH (3)		Total		Financed		IAH		Total
Credit Risk Weighted Assets	BD'000		BD'000	BD'000		BD'000		BD'000		BD'000		BD'000		BD'000		BD'000
Funded
Cash and balances with banks and Central Bank	27,088		33,136		60,224	4,980	-	4,980	623	-	623
Murabaha and Wakala receivables - interbank	37,462		-		37,462	7,925	-	7,925	991	-	991
Murabaha receivables*	368,291		191,064		559,355	281,979	43,886	325,865	35,247	5,486	40,733
Musharaka receivables*	56,516		29,321		85,837	46,687	7,266	53,953	5,836	908	6,744
Investment in Sukuk	168,666		87,502		256,168	-	-	-	-	-	-
Investment in equity and funds	20,487		-		20,487	72,744	-	72,744	9,093	-	9,093
Ijarah Muntahia Bittamleek*	205,286		106,499		311,785	122,455	19,058	141,513	15,307	2,382	17,689
Investment in associates	8,115		-		8,115	26,103	-	26,103	3,263	-	3,263
Investment in real estate	16,176		-		16,176	32,352	-	32,352	4,044	-	4,044
Property and equipment	13,679		-		13,679	13,679	-	13,679	1,710	-	1,710
Other assets	15,465		-		15,465	15,464	-	15,464	1,933	-	1,933
	937,231		447,522		1,384,753	624,368	70,210	694,578	78,047	8,776	86,823
Unfunded
Commitments and contingent liabilities	96,230		-		96,230	16,043	-	16,043	2,005	-	2,005
Total Credit Risk Weighted Assets
1,033,461		447,522		1,480,983	640,411	70,210	710,621	80,052	8,776	88,828
Total Market Risk Weighted Assets	411		-		411	411	-	411	51	-	51
Total Operational Risk Weighted Assets	119,149		-		119,149		119,149		-		119,149		14,894		-		14,894
Total Risk Weighted Assets	1,153,021	(1)	447,522 (2)	1,600,543	759,971	70,210	830,181	94,997	8,776	103,773

* The risk weighted assets are net of credit risk mitigant of BD 44,665 thousand.

1. The exposure is gross of expected credit loss Stages 1 & 2 of BD 9,434 thousand and net of expected credit loss Stage 3 of BD 28,284 thousand.
2. The exposure is gross of expected credit loss Stages 1 & 2 of BD 4,813 thousand and net of expected credit loss Stage 3 of BD 12,028 thousand.
3. For assets funded through IAH only 30% of exposure is considered. (CA-1.1.12)

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Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

For the period ended 30 June 2023

3	Capital Adequacy (continued)

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

The following table summarises the amount of exposures as of 30 June 2023 subject to standardised approach of market risk and related capital requirements:

Market Risk - Standardised Approach
Foreign exchange risk (BD'000)	33
Total of Market Risk - Standardised Approach	33
Multiplier	12.5
Risk Weighted Exposures for CAR Calculation (BD'000)
411
Total Market Risk Exposures (BD'000)
411
Total Market Risk Exposures - Capital Requirement (BD'000)	51

Table - 5. Capital requirements for operational risk (PD-1.3.30 (a & b) and PD-1.3.19)

The following table summarises the amount of exposures as of 30 June 2023 subject to basic indicator approach of operational risk and related capital requirements:

Indicators of operational risk
Average Gross income (BD'000)	63,546
Multiplier	12.5
	794,325
Eligible Portion for the purpose of the calculation	15%
Total Operational Risk Exposure (BD'000)
119,149
Total Operational Risk Exposures - Capital Requirement (BD'000)	14,894

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

The following are Capital Adequacy Ratios as of 30 June 2023 for total capital and CET 1 capital:

	Total capital		T1 Capital		CET 1 capital
	ratio		ratio		ratio
Top consolidated level	19.60%	18.37%	15.36%

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Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

For the period ended 30 June 2023

4	Risk Management

4.1Group-wide Risk Management Objectives

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

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

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

4.2Strategies, Processes and Internal Controls

4.2.1 Group's risk strategy

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

The Risk Management Framework identifies risk objectives, policies, strategies, and risk governance both at the Board and management level.

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

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

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Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

For the period ended 30 June 2023

4	Risk Management (continued)

4.2Strategies, Processes, and Internal Controls (continued)

4.2.2 Credit risk

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

4.2.3 Market risk

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

The Group has established a limit structure to monitor and control the market risk in its trading portfolio. These limits include maximum Stop-loss limits and position limits. As at 30 June 2023, the group does not maintain any trading portfolio.

4.2.4 Operational risk

The Group carries out Risk Control Self-Assessment ("RCSA") exercises on a regular basis to record potential risks, controls and events on a continuous basis across different business and support functions. Key operational risk reports are delivered to all relevant stakeholders in the Bank on a periodic basis.

The Group has a mechanism to review the policies and procedures in effect.

4.2.5 Equity price risk

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

4.2.6 Profit rate risk

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

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

4.2.7 Displaced Commercial Risk

Displaced Commercial Risk ("DCR") refers to the market pressure to pay returns that exceed the rate that has been earned on the assets financed by the liabilities, when the return on assets is underperforming as compared with competitors rates.

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

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

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

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