Bahrain Islamic Bank B S CBAHRAIN: BISB

Basel III, Pillar III Disclosures - 30 June 2024

Sep 2, 2024 at 2:46 PM UTC · Issued by Bahrain Islamic Bank B S C

Risk and Capital Management Disclosure

for the period ended 30 June 2024

Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

for the period ended 30 June 2024

	Content	Page
1	Background	3
2	Statement of Financial Position Under the Regulatory Scope of Consolidation	3
3	Capital Adequacy	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	Quasi-Equity	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 2024

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.

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 contracts

Less: Expected credit loss (stage 3)

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

Gross investment securities

Less: Expected credit loss (stage 3)

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

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 2024	30 June 2024
BD'000	BD'000
59,769	59,769
119,629	119,629
-	-
(3)	-
119,626	119,629
1,003,017	1,003,017
(30,842)	(30,842)
(12,311)	-
959,864	972,175
289,768	289,768
(26,988)	(26,988)
(50)	-
262,730	262,780
11,374	11,374
14,725	14,725
13,915	13,915
7,591	7,591
1,449,594	1,461,958

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Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure for the period ended 30 June 2024

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

LIABILITIES,QUASI EQUITY AND OWNERS' EQUITY			Reference
Liabilities
Placements from financial institutions	88,390	88,390
Placements from non-financial institutions and individuals	401,255	401,255
Financing from financial institutions	147,801	147,801
Customers' current accounts	205,332	205,332
Other liabilities	41,212	41,004
of which: Expected credit loss - Off balance sheet exposures (stage 3)	837	837
of which: Expected credit loss - Off balance sheet exposures
(stage 1 and stage 2)	208	-
of which: Other liabilities	40,167	40,167
Total Liabilities	883,990	883,782
Quasi Equity
Financial institutions	58,563	58,563
Non-financial institutions and individuals	362,396	362,396
Total Quasi-Equity	420,959	420,959
Owners' Equity
Share capital	106,406	106,406	a
Treasury shares	(892)	(892)	b
Shares under employee share incentive scheme	(47)	(47)	c
Share premium	206	206	d
Statutory reserve	7,720	7,720	e
Real estate fair value reserve	1,320	1,320	f
Investment securities fair value reserve	1,579	1,579	g
Expected credit loss	-	12,572	h
of which: amount eligible for Tier 2 capital subject to a maximum of 1.25%			i
of credit risk weighted assets	-	9,022

of which: amount ineligible for Tier 2 capital	-	3,550	j
Profit for the period	2,314	2,314	k
Retained earnings brought forward	1,039	1,039	l
of which: Retained earnings as of 1 January 2024	3,484	3,484
of which: Zakah and donations approved	(539)	(539)
of which: Profit distribution on AT1 Capital	(1,906)	(1,906)
Equity attributable to Bank's shareholders	119,645	132,217
Subordinated Mudaraba (AT1)	25,000	25,000	m
Total Owners' Equity	144,645	157,217
TOTAL LIABILITIES, QUASI-EQUITY AND OWNERS' EQUITY	1,449,594	1,461,958

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 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.

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 Quasi-equity 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 2024

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 2024 after deductions for Capital Adequacy Ratio (CAR) calculation:

Components of capital

Issued and fully paid ordinary shares

General reserves

Statutory reserves

Share premium

Retained earnings brought forward

COVID-19 concessionary measures adjustments*: Modification loss and Government subsidy, net Aggregate ECL provision relating to stage 1 and 2

Less: amortization of modification loss and government subsidy Current period profits

Unrealized gains and losses on available for sale financial instruments

Less:

Employee stock incentive program funded by the bank (outstanding) Treasury shares

Total Common Equity Tier 1 capital after the regulatory adjustments above (CET1)

Instruments issued by parent company (AT1 Subordinated Mudaraba)

Assets revaluation reserve - property, plant, and equipment

Expected credit loss (ECL) - stages 1 & 2

Total Available AT1 & T2 Capital

Total Capital

		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
106,406	-	a
-	-
7,720	-	e
206	-	d
1,039	-	l
12,897
4,258
(8,578)
2,314		k
1,579	-	g
47	-	c
892	-	b
126,903	-
	25,000	m
	1,320	f
	9,022	i
	35,342
	162,245

*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. As at the period ended 30 June 2024, out of the modification loss of BD 17,155, an amount BD 8,578 thousand representing modification loss net of government subsidy was deducted from CET1.

	Amount of
	exposures
	BD'000
Total Credit Risk Weighted Assets	721,773
Total Market Risk Weighted Assets	251
Total Operational Risk Weighted Assets	125,479
Total Regulatory Risk Weighted Assets	847,503
Investment risk reserve (30% only)	-
Profit equalization reserve (30% only)	66
Total Adjusted Risk Weighted Exposures	847,437
TOTAL CAPITAL ADEQUACY RATIO	19.15%
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 2024

Capital Adequacy (continued) AT1 Subordinated Mudaraba

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

During 2024, an amount of BD 1,906 thousand (2023: 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 2024

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 2024 subject to standardised approach of credit risk and related capital requirements by type of Islamic financing contracts:

			Exposure		Risk Weighted Assets*	Capital Requirements
	Self-		Quasi-			Self-	Quasi-		Self-	Quasi-
	Financed		Equity	Total	Financed	Equity (3)	Total	Financed	Equity	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	18,813		40,956		59,769	4,857	-	4,857	607	-	607
Murabaha and Wakala receivables - interbank	115,088		4,541		119,629	18,369	217	18,586	2,296	27	2,323
Murabaha receivables*	388,437		176,386		564,823	279,825	38,120	317,945	34,978	4,765	39,743
Musharaka receivables*	62,266		28,276		90,542	51,568	7,025	58,593	6,446	878	7,324
Investment in Sukuk	166,760		75,725		242,485	-	-	-	-	-	-
Investment in equity and funds	20,295		-		20,295	71,971	-	71,971	8,996	-	8,996
Ijarah Muntahia Bittamleek*	217,874		98,936		316,810	130,713	17,807	148,520	16,339	2,226	18,565
Investment in associates	11,374		-		11,374	24,982	-	24,982	3,123	-	3,123
Investment in real estate	14,725		-		14,725	29,450	-	29,450	3,681	-	3,681
Property and equipment	13,915		-		13,915	13,915	-	13,915	1,739	-	1,739
Other assets	7,591		-		7,591	7,591	-	7,591	949	-	949
	1,037,138		424,820		1,461,958	633,241	63,169	696,410	79,154	7,896	87,050
Unfunded
Commitments and contingent liabilities	123,351		-		123,351	25,363	-	25,363	3,170	-	3,170
Total Credit Risk Weighted Assets	1,160,489	(1)	424,820	(2)	1,585,309	658,604	63,169	721,773	82,324	7,896	90,220
Total Market Risk Weighted Assets						251	-	251	31	-	31

Total Operational Risk Weighted Assets						125,479	-	125,479	15,685	-	15,685
Total Risk Weighted Assets						784,334	63,169	847,503	98,040	7,896	105,936

* The risk weighted assets for funded exposures are net of credit risk mitigant of BD 42,862 thousand and for unfunded exposures the appropriate credit conversion factors are applied.

The exposure is gross of expected credit loss Stages 1 & 2 of BD 8,712 thousand and net of expected credit loss Stage 3 of BD 30,761 thousand.
The exposure is gross of expected credit loss Stages 1 & 2 of BD 3,861 thousand and net of expected credit loss Stage 3 of BD 13,542 thousand.
For assets funded through Quasi-equity 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 2024

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 2024 subject to standardised approach of market risk and related capital requirements:

Market Risk - Standardised Approach
Foreign exchange risk (BD'000)	20
Total of Market Risk - Standardised Approach	20

Multiplier	12.5
Risk Weighted Exposures for CAR Calculation (BD'000)	251
Total Market Risk Exposures (BD'000)	251
Total Market Risk Exposures - Capital Requirement (BD'000)	31

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 2024 subject to basic indicator approach of operational risk and related capital requirements:

Indicators of operational risk
Average Gross income (BD'000)			66,922
Multiplier			12.5
			836,529
Eligible Portion for the purpose of the calculation			15%
Total Operational Risk Exposure (BD'000)			125,479
Total Operational Risk Exposures - Capital Requirement (BD'000)			15,685
Table - 6. Capital Adequacy Ratios (PD-1.3.20)
The following are Capital Adequacy Ratios as of 30 June 2024 for total capital and CET 1 capital:
	Total capital	T1 Capital	CET 1 capital
	ratio	ratio	ratio
Top consolidated level	19.15%	17.92%	14.97%

ICAAP

The Group's capital management aims to maintain an optimum level of capital to enable it to pursue strategies that build long term shareholder value, whilst always maintaining minimum regulatory ratio requirements and for Pillar II risks.

The key principles of capital management comprise of:

Adequate capital is maintained as buffer for unexpected losses to protect shareholders and depositors.
Optimize risk adjusted return on capital and maintain sustainable return above the cost of capital.

The adequacy of the Group's capital is monitored using, primarily, the rules and ratios established by the CBB. The primary objective of the Group's capital management is to be in compliance with externally imposed capital requirements. The Group is in compliance with all externally imposed capital requirements during the period ended 30 June 2024.

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Bahrain Islamic Bank B.S.C.

Risk and Capital Management Disclosure

for the period ended 30 June 2024

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 2024

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 2024, 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 Quasi-equity 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. The Group uses profit rate swaps as a means to manage this

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 year.

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