CREATING POSSIBILITIES

TOGETHER
Annual Report 2020
CONTENTS

02 At a Glance
03 Vision, Mission and Values
04 Financial Highlights
06 Joint Message
08 Review of Operations
16 Financial Review

18 Key Operating Subsidiaries

19 Board of Directors
22 Sharia Supervisory Board
23 Executive Management
24 Corporate Governance
43 Funds Under Management

48 Report of the Sharia Supervisory Board

50 Directors’ Report
52 Independent Auditor’s Report
55 Consolidated statement of financial position
56 Consolidated income statement
57 Consolidated statement of changes in owners’ equity
58 Consolidated statement of cash flows
59 Consolidated statement of changes in restricted investment accounts
60 Notes to the Consolidated Financial Statements

111 Public Disclosures

138 Corporate Information

02 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

AT A GLANCE

Ithmaar Bank B.S.C. (closed) (Ithmaar Bank, Ithmaar or Bank) is a

Bahrain-based Islamic retail bank that is licensed and regulated by the
Central Bank of Bahrain (CBB) and provides retail, commercial, treasury
and financial institutions, and other banking services.
Ithmaar Bank is a wholly-owned subsidiary of Ithmaar Holding B.S.C.
(Ithmaar Holding or the Group), which is a Bahrain-based holding company that
is licensed and regulated as a Category 1 Investment Firm by the CBB and listed
on the Bahrain Bourse and Dubai Financial Market (DFM). Ithmaar Holding is a
subsidiary of Dar Al-Maal Al-Islami Trust (DMIT).
Ithmaar Bank provides a diverse range of Sharia-compliant products and
services that cater to the financing and investment needs of individuals and
institutions. Ithmaar Bank also maintains a presence in overseas markets
through its subsidiary, Faysal Bank Limited (Pakistan).
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 03

VISION, MISSION AND VALUES

Our Vision Our Values

To help all stakeholders and • Comply with Sharia principles
communities realise their long- • Honesty, integrity and
term ambitions. objectivity in all our
relationships
Our Mission • Market and customer focused
To empower people, businesses • Continuous improvement,
and communities to thrive by creativity, innovation and
extending simple, personalised willingness to bring about
and innovative financial changes; and
solutions. • Active role in community
04 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

FINANCIAL HIGHLIGHTS
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 05

FINANCIAL HIGHLIGHTS

2020 2019 2018 2017

Net profit [BD 000] (10,969) 2,480 14,140 6,238

Net profit/(loss) attributable to shareholders [BD 000] (15,294) (1,352) 1,409 1,582
Net income before provision for impairment and overseas taxation [BD 000] 14,485 15,667 13,700 19,031
Total equity attributable to shareholders [BD 000] 49,831 79,171 85,385 154,603
Book value per share [Fils] 50 79 85 155
Earnings per share [Fils] -15.29 -1.35 1.41 1.58
Total assets [BD 000] 3,094,777 2,978,946 3,127,795 3,242,419
Funds under management [restricted investment accounts] [BD 000] 16,676 17,203 17,203 96,707
Return on average shareholders’ equity -23.71% -1.64% 1.17% 1.02%
Return on average assets -0.36% 0.08% 0.44% 0.19%
Capital adequacy ratio 12.65% 13.52% 13.43% 13.92%
Cost to operating income ratio 83.36% 81.26% 83.65% 78.66%
06 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

JOINT MESSAGE

In the name of Allah, most Gracious, most Merciful

Dear Shareholders,
We are pleased to report that, despite the unprecedented challenges Despite the challenges of 2020, we maintained an unwavering
of 2020, Ithmaar Bank’s resolute focus on customer-centric growth commitment to our shared vision and continued to invest heavily in the
continues to bear positive results, bringing us closer to our shared vision future. This included implementing various enhancements as part of
of becoming the Islamic retail bank of choice. This vision was truly put to our far-reaching Digital Transformation Strategy, as well as adding new
test by the trials of 2020. products and services and enhancing existing ones – all while further
enhancing our customers’ Islamic banking experience. This included
In particular, we are pleased to report that, despite the many challenges enhancing our retail banking network, already one of the largest in the
of 2020, Ithmaar Bank continued to demonstrate remarkable resilience Kingdom.
and show stable, consistent growth in key areas while setting the stage
for brisk growth when markets eventually return to some sense of Preparing for the next phase of the Bank’s growth, our parent company,
normalcy. Ithmaar Holding, announced in August initial talks with the Bank of
Bahrain and Kuwait (BBK), one of the largest commercial banks in
Perhaps the clearest testimony to the Bank’s resilience and continued Bahrain, to explore a potential sale to BBK of Ithmaar Bank’s Bahrain
growth is the fact that it has reported increased operating income for operations as well as specific assets of IB Capital, another wholly-owned
2020, one of the most challenging years in decades. Operating income subsidiary of Ithmaar Holding.
increased by 4 percent, growing to BD87.02 million for the year ended
31 December 2020, compared to the BD83.59 million reported for Ithmaar Holding have since signed a Memorandum of Understanding
2019. Income from unrestricted investment accounts also increased by (MoU) with BBK and the plans, which are subject to shareholder and
11 percent, growing to BD91.60 million for the year ended 31 December regulatory approvals as well as the completion of due diligence by both
2020, compared to BD82.55 million for 2019. parties, are now in the advanced phase.
This growth demonstrates continued customer confidence in the Bank, The plans are in line with Ithmaar Holding’s strategy of creating value
despite the extraordinary market conditions of 2020. for its shareholders and, when implemented, will lead to bolstering
the already well-established Ithmaar Bank brand and position it to
Another key demonstration of customer confidence in Ithmaar Bank is the better capitalize on future opportunities for growth. The plans will also
growth in equity of unrestricted investment accountholders by 20 percent significantly expand BBK’s already large operations in Bahrain and add a
to reach BD1.28 billion as at 31 December 2020, from BD1.06 billion as at turn-key, full-service Islamic banking solution.
31 December 2019, as well as the increase in customers’ current accounts
by 16 percent to reach to BD661.7 million as at 31 December 2020, The plans will help shape our collective future in line with the strategic
compared to BD572.5 million as at 31 December 2019. decisions taken by the shareholders in 2016, and we look forward to
working with Ithmaar Holding and BBK as they explore this opportunity
The Bank’s 2020 achievements, however, are tempered by the bottom- further in 2021.
line of its financial results, which were severely impacted by the economic
impact of the global Covid-19 pandemic. Meanwhile, as always, we take this opportunity, to thank our customers
as well as each one of Ithmaar Bank’s employees for their truly valuable
The results show a net loss attributable to equity holders for the year contributions as well as the members of the Board of Directors and
ended 31 December 2020 of BD15.29 million compared to the net loss the Sharia Supervisory Board for their continued support. We take this
of BD1.35 million reported for 2019. Total net loss for the year ended opportunity, also, to thank the Bank’s investors and all other stakeholders
31 December 2020 was BD10.97 million, compared to the net profit for their continued confidence and, in particular, the Central Bank of
of BD2.48 million reported for 2019. These results are mainly due to Bahrain and the Ministry of Industry, Commerce and Tourism for their
prudent impairment provisions, which increased by BD12.81 million in guidance and support.
2020 compared to their 2019 levels, largely as a consequence of the
ongoing global Covid-19 pandemic.

Amr Mohammed Al Faisal Ahmed Abdul Rahim

Chairman Chief Executive Officer
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 07

HRH Prince Amr Mohammed Al Faisal Ahmed Abdul Rahim

Chairman Chief Executive Officer

“Despite the challenges of 2020, we maintained

an unwavering commitment to our shared
vision and continued to invest heavily in the
future. This included implementing various
enhancements as part of our far-reaching Digital
Transformation Strategy, as well as adding
new products and services and enhancing
existing ones – all while further enhancing our
customers’ Islamic banking experience.”
08 ITHMAAR BANK B.S.C. (c) ANNUAL
ANNUAL REPORT 2020

REVIEW OF OPERATIONS
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 09

REVIEW OF OPERATIONS

Economic Outlook The Gulf Cooperation Council (GCC)

Although recent vaccine approvals have raised hopes of a turnaround The GCC countries face a double impact from the coronavirus and lower
in the pandemic later in 2021, renewed waves and new variants of oil prices. GCC authorities have implemented a range of appropriate
the virus pose concerns for the outlook. Amid exceptional uncertainty, measures to mitigate the economic damage, including fiscal packages,
the global economy is projected to grow 5.5 percent in 2021 and 4.2 relaxation of monetary and macroprudential rules, and the injection
percent in 2022. The 2021 forecast is revised up 0.3 percentage point of liquidity into the banking system, and there are recent signs of
relative to the previous forecast, reflecting expectations of a vaccine- improvement. Low oil prices have caused a sharp deterioration of
powered strengthening of activity later in the year and additional external and fiscal balances, and fiscal strains are evident in countries
policy support in a few large economies. with higher debt levels.

The projected growth recovery this year follows a severe collapse in The immediate priority is to continue to meet the health and economic
2020 that has had acute adverse impacts on women, youth, the poor, needs arising from the COVID-19 pandemic. Countries should continue
the informally employed, and those who work in contact-intensive to implement the health measures necessary to contain the pandemic,
sectors. The global growth contraction for 2020 is estimated at treat those infected, and support households and firms. Fiscal and
negative 3.5 percent, 0.9 percentage point higher than projected in the monetary policy should remain accommodative until the recovery is
previous forecast (reflecting stronger-than-expected momentum in the well-established, although the focus of support measures should move
second half of 2020). from being broad-based to targeting households and businesses most
in need (and for the latter those likely to be viable in the post-COVID
The strength of the recovery is projected to vary significantly across environment). Careful planning will be needed to gradually withdraw
countries, depending on access to medical interventions, effectiveness support without disrupting the recovery.
of policy support, exposure to cross-country spillovers, and structural
characteristics entering the crisis. Once the recovery is established, substantial and sustained fiscal
consolidation will be needed. Credible medium-term adjustment
Policy actions should ensure effective support until the recovery is will help rebuild buffers and reduce vulnerabilities to future shocks.
firmly underway, with an emphasis on advancing key imperatives of Adjustment speeds will have to balance the strength of the fiscal
raising potential output, ensuring participatory growth that benefits all, position with the need to avoid excessively dampening growth-those
and accelerating the transition to lower carbon dependence. with high debt levels will need to adjust more quickly. Phasing out
subsidies, reforming public wage bills, ensuring high efficiency of
Strong multilateral cooperation is required to bring the pandemic under
spending on infrastructure, and creating space for additional social
control everywhere. Such efforts include bolstering funding for the
spending will be critical. Diversifying sources of government revenues
COVAX facility to accelerate access to vaccines for all countries, ensuring
will also be essential. Reducing the procyclicality of fiscal policy with
universal distribution of vaccines, and facilitating access to therapeutics
respect to oil price swings will be a key part of the reforms.
at affordable prices for all. Many countries, particularly low-income
developing economies, entered the crisis with high debt that is set to Further structural reforms are needed to strengthen private sector
rise further during the pandemic. The global community will need to led growth and job creation. Labor market reforms will need to
continue working closely to ensure adequate access to international reduce large public sector wage premiums to encourage more
liquidity for these countries. Where sovereign debt is unsustainable, nationals to work in the private sector while enhancing education
eligible countries should work with creditors to restructure their debt and skills. Continuing to increase female labor force participation is
under the Common Framework agreed by the G20. essential. Addressing constraints on access to credit for SMEs is critical.
Governments could promote well-designed credit guarantee schemes,
Source: International Monetary Fund (IMF) - World Economic Outlook
strengthen the availability of information needed for assessing credit
(WEO) Update, January 2021
risks, and continue to support the adoption of digital technologies to
enlarge financing options.

Source: International Monetary Fund (IMF) - Economic Prospects and

Policy Challenges for the GCC Countries, October 2020
10 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

REVIEW OF OPERATIONS CONTINUED

Bahrain Pakistan
Bahrain moved quickly to address the health and economic effects Pakistan’s real GDP growth is estimated to have declined from 1.9
of the COVID-19 pandemic, protecting lives and livelihoods. Swift and percent in 2019 to negative 1.5 percent in 2020. The first contraction
well-coordinated policy responses have helped limit the spread of the in decades, this reflects the effects of COVID-19 containment measures
virus, deliver rapid and widespread access to vaccinations, and target that followed monetary and fiscal tightening prior to the outbreak. To
income and liquidity support to those most in need. curtail the spread of the pandemic, a partial lockdown – that included
restrictions on air travel, inner-city public transport, religious/social
Nevertheless, as in other countries, the prolonged COVID-19 pandemic gatherings and the closure of all schools and non-essential businesses
and necessary containment measures continue to impact Bahrain. – was imposed in March, and gradually eased from May 2020
Growth slowed down in 2020 to an estimated negative 5.4 percent, onwards. This disrupted domestic supply and demand, as businesses
driven by a sharp contraction in non-oil growth of negative 7 percent. were unable to operate and consumers curbed expenditures, which
Activity in high contact and job-rich services sectors contracted specifically affected services and industries. The services sector is
markedly, but manufacturing has been relatively unaffected. estimated to have contracted, by over 1 percent, while industrial
Hydrocarbon GDP growth is estimated at 2 percent, while CPI inflation production is expected to have declined even more, due to the high
averaged negative 2.3 percent in 2020. With the plunge in oil prices policy rates prior to the pandemic and plunging domestic and global
and the contraction in nominal GDP, the state budget deficit in 2020 demand thereafter. The agriculture sector, partially insulated from the
increased to 12.8 percent of GDP from 4.7 percent of GDP in 2019, effects of the containment measures, is estimated to have expanded
while the overall fiscal deficit increased to 18.2 percent of GDP in 2020, modestly over the year.
from 9 percent of GDP in 2019. Public debt increased to 133 percent
of GDP from 102 percent of GDP in 2019. The current account deficit While domestic economic activity is expected to recover, as lockdown
widened to 9.6 percent of GDP and international reserves declined to measures are lifted and base effects materialize, Pakistan’s near-
about 1.4 months of prospective non-oil imports. term economic prospects are subdued. Significant uncertainty over
the evolution of the pandemic and availability of a vaccine, demand
Despite considerable challenges, the authorities remain committed to compression measures to curb imbalances, along with unfavorable
achieving the key objectives of the Fiscal Balance Program, including external conditions, all weigh on the outlook. Economic growth is
gradually rebuilding policy buffers and reversing the rise in public debt. projected to remain below potential, averaging 1.3 percent for 2021-
2022. This baseline projection, which is highly uncertain, is predicated
The near-term priority remains to ensure public health, essential
on the absence of significant infection flare ups or subsequent waves
services, and targeted fiscal support to the most vulnerable. Once
that would require further widespread lockdowns.
the recovery firms, ambitious and growth-friendly fiscal adjustment
set within a credible medium-term framework is needed to address The current account deficit is expected to widen to an average of 1.5
Bahrain’s large imbalances, put government debt on a firm downward percent of GDP over 2021-2022, with imports and exports gradually
path, and restore macroeconomic sustainability. The adjustment would picking up as domestic demand and global conditions improve. The
also help rebuild external buffers, solidify the exchange rate peg, fiscal deficit is projected to narrow to 7.4 percent in 2022, with the
which continues to serve Bahrain well as a monetary policy anchor, resumption of fiscal consolidation and stronger revenues driven by
and support access to sustainable external financing. recovering economic activity and structural reform dividends.
The post-pandemic recovery will be gradual. Economic growth is There are considerable downside risks to the outlook with the most
projected at 3.3 percent in 2021 and is expected to remain flat at significant being a resurgence of the COVID-19 infection, triggering a
around 3 percent over the medium term. This outlook reflects a new wave of global and/or domestic lockdowns and further delaying
recovery in non-oil growth to 3.9 percent in 2021 as widespread the implementation of critical IMF-EFF structural reforms.
vaccine distribution boosts activity toward pre-crisis levels. However,
there is considerable uncertainty around the outlook, including from Source: World Bank – Pakistan Overview, October 2020
the path of the pandemic and related global and domestic containment
measures.

Source: International Monetary Fund (IMF) statement, February 2021

 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 11

Strategy and Focus Continuing the digital transformation

Ithmaar Bank remains committed to becoming one of the region’s In 2020, Ithmaar Bank continued the implementation of its far-reaching
premier Islamic retail banks and realising its shared vision of becoming Digital Transformation Strategy.
the Islamic retail bank of choice.
The board-approved Strategy, which reinforces Ithmaar Bank’s
In line with that commitment, the Bank continued to focus on further customer-centric focus, was designed to usher the Bank and its
developing its customers’ Islamic banking experience. customers into the future and leapfrog current trends to retain its
reputation as a pioneering Islamic retail bank. It is the natural next step
In 2020, this included investing in further developing the Bank’s digital for the Bank, which played a pioneering role in the establishment and
infrastructure, enhancing existing products and services while also subsequent development of Islamic banking and finance in the region
introducing new ones, and improving its retail banking network – all and has long-played a key role in driving the use of technology in the
while helping fight a global pandemic. industry. Throughout its history, which dates back to 1984, Ithmaar
Bank has led by example, often leading the change as first adopters of
Helping fight a global pandemic
new technology.
The global COVID-19 pandemic has had a profound impact on almost
aspects of life in 2020. In 2020, this included introducing new online services - including
a new app to allow customers to instantly open accounts online -
From the onset, Ithmaar Bank announced, and continues to maintain, implementing a world-class customer-focused solution and providing
its absolute commitment to following all applicable directives and to enhanced protection for customers online.
doing its part to help contain the pandemic.
In June 2020, Ithmaar Bank announced the introduction of its latest
This included following all Ministry of Health (MOH) directives as well online service, Ithmaar eChat. The service uses a chatbot to assist
as implementing Central Bank of Bahrain (CBB) directives urging all customers with enquiries or requests about the Bank's products or
banks to grant concessions to affected customers. services, directly from their smartphone, tablet or computer. These
include general enquiries about branch locations and timings, ATM
In mid-March 2020, Ithmaar Bank, which operates one of the largest locations, Thimaar draw dates and winners list and information about
retail banking networks in the Kingdom, launched a public awareness the latest promotions. Ithmaar eChat is available every day, 24 hours a
campaign to encourage its customers to bank online and help contain day, through the Bank's website.
the pandemic.
In July 2020, as part of its efforts to encourage customers to bank
Later in March 2020, the Bank also announced revised branch and online, Ithmaar Bank launched an all-new mobile application (App).
office timings, as well as additional precautions to help contain the The new App, which allows customers to instantly open new accounts
virus. These included limiting the number of customers present directly from their mobile phones was designed from the ground up
in a branch at any given time and providing appropriate waiting specifically to enhance customers’ digital banking experience to reduce
arrangements to ensure customers are seated at least a meter from the need to physically visit a branch. Following the launch, Bahrain
one another. citizens and residents can safely and securely open a new account in
In April 2020, to support national efforts to contain COVID-19, Ithmaar just a few minutes by simply downloading the Ithmaar Bank Mobile
Bank conducted its first ever remote draw to select a Thimaar App – without ever having to visit a branch. The fast, secure and user-
winner. The first-of-its-kind draw was physically held at the Bank’s friendly mobile app, which is available for free download at both the
headquarters in Seef but remotely coordinated and supervised by Apple and Google Play app stores, allows customers to enjoy numerous
the Ministry of Industry, Commerce and Tourism (MOICT) as well as banking services such as appointment bookings by using the eQ
external auditors BDO Bahrain and the Bank’s own internal auditors. feature, cash transfers through MobiCash, and bill payments from the
comfort of their homes. Additionally, the App allows customers to use
biometric features such as face and fingerprint recognition. Customers
can also view accounts, cards, and finances, as well as easily transfer
money through the quick pay feature, and pay their utility bills through
Fawri, Fawri+, and Fawateer. Customers can also use the App to help
locating the nearest Ithmaar Bank branches or ATM.
12 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

REVIEW OF OPERATIONS CONTINUED

Continuing the digital transformation (Continued) faster, simpler and more secure way of transferring money abroad
In 2020, the implementation of the Bank’s Digital Transformation from almost anywhere in the world, through mobile phones, tablets
Strategy also included completing the implementation of a major or any other internet-connected device. IthmaarSEND uses the
upgrade to its Customer Relationship Management (CRM) to help Mastercard Send for Cross-Border money remittance platform, which
further improve its customers’ banking experience. The sophisticated enables fast, secure international fund transfers to a variety of payout
new Microsoft Dynamics CRM solution enhances customers’ banking methods. This provides customers new levels of choice, convenience,
experience and helps introduce new, customer focused solutions in and certainty by allowing them to transfer money to accounts, cards
line with banking industry trends towards increasing personalisation, or mobile wallets, with enhanced transparency. In effect, the service
security and mobility, as well as customer engagement. The upgrade offers Ithmaar Bank customers a dramatically faster alternative to
helps maintain the Bank’s leading position in terms of innovation and transfer money abroad. It also allows customers to know, in advance
technology and puts its customer service capabilities among the best in and before executing the transaction, all associated costs including the
the world. currency exchange rate.

It also included the commissioning of a best-in-class Digital Risk In June, Ithmaar Bank announced the launch of special financing offers
Protection solution to help better protect its customers as well as for villas at the Deerat Al Oyoun development in Diyar Al Muharraq.
the general public from online fraud. The Bank commissioned the The special financing offers are designed exclusively for beneficiaries
solution to help enhance its customers’ Islamic banking experience and of the Mazaya programme, the Kingdom of Bahrain's social housing
contribute to their safety. This was particularly important as the global scheme that aims to help eligible nationals buy their first homes by
Covid-19 pandemic has significantly accelerated the adoption of online providing government-subsidised financing through specific banks to
technology and other digital solutions across various sectors, including help them buy their first homes. The Deerat Al Oyoun development
banking and financial services. As a result, online presence has includes 515 new villas that were developed in collaboration with the
become as important as physical, real-world presence. Following the Ministry of Housing and Eskan Bank specifically for beneficiaries of
commissioning, an award-winning Bahraini cybersecurity firm provides the Mazaya programme. In October, Ithmaar Bank announced similar
round-the-clock Cyber Threat Management to detect and respond to financing offers for Mazaya programme beneficiaries to purchase villas
threats that may be targeting the Ithmaar Brand, its customers, or at the Danaat Al Lawzi development, located at the West of Hamad
prospects. Town. The Danaat Al Lawzi development covers a total area of 107
meters square and comprises of 303 villas and a community centre.
Improving products and services
In September, Ithmaar Bank announced that its customers could use
In February 2020, Ithmaar Bank announced that, in the ten years since
BenefitPay’s Tap and Go contactless payment method to make secure
it launched its prize-based saving account, Thimaar, the Bank will
digital payments through Point of Sale (POS) machines. This new
have distributed more than US$26 million in prizes to almost 29,000
method allows Ithmaar Bank customers who are BenefitPay users to
customers. To mark the account's ten-year anniversary, the Bank
purchase goods and services at various locations around the Kingdom
announced that it is offering even more prizes and more chances to
of Bahrain simply by placing their NFC-enabled smartphone few
win, with over US$ 4 million in prizes for more than 3,000 winners in
centimeters over the POS machine.
2020. The announcement helped reinforce Thimaar account as one of
the most rewarding saving schemes in Bahrain. Growing closer to customers
In February, Ithmaar Bank also launched a year-long Credit Card In June, Ithmaar Bank announced the opening of a new branch in
campaign to reward customers for using their contactless Ithmaar Bank Hamad Town, effectively relocating the Bank's Al Hamalah branch to a
Mastercard Credit Cards in 2020 with a chance to win cash prizes. In new, better and more accessible location with ample parking facilities.
December, the Bank began distributing newly-designed credit card and The new branch maintains Ithmaar Bank's network of 14 branches
eCards to its customers. and 40 ATM machines, one of the largest retail banking networks in
Bahrain.
… and introducing new ones
Over the years, Ithmaar Bank invested tremendous time, money
In May, Ithmaar Bank in collaboration with Mastercard, announced
and effort on developing the Bank's digital infrastructure and on
the launch of a new service that allows Ithmaar Bank customers to
implementing far-reaching, bank-wide digital initiatives. As a result,
transfer money from Bahrain to various countries around the world
almost all Ithmaar Bank transactions can now be completed online,
almost instantly. The service, called IthmaarSEND, is provided directly
without ever having to visit a branch. This was of particular significance
from the Ithmaar Bank eBanking platform and offers customers a
in 2020, particularly as a tool to help contain the COVID-19 pandemic.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 13

The announcement of the new branch however underscores the Bank's Training and development
unwavering commitment to continuously investing on improving its Ithmaar Bank believes that its people are the primary force for
customer service offerings and to growing closer to its customers in driving success, and invests heavily in their continuous training and
the medium to long-term. development.
Banking for High Net Worth Individuals In 2020, despite initial disruptions caused by the COVID-19 pandemic,
In 2020 the Bank continued to recognise the importance of high net the Bank introduced several key enhancements to respond and
worth customers, and as part of efforts to further enhance the level of improve employee development.
service it provides, the Bank introduced Premier Banking and Private
In March, Ithmaar Bank released its first internally developed training
Banking programmes that aim to cater for High Net Worth Individuals
programme. The programme was developed using internal centres of
(HNWI), and Ultra High Net Worth Individuals (UHNWIs). During 2020,
excellence and deployed to the Banks' Learning Management System.
the Private Banking department continued to focus and expand their
Not only did it allow the Bank to circumvent restrictions imposed by
respective HNWI and UHNWI client base through dedicated Relationship
the pandemic, it also provided better reporting, attendance and higher
Managers who provide effective and efficient personalised services
relevance for staff. A total of 12 internal virtual programmes were
with comprehensive and seamless service that is founded on discretion
developed, ranging from mandatory compliance training and Islamic
and professionalism.
banking concepts to the latest technological collaboration tools training.
Business Banking In July, Ithmaar Bank held training sessions for all employees to ensure
Ithmaar Bank’s Business Banking Group (BBG) continued to cater to their adherence to the Bank’s Code of Ethics and Business Conduct and
the banking needs of corporate and Small and Medium Enterprises to raise awareness of the Bank’s Human Resources policies.
(SMEs) clients, as well as to financial institutions. It also provided
treasury services. In 2020, the BBG continued to diversify its asset Ithmaar Bank conducted all necessary mandatory training as required
base and achieved good recovery of non-performing assets. The focus by the CBB, which Included: training on the Personal Data Protection
in 2020 continued to be on growing the Bank’s SME portfolio and Law, and an annual Anti Money Laundering (AML) refresher courses
strengthening relationships with corporate and financial institution for all relevant employees, and a physical security training for all new
clients. Diversification of assets was through the financing of the joiners, including employees, trainees, temporary employees and
manufacturing, education, healthcare, retail trade, food, infrastructure, outsourced personnel.
and social housing development sectors.
Celebrating success
Asset Management In September, four Ithmaar Bank staff completed their Chartered
Ithmaar Bank’s Asset Management Department focused in 2020 on Management Institute (CMI) certification as part of the Bank's
actively managing the Bank’s real estate investment portfolio and management development programme. The programme selected
providing investment management services in relation to the corporate some of the Bank’s top performers and enrolled them to accredited
book investments and clients’ investments. As part of its role, the programmes to help prepare them for future challenges.
Asset Management Department aims to protect and enhance the
In December, Ithmaar Bank rewarded teams of front-line employees,
value of investments, maximise their performance and look for exit
during the challenging days of the Covid19. These teams were doing
opportunities. The investments are located in Bahrain, the United States
amazing work serving customers' essential needs, while also ensuring
of America and Europe. The Bank’s Asset Management Department
that the Bank continues to operate at the high-quality standards that
also provides outsourcing services to manage investments held by
its customers have come to expect.
Ithmaar Holding, and its subsidiary IB Capital.
In the same month, Ithmaar Bank awarded employees who
recently earned advanced professional certifications. A total of
eleven employees from various departments, including Information
Technology, Risk Management, Retail Support, Branches Network,
Banking Operations, and the Collection Unit, were honoured for having
earned the Advanced Diploma in Islamic Finance.
Ithmaar Bank also presented token gifts to employees to mark their
individual employment anniversaries and celebrate their commitment.
14 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

REVIEW OF OPERATIONS CONTINUED

Training (Bahrain)

BIBF Levy Training Total: 1,994 hours

Managers and Above: 510 hours
Below Managers: 1,484 hours

External Training - Bahrain Total: 3,410 hours

Managers and Above: 1,785 hours
Below Managers: 1,625 hours

External Training - Abroad Total: 48 hours

Managers and Above: 48 hours
Below Managers: 0 hours

In-House Training Total: 3,847 hours

Managers and Above: 993 hours
Below Managers: 2,854 hours

Financial Advice Programme Level 1 1 employee successfully completed the Programme

Anti-Money Laundering – CBB Requirement New Joiners: 11 employees

Annual Refresher Course: 281 employees

Staff Overview (Bahrain)

Bahrainis Non-Bahrainis
Manager and Associate and Senior Officer Manager Associate and Senior Officer
Above Assistant Manager and Below and Above Assistant Manager and Below Total

Male 51 40 75 6 0 0 172
Female 13 29 59 1 1 0 103
Total 64 69 134 7 1 0 275
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 15

Role in the Community

As a pioneering Islamic retail bank, Ithmaar Bank has long-recognised Ithmaar Bank’s role in the community, however, has always been
the important role it must play in supporting the community in which about a lot more than simple philanthropy and, in addition to the
it operates. financial support it provides through donations and sponsorships, the
Bank also contributes directly to the community.
The Bank, which has always taken this responsibility very seriously,
continued throughout 2020 to support various local charities while also The Bank, for example, was recognised by Tamkeen, a public authority
participating in key national events, albeit at a significantly reduced established to contribute towards the development and growth of
scale due to the limitations imposed by the global COVID-19 pandemic. the national economy by strengthening the private sector, for its
exceptionally high 97 percent Bahrainisation level. Ithmaar Bank’s
In 2020, this included the TV show “Lets Cook with Afnan”, which performance in this area, among the best in the Kingdom, is in
supports youth and Bahraini entrepreneurs who have established line with the objectives of Tamkeen’s Taqdeer programme and the
business in restaurants and food industry. The Bank provided its Government of the Kingdom of Bahrain’s overall goal of creating a
support to encourage the SMEs and Bahraini entrepreneurs to establish highly skilled Bahraini workforce and positioning them as employees
and grow their businesses. Ithmaar Bank also provided a financial of choice.
support to two centres that teach Quran, the Muhra Center as well as
the Mohammed bin Yousif Al Hassan Center. Ithmaar Bank is also a strong advocate of gender equality, counting
several women among its management team and two on its board.
Ithmaar Bank sponsored the e-Pay Summit 2020, which was hosted It employs just over 100 women in total at various levels, from
virtually, with live viewing via a dedicated App due to limitations customer-facing personnel to executives.
imposed by the Covid-19 pandemic. The dedicated App allowed
participants to connect, stream and stay up-to-date on the latest
speaker announcements, topics and panel discussions. The Summit
focused on the changing customer experience as a result of the latest
e-payment technologies.

Ithmaar Bank also sponsored the 100- Years of Banking in Bahrain

celebration, which was organised by Bahrain Association of Banks. This
high–level event was hosted to reflect profound contribution of banks
to Bahrain’s economic development. Due to the pandemic, the event
was hosted with a limited number of attendees.
16 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

FINANCIAL REVIEW

Financial Performance Financial Position

The Bank reported a net loss attributable to equity holders for the year Total assets stood at BD3.09 billion as at 31 December 2020, a
ended 31 December 2020 of BD15.29 million compared to the net loss 3.9 percent increase compared to BD2.98 billion as at 31 December
of BD1.35 million reported for 2019. 2019.

Total net loss for the year ended 31 December 2020 was BD10.97 The Bank also reported growth in equity of unrestricted investment
million compared to the net profit of BD2.48 million reported for accountholders by 20 percent to reach to BD1.28 billion at 31
2019. Operating income increased by 4 percent, growing to BD87.02 December 2020 from BD1.06 billion in year 2019, as well as the
million for the year ended 31 December 2020, compared to the increase in customers’ current accounts by 16 percent to reach to
BD83.59million reported for 2019. BD661.7 million at 31 December 2020, compared to BD572.5 million in
year 2019.
Income from unrestricted investment accounts also increased by
11 percent, growing to BD91.60 million for the year ended 31 Total owners’ equity stood at BD49.83 million as at 31 December 2020,
December 2020, compared to BD82.55 million for 2019. a 37.1 percent decrease compared to BD79.17 million as 31 December
2019, mainly due to the modification losses resulting from deferment
of financing instalments recognised directly in equity.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 17

KEY OPERATING SUBSIDIARIES

BOARD OF DIRECTORS
SHARIA SUPERVISORY BOARD
EXECUTIVE MANAGEMENT
18 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

KEY OPERATING SUBSIDIARIES

Faysal Bank Limited (FBL) Dilmunia Development Fund I L.P.

FBL is one of the most prominent and fastest growing retail banks in Dilmunia Development Fund I L.P. (the “Fund”) is an exempted limited
Pakistan. partnership formed and registered under the laws of the Cayman
Islands. The General Partner in the Partnership is Ithmaar-Dilmunia
FBL, including its predecessors, has been in operations for more than General Partner Company Limited. The Fund was formed to acquire
30 years. FBL shares are listed on the Pakistan Stock Exchange. FBL is 650,000 square meters of land within the Health Island - Dilmunia
mainly engaged in Commercial, Retail and Corporate banking activities Project in Bahrain to develop the infrastructure and to sell the Land in
and strives to provide quality service to its customers to meet their parcels.
financial needs. FBL’s branches have been transformed into multi-
product selling hubs through which customers can access a wide The total assets and total shareholders’ equity as of 31 December 2020
variety of products and services. There is also a great deal of focus on amounted to BD54 million and BD48 million respectively.
realising synergies between FBL’s various operating units to ensure
maximum value creation and holistic customer solutions. Ithmaar Bank
owns 66.57 percent of FBL.

FBL has 576 branches, spread over 130 cities across Pakistan. The
Bank has also sizable clients in the Corporate, Commercial, SME and
Consumer segments. FBL is increasing its branch network to strengthen
its customer reach and ability to provide banking services to customer
at their doorsteps. The Bank is enhancing its technology platform to
facilitate customers transactions and reduce the cost of doing business.
FBL introduced a Virtual Card allowing customers to make secure
worldwide online purchases.

With a noticeable increase in its Islamic financing, deposits and

investment accounts portfolios, the Bank is expected to maintain its
growth trajectory.

FBL’s total assets and total shareholders’ equity as of 31 December

2020 amounted to PKR 710 billion (equivalent BD1.6 billion) and PKR
60 billion (equivalent BD141 million) respectively.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 19

BOARD OF DIRECTORS

HRH Prince Amr Mohammed Al Faisal Tunku is the founder and chairman for The Budimas Charitable
Non-Executive Chairman Foundation (Budimas) and MAA Medicare Charitable Foundation (MAA
Medicare). Budimas is a non-government charity, established in 1998
Elected 18 April 2019
that provide financial support for orphans and underprivileged children
HRH Prince Amr has more than 30 years of extensive and diversified in Malaysia. MAA Medicare is a non-government charity, established
experience in commercial and investment banking, executive in 1994, that provide nationwide dialysis treatment and support for
management, architecture and engineering. underprivileged kidney patients, and also operates a Cardiac Diagnostic
Centre for underprivileged patients, in Malaysia.
He is Chairman of the Board of Supervisors of Dar Al-Maal Al-Islami
Trust (DMIT), and Chairman of Ithmaar Holding, Faisal Islamic Bank Sheikh Zamil Abdullah Al-Zamil
(Sudan) and Faisal Islamic Bank of Egypt. HRH Prince Amr is also
Independent Board Member
Founder and Director of Red Sea Design Consultants (Jeddah),
and Chairman of the Board of Directors of Al Daleel Company for Elected 18 April 2019
Information Systems (headquartered in Jeddah with sister companies in Sheikh Al-Zamil is a prominent businessman in the Kingdom of Saudi
Tunisia, Sudan and Pakistan). Arabia and in other countries in the GCC region, and has years of
experience in managing business activities in various sectors.
He is a Fellow of the Saudi Association for Construction Societies, City
Development and Clean Environment and a Member of the Saudi He is a member of the Ithmaar Holding Board of Directors. He is also
Council of Engineers. Executive Vice-President of Zamil Group Holdings Company and serves
as the Chairman of Zamil Offshore Services Co. and Zamil Operations
HRH Prince Amr holds a Bachelor of Arts Degree in Architecture from and Maintenance Co. Ltd. Sheikh Al-Zamil is actively involved in various
King Abdulaziz University, Saudi Arabia. institutions such as the Chambers of Commerce, industrial companies
and banks in his capacity as a Director.
Tunku Yaacob Khyra
Independent Board Member Educated in the United States, he has a BS degree in Petroleum
Elected 18 April 2019 Engineering from the University of Southern California (USC) and an MS
degree in the same major from West Virginia University, USA.
Tunku Dato’ Yaacob Khyra holds a Bachelor of Science (Hons) Degree
in Economics and Accounting from City University, London and is a Abdelhamid Mohamed Aboumousa
member of the Ithmaar Holding Board of Directors. An accountant by
Executive Board Member
training, he is a Fellow of the Institute of Chartered Accountants in
England & Wales (ICAEW) and a member of the Malaysian Institute of Elected 18 April 2019
Accountants (MIA). Tunku is also a Certified Financial Planner (CFP) and Mr. Aboumousa has more than 49 years of diversified banking and
is a member of the Financial Planning Association of Malaysia (FPAM). finance experience.

Tunku started his career as an auditor with Price Waterhouse in London He is a member of the Dar Al-Maal Al-Islami Trust (DMIT) Board of
and Kuala Lumpur (from 1982 to 1987). He later joined Malaysian Supervisors and a member of the Ithmaar Holding Board of Directors.
Assurance Alliance Berhad which, under his leadership, became the
leading locally owned life and non-life insurance company in Malaysia. He is currently Governor of Faisal Islamic Bank of Egypt, which he
Tunku later established MAA Takaful Berhad, which became the leading joined in 1979. Prior to joining Faisal Islamic Bank of Egypt, Mr.
Islamic family and general insurance institution in Malaysia. Aboumousa worked at the Central Bank of Egypt (CBE) for 17 years. He
is Head of the Egyptian–Saudi Business Council, and is also a Member
Currently, Tunku is the executive chairman of Malaysian listed of the General Assembly of Misr Insurance Holding Company, Egypt.
companies, MAA Group Berhad, Melewar Industrial Group Berhad,
and Mycron Steel Berhad. He is also a board member of Khyra Legacy Mr. Aboumousa is a Member of the Board of Faisal Islamic Bank of
Berhad, Yayasan Khyra Berhad, Melewar Equities Sdn Bhd and several Sudan, Momtalakat for Insurance in Egypt, Ayadi for Investment and
other private companies. He also sits on the board of directors of Development in Egypt, Midor for Electricity - MIDALIC – Egypt, and
Altech Chemicals Limited (listed in Australia), and Turiya Berhad (listed Awqaf Properties Investment Fund (APIF) - Islamic Development
in Malaysia). Bank (IDB) – Jeddah. He is also Chairman of International Company
for Leasing S.A.E. (Incolease) in Egypt, and Deputy Chairman of the
General Council for Islamic Banks and Financial Institutions (CIBAFI).
20 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

BOARD OF DIRECTORS CONTINUED

Mr. Aboumousa is also a member of the Advisory Committee of Engineering and Maintenance at the Bahrain Ministry of Health. He has
ARMILA Fund, Milan, Italy, and a member of the Advisory Committee of also served as the Chairman of the Bahrain Qualifications Framework
ANASTASIA Fund, Milan, Italy. Steering Committee, and the Steering Committee of Career Expo, and
was a Board member of the Bahrain Society of Engineers and the
He holds a Bachelor’s degree in Accounting from the Faculty of Bahrain Consumer Protection Society.
Commerce, Cairo University, Egypt, and a diploma in Finance, also from
Cairo University. He is currently a member of the Board of Directors of Solidarity Group
Holding, Naseej, Faysal Bank Limited (Pakistan); and Saudi Solidarity
Mohammed A. Rahman Bucheerei Takaful Co. (KSA), as well as a member of the Board of Trustees
Executive Board Member of Arabian Pearl Gulf School. Mr. Al-Qassimi holds a BSc in Civil
Elected 18 April 2019 Engineering from Queen Mary College, University of London, UK; a MSc
in Health Facility Planning from the University of North London, UK,
Mr. Bucheerei has more than 50 years of experience in Accounting
and a Diploma in Health Care Management from the Royal College of
and Commercial, and Offshore Banking. He was Chief Executive Officer
Surgeons in Ireland, Bahrain.
of Ithmaar Bank from 12 July, 2010 to 31 August, 2013, and has been
a Member of the Ithmaar Bank Board of Directors since March 2010. Omar Abdi Ali
Mr. Bucheerei is also a member of the Board of Directors of Ithmaar
Non-Executive Board Member
Holding and IB Capital and is Group Chief Executive Officer of Dar
Al-Maal Al-Islami Trust (DMIT). Previously, he served as the General Elected 20 June 2019
Manager of the Private Offices of HRH Prince Mohammed Al Faisal Mr. Ali has more than 50 years of experience in financial and general
Al Saud, Saudi Arabia, and Executive Vice-President, Shamil Bank of management in development as well as commercial and investment
Bahrain. banking in Africa, the Middle East and Europe. He is a member of the
Ithmaar Holding Board of Directors and the Board of Supervisors of Dar
He is Chairman of MFAI (Jersey) Limited, Faisal Finance Maroc Al-Maal Al-Islami Trust (DMIT).
S.A., Faisal Private Bureau, DMI Administrative Services, Ithmaar
Development Company, and NASEEJ Rabat. Mr. Ali is Founder and Chairman of the Board of Directors of Quadron
Investments Co. Ltd. (Sudan) and Integrated Property Investments
He is a member of the Board of Directors of the Islamic Investment (United Kingdom and Tanzania). Previously, Mr. Ali served at DMIT
Company of the Gulf (Bahamas) Limited, Faysal Bahamas Limited, Gulf where he was Chief Executive Officer and Chief Operating Officer from
Investors Asset Management Company J.S.C. Closed, DMI NV, Faisal 1986 to 1999 and, before that, Executive Vice-President, Finance and
Finance Luxembourg and Shamil Finance Luxembourg. Vice-President in charge of Internal Audit from 1983 to 1986.
He studied accounting, mathematics and economics at Gulf Prior to his DMIT appointments, Mr. Ali was Director of Finance and
Polytechnic, Bahrain. Chief Financial Officer at the Arab Authority for Agricultural Investment
and Development (Sudan). He has served in the African Development
Abdulellah Ebrahim Al-Qassimi
Bank for ten years and his last post there was CFO of the Bank. He has
Independent Board Member also served with the Arab Fund for Economic and Social Development
Elected 18 April 2019 and the Arab Authority for Agriculture and Investment where he was
Mr. Al-Qassimi has more than 35 years of diversified management also the CFO. He has served these two institutions for seven years.
experience. He is a member of the Ithmaar Holding and the IB Capital
Mr. Ali is a Certified Accountant, Leeds College of Commerce, UK, and a
Boards of Directors.
Fellow of the Association of Chartered Certified Accountants.
His previous positions including being Chief Executive of Tamkeen
(the Labour Fund), from which he resigned in May 2010; Deputy
Chief Executive Officer of the Labour Fund Project at the Bahrain
Economic Development Board; Assistant Undersecretary for Training
at the Bahrain Ministry of Labour and Social Affairs; and Director of
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 21

Dr. Amani Khaled Bouresli Vice Chairman of the Board of Directors of Yanbu Cement Company
Independent Board Member (Saudi Arabia) as well as the Worldcare International Company (United
States of America). Sheikh Elkhereiji is also a member of the Board of
Elected 18 April 2019
Directors of Faisal Islamic Bank of Egypt. Previously, Sheikh Elkhereiji
Dr. Bouresli, formerly the Kuwait Minister of Commerce and the was the Ex-Chairman of Faisal Investment Bank (Bahrain). He holds a
Minister of Planning and Development Affairs, has more than 30 years Bachelor’s degree in Law from Cairo University, Egypt, a Diploma in
of experience in training, consulting and banking. Dr. Bouresli is the Change Management from Harvard, USA, and a Diploma in Marketing
Chairperson of the IB Capital Board of Directors, and a member of the Management from the International Marketing Institute, Cambridge in
Ithmaar Holding and Faisal Islamic Bank of Egypt Board of Directors. USA.
She is currently a Professor of Finance at Kuwait University’s College Elham Ebrahim Abdulla Hasan
of Business Administration, and her research interests include Capital
Independent Board Member
Markets Regulations, Corporate Governance and Strategic Planning.
Dr. Bouresli is also a Member at the Board of Trustees at Kuwait Elected 18 April 2019
Transparency Association for the Anti-Corruption Award for the Public Ms Hasan, who has more than thirty years of diversified experience in
Sector in Kuwait. She earned the 2018 Kuwaiti Economic Researcher the financial services industry, is a member of the Ithmaar Holding and
Award sponsored by the Central Bank of Kuwait. Also, she earned the IB Capital Boards of Directors.
the Middle East Excellence Award in business administration and
economics for her contributions toward the development of the capital She is currently Chairwoman of Taaheal Healthcare and an Advisor
market structure and regulation in Kuwait. She is the founder of the on Business and Corporate Strategy, as a well as a Board Member
Governance Excellency Prize. of Mumtalakat, Solidarity Group Holding – Bahrain and BNP Paribas
Investment Company – Saudi Arabia. A leading businesswoman in
Prior to her ministerial appointments, Dr. Bouresli was the Chairwoman the Kingdom of Bahrain, Ms Hasan was the first female partner at
and Founder of Capital Standards Rating Co., the first independent PricewaterhouseCoopers in the Middle East region. She was voted one
credit rating agency in Kuwait, from 2009 to 2011; a Board Member of the Most Influential Women in the Middle East by Forbes Magazine,
at Burgan Bank, Kuwait, from 2010 to 2011; and Head of the Capital and earned the Euro Money Award for Islamic Assurance Advisory
Market Authority Project from 2006 to 2007. Dr. Bouresli, who has Services.
many published works in refereed journals as well as in specialised
books and magazines, began her banking career at the National Bank Ms Hasan was previously a Board Member of the Bahrain Economic
of Kuwait in 1987, and her teaching career at Kuwait University in Development Board (EDB), Tamkeen, BBK, the Bahrain Real Estate
1988. Investment Company (EDAMAH), and the University of Bahrain, as well
as a member of both the Women Empowerment Economic Committee
Dr. Bouresli holds a BC in Finance and Banking from Kuwait University, of the Supreme Council for Women and the Planning and Follow-up
Kuwait; an MBA from Seattle University, USA; and a PhD in Finance Committee of the Bahrain Business Women’s Society. She was the
from Southern Illinois University at Carbondale, USA. Country Senior Partner at PricewaterhouseCoopers in Bahrain until June
2010, and was the financial services leader for PricewaterhouseCoopers
Sheikh Mohamed Abdullah Abdelkarim Elkhereiji Middle East until June 2007. While at PricewaterhouseCoopers, Ms
Non-Executive Board Member Hasan worked extensively with Islamic institutions since the early
Elected 18 April 2019 eighties.
Sheikh Elkhereiji has more than 41 years of diversified banking and Ms Hasan qualified as Certified Public Accountant in 1986 and is a
management experience. member of the American Institute of Certified Public Accountants.
He is a member of the Ithmaar Holding Board of Directors. Sheikh
Elkhereiji is the Chairman of many companies in Saudi Arabia, including
Elkhereiji Group Holding Co., Hal International Company and S.A.
Elkhereiji Real Estate Limited Company. Sheikh Elkhereiji is a member
in the Board of Supervisors of Dar Al-Maal Al-Islami Trust, and is the
22 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

SHARIA SUPERVISORY BOARD

Sheikh Abdullah Sulaiman Al Manee’a Sheikh Mohsin Al-Asfoor

Chairman Member
Appointed 25 March 2019 Appointed 25 March 2019
Sheikh Al Manee’a is a prominent, highly-respected Sharia scholar. He Sheikh Al-Asfoor is a well-known and highly respected Sharia scholar in
is the Chairman of the Ithmaar Holding, Ithmaar Bank and the IB Capital the Kingdom of Bahrain.
Sharia Supervisory Boards.
He is a member of the Ithmaar Holding, Ithmaar Bank and IB Capital
He is a member of the Senior Sharia Board in the Kingdom of Saudi Sharia Supervisory Boards.
Arabia, a consultant at the Royal Court, and a member of the Sharia
He is also a member in the Sharia Advisory Board of the CBB and
Board of the Accounting and Auditing Organisation for Islamic Financial
several Sharia Supervisory Boards in the Kingdom of Bahrain and
Institutions (AAOIFI). He is also Chairman or a member of the Sharia
abroad.
Supervisory Boards of several other Islamic banks and financial
institutions. Sheikh Al-Asfoor is a member of Curriculum Development at the Jaafari
Religious Institute as well as the Sharia Board of the International
An expert at the Islamic Fiqh Academy, Sheikh Al Manee’a holds a Islamic Rating Agency of the Islamic Development Bank. He is a
Master’s degree from the Higher Institute for Judgment in Saudi Arabia, graduate of Islamic Hawza from Qom, Iran, and has authored more
and has authored several books including `Paper Money: Truth, History than 60 books on the Islamic Sharia.
and Reality’, `Economic Research’, `A window on the community’ and
others. Sheikh Osama Mohammed Saad Bahar
Sheikh Nedham Mohammed Saleh Yaqouby Member
Member Appointed 25 March 2019
Appointed 25 March 2019 Sheikh Bahar is a well-known, highly-respected Sharia scholar from the
Kingdom of Bahrain.
Sheikh Yaqouby is a prominent, highly-respected Islamic Sharia scholar
and a successful businessman from the Kingdom of Bahrain. He is a member of the Ithmaar Holding, Ithmaar Bank and IB Capital
Sharia Supervisory Boards.
He is a member of the Ithmaar Holding, Ithmaar Bank and the IB
Capital Sharia Supervisory Boards. He is currently a member of the Sharia Board of First Energy Bank, as
well as of several other Islamic banks and financial institutions, funds
He is a member of the Sharia Board of AAOIFI, a member of the Sharia and investment portfolios in Bahrain and abroad.
Advisory Board of the Central Bank of Bahrain (CBB) and Chairman or
a member of the Sharia Supervisory Boards of several banks, Islamic Sheikh Bahar holds, a Master’s degree from Allmam Ouzai University in
financial institutions, investment funds and international banks in the Lebanon, and a Bachelor’s degree in Islamic Sharia from Prince Abdul
GCC region, Arab countries and around the world. Qader Al Jaazaeri University of Islamic Studies in Algeria.
In 2007, the King of Bahrain, His Majesty King Hamad bin Isa Al Khalifa, Sheikh Bahar has authored several books on Islamic banking as well as
awarded Sheikh Yaqouby the Order of Merit in recognition of his on society affairs. He has participated in and conducted several radio
services in Bahrain and abroad. Sheikh Yaqouby has also received the interviews and written newspaper columns.
Euromoney award for Innovation in Sharia Supervision, as well as the
Malaysian Islamic Banking Award among other awards.

Sheikh Yaqouby holds many academic, appreciation and honorary

degrees. He has authored a large number of books.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 23

EXECUTIVE MANAGEMENT

Ahmed Abdul Rahim Yusuf Abdulla Alkhan

Chief Executive Officer General Manager, Information Technology and Banking Operations
• Master of Business Administration, University of Glamorgan, Wales • Master of Business Administration, AMA International University
(UK) (1999) (2005)
• Fellow of the Institute of Financial Accountants, UK; and the Institute • Bachelor of Science in Computer Science, University of Bahrain
of Public Accountants, Australia (2014) (1989)
• Executive Management Diploma, University of Bahrain (1993) • 31 years of experience
• Advanced Banking Diploma, Bahrain Institute of Banking and Finance • Joined the group in 1989
(1988)
Maysan Faisal Almaskati
• 43 years of banking experience Assistant General Manager, Head of Asset Management
• Joined the group in 2006 • B.Sc. in Industrial Engineering, Kansas State University, USA (1997)
Abdulhakeem Khalil Al Mutawa • Investment Representative Program (Series 7), Bahrain (2000)
Deputy Chief Executive Officer • 20 years of banking experience
• Master of Business Administration, University of Bahrain (1991)
• Joined the group in 2019
• Post-Graduate Diploma in Management, University of Bahrain (1990)
Saqib Mahmood Mustafa
• Bachelor of Science in Mechanical Engineering, The University of Assistant General Manager, Chief Financial Officer, Head of
Texas at Austin, USA (1981) Financial Control
• 39 years of experience, of which 18 years in banking • Certified Sharia Advisor and Auditor (CSAA) (Awarded by AAOIFI)
(2019)
• Joined the group in 2003
• International Certificate in Banking Risk & Regulation (ICBRR) (2011)
Abdulla Abdulaziz Taleb
General Manager, Business Banking Group • Fellow Member of the Institute of Chartered Accountants of England
& Wales (ICAEW) (2010)
• Bachelor of Science in Banking and Finance, Kingdom University
(2009) • Certified Islamic Professional Accountant (CIPA) (awarded by AAOIFI)
(2009)
• Advanced Diploma in Islamic Banking, Bahrain Institute of Banking
and Finance (BIBF) (2005) • Fellow Member of the Association of Chartered Certified Accountants
(ACCA) (2003)
• 20 years of banking experience
• Bachelor of Commerce Karachi University (Pakistan) (1999)
• Joined the group in 2014
• 20 years of banking and finance experience
Mohammed Hasan Janahi
General Manager, Retail Banking Group • Joined the group in 2007
• Advanced Diploma in Banking and Finance, BIBF (1998)
• 36 years of Banking experience
• Joined the group in 2002
24 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE GOVERNANCE
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 25

CORPORATE GOVERNANCE

Overview of Policies and Controls The “Comply or Explain” Principle

Ithmaar Bank follows the “High Level Controls” and “Public Disclosure” The CBB Rulebook requirements in the High-Level Controls (HC) Module
Modules of the Rulebook issued by the Central Bank of Bahrain (CBB) specify that the Bank must comply with the Guidelines of the HC
and the Corporate Governance Code of the Ministry of Industry, Module, or explain its non-compliance in the Annual Report. As part
Commerce and Tourism, Ithmaar Bank’s Articles and Memorandum of of its commitment to adherence with the CBB regulations, the Bank
Association, the Bahrain Commercial Companies Law, the Accounting wishes to explain the following:
and Auditing Organization for Islamic Financial Institutions (AAOIFI) and
international best practices, where applicable. The Chairman is a non-executive director but not an independent
director, as defined by the CBB, due to his position as the Chairman
Ithmaar Bank’s Corporate Governance Policy provides guidance on of the Board of Supervisors of Dar Al-Maal Al-Islami Trust (DMIT), the
engaging with its stakeholder groups. Bank’s controller.

Recognising its fundamental stewardship role towards shareholders, it FBL, a subsidiary of Ithmaar Bank, follows the local regulations of the
is Ithmaar Bank’s policy to treat shareholders in line with the governing State Bank of Pakistan, which may differ from CBB regulations in some
laws and regulatory guidelines. The overarching goal is to ensure aspects, including the Sharia governance requirements applicable to
sustainable growth with due consideration to both current and future Bahrain-incorporated banks.
risks, and thereby generate optimum value for shareholders over the
long-term. The Bank adheres to Sharia principles in striking a balance
Developments in Regulations
between the interests of its various stakeholders.
On an ongoing basis, the Bank monitors updates in the CBB
Ithmaar Bank adheres to a business approach that is transparent, requirements, including those stipulated under the HC Module, and
honest and fair. It has established various written policies such as the implements the necessary updates to its processes and procedures in
Code of Ethics and Business Conduct and Anti-Money Laundering and response to those regulatory changes. There were no material changes
Whistle-Blowing Policy for strict adherence by Directors, executives and introduced to the HC Module by the CBB during the year 2020.
employees at all levels. These are distributed as guidelines through
multiple internal communication channels.
Administration
The Board’s adherence to corporate governance practices is underlined Ithmaar Bank is administered by the Board of Directors and the Sharia
by various principles, such as integrity, transparency, independence, Supervisory Board and, for day-to-day matters, by the Executive
accountability, responsibility, fairness, Sharia principles and social Management.
responsibility.

Moreover, the corporate governance policies are designed to lay a

solid foundation for the executive management and the Board of
Directors in managing the Bank, as well as to promote ethical and
responsible decision-making, safeguard integrity in financial reporting,
make timely disclosures, respect the rights of shareholders, recognise
and manage risk, encourage enhanced performance, remunerate fairly
and responsibly, and recognise the legitimate interests of stakeholders.

The written Code of Ethics and Business Conduct that binds all
employees and members of the Board of Directors lends further
weight to the practical implementation of the Bank’s stated policies.
26 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE GOVERNANCE CONTINUED

Organisation Chart
Ithmaar Bank B.S.C. (C )

Executive Committee Board of Directors Sharia Supervisory Board

Audit, Governance & Risk Remuneration & Internal Sharia Auditor

Corporate Secretary
Management Committee Nomination Committee
Chief Executive Officer
Sharia Coordination &
Implementation Officer

Internal Compliance Risk Remedial

Audit & AML Management Management

IT & Banking
Financial Control Legal Affairs Deputy Chief Executive Officer Human Resources
Operations

Product Marketing
Information Asset Business Retail Banking
Management & & Corporate
Technology Management Banking Group Group
Business Alliances Communication

IT Financial, Commercial Branches Product

Infrastructure MIS & Regulatory Banking Network Development

IT Systems Internal Financial Branch Network

Management Control Institutions Support

VAT, Expenses
IT Support & Shareholder Treasury Private Banking
Affairs

Business
Banking Development &
Operations Sales

General Collections
Services

Cards Products
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 27

Board of Directors • Ensuring adherence to high standards of ethics and corporate

The Board of Directors of Ithmaar Bank is comprised of ten members, governance;
of whom five are independent. Independence is determined based on • Ensuring that appropriate risk management and regulatory
the Central Bank of Bahrain (CBB) definition of “Independent Director” compliance policies are in place;
which is stipulated in the Glossary section of the CBB Rulebook.
• Monitoring the effectiveness of the governance, compliance, and
The Board is committed to the roles and responsibilities prescribed internal control framework;
by the Commercial Companies Law of 2001 (as amended), which are • Ensuring timely and adequate legal and regulatory disclosures;
reflected in Ithmaar Bank’s Board of Directors Charter and constitutive
• Arranging the shareholders’ annual, ordinary and extraordinary
documents.
general meetings; and
The Board’s roles and responsibilities include, but are not limited to, • Ensuring equitable treatment of minority shareholders.
the overall business performance and strategy for the Bank; causing
Some of the responsibilities of the Board of Directors are delegated to
financial statements to be prepared which accurately disclose Ithmaar
the committees of the Board.
Bank’s financial position; monitoring management’s performance;
monitoring conflicts of interest and preventing abusive related party The Board of Directors has drawn a ‘Business Discretionary Powers’
transactions; and assuring equitable treatment of shareholders. In policy which outlines authorities and approval powers for the Board
particular, the Board, among other things, ensures that Ithmaar Bank’s and the Executive Management. In general, all business decisions
goals are clearly established, and that strategies are put in place relating to strategic investment, and financing exceeding certain limits,
towards achieving those goals. including business relationships with connected counterparties, require
the Board’s approval. All transactions that require Board approval have
Members of the Board are responsible, both individually and
been approved by the Board as per applicable regulations.
collectively, for performing these responsibilities, including the
following: The Board’s functions, mandate, appointment, responsibilities and
terminations are governed by the Articles of Association and the Board
• Setting Ithmaar Bank’s strategic direction;
of Directors Charter of Ithmaar Bank, which complies with applicable
• Maintaining overall responsibility for the performance of Ithmaar statutory and regulatory rules. Board members serve three-year terms.
Bank; At the end of each term, the new Board is to be elected (or appointed,
• Establishing policies for strengthening the performance of the Bank, as applicable) at Ithmaar Bank’s annual general meeting.
including ensuring that management is proactively seeking to build
The next election of the Board of Directors will take place during the
the business through innovation, initiative, technology, new products
annual general meeting to be held in 2022.
and the development of its business capital;
• Selecting, appointing, monitoring and evaluating the performance of Structure and Composition of the Board
management; Ithmaar Bank is managed at the high level by the Board. The size
• Appointing the Chief Executive Officer and the executive of the Board is subject to Ithmaar Bank’s Articles of Association, the
management, as well as setting the terms of their employment; Board of Directors Charter and the rules and regulations decreed by the
Ministry of Industry, Commerce and Tourism and the Central Bank of
• Reviewing the performance and compensation of the management; Bahrain.
• Reviewing the structure and succession planning of the
management; Duties of Board Members
• Overseeing, advising and counselling the management; The Board members, individually and collectively, are bound by distinct
fiduciary duties to Ithmaar Bank and its shareholders. The Board
• Monitoring and managing potential conflicts of interest; members owe their fiduciary duty to the Bank as a corporate entity in
• Deciding on whatever steps are necessary to protect the Bank’s its own right and not just to individual shareholders and/or groups of
financial position and viability; shareholders. These duties apply to all the Board members whether
they are appointed or elected.
• Ensuring that the financial statements are true and fair, and
otherwise conform with applicable law; The main duties owed by Board members to Ithmaar Bank are the duty
of obedience, the duty of care and the duty of loyalty.
28 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE GOVERNANCE CONTINUED

Duty of Obedience The arrangements for the termination of membership in the Board of
The Board members are required to act in accordance with Ithmaar Directors are stipulated in the Articles of Association of Ithmaar Bank.
Bank’s rules and policies to further its goals and objectives. In In the event of a vacancy, termination or resignation on the Board of
addition, the Board members must comply with all relevant laws and Directors, the Remuneration and Nomination Committee shall make
regulations. The duty of obedience forbids the Board members from recommendations to the Board for the appointment of a director,
acting outside the scope of Ithmaar Bank’s internal authorities and which recommendation shall be made pursuant and subject to the
policies. legal and regulatory requirements in place.

Duty of Care All the Board members receive a letter of appointment signed by the
Chairman in which relevant information, including responsibilities, are
The Board members are under duty to exercise, in carrying out their
described.
responsibilities in good faith, the same level of care, skill and diligence
that an ordinary, prudent person would exercise in the same position The Board members also receive a copy of the Code of Ethics and
or under similar circumstances. Accordingly, the Board members must Business Conduct.
act in a manner that they reasonably believe is in the best interest of
Ithmaar Bank. The Board, its Committees and individual members are regularly
assessed with respect to their effectiveness and contributions.
Duty of Loyalty
This duty requires the Board members to act in good faith, solely and Board Induction and Development Programme
collectively, in the best interest of Ithmaar Bank. The Board members Ithmaar Bank prepares an all-day induction programme for newly
should not act out of expedience, avarice or self-interest. The Board appointed/elected Board members, which starts with a welcome note
members are barred from using Ithmaar Bank’s properties and assets from the Chief Executive Officer and Deputy Chief Executive Officer(s).
for their personal needs or seeking business opportunities for personal Thereafter, members of the Executive Management introduce Ithmaar
benefit. This duty also requires the Board members to retain the Bank in detail, covering its history, structure, subsidiaries, products,
confidentiality of information that is explicitly deemed confidential by strategy, financial performance and organisational chart. This is
Ithmaar Bank, as well as information that appears to be confidential followed with presentations from the heads of various departments in
from its nature or matter. respect of their role and function within Ithmaar Bank. The Bank also
arranges training sessions throughout the year for Board members
Ithmaar Bank provides insurance to indemnify the Board members for and Executive Management to keep them abreast of recent legal,
negligence, default, breach of duty or breach of trust, provided that the regulatory, market, technological and other developments in the
Board member was acting in good faith. banking and Investment sector.
The above duties are detailed in the Board of Directors Charter and Board Members’ Conflict
Code of Ethics and Business Conduct, which is approved by the Board.
When the Board deliberates an agenda item wherein a conflict of
Board Members’ Election and Evaluation System interest arises, the conflicted director declares his or her conflict and
abstains from voting or deliberation. Article 189 of the Commercial
All appointments to the Board of Directors are governed by and subject
Companies Law of 2001 (as amended) requires that members of the
to Ithmaar Bank’s Memorandum of Association, Articles of Association,
Board and Management should not have personal direct or indirect
the Board of Directors Charter and the laws, rules, regulations, policies
interest in transactions and contracts concluded by Ithmaar Bank,
and charters in place, as amended from time to time.
without the authorisation of the General Assembly, otherwise such
The Remuneration and Nomination Committee reviews the transaction or contract shall be deemed null and void.
composition and performance of the Board of Directors annually.
Interested members have a duty to inform the Board of any matter
The Remuneration and Nomination Committee’s duties in relation
which presents a conflict and are then restricted from participating
to the composition and performance of the Board include, among
in deliberations of, or voting on, the matter. Such declaration is to
other things, assessing the skills required for the Board members to
be recorded in the meeting minutes. The Chairman shall inform the
competently perform their responsibilities and meet their objectives,
General Assembly of the results of such contracts in the annual general
as well as developing and implementing a plan to identify, assess and
meeting following execution of the transactions and such notification is
enhance the Board members’ competencies.
to be accompanied by a special report of an external auditor in respect
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 29

of the nature and details of the matter, and the extent of interest of The remuneration policy in particular considers the role of each
the respective member. Violating this Article shall render the member employee and has set guidance depending on whether an employee
and the Board jointly liable for compensation for any damage caused is a Material Risk Taker and/or an Approved Person in a business
by the breach. line, control or support function. An Approved Person is an employee
whose appointment requires prior regulatory approval because of the
This provision is reflected in Ithmaar Bank’s Articles of Association significance of the role, and an employee is considered a Material
which specify that directors shall not have any direct or indirect Risk Taker if they head significant business lines and if any individuals
interest in any transaction or contract relating to Ithmaar Bank without within their control have a material impact on the Bank’s risk profile.
the approval of the Annual General Meeting. Any transaction or
contract contrary to the above is deemed null and void, unless later In order to ensure alignment between what we pay our employees
confirmed by the majority vote of disinterested directors subject to CBB and our business strategy, we assess individual performance against
approval. The Articles of Association specifies that violations of such annual and long-term financial and non-financial objectives in line with
restriction shall permit the shareholders to claim compensation from our performance management system.
the conflicted director, for damage caused to Ithmaar Bank or profit
realised by the conflicted director. This assessment also takes into account adherence to the Bank’s
values, risk and compliance measures and, above all, acting with
Board Members’ Remuneration integrity.
The Board member’ sitting fees for Board and Board Committee
Altogether, performance is therefore judged not only on what is
meetings in 2020 amounted to BD116,493 (2019: BD119,886). The
achieved over the short and long-term but also, importantly, on how it
Sharia Supervisory Board retention fee for 2020 amounted to BD22,620
is achieved, as the RNC believes the latter contributes to the long-term
(2019: BD22,620) and their sitting fees for 2020 was BD7,917 (2019:
sustainability of the business.
BD8,294).
Remuneration Policy
Remuneration Strategy
The Remuneration Policy is reviewed on a periodic basis to reflect
It is the Bank’s basic compensation philosophy to provide a competitive
changes in market practices and Ithmaar Bank’s business plan and risk
level of total remuneration to attract and retain qualified and
profile.
competent employees. The Bank’s Variable Remuneration Policy is
driven primarily by a performance-based culture that aligns employee The Bank’s remuneration policies will apply only to its subsidiaries
interests with those of the shareholders. These elements support which are licensed by the CBB under Volume 1 or Volume 2 of the CBB
the achievement of the Bank’s objectives through balancing rewards Rulebook. In the case of other subsidiaries and branches of the Bank,
for both short-term results and long-term sustainable performance. the RNC should ensure that, where applicable, such entities comply
This strategy is designed to share the Bank’s success, and to align with local rules that apply to their remuneration policies.
employees’ incentives with its risk framework and risk outcomes.
No external consultants’ advice was sought in 2020 regarding the
The Bank’s reward package comprises the following key elements: remuneration process.
• Fixed pay;
Ithmaar Share Incentive Scheme
• Benefits; and
As Ithmaar Bank is not listed, the Award Price of the Phantom Shares
• Discretionary performance bonus. will be defined to be the adjusted Net Asset Value (NAV) as per the
A robust and effective governance framework ensures that the Bank latest audited financial statements of the Bank.
operates within clear parameters of its remuneration strategy and
policy.

All remuneration matters, and related overall compliance with

regulatory requirements, are overseen by the Remuneration and
Nomination Committee (RNC).
30 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE GOVERNANCE CONTINUED

Variable Remuneration for Employees The Bank will take all reasonable steps to ensure that control function
The variable remuneration is performance related and consists personnel are not placed in a position where, for example, approving
primarily of the annual performance bonus award. As a part of the a transaction, making decisions or giving advice on risk and financial
employee’s variable remuneration, the annual bonus rewards delivery control matters could be directly linked to an increase in their
of operational and financial targets set each year, the individual performance-based remuneration.
performance of the employees in achieving those targets, and their
The variable remuneration of those staff members in control functions
contribution to delivering strategic objectives.
will be designed in a way that avoids conflict of interests related
The Bank has adopted a Board-approved framework to develop a to the business unit they are overseeing and will be appraised and
transparent link between variable remuneration and performance. The determined independently.
framework is designed on the basis that the combination of meeting
Risk Assessment Framework
both satisfactory financial performance and achievement of other non-
financial factors, would, all other things being equal, deliver a target The purpose of the risk linkages is to align variable remuneration to
bonus pool for the employees, prior to consideration of any allocation the risk profile of the Bank. The risk assessment process encompasses
to business lines and employees individually. In the framework the need to ensure that the remuneration policy reduces employees’
adopted in determining the variable remuneration pool, the RNC aims incentives to take excessive and undue risk, is symmetrical with
to balance the distribution of profits to shareholders and performance risk outcomes, and has an appropriate mix of remuneration that is
bonuses to employees. consistent with risk alignment.

The key performance metrics include a combination of short-term and The RNC considers whether the variable remuneration policy is in line
long-term measures and include profitability, solvency, liquidity and with the risk profile and ensures that through the ex-ante and ex-post
growth indicators. The performance management process ensures that risk assessment framework and processes, remuneration practices
all goals are appropriately cascaded down to respective business units where potential future revenues whose timing and likelihood remain
and employees. uncertain are carefully evaluated.

In determining the amount of variable remuneration, the Bank Risk adjustments take into account all types of risk, including intangible
starts from setting specific targets and other qualitative performance and other risks such as reputation risk, liquidity risk and the cost of
measures that result in a target top-down bonus pool. The bonus pool capital. The Bank undertakes risk assessment to review financial
is then adjusted to take account of risk via the use of risk-adjusted and operational performance against the business strategy and risk
measures, including forward-looking considerations. performance prior to distribution of the annual bonus. The Bank
ensures that total variable remuneration does not limit its ability to
The Bank uses a formalised and transparent process to adjust the strengthen its capital base. The extent to which capital needs to be
bonus pool for quality of earnings. The objective is to pay bonuses built up is a function of a bank’s current capital position and its ICAAP.
out of realised and sustainable profits. If the quality of earnings is not
strong, the profit base could be adjusted based on the discretion of the The size of the variable remuneration pool and its allocation takes into
RNC. account the full range of current and potential risks, including:
• The cost and quantity of capital required to support the risks taken;
At the individual level, poor performance by the Bank would mean
individual Key Performance Indicators are not met and hence • The cost and quantity of the liquidity risk assumed in the conduct of
employee performance ratings would be lower. business; and
• Consistency with the timing and likelihood of potential future
Remuneration of Control Functions
revenues incorporated into current earnings.
The remuneration structure of control function personnel should not
compromise their independence or create conflicts of interest in their
advisory role to the RNC. The RNC will ensure that the increased
conflicts of interest arising from variable remuneration of the control
functions based on institution-wide performance criteria is properly
addressed.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 31

Risk Adjustment Methodologies

The Bank’s risk alignment framework will use a mix of quantitative and qualitative approaches.

The Bank’s risk adjustment framework is set out below:

Risk Assessment Ex-ante Risk Assessment Ex-post Risk Assessment

Parameters

Typical ex-ante Risk Assessment Components Typical ex-post Risk Adjustments

Entity Risk Profile
Capital Assessment Reputational Risk Worse Off Performance Reputational Risk
Capital Impact Liquidity Risk Quality of Earnings Regulatory Fines Strategic Risk
RAROC and
Liquidity Strategic Risk Operational Failures Capital Deficiency
Economic Profit
Stress Testing Back Testing
Quality of Earning

Risk Adjustments

Allocation to Cash and

Changes to Vesting Period Additional Deferral Malus Adjustments Claw Back
Non-cash Instruments

Long-term Performance Measures

These events include the following:
The malus and clawback provisions allow the Board of Directors to
determine that, if appropriate, elements under the deferred bonus • Reasonable evidence of wilful misbehaviour, material error,
plan can be forfeited or adjusted, or that the delivered variable negligence or incompetence of the employee causing the Bank or
compensation could be recovered in certain situations. The intention the employee’s business unit to suffer material loss in its financial
is to allow appropriate response if the performance factors on which performance, material misstatement of financial statements,
reward decisions were based turn out not to reflect the corresponding material risk management failure or reputational loss or risk due to
performance in the longer term. All deferred compensation awards such employee’s actions, negligence, misbehaviour or incompetence
contain provisions that enable the Bank to reduce or cancel the during the concerned performance year.
awards of employees whose individual behaviour has had a materially • The employee deliberately misleads the market and/or shareholders
detrimental impact on the Bank during the concerned performance year. in relation to the financial performance of the Bank during the
concerned performance year.
Any decision to take back an individual’s award can only be taken by
the Board of Directors. Clawback can be used if the malus adjustment on the unvested portion
is insufficient given the nature and magnitude of the issue.
The Bank’s malus and clawback provisions allows the Board to
determine that, if appropriate, vested/unvested elements under the
deferred bonus plan can be adjusted or cancelled in certain situations.
32 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE GOVERNANCE CONTINUED

Components of Variable Remuneration

Variable remuneration has the following main components:

Upfront Cash The portion of the variable compensation that is awarded and paid out in cash on conclusion of the performance
evaluation process for each year.

Deferred Cash The portion of variable compensation that is awarded and paid in cash on a pro-rata basis over a vesting period of
three years.

Deferred Non-cash The Bank has two forms of non-cash awards to align long-term performance and risk and to encourage employee
retention:
• Deferred short-term incentives – incentives that are rewarded for current performance and considered as earned
but are deferred in terms of payment to employees. These include deferred annual bonuses in the form of
Phantom Shares Awards (PSA) or deferred annual bonus Performance Linked Units (PLU). The minimum term of
deferral is three years.
• Future performance awards (FPA) – incentives that are awarded with future performance and service conditions
i.e. not yet earned by the employee. FPAs include Long Term Incentive Plan (LTIP) shares in the form of Phantom
Shares and performance linked units and provide better risk alignment to the business and individual performance
of the employee.

Deferred Compensation (Bahrain)

All employees with job titles of Executive Senior Manager and above shall be subject to deferral of variable remuneration as follows:

Element of Variable Assistant General Executive Senior Deferral

Remuneration Managers and Above Managers Period Retention Malus Clawback
Upfront cash 40% 70% Immediate - - Yes

Over 2
- 30% years - Yes Yes
Deferred cash
Over 3
10% - - Yes Yes
years

Over 3
Deferred non-cash 50% - 6 months Yes Yes
years

Minimum Vesting Period

The minimum vesting period for deferred annual bonus share awards is pro-rata over a minimum three-year period, i.e. at most, a third of the
deferred awards vest each year. For Future Performance Awards (FPA), the Bank may provide for a longer period to align with the underlying
performance conditions, but a minimum period of three years would apply.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 33

Employee Remuneration (Bahrain)

2020
Total Variable Remuneration
Fixed Bonuses Guaranteed
Remuneration Distributed Bonuses Upfront Deferred
No. of Severance Total
Staff Cash BHD Others (Cash/Shares) (Cash/Shares) Cash BHD Shares Cash BHD Shares payment Others BHD
Approved Persons
7 1,212,422 - 245,392 104,424 28,717
Business Lines - - 112,250 - - 245,392
Approved Persons
9 1,016,532 - 111,186 54,237 17,627
Control & Support - - 39,323 - - 111,186
Other Material Not Not
Risk Takers Applicable Applicable - - - - - - - - - -
Other Staff 2 158,854 - 12,587 - 8,811 - 3,776 - - - 12,587
Other Staff of Bahrain Not Not
Operations Applicable Applicable - - - - - - - - - -
Staff of Branches & Not Not
Subsidiaries Applicable Applicable - - - - - - - - - -
Total 18 2,387,808 - 369,165 - 167,472 - 50,120 - - - 369,165

2019
Variable remuneration
Fixed Total
Remuneration Bonuses Guaranteed Upfront Deferred
No. of Distributed Bonuses Severance Total
Staff Cash BHD Others (Cash/Shares) (Cash/Shares) Cash BHD Shares Cash BHD Shares payment Others BHD
Approved Persons
6 1,280,901 - 279,275
Business Lines - 116,818 - 31,333 131,125 - - 279,275
Approved Persons
9 1,015,656 - 74,908
Control & Support - 38,007 - 12,853 24,048 - - 74,908
Other Material Not Not
Risk Takers Applicable Applicable - - - - - - - - - -
Other Staff 2 165,659 - 10,402 - 7,282 - 3,121 - - - 10,402
Other Staff of Bahrain Not Not
Operations Applicable Applicable - - - - - - - - - -
Staff of Branches Not Not
& Subsidiaries Applicable Applicable - - - - - - - - - -
Total 17 2,462,216 - 364,585 - 162,106 - 47,306 155,173 - - 364,585
34 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE GOVERNANCE CONTINUED

Deferred Awards for Current Year (2020)

Cash Shares Total
BHD Number BHD BHD
Opening Balance 653,773 1,504,630 240,581 894,354

Awarded During the Period 37,968 - - 37,968

Paid Out / Released During the Period (64,069) (2,452,704) (220,328) (284,397)

Service, Performance and Risk Adjustment - - - -

Bonus Share Adjustment - - - -

Closing Balance 627,672 (1,699,301) (13,229) 614,443

Deferred Awards for Previous Year (2019)

Cash Shares Total
BHD Number BHD BHD
Opening Balance 399,902 2,596,907 409,884 809,786

Awarded During the Period 341,594 - - 341,594

Paid Out / Released During the Period (87,722) (1,843,504) (202,785) (290,507)

Service, Performance and Risk Adjustment - - - -

Bonus Share Adjustment - - - -

Closing Balance 653,773 753,403 207,099 860,872

Notes:
1- The payment of vested shares for the deferred component was completed after the reorganisation.

2- The number of shares have been adjusted to reflect the Phantom Shares in Ithmaar Bank B.S.C. (c) post reorganisation.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 35

Employment of Relatives of Approved Persons

The Human Resources Policy of Ithmaar Bank indicates that any This Committee also assists the Board of Directors in fulfilling its
employee who is a first degree relative of an existing Approved Person governance responsibility, particularly to (a) oversee and monitor
in the Bank is required to declare the relationship in writing to the the implementation of a robust compliance framework by working
Human Resources Department. together with the Management and the Sharia Supervisory Board, and
(b) provide the Board of Directors with reports and recommendations
Board Committees based on its findings in the exercise of its function.
In accordance with regulatory requirements and best practices, the
Board has established the following committees and has adopted The objectives of the Committee also include making recommendations
charters setting out the matters relevant to their composition, to the Board in relation to the overall risk appetite and tolerances and
responsibilities and administration. the risk policies within which to manage them. These policies cover
credit risk, market risk, operational risk, liquidity risk and profit rate, in
Audit, Governance and Risk Management Committee (AGRMC) addition to any other risk categories Ithmaar Bank faces in carrying out
The AGRMC is chaired by an Independent Director and comprised of: its activities.

• Elham Ebrahim Abdulla Hasan- Chairperson The Committee also recommends and monitors the overall risk
management framework in line with the regulatory guidelines
• Dr. Amani Khaled Bouresli - Member which involves all business activities and operations policies, internal
• Abdulellah Ebrahim Al-Qassimi – Member controls, methods of risk management and risk reporting to the Board.
The Committee also ensures that the information security and the
• Sheikh Osama Bahar – Member*
business continuity management framework of the Bank are in line
* Sheikh Bahar is a Sharia Supervisory Board Member with a voting with regulatory guidelines and commensurate to the scale of business
right in respect of the agendas relating to Corporate Governance. operations of the Bank.

The AGRMC meets a minimum of four times in a year. The key matters reviewed and, as appropriate, approved and/or
recommended for the approval of the Board of Directors during the
The AGRMC is appointed by the Board of Directors to assist in reviewing year include:
the selection and application of the accounting and financial policies,
reviewing the integrity of the accounting and financial reporting • Reviewing the consolidated financial statements and recommending
systems and the effectiveness of the internal controls framework, them to the Board for approval;
monitoring the activities and performance of the internal audit function • Reviewing and approving the proposed annual Internal Audit plan
and external auditors, and coordinating the implementation of the and strategy and all reports issued by the Internal Audit Department;
Corporate Governance Policy framework.
• Providing oversight of the Corporate Governance, Compliance and
The Committee reviews and, as appropriate, approves and/or Regulatory requirements.
recommends for the approval of the Board of Directors, among • Updating and aligning all risk and information security policies in line
other things: the interim and annual consolidated financial results; with changes in the regulatory requirements;
status updates on compliance with various regulatory requirements;
implementation of various regulatory reports; internal and external • Reviewing of existing risk limits and establishing new risk limits for
audit reports and the status of their implementation (as appropriate); better control of credit, market, operational, liquidity, profit rate risk
and new accounting and regulatory pronouncements and their and concentration risks;
implications. • The Internal Capital Adequacy Assessment Process (ICAAP) report for
review; and
• Reviewing the Expected Credit Losses as per the FAS 30 standards.
36 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE GOVERNANCE CONTINUED

Executive Committee Remuneration and Nomination Committee (RNC)

The Executive Committee is appointed by the Board of Directors to The Remuneration and Nomination Committee is appointed by the
assist with the oversight of the general management of Ithmaar Board of Directors to provide a formal forum for communication
Bank and its business by management, as well as considering and between the Board and Management on human resources issues.
recommending to the Board of Directors the strategy, business plans The aggregate sitting fees paid to its members in 2020 was BD47,745
and budget, and evaluating the financial and business performance. (2019: BD10,179).

The Executive Committee reviews and, as appropriate, approves and/ The RNC reviews and, as appropriate, approves and/or recommends
or recommends for the approval of the Board: credit proposals over for the approval of the Board of Directors:
certain threshold; asset quality and exit strategies; status updates and
reports from the management in respect of major issues and group • Candidates for Board election;
reorganisation; consolidated financial performance; strategic business • The appointment of new senior management executives; and
plans; and key management initiatives.
• The remuneration policies as well as guidelines for increments; and
The Committee meets at least twice a year. promotions.
The Executive Committee comprises: The RNC meets at least twice a year.
• Omar Abdi Ali - Chairman The RNC comprises:
• Abdelhamid Mohamed Aboumousa - Member
• Abdulellah Ebrahim Al-Qassimi - Chairman
• Mohammed A. Rahman Bucheerei - Member
• Tunku Yaacob Khyra - Member
The key matters reviewed and, as appropriate, approved and/or • Sheikh Zamil Abdullah Al-Zamil - Member
recommended for the approval of the Board of Directors during the
year include: The key matters reviewed, approved (as appropriate) and
recommended for approval (as appropriate) to the Board of Directors
• Evaluating the financial and business performance and monitoring during the year include:
the implementation of the approved business / budget plans against
Key Performance Indicators; • Recommending to the Board changes in the structure and job
descriptions of Approved Persons;
• Approving business proposals falling within its authority in
accordance with the Business Discretionary Powers Policy; • Recommending the composition, quantum and structure of
remuneration for the members of the Sharia Supervisory Board;
• Reviewing the Company’s funding requirements and strategies;
• Recommending the organisation chart and succession plan and
• Reviewing the strategic business plan and annual budget and
recommending them to the Board for approval; • Recommending the Variable Remuneration Policy implemented in
compliance with the regulations of the Central Bank of Bahrain on
• Reviewing the financial position, including the capital adequacy and
Sound Remuneration Practices of Approved Persons and Material
liquidity positions, and the status of its overall business portfolio; and
Risk Takers.
• Reviewing strategic and other investments.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 37

Attendance
2020 Board of Directors / Board Committees Meetings Attendance

Audit,
Board of Governance & Risk Executive Remuneration &
Directors Management Committee Committee Nomination Committee
Eligible Attended Eligible Attended Eligible Attended Eligible Attended
1 HRH Prince Amr Mohammed Al Faisal 4 4 - - - - - -
2 Tunku Yaacob Khyra 4 4 - - - - 2 2
3 Abdelhamid Mohamed Aboumousa 4 4 - - 2 1 - -
4 Sheikh Zamil Abdullah Al-Zamil 4 4 - - - - 2 2
5 Mohammed A. Rahman Bucheerei 4 4 - - 2 2 - -
6 Abdulellah Ebrahim Al-Qassimi 4 4 4 4 - - 2 2
7 Dr. Amani Khaled Bouresli 4 4 4 4 - - - -
8 Sheikh Mohamed Abdullah Abdelkarim
Elkhereiji 4 4 - - - - - -
9 Elham Ebrahim Abdulla Ha-san 4 4 4 4 - - - -
10 Omar Abdi Ali 4 4 - - 2 2 - -

Dates of Meetings During 2020

2 March 4 February 21 June 1 March
22 June 10 May 6 December 3 December
28 September 5 August - -
7 December 3 November - -

Notes:
• Sheikh Osama Bahar, member of the Sharia Supervisory Board, is also a member of the Audit, Governance and Risk Management Committee.
He attended all four meetings.
• In accordance with the Central Bank of Bahrain’s requirement and Ithmaar Bank’s Articles of Association, the Board of Directors shall meet at
least four times a year, and each Board member is required to attend at least 75 percent of all Board meetings in a financial year.
• All Board members satisfied the minimum attendance percentage required.
38 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE GOVERNANCE CONTINUED

Sharia Supervisory Board All SSB members receive a letter of appointment signed by the
The Sharia Supervisory Board (SSB) is an independent board of Chairman in which relevant information, including responsibilities, are
specialised scholars in Sharia and Fiqh of financial transactions described.
according to Sharia requirements. The SSB contributes in the guidance
SSB members also receive a copy of the Code of Ethics and Business
and development of Ithmaar Bank’s activities and it monitors its
Conduct.
business to ensure it is compliant with Islamic Sharia principles.
Management
The SSB is appointed in compliance with the licensing requirements of
the Central Bank of Bahrain (CBB) and Ithmaar Bank’s Memorandum The day-to-day operations of Ithmaar Bank are handled by the
and Articles of Association by the shareholders at the General Meeting Executive Management team.
based on recommendations of the Board of Directors through the
Departments are grouped into Business, Control and Support Units with
Remuneration and Nomination Committee (RNC). The SSB serves a
clear definition between them to avoid conflicts of interests. These
three-year term.
safeguard measures are reinforced by independent Internal Audit, Risk
The SSB has full authority to achieve its goals and responsibilities. Management, Compliance and Anti-Money Laundering departments,
It is also allowed to view all records and transactions from any sources as well as an Internal Sharia Auditor and a Sharia Coordinator and
without restrictions, including access to the Board and to management Implementation Officer.
personnel, professional and legal consultants, employees, as well as
The Risk Management Department reports functionally to the Audit,
access to the Sharia Coordination and Implementation Department
Governance and Risk Management Committee and, administratively, to
at Ithmaar Bank, which is represented by the Sharia officer who
the Chief Executive Officer. The Compliance and Anti-Money Laundering
is proactively involved in reviewing and advising on the Sharia
Department reports functionally to the Audit, Governance and Risk
compliance of all products and anything related to the products, as
Management Committee and, administratively, to the Chief Executive
well as investment projects, conducting training for employees to
Officer. The Internal Audit Department reports functionally to the Audit,
ensure they understand the products and their implementations,
Governance and Risk Management Committee and, administratively,
handling the secretary tasks for the SSB and replying to customers’
to the Chief Executive Officer. The Internal Sharia Auditor and Sharia
inquiries according to SSB’s fatwas. The SSB also communicates directly
Coordinator & Implementation Officer reports functionally to the Sharia
with the Internal Sharia Audit Department and reviews its periodic
Supervisory Board, and, administratively, to the Chief Executive Officer.
reports and implemented operations according to SSB fatwas and
AAOIFI standards and produces periodic reports to the SSB in order The total remuneration of the Chief Executive Officer and senior
to ensure that activities are under a strict and direct oversight of SSB management in 2020 was US$6.3 million (2019: US$6.2 million).
guidelines and decisions.
Management Committees
The SSB operates within its own charter which sets forth its policies,
procedures, meeting operations and responsibilities, in addition to Ithmaar Bank has the following key Management Committees:
the qualifications for membership. This charter was developed in Investment and Credit Committee (ICC)
coordination with the Board and is disclosed on the website.
The main objective of the ICC is to review and approve transactions
SSB members are entitled to remuneration comprising an annual within their discretionary powers. It is also responsible for assessing
retainer fee and sitting fees paid per meeting attended. and mitigating the credit risk of the Bank as well as recommending
changes in the Bank’s credit & investment banking portfolio strategy
These remunerations are recommended by the RNC, the structure of and related policies. The Committee is chaired by the Chief Executive
which is approved by the shareholders. Officer.

Currently, Ithmaar Bank does not pay any performance related Asset and Liability Management Committee (ALCO)
remuneration to SSB members. If any, this will be structured in The ALCO is responsible for the management of liquidity risk, profit rate
accordance with the Memorandum and Articles of Association and risk, market risk, balance sheet structure and capital management. The
subject to shareholder approval. main objective of this Committee is to review financial performance
and manage liquidity to achieve sustainable and stable profits within a
The profiles of all SSB members are included in the Sharia Supervisory
framework of acceptable financial risks and controls. The Committee is
Board section.
chaired by the Chief Executive Officer.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 39

Business Continuity Plan (BCP): Crises Management Team (CMT) Compliance Committee (CC)
The Committee defines the roles and responsibilities for executives in The CC is a standing committee that has the general responsibility to
the management of a crisis, including an assessment of the impact an oversee the Bank’s compliance, policies and procedures as well as to
event will have on time-sensitive business processes, and guidance discuss and decide compliance-related issues including compliance
on formally declaring a disaster. Since such plans are developed to with regulatory requirements, AML/CFT, sanctions, KYC, FATCA, CRS and
address the worst-case scenario, they are likely to require alteration at other matters relating to managing the compliance risk facing the Bank
the time of the event to effectively address the specific situation. and arising from time to time.

The CMT is responsible for working with each of the teams to refine Changes in Management and Management Committees
strategies, tasks, and assignments at the time of the incident; Changes in Management Personnel
therefore, CMT meets at least twice a year. The CMT plays a leadership
role in managing disasters as well as maintaining the Bank Business Senior appointments:
Continuity plan. The Committee is chaired by the Chief Executive Officer March 2020: Senior Manager, Luay Yaqoob Seyadi, was appointed as
or by the next reporting line at the Bank, and consists of the respective the Head of Banking Operations.
departmental managers.
September 2020: Senior Manager, Ebrahim Abdulla Khalil Jasim, was
Information Security Steering Committee (ISSC) appointed as the Head of Commercial Banking.
The Committee’s focus is to ensure the confidentiality, integrity, and
availability of the Bank’s information technology resources and data by January 2021: Manager, Fatema Abdulla Mohamed Mufeez, was
safeguarding them from compromise, misuse, loss or damage caused appointed as the Head of Legal Affairs.
intentionally or unintentionally. The Committee is chaired by the
Deputy Chief Executive Officer. Other appointments, promotions and resignations:
July 2020: Luay Yaqoob Seyadi, was promoted to Executive Senior
Information Technology Steering Committee (ITSC) Manager, Head of Banking Operations.
The ITSC is a recommendation-making authority with regards
to Information Technology (IT), its strategy, management and October 2020: Ebrahim Abdulla Khalil Jasim, was promoted to Executive
governance. The ITSC is responsible for the effective and cost-efficient Senior Manager, Head of Commercial Banking.
application of information technologies, related personnel resources
and funding to achieve the goals and the needs of the Bank. The ITSC November 2020: Ali Ahmed Mohamed, Assistant Manager, was
aims to obtain the greatest value and returns for its use within a well- appointed as the Corporate Secretary.
controlled risk containment framework. The Committee is chaired by
December 2020: Fatema Abdulla Budehaish, Executive Senior Manager,
the Chief Executive Officer.
Head of Risk Management left the Bank.
Recoveries – RMU and Collection Committee (RECO)
January 2021: Asma Abdulhameed Abdulla, Associate, was appointed
The RECO is primarily responsible for monitoring and enhancing as the Acting Head of Internal Sharia Audit.
recoveries from retail and corporate customers as performed by
Remedial (RMU) and Collections units. The Committee is chaired by the Changes in Management Committees:
Chief Executive Officer.
Information Technology Steering Committee (ITSC):
Provisioning Committee (ProvCom) August 2020: the Head of Product Development and Business Alliances
The ProvCom is primarily responsible for the level of provisioning of was added as a member.
retail, corporate customers and all the investments of the Bank which
are being proposed by Risk Management Department in line with the Asset and Liability Management Committee (ALCO)
Bank’s policies and CBB regulations. The Committee is chaired by the
December 2020: quorum numbers were increased
Chief Executive Officer.
40 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE GOVERNANCE CONTINUED

Changes in Management and Management Committees (Continued) Risk Management

Ithmaar Bank has in place a comprehensive Enterprise Wide Risk
Investment and Credit Committee (ICC)
Management Framework in place addressing all activities and
• July 2020: Committee Secretary was changed commensurate to the business operations and risk appetite of the
• September 2020: Head of Commercial Banking Department was Bank. The Risk Management Framework plays a pivotal role in
added as an invitee protecting the shareholders’ and customers’ interests and is accorded
paramount importance by the Board and the management.
• December 2020: Senior Manager Risk was added as a nonvoting
member The Risk Management culture emanates at the level of Board of
• December 2020: responsibility for specific provisions for non- Directors who establish the risk appetite and tolerance levels in
performing assets was deleted, assigned to the Provisioning line with the business strategy. The risk management framework is
Committee detailed in the Risk Charter and the various risk management policies
which include the approach and methodology for the management
• December 2020: Added approval by circulation procedures
of various risks. The risk appetite and risk policies are periodically
Communication with Stakeholders reviewed to maintain their relevance and alignment with the business
strategy and prevailing market conditions, and to ensure compliance
Ithmaar Bank maintains a website which customers and other
with the guidelines of the CBB.
stakeholders may access for information about products and services,
as well as the corporate profile, corporate information, press releases Risk Management in Ithmaar Bank is considered a collective
and financial performance, amongst others. The Bank also continues responsibility and hence the risk management culture is effectively
to provide public announcements and press releases on major communicated across the organisation. Ithmaar Bank has an effective
developments and news. risk governance structure enabling the effective monitoring and
management of risks across all business and support activities. The
Code of Ethics and Business Conduct
Board is assisted by the Audit, Governance and Risk Management
Ithmaar Bank’s Code of Ethics and Business Conduct applies to Committee, which meet periodically to oversee the implementation
members of the Board, as well as executive management, officers, of the risk framework and management of the same. However the
employees, agents, consultants, and others, when they are Board retains ultimate responsibility for the effective implementation
representing or acting for Ithmaar Bank. and functioning of the risk management framework and thereby
approves all risk management policies. The Audit, Governance and
The Board expects all Directors, as well as officers and employees, Risk Management Committee is supported by an independent Risk
to act ethically at all times and to acknowledge their adherence to Management Department headed by the Chief Risk Officer which is
Ithmaar Bank’s policies. Any waiver of the Code of Ethics and Business responsible for implementing the Board-approved risk management
Conduct for a Director or executive officer may be granted only by framework in close coordination with the senior management and all
the Board or the appropriate Board committee and must be promptly other relevant departments.
disclosed to the shareholders.
The Risk management framework also encapsulates a robust
The employment of relatives of approved persons is covered under monitoring and reporting process wherein the Risk Management
the Human Resource Policy which requires the employee to declare Department monitors risk parameters on an ongoing basis against the
to the Human Resources Department the relationship (father, mother, Board approved limits and tolerance levels, and presents the same to
brother, sister, husband or wife) with any approved persons at the management and the Board.
the time of recruitment and/or subsequently, as appropriate. The
employees will be given a grace period of one year so one or more Additional information on the risk framework and the approach and
of the relatives leave the Bank and exceptions, if any, require the methodology of managing each dimension of risk is detailed in the
approval of the Chief Executive Officer. Public Disclosures section.
41 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 41

Compliance, Anti-Money Laundering and Internal Controls Anti-Money Laundering

Compliance The Kingdom of Bahrain defines Money Laundering and Terrorist
Financing (ML/TF) as criminal offences. The CBB mandates Islamic
Compliance risk is the risk of legal or regulatory sanctions, material
Financial Institutions in Bahrain to comply with all applicable
financial loss, or loss of reputation a bank may suffer as a result
legislations, laws and regulations on Anti-Money Laundering and
of its failure to comply with laws, regulations, directives, reporting
Combating Terrorist Financing.
requirements and codes of conduct, including the internal code of
conduct. Ithmaar Bank complies with Bahrain relevant legislations on AML/
CFT, CBB rules and the guidance of the Financial Crime Module which
The Compliance Management Policy sets the compliance framework
is based on the principles of the Financial Action Task Force’s (FATF) 40
for managing compliance risks within the Bank, through setting
recommendations and the Basel Committee on Banking Supervision
the roles and responsibilities of the Board of Directors, the Senior
Paper.
Management and the Compliance Function staff, as well as formalising
the independence and effectiveness of the compliance function and The Bank continues to follow a Risk Based Approach (RBA) in terms
the reporting line of the Compliance Officer. The compliance function of transaction monitoring, sanctions screening, Know Your Customer
follows a risk-based approach to compliance risk management, (KYC) requirements, as well as other matters relating to financial crime.
in accordance with the compliance plan approved by the Audit, The Bank has adopted policies and procedures to combat ML/TF that
Governance and Risk Management Committee of the Board. are approved by the Board of Directors, and implements programmes
against ML/TF by establishing and maintaining appropriate systems
Ithmaar Bank’s management ensures that business is conducted in
and controls to limit the vulnerability to Financial Crime. The Bank
conformity with high ethical standards and is in compliance with
maintains adequate policies and procedures related to Customer
all applicable laws and regulations. The Bank has established the
Due Diligence (CDD), customer screening and transaction monitoring
Compliance Committee to effectively oversee and manage the
to prohibit and actively prevent the Bank from conducting business
compliance risk and other matters relating to regulatory requirement,
relationships with entities engaged in money laundering practices or
AML/CFT and KYC standards. The Compliance Officer has the duty
any illegal activities that facilitate funding of terrorism. These policies
of promoting a sound compliance culture across the organisation
and procedures apply to all employees, branches and offices of the
through effective training, supported by periodic compliance testing to
Bank.
identify areas of improvement. Furthermore, the Compliance Function
communicates matters of interest from a compliance perspective All relevant staff of the Bank who deal with customers and/or are
across the Bank by way of regular communications, training & managerially responsible for handling customer relationships, must
awareness programs and the electronic compliance Newsletter in order undergo annual training on Anti-Money Laundering and Know Your
to ensure that Senior Management and other personnel are aware Customer (KYC) rules and procedures.
of the applicable regulatory requirements, and implications thereof,
in order to achieve a consistently high level of compliance across the Ithmaar Bank has adopted specific initiatives and measures to facilitate
Bank’s operations. The Bank has also implemented the concept of implementation of these policies and procedures. These include the
“compliance champions” in support of the Bank’s continuing efforts appointment of a dedicated Money Laundering Reporting Officer
in strengthening the compliance culture and sustaining the highest (MLRO), who is empowered with sufficient mandate to implement
standards in regulatory compliance. the Bank’s Anti-Money Laundering (AML) programmes. The MLRO
independently monitors implementation of the AML policies of the
Customer Complaint Procedures Bank and reports suspicious transactions to the relevant regulatory
A formal complaints management policy is in place, in line with authorities in the accordance with the regulatory requirements. The
the requirements of the Central Bank of Bahrain (CBB). A dedicated AML and KYC framework incorporates the following four key elements:
customer complaints unit and officer is responsible for handling the customer acceptance, customer identification procedures, verification of
management of complaints. Contact details of the complaints unit are source of funds, ongoing transaction monitoring and risk assessment.
published at all branches and on Ithmaar Bank’s website. All customer
complaints are promptly resolved to the best satisfaction of the
customers.
42 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE GOVERNANCE CONTINUED

Internal Controls
The Internal Control Framework of the Bank is overseen by the Board All processes and systems are evaluated on an ongoing basis by the
Audit, Governance and Risk Management Committee (AGRMC). concerned process owners and by the Risk Management through the
Risk Control Self-Assessment as well as Internal Audit departments for
The Bank has a multi-faceted internal control framework in terms of any possible enhancements of controls from an audit perspective.
the following:
Any instances of control failures are immediately investigated by
• Policies and procedures detailing the controls to be adopted for the business and control functions to evaluate the need for further
various processes in place. strengthening on controls across processes and functions. The AGRMC
• Clear segregation of duties to ensure there are no lapses in controls actively monitors the Internal Control Framework of the Bank based
with adequate monitoring of processes. on reports submitted by the Internal Control, Risk Management,
Compliance and Internal Audit departments on a periodic basis.
• Robust Operational Risk Management Framework defining the
methodologies for identification, measurement and monitoring of
operational risks.
• Independent Internal Audit of all functions to measure the adequacy
of internal controls across various processes and systems.
• Independent compliance oversight to ensure that the applicable
regulatory requirements are adequately adhered to.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 43

FUNDS UNDER MANAGEMENT

44 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

FUNDS UNDER MANAGEMENT

As a commercial financial institution, a fundamental objective of the These are subject to various risks including:
Bank is to act as a financial intermediary, channelling funds between
• Foreign exchange risk as a result of fluctuating currency exchange
deficit and surplus agents, for economic benefits. This is usually done
rates.
through pooling monetary resources from Investment Account Holders
(IAH), investing them in the market, and sharing the profits with IAHs • Liquidity risk due to the nature of the holdings in those funds being
at predetermined ratios and conditions set out in the agreements. This not marketable nor listed on any security exchange platforms.
activity is known as Funds Under Management (FUM). • Market risk as a result of changing market conditions, including
demand and price changes.
Structure of the Funds • Economic risk due to changes in the economic climate.
The Bank provides three types of FUMs, namely Un-restricted • Credit risk of parties with whom the Fund conducts business and
Investments Accounts (URIA), Restricted Investments Accounts (RIA), may also bear the risk of settlement default.
and Collective Investment Undertakings (CIU). • Risks of changes in government policy, including issuing necessary
approvals.
I. Un-restricted Funds (URIA)
• The value of investments in real estate and/or the rental income
In the case of URIA accounts, the Bank as Mudarib (investment derived from them will fluctuate as property values and rental
manager) is authorised by the Investment Account Holders (IAHs) to incomes rise and fall.
invest their funds in any manner in which the Bank deems appropriate,
• Investments in real estate may be affected by changes in the
without laying down restrictions as to where, how, and for what
general economic climate, competition on rental rates, the financial
purpose their contribution amounts should be invested. All URIA funds
standing of tenants, the quality of maintenance, insurance and
are accounted for as ‘on’ balance sheet items. These funds are open
management services and changes in operational costs.
for the public (natural persons and corporates including financial
institutions) provided they satisfy the Bank’s Know Your Customer • Investments in real estate which require development or
(KYC) requirements. refurbishment works may also entail risks associated with
construction delays, cost overruns and an inability to rent either
As of 31 December 2020, the Bank’s operated URIA funds are as at all or at satisfactory rental levels following completion of the
follows: development or refurbishment works.
• General Modaraba • The value of the investments may be affected by uncertainties,
such as political developments, changes in governmental policies,
• Special Modaraba
taxation, currency repatriation restrictions, and restrictions on foreign
II. Restricted Funds (RIA) investment in some or all of the countries in which the Fund may be
directly or indirectly invested.
In the case of RIA accounts, the Bank as the Mudarib is restricted
by the IAHs with regard to the use of their funds - where, how, for • The regulatory supervision, legal infrastructure and accounting,
what period, and for what purpose their contribution amounts are auditing and reporting standards in emerging markets may not
invested. Such features are required to be agreed between the parties provide the same degree of protection or information as would
at the time of contracting (such as signing the Modaraba and/or generally exist in more mature or developed markets.
Agency agreements) so as to formalise the relationship. RIA funds • Risks from uncertainties such as political or diplomatic developments,
are accounted for as ‘off’ balance sheet items as the Bank has no social instability, changes in government policies, taxation, and
discretion on the utilisation of funds in the case of RIA funds. As per interest rates and other political and economic developments in
the CBB’s instructions, all future RIA funds shall be structured as CIUs. legislation, in particular changes in legislation relating to the right of,
and level of, foreign ownership.
The funds managed by the Bank are mainly in real estate and private
• Risks outside control of funds, including labour unrest, civil disorder,
equity.
war, subversive activities, sabotage, fires, floods, acts of God,
explosions or catastrophes.
The specific risks for each fund is detailed in the respective prospectus.
Ithmaar Bank discloses regular updates related to individual funds on
its corporate website www.ithmaarbank.com
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 45

Structure of the Funds Redemptions

III. Collective Investment Undertakings (CIU) All funds are redeemed on their respective maturities. In special
CIU have the following features: circumstances, the Bank may allow early withdrawals by either finding
a purchaser for the contribution, or by purchasing the IAH’s contribution
• The collective capital raised from the public or through private at prevailing market prices, provided such exposure does not cause any
placement, including investments seeded by the operator, is violations of regulatory or internal limits.
invested in financial instruments and other assets which operate on
the basis of risk-spreading as appropriate, the holdings of which may Fiduciary Obligations
be repurchased or redeemed. Although the IAH is fully responsible for risks associated with his/her
• These funds are structured in accordance with relevant CIU rules investments in an FUM, the Bank is bound by its fiduciary obligation
issued by the CBB. and duty of care to safeguard the assets of the IAHs. In this respect,
All investors are required to meet the KYC requirements as per CBB the Bank subscribes to the following guiding principles issued by the
rules. Islamic Financial Services Board (IFSB):

Risk and Reward • Aspire to the highest standards of truthfulness, honesty and fairness
in all its statements and dealings, and treat its customers fairly
In accordance with the principles of the Islamic Sharia, all FUMs are
managed on a profit and loss sharing basis with the IAH bearing all • Exercise due care and diligence in all its operations, including the
risks except for gross negligence and misconduct. way it structures and offers its products and provides financing, with
particular regard to Sharia compliance, and to the thoroughness of
The profit or loss of a FUM is determined using the accounting policies research and risk management
normally applied by the Bank. The distribution of the profit or loss may • Ensure that it has in place the necessary systems and procedures,
either be on a limited or continuous basis as follows: and that its employees have the necessary knowledge and skills to
manage FUMs in accordance with this policy and other regulatory
Specific Term
rules
The IAH invests for a specific term, and profits/losses are accounted for
at the time the Fund is liquidated (or staged liquidation) and the capital • Take steps to ensure that it understands the nature and
is returned to the IAHs along with any profits/losses. circumstances of its IAHs so that it offers those products most
suitable for their needs, as well as offering financing only for Sharia-
Open Term compliant projects
The IAH may invest for an unspecified term (such as Savings Accounts), • Provide clear and truthful information both in any public document
and profits are accounted for on a periodical basis during the Modaraba issued as well as to its actual and prospective clients, both during
period. URIA funds are not subject to administration fees. the sales process and in subsequent communications and reports

In the case of RIA and CIU, specific expenses that may arise in relation • Recognise the conflicts of interest between it and its clients that
to the launching of a Modaraba fund and in the employment of funds arise from the type of products it offers, and either avoid or disclose
may be charged against the gross revenue of that Modaraba, provided and manage them, bearing in mind its fiduciary duties to IAHs as
this is set out in the related Modaraba agreement. Audit and legal fees, well as shareholders
documentation and printing charges are all examples of expenses that • Ensure that its operations are governed by an effective system of
may be charged to the Modaraba. Distributable profit is calculated after Sharia governance and that it conducts its business in a socially
all permitted expenses have been deducted. responsible manner

The Bank applies appropriate income smoothening techniques to Investment Objectives

ensure that profits are fairly distributed to the IAHs, both current and The investment objective of the funds is to provide maximum returns
future. These include Profit Equalisation Reserves and Investment Risk to both the IAHs and the Bank in a manner that is consistent with the
Reserves. Modaraba agreement of the specific fund and Sharia guidelines while
at the same time managing risks within predetermined levels.
46 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

FUNDS UNDER MANAGEMENT CONTINUED

Governance of Funds Under Management

The Board of Directors is responsible for ensuring that the Funds A comprehensive policy is in place which outlines processes for
Investment Objectives are adhered to. The Board has established an managing funds. All funds are reviewed independently by the Risk
Audit, Governance and Risk Management Committee, amongst its Management department and the Compliance department prior to
other responsibilities, to look after the interests of the IAHs. The Asset- their approval and launch. Once approved, these funds are utilised
Liability Committee (ALCO) and Investment and Credit Committee (ICC) strictly in accordance with the fund’s prospectus and terms of approval.
play a pivotal role in monitoring the performance of funds. The Asset
Management department is responsible for the effective management URIA Funds are primarily used for retail and commercial financings.
of RIA and CIU funds. Customer affairs are handled by various business The Bank diversifies the portfolio through establishing prudent limits
units including the Retail Banking and the Business Banking groups. determined by geographical areas, industry sectors, tenors, customer
type, etc. The composition, characteristics and diversification of the
RIA and CIU funds are launched after comprehensive due diligence of Bank’s funding structure is recorded in various risk policies.
the market and the needs and risk appetites of investors.

The Profit Distribution Sheet (Modaraba Account) provides details the on investment periods and the Bank’s share of investments in 2020 as per
the terms and conditions:

Period Bank’s share (%)

Undetermined term (savings account) 60

1 month 50

3 months 45

6 months 40

9 months 38

1 year 35

18 months 33

2 years 30

30 months 28

3 years 25

The average benchmark and declared rate of return or profit rate on Profit Sharing Investment Accounts (PSIA) by maturity in percentage terms
paid annually in 2020:

1 7 1 3 6 9 1 18 2 3
BD or US$ day days month months months months year months years Years
Savings 0.10 - - - - - - - - -

General Modaraba 0.10 0.10 1.27 1.55 1.80 2.05 2.45 2.55 2.65 2.75

Special Modaraba - - 2.06 2.70 3.15 3.25 3.94 3.99 4.04 4.19
47 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED

CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS CONTINUED
For the year ended 31 December 2020

Contents
Report of the Sharia Supervisory Board 48
Directors’ Report 50
Independent Auditor’s Report 52
Consolidated statement of financial position 55
Consolidated income statement 56
Consolidated statement of changes in owners’ equity 57
Consolidated statement of cash flows 58
Consolidated statement of changes in restricted investment accounts 59
Notes to the Consolidated Financial Statements 60
48 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

REPORT OF THE SHARIA SUPERVISORY BOARD

In the Name of Allah, the Beneficent, the Merciful

Report of the Sharia Supervisory Board on the activities of Ithmaar Bank B.S.C. (c) and subsidiaries for the Financial Year from 1 January 2020
until 31 December 2020, corresponding to the Year from 6 Jumada Al-Awal 1441 H until 16 Jumada Al-Awal 1442 H.

Praise be to Allah, the Lord of the worlds, and peace and blessings be upon our Master, Mohammed, the leader of Prophets and Messengers, and
upon his scion and companions, and upon those who follow his guidance until the Day of Judgement.
The Sharia Supervisory Board of Ithmaar Bank B.S.C. (c) and subsidiaries (the Bank) performed the following during the financial year ended at
31 December 2020:
1. Issued fatwas and Sharia resolutions related to Ithmaar’s products and activities through Ithmaar Bank’s Sharia Coordination and Implementation
Department and followed its execution through Internal Sharia Audit Department while also guiding different departments towards implementing
Sharia-compliant transactions.
2. Studied different mechanisms of financing, investing and different mudaraba investments and prepare its documents with the concerned
departments that develop and present products.
3. Examined the books, records and transactions and auditing some of their samples through Internal Sharia Audit Department as per established
sharia auditing standards.
4. Examined sources of income and expenditures through reviewing the consolidated statement of financial position, consolidated income
statement and the Bank’s overall banking activities.
5. Examined and approved Sharia reports which are published by the Sharia Coordination and Implementation Department, Internal Sharia Audit
Department and External Sharia Audit Department
We have reviewed the principles and contracts relating to transactions and products launched by the Bank during the year ended at 31 December
2020. We have also conducted the required inspection to provide our opinion on whether the Bank had complied with the provisions and principles
of Islamic Sharia, as well as fatwas, resolutions and specific guidance that was issued by us, the resolution of the Centralized Sharia Council and the
regulations and instructions issued by the Central Bank of Bahrain.
The Bank’s management is responsible for ensuring that the Bank operates in accordance with the provisions and principles of Islamic Sharia. Our
responsibility is to express an independent opinion based on our observation of the Bank’s operations, and prepare a report.

In view of the above, the Sharia Supervisory Board hereby resolves as follows:
I: With regard to the Bank business in general:
a.Ithmaar’s overall operations and activities were conducted in full in compliance with the principles and provisions of Islamic Sharia and in
accordance with the Sharia Supervisory Board approved standard contracts.
b. Mudaraba profit and loss distribution reserve is in compliance with the principles and provisions of Islamic Sharia.
c. Gains made from sources prohibited by Sharia were identified and transferred to the Charity Fund.
d. Z akat is calculated in accordance to Sharia Standard on Zakat issued by the Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI). Ithmaar Bank’s accounts are consolidated under Ithmaar Holding. Thus, Zakat calculation will be included in the consolidated Financial
Statements of Ithmaar Holding.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 49

REPORT OF THE SHARIA SUPERVISORY BOARD CONTINUED

ii: What has been transferred to the Bank after reorganization:

The Sharia Supervisory Board has reviewed the structure of the Bank, its projects and its subsidiaries following the establishment of the Holding
Company and the setting up of Ithmaar Bank B.S.C. (c) as subsidiary (for commercial operations in Bahrain and Pakistan) and to ensure compliance
with its Fatwas and directions, the Sharia Supervisory Board has reviewed the income statement of Ithmaar for the year ended 31 December
2020 and has satisfied itself that Ithmaar has appropriately disclosed the income and expenses arising from the conventional assets and liabilities,
according to Note (36), the Sharia Supervisory Board guides the shareholders of Bank to dispose of impermissible earnings which has been
calculated, in the current years financial statements, at 4.78 Bahraini fils per share.

We pray to Almighty Allah to grant success to Ithmaar and whom are responsible and grant them success for everything He pleases. May peace and
blessings be upon our Master, Mohammed, and upon his scion and companions.

His Eminence Shaikh Abdullah Al Manee’a

Chairman

His Eminence Shaikh Nizam Yacooby His Eminence Shaikh Mohsin Al-Asfoor His Eminence Shaikh Osama Bahar
Member Member Member
50 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

DIRECTORS’ REPORT
For the year ended 31 December 2020

The Directors submit their report dealing with the activities of Ithmaar Bank B.S.C. (C) (“the Bank”) for the year ended 31 December 2020, together
with the audited consolidated financial statements of the Bank and its subsidiaries (collectively the “Group”) for the year ended.
Principal activities
Ithmaar Bank B.S.C. (C) (the “Bank”) was incorporated in the Kingdom of Bahrain on 12 May 2016 as a Closed Joint Stock entity and registered with
the Ministry of Industry & Commerce under commercial registration number 99336-1 and was licensed as an Islamic retail bank by the Central Bank
of Bahrain (the “CBB”) on 14 August 2016. As part of reorganization of erstwhile Ithmaar Bank B.S.C (now Ithmaar Holding B.S.C.), the identified
assets & liabilities were transferred to the Bank on 2 January 2017.
The principal activities of the Group are a wide range of financial services, including retail, commercial, investment banking and private banking.
Consolidated financial position and results
The consolidated financial position of the Group as at 31 December 2020, together with the consolidated results for the year ended is set out in the
accompanying consolidated financial statements.
The Group has reported a net loss of BD15.3 million for the year ended 31 December 2020 attributable to the equity shareholders of the Group, as
compared to a net loss of BD1.4 million for 2019. Total assets at 31 December 2020 amounted to BD3,094.8 million (31 December 2019: BD2,979
million).
The consolidated Capital adequacy ratio of the Bank as at 31 December 2020 was 12.65% (31 December 2019: 13.52%) as compared to a minimum
regulatory requirement of 12.5%. The Group’s risk weighted exposures and eligible capital are set out in note 34 of the accompanying consolidated
financial statements.
Directors
The following served as Directors of the Bank during the year ended 31 December 2020:
HRH Prince Amr Mohammed Al-Faisal (Chairman)
Tunku Yaacob Khyra
Governor Abdelhamid Mohamed Abou Moussa
Sheikh Zamil Abdullah Al-Zamil
Mr. Mohammed A. Rahman Bucheerei
Mr. Abdulellah Ebrahim Al-Qassimi
Dr. Amani Khaled Bouresli
Sheikh Mohamed Abdullah El Khereiji
Ms. Elham Ebrahim Hasan
Mr. Omar Abdi Ali
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 51

DIRECTORS’ REPORT CONTINUED

For the year ended 31 December 2020

Directors’ sitting fees

Directors’ sitting fees for 2020 amounted to BD116,493 (2019: BD119,886).
Dividend
No dividend has been proposed for 2020 (2019: Nil).
Auditors
The auditors, PricewaterhouseCoopers ME Limited, have expressed their willingness to be reappointed as auditors of the Bank for the year ending
31 December 2021.

By order of the Board of Directors

HRH Prince Amr Mohammed Al-Faisal

Chairman
18 February 2021
52 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of Ithmaar Bank B.S.C.(C)

Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all materials respects, the consolidated financial position
of Ithmaar Bank B.S.C. (the “Bank”) and its subsidiaries (the “Group”) as at 31 December 2020, its consolidated financial performance, consolidated
cash flows and consolidated statement of changes in restricted investment accounts, for the year then ended in accordance with the Financial
Accounting Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”) as modified by the Central Bank
of Bahrain (“CBB”).
What we have audited
The Group’s consolidated financial statements comprise:
• the consolidated statement of financial position as at 31 December 2020;
• the consolidated income statement for the year then ended;
• the consolidated statement of changes in owners’ equity for the year then ended;
• the consolidated statement of cash flows for the year then ended;
• the consolidated statement of changes in restricted investment accounts for the year then ended; and
• the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.
Basis for opinion
We conducted our audit in accordance with the Auditing Standards for Islamic Financial Institutions issued by AAOIFI. Our responsibilities under those
standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Group in accordance with AAOIFI’s Code of Ethics for Accountants and Auditors of Islamic Financial Institutions (AAOIFI
Code) and the ethical requirements that are relevant to our audit of the consolidated financial statements in the Kingdom of Bahrain. We have
fulfilled our other ethical responsibilities in accordance with these requirements and the AAOIFI Code.

Other information
The Board of Directors are responsible for the other information. The other information comprises the Directors’ report and the Report of the Sharia
Supervisory Board (but does not include the consolidated financial statements and our auditor’s report thereon), which we obtained prior to the date
of this auditor’s report and the Annual Report which is expected to be made available to us after that date.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance
conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing
so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there
is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
When we read the Annual Report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the
Board of Directors.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 53

INDEPENDENT AUDITOR’S REPORT CONTINUED

To the Shareholders of Ithmaar Bank B.S.C.(C)

Responsibilities of the Board of Directors for the consolidated financial statements

These consolidated financial statements and the Group’s undertaking to operate in accordance with Islamic Sharia Rules and Principles are the
responsibility of the Group’s Board of Directors.
The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the FAS
as modified by CBB and the Bahrain Commercial Companies Law number (21) of 2001, as amended (the Commercial Companies Law), CBB Volume
2 and for such internal control as the Board of Directors determines is necessary to enable the preparation of the consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors
either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is
not a guarantee that an audit conducted in accordance with Auditing Standards for Islamic Financial Institutions issued by AAOIFI will always detect
a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with the Auditing Standards for Islamic Financial Institutions issued by AAOIFI, we exercise professional judgement
and maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the
Board of Directors.
• Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the
consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express
an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We
remain solely responsible for our audit opinion.
We communicate with the Board of Directors regarding, among other matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we identify during our audit.
54 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

INDEPENDENT AUDITOR’S REPORT CONTINUED

To the Shareholders of Ithmaar Bank B.S.C.(C)

Report on other legal and regulatory and Sharia requirements

As required by the Commercial Companies Law and the CBB Rule Book (Volume 2), we report the followings:
i. The Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith.
ii. The financial information contained in the Directors’ report and the Report of the Sharia Supervisory Board is consistent with the consolidated
financial statements.
iii. Except for the matter described below in connection with the non-compliance with the requirements of the CBB’s Rulebook Volume 2 – Licensing
Requirements module – LR-2.5.2A, nothing has come to our attention which causes us to believe that the Bank has, during the year, breached
any of the applicable provisions of the Commercial Companies Law, CBB and the Financial Institutions Law, the CBB Rule Book (Volume 2) and
CBB directives or the items of its Memorandum and Articles of Association that would have a material adverse effect on its activities for the year
ended 31 December 2020 or its financial position as at that date.
• The total consolidated shareholders’ equity of the Bank as at 31 December 2020 stood at less than BD 100 million which is a non-compliance
with the requirements of the CBB’s Rulebook Volume 2 – Licensing Requirements module – LR-2.5.2A.
iv. Satisfactory explanations and information have been provided to us by the Board of Directors in response to all our requests.
Further, we report that the Bank has complied with the Islamic Sharia Principles and Rules as determined by the Sharia Supervisory Board of the
Group during the period under audit.

PricewaterhouseCoopers M.E Limited

18 February 2021
Partner’s registration number: 196
Manama, Kingdom of Bahrain
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 55

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Expressed in thousands of Bahraini Dinars unless otherwise stated)

At 31 December At 31 December
2020 2019
Notes (Audited) (Audited)
ASSETS
Cash and balances with banks and central banks 3 239,332 253,124
Commodity and other placements with banks, financial and other institutions 4 85,612 127,602
Murabaha and other financings 5 1,347,337 1,497,391
Musharaka financing 350,420 239,452
Sukuk and investment securities 6 755,225 523,702
Assets acquired for leasing 7 145,346 148,084
Other assets 8 47,953 55,544
Investment in real estate 2,316 2,398
Development properties 9 73,359 75,838
Fixed assets 10 22,274 22,235
Intangible assets 11 25,603 33,576
Total assets 3,094,777 2,978,946

LIABILITIES, EQUITY OF UNRESTRICTED INVESTMENT ACCOUNTHOLDERS,

MINORITY INTEREST AND OWNERS’ EQUITY
Customers’ current accounts 12 661,739 572,466
Due to banks, financial and other institutions 13 435,764 501,616
Due to investors 14 514,234 589,550
Other liabilities 15 102,998 104,908
Total liabilities 1,714,735 1,768,540
Equity of unrestricted investment accountholders 16 1,275,162 1,063,928
Minority interest 17 55,049 67,307
Total liabilities, equity of unrestricted investment accountholders and minority interest 3,044,946 2,899,775
Share capital 18 100,000 100,000
Reserves (34,033) 7,590
Accumulated losses (16,136) (28,419)
Total owners’ equity 49,831 79,171
Total liabilities, equity of unrestricted investment accountholders, minority interest and
owners’ equity 3,094,777 2,978,946
These consolidated financial statements were approved by the Board of Directors on 18 February 2021 and signed on its behalf by:

HRH Prince Amr Mohamed Al Faisal Elham Hasan Ahmed Abdul Rahim
Chairman Director CEO

The notes 1 to 38 on pages 60 to 110 form an integral part of the consolidated financial statements.
56 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CONSOLIDATED INCOME STATEMENT

(Expressed in thousands of Bahraini Dinars unless otherwise stated)

Year ended
31 December 31 December
2020 2019
Notes (Audited) (Audited)
INCOME
Income from assets financed by unrestricted investment account holders 91,603 82,551
Less: return to unrestricted investment accounts and impairment provisions (55,655) (54,359)
Group’s share of income from unrestricted investment accounts as a Mudarib 35,948 28,192
Income from murabaha and other financings 20 52,139 77,958
Income from other investments 21 53,410 41,854
Other income 22 20,700 23,212
Total income 162,197 171,216
Less: profit paid to banks, financial and other institutions (75,173) (87,630)
Operating income 87,024 83,586

EXPENSES
Administrative and general expenses 23 (63,507) (59,250)
Depreciation and amortization 10,11 (9,032) (8,669)
Total expenses (72,539) (67,919)
Net income before provision for impairment and overseas taxation 14,485 15,667
Provision for impairment (net) 24 (15,587) (2,779)
Net (loss)/income before overseas taxation (1,102) 12,888
Overseas taxation 25 (9,867) (10,408)
NET (LOSS)/PROFIT FOR THE YEAR (10,969) 2,480
Attributable to:
Equity holders of the Bank (15,294) (1,352)
Minority interests 17 4,325 3,832
(10,969) 2,480
Basic and diluted (losses)/earnings per share 19 Fils (15.29) Fils (1.35)
These consolidated financial statements were approved by the Board of Directors on 18 February 2021 and signed on its behalf by:

HRH Prince Amr Mohamed Al Faisal Elham Hasan Ahmed Abdul Rahim
Chairman Director CEO

The notes 1 to 38 on pages 60 to 110 form an integral part of the consolidated financial statements.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 57

CONSOLIDATED STATEMENT OF CHANGES IN OWNERS’ EQUITY

For the year ended 31 December 2020 and 2019
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

Reserves
Investment
in real
Investments estate Foreign Total
Share Statutory fair value Hedging fair value currency Share Total Accumulated owners’
capital reserve reserve reserve reserve translation premium reserves losses equity
At 1 January 2020 (Audited) 100,000 299 5,193 (1,453) 744 (37,473) 40,280 7,590 (28,419) 79,171
Adjustments resulting from
reclassification of investments on
adoption of FAS 33 (note 2) - - 4,019 - - - - 4,019 - 4,019
At 1 January 2020 (Audited) 100,000 299 9,212 (1,453) 744 (37,473) 40,280 11,609 (28,419) 83,190
Set off of accumulated
losses (note 1) - - - - - - (40,280) (40,280) 40,280 -
Net loss for the year - - - - - - - (15,294) (15,294)
Modification loss net of
Government assistance (note 2) - - - - - - - - (14,836) (14,836)
Increase in shareholding of
subsidiary - - - - - - - - 2,133 2,133
Movement in fair value of sukuk
and investment securities - - (1,895) - - - - (1,895) - (1,895)
Movement in hedging reserve
(note 32) - - - (1,307) - - - (1,307) - (1,307)
Foreign currency translation
adjustments - - (8) - (23) (2,129) - (2,160) - (2,160)
At 31 December 2020 (Audited) 100,000 299 7,309 (2,760) 721 (39,602) - (34,033) (16,136) 49,831

Reserves
Investment
in real
Investments estate Foreign Total
Share Statutory fair value Hedging fair value currency Share Total Accumulated owners’
capital reserve reserve reserve reserve translation premium reserves losses equity
At 1 January 2019 (Audited) 100,000 299 3,446 - 808 (30,655) 40,280 14,178 (28,793) 85,385
Net loss for the year - - - - - - (1,352) (1,352)
Increase in shareholding of
subsidiary - - - - - - - - 1,726 1,726
Movement in fair value of sukuk
and investment securities 1,734 - 1,734 1,734
Movement in hedging reserve
(note 32) - - - (1,453) - - - (1,453) - (1,453)
Foreign currency translation
adjustments - - 13 - (64) (6,818) - (6,869) - (6,869)
At 31 December 2019 (Audited) 100,000 299 5,193 (1,453) 744 (37,473) 40,280 7,590 (28,419) 79,171

The notes 1 to 38 on pages 60 to 110 form an integral part of the consolidated financial statements.
58 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

Year ended Year ended

31 December 2020 31 December 2019
Notes (Audited) (Audited)
OPERATING ACTIVITIES
Net income before overseas taxation (1,102) 12,888
Adjustments for:
Depreciation and amortization 10,11 9,032 8,669
Provision for impairment (net) 15,587 2,779
Income from other investments (53,410) (41,854)
Loss on sale of fixed assets 50 287
Operating loss before changes in operating assets and liabilities (29,843) (17,231)
(Increase)/decrease in balances with banks maturing after ninety days and including with central
banks relating to minimum reserve requirement (9,070) (19)
Changes in operating assets and liabilities:
Murabaha and other financings 121,776 128,063
Musharaka financing (118,395) (73,730)
Other assets 6,508 17,335
Customers’ current accounts 101,647 48,317
Due to banks, financial and other institutions (60,020) (53,453)
Due to investors (54,691) 13,236
Other liabilities (1,963) (83,260)
(Decrease)/Increase in equity of unrestricted investment accountholders 216,010 81,535
Taxes paid (7,009) (10,628)
Net cash provided by operating activities 164,950 50,165
INVESTING ACTIVITIES
Net (increase)/decrease:
Assets acquired for leasing 2,748 6,774
Sukuk and investment securities (193,949) 39,083
Purchase of fixed assets (3,760) (9,303)
Net cash (used in)/provided by investing activities (194,961) 36,554
FINANCING ACTIVITIES
Minority interests - (201)
Net cash used in financing activities - (201)
Foreign currency translation adjustments (4,269) (7,976)
Net (decrease)/increase in cash and cash equivalents (34,280) 78,542
Cash and cash equivalents at the beginning of the year 312,560 234,018
Cash and cash equivalents at the end of the year 4 278,280 312,560

The notes 1 to 38 on pages 60 to 110 form an integral part of the consolidated financial statements.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 59

CONSOLIDATED STATEMENT OF CHANGES IN RESTRICTED INVESTMENT ACCOUNTS

For the year ended 31 December 2020 and 2019
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

At 1 January 2020 Fair value movements At 31 December 2020

Shamil Bosphorus Modaraba* 2,356 - 2,356
European Real Estate Placements* 5,333 (527) 4,806
US Real Estate Placements* 9,514 - 9,514
TOTAL 17,203 (527) 16,676

* Income/(loss) will be recognised and distributed at the time of disposal of the underlying investments

At 1 January 2019 Fair value movements At 31 December 2019

Shamil Bosphorus Modaraba* 2,356 - 2,356
European Real Estate Placements* 5,896 (563) 5,333
US Real Estate Placements* 9,514 - 9,514
TOTAL 17,766 (563) 17,203

* Income/(loss) will be recognised and distributed at the time of disposal of the underlying investments

The notes 1 to 38 on pages 60 to 110 form an integral part of the consolidated financial statements.
60 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2020

1. INCORPORATION AND ACTIVITIES

Ithmaar Bank B.S.C. (C) (the “Bank”) was incorporated in the Kingdom of Bahrain on 12 May 2016 as a Closed Joint Stock entity and registered
with the Ministry of Industry & Commerce under commercial registration number 99336-1 and was licensed as an Islamic retail bank by the
Central Bank of Bahrain (the “CBB”) on 14 August 2016.
Ithmaar Holding B.S.C.(formerly Ithmaar Bank B.S.C.) ["Ithmaar"], a Category 1 investment firm licensed and regulated by the Central Bank of
Bahrain (CBB) is the immediate parent company of the Bank. Dar Al-Maal Al-Islami Trust (“DMIT”), a Trust incorporated in the commonwealth of
Bahamas is the ultimate parent company of the Bank.
Pursuant to the reorganisation of Ithmaar at its Extraordinary General Meeting (EGM) held on 28 March 2016 where shareholders approved to
restructure Ithmaar Bank B.S.C. into a holding company and two subsidiaries to segregate core and non-core assets, the core assets and liabilities
of Ithmaar were transferred to the Bank along with control over the below mentioned subsidiaries on 2 January 2017. Since Ithmaar remained
the ultimate parent before and after this reorganization, this transaction has been accounted as a business combination under common control
and the related assets and liabilities have been transferred at their book values. No financial transactions were incurred by the Bank between
the date of incorporation 12 May 2016 and 1 January 2017.
Subsequent to reorganization, the transfer of the legal ownership of certain assets and liabilities from Ithmaar to the Bank are in progress.
The principal activities of the Bank and its subsidiaries (collectively the “Group”) are a wide range of financial services, including retail, commercial,
investment banking, private banking, takaful and real estate development.
The Bank's activities are regulated by the CBB and are subject to the supervision of Sharia Supervisory Board.
The Group’s activities also include acting as a Mudarib (manager, on a trustee basis), of funds deposited for investment in accordance with
Islamic laws and principles particularly with regard to the prohibition of receiving or paying interest. These funds are included in the consolidated
financial statements as equity of unrestricted investment accountholders and restricted investment accounts. In respect of equity of unrestricted
investment accountholders, the investment accountholder authorises the Group to invest the accountholders’ funds in a manner which the Group
deems appropriate without laying down any restrictions as to where, how and for what purpose the funds should be invested. In respect of
restricted investment accounts, the investment accountholders impose certain restrictions as to where, how and for what purpose the funds are
to be invested. Further, the Group may be restricted from commingling its own funds with the funds of restricted investment accounts.
The Group carries out its business activities through the Bank’s head office, 14 commercial branches in Bahrain and its following principal
subsidiary companies:

% Owned
2020 2019 Country of Incorporation Principal business activity
Faysal Bank Limited 67 67 Pakistan Banking
Dilmunia Development Fund I L.P. 90 66 Cayman Islands Real estate
Sakana Holistic Housing Solutions B.S.C. (C)
(Sakana) [under Voluntary Liquidation] 50 50 Kingdom of Bahrain Mortgage finance

During the year the Group acquired additional 2,547 units of Dilmunia Development Fund I L.P. as part of settlement of certain financings. The
acquisition resulted in increase of shareholding from 66% to 90% without change in control.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 61

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

1. INCORPORATION AND ACTIVITIES (continued)

1.1 As of 31 December 2020, the consolidated equity of the Group stood at BD49.8 million, which is below the minimum regulatory capital required
by the CBB of BD100 million as per LR module of Volume 2 rulebook. To meet the regulatory minimum requirement, the Board of Directors is in
the process of issuing Additional Tier 1 capital instruments (AT1) up to BD62 million which is expected to be completed by 31 March 2021. This
has been approved by the CBB on 1 October 2020 and by the shareholders at the Extraordinary General Meeting held on 20 September 2020
(which also approved the offset of accumulated losses amounting to BD 40.3 million out of the Group’s total accumulated losses of BD 43.9
million as of 30 June 2020 against the available balance in the share premium account).
The Group’s management assessed its liquidity and equity projections for the coming twelve months from the date of the consolidated financial
statements including various stress scenarios as follows:
• Assuming the lifting of sanctioned deposits and partial repayments
• Stressing the expected outflows of the liabilities
• Stressing the expected inflows from financings
• Increased availability of liquid assets in the form of government securities
• Stressing the estimated change in fair values of equity and debt instruments
The Board of Directors have reviewed the above projections and believes that the Group will be able to continue its business without any significant
curtailment of operations and meet its obligations for a period of at least one year from the date of issue of this consolidated financial statements.
Accordingly, this consolidated financial statements is prepared on a going concern basis.
1.2 On 14 September 2020, Ithmaar Holding signed a non legally binding Memorandum of Understanding (MoU) with Bank of Bahrain and Kuwait
B.S.C. (BBK) where BBK is interested in considering the acquisition of certain assets forming part of Bahrain operations of Ithmaar Bank B.S.C
(c) and other specific assets of a related party. The potential acquisition, which is subject to the Board of Directors, shareholders and regulatory
approvals is still currently in its preliminery stage and subject to the completion of all necessary due diligence as well as signing a detailed and
legally binding sale and purchase agreement by the concerned parties, as appropriate, incorporating all the terms of the proposed transaction.

2. SIGNIFICANT GROUP ACCOUNTING POLICIES

(i) Basis of preparation
The consolidated financial statements of the Group have been prepared in accordance with applicable rules and regulations issued by the Central
Bank of Bahrain (“CBB”) including the recently issued CBB circulars on regulatory concessionary measures in response to COVID-19. These rules
and regulations require the adoption of all Financial Accounting Standards issued by the Accounting and Auditing Organisation of Islamic Financial
Institutions (AAOIFI) (FAS), except for:
a. recognition of modification losses on all financing assets arising from payment holidays provided to customers impacted by COVID-19 without
charging additional profits, in equity instead of the profit or loss account as required by FAS issued by AAOIFI. Any other modification gain or
loss on financial assets are recognised in accordance with the requirements of applicable FAS. Please refer to note 32 for further details; and
62 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(i) Basis of preparation (continued)
b. recognition of financial assistance received from the government and/ or regulators in response to its COVID-19 support measures that meets
the government grant requirement, in equity, instead of the profit or loss account as required by the statement on “Accounting implications
of the impact of COVID-19 pandemic” issued by AAOIFI. This will only be to the extent of any modification loss recorded in equity as a result
of (a) above, and the balance amount to be recognized in the income statement. Any other financial assistance is recognised in accordance
with the requirements of FAS. Please refer to note 32 for further details.
Further in line with the requirements of AAOIFI and the CBB rule book, for matters not covered under AAOIFI standards the Group uses
guidance from the relevant International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board
(“IASB”).
The above framework of the consolidated financial statements is hereinafter referred to as ‘Financial Accounting Standards as modified
by CBB’.
The Group has certain assets, liabilities and related income and expenses which are not Sharia compliant as these existed before Ithmaar (the
parent) converted to an Islamic retail bank in April 2010. These are currently presented in accordance with FAS as modified by the CBB standards
in the consolidated financial statements for the year ended 31 December 2020 as appropriate.
The Sharia Supervisory Board has approved the Sharia Compliance Plan (“Plan”) for assets and liabilities which are not Sharia Compliant. The
Sharia Supervisory Board is monitoring the implementation of this Plan. The income and expenses attributable to non-Sharia compliant assets
and liabilities is disclosed under note 40.
The consolidated financial statements comprise the financial information of the Group for the year ended 31 December 2020.
The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below:

(A) New standards, amendments and interpretations not yet effective but early adopted
FAS 31 “Investment Agency (Al-Wakala Bi-Al – Istithmar)”
The Group has early adopted FAS 31 as issued by AAOIFI effective 1 January 2021. This standard intends to define the accounting principles and
reporting requirements for investment agency (Al-Wakala Bi AlIstithmar) transactions and instruments, in the hands of both the principal and
the agent.
The standard requires the principal to evaluate the nature of the investment as either a) a pass-through investment or b) wakala venture.
The adoption of this standard did not have a significant impact on the consolidated financial statements.
FAS 33 “Investments in Sukuk, Shares and Similar Instruments”
FAS 33 “Investments in Sukuk, Shares and Similar Instruments” supersedes earlier FAS 25 “Investments in Sukuk, Shares and Similar Instruments”
and produces revised guidance for classification and measurement of investments to align with international practices.
Investment can be classified and measured at amortized cost, fair value through equity or fair value through the income statement. Classification
categories are now driven by business model tests and reclassification will be permitted only on change of a business model and will be applied
prospectively. In limited circumstances, where the institution is not able to determine a reliable measure of fair value of equity investments, cost
may be deemed to be best approximation of fair value.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 63

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(A) New standards, amendments and interpretations not yet effective but early adopted (continued)
The adoption of this standard has resulted in amendment of the following accounting policies:
Investments carried at amortised cost
Sukuk and debt-type instruments (monetary or non-monetary) are carried at amortised cost where the investment is held within a business
model whose objective is to hold such investment in order to collect expected cash flows till maturity of the investment and having
reasonably determinable effective yield. These investments are measured using the effective profit rate method. All gains or losses arising
from the amortization process and those arising from de-recognition or impairment of the investment, are recognized in the consolidated
income statement. These investments are tested for impairment at each reporting period in accordance with FAS 30 “Impairment, credit
losses and onerous commitments”.
Investments carried at fair value through equity
These represent investments (Equity-type or debt-type instruments) held within a business model whose objective is achieved by both
collecting expected cash flows and selling the investment.
These investments are initially recognised at fair value plus transaction costs. These investments are subsequently re-measured at fair value
at the end of each reporting period and the resulting unrealised gains or losses are recognised in the consolidated statement of changes
owners' in equity under “Investments fair value reserve”, taking into consideration the split between the portion related to owners’ equity
and the portion related to the equity of investment accountholders, until the financial asset is derecognized or impaired. At this time, the
cumulative gain or loss previously recognised in equity is recognised in the consolidated income statement.
These investments are tested for impairment at each reporting period in accordance with FAS 30 “Impairment, credit losses and onerous
commitments”. As part of impairment assessment, the Group assesses at the end of each reporting date whether there is any objective
evidence that an investment carried at fair value through equity is impaired. Among other factors that may be considered for impairment, a
significant or prolonged decline in the fair value of an equity investment below its cost is also an objective evidence of impairment.
Investments carried at fair value through income statement
An investment is classified as investment carried at fair value through income statement if not classified as fair value through equity
or amortised cost. At the end of each reporting period, investments are re-measured at their fair value and the difference between
carrying value and fair value is recognised in the consolidated income statement. All other gains/ losses arising from these investments are
recognized in the consolidated income statement.
The implementation of FAS 33 has resulted in re-classification of investment securities amounting to BD427 million from amortized cost
to investments held at fair value through equity. Accordingly, the cumulative changes in fair value of BD4 million (refer note 6) have been
recognized in opening balance of fair value reserve in the owners' equity.
FAS 34 “Financial Reporting for Sukuk-holders”
FAS 34 “Financial Reporting for Sukuk-holders” aims to establish the principles of accounting and financial reporting for assets and businesses
underlying the Sukuk to ensure transparent and fair reporting to all relevant stakeholders, particularly including Sukuk-holders.
The adoption of this standard did not have a significant impact on the consolidated financial statements.
64 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(B) New standards, amendments and interpretations issued but not effective and not early adopted by the Group.
FAS 32 “Ijarah”
FAS 32 “Ijarah” supersedes the earlier FAS 8 “Ijarah and Ijarah Muntahia Bittamleek” and is effective from the financial periods beginning on
or after 1 January 2021.
This standard aims at setting out principles for the classification, recognition, measurement, presentation and disclosure of Ijarah type
transactions including their different forms entered into by an institution, in both the capacities of lessor and lessee.
This standard brings significant changes from its predecessor standard (FAS 8), inter alia, in the following aspects:
a. Changes in the classification. Ijarah transactions under in this standard are classified into the following:.
i. Operating Ijarah;
ii. Ijarah MBT with expected transfer of ownership after the end of the Ijarah term –either through a sale or gift; and
iii. Ijarah MBT with gradual transfer –with gradual transfer ownership during the Ijarah term including Diminishing Musharaka Ijarah;
b. New recognition and measurement principles for initial recognition for right-of-use asset, Ijarah liability and advance payments for lessee
and lessor accounting;
c. Requirement to identify and separate Ijarah and non-Ijarah components, if needed;
d. New recognition and measurement principles for an Ijarah MBT through gradual transfer / Diminishing Musharaka Ijarah, whereby the
lessee shall recognize the ‘combined asset’ (including the right-of-use asset and the proportionate asset already owned by the lessee)
whereas the lessor shall recognize the proportionate asset owned. FAS 8 requirements of recording monthly depreciation and gain and
loss for such transactions are done away with;
e. Allowing effective rate of return/ profit rate method for accounting for rental income, in the hand of the lessor;
f. Testing for impairment of right-of-use asset shall be subject to requirements of FAS 30 “Impairment, Credit Losses and Onerous
Commitments”; and
g. Detailed guidelines are provided for presentation and disclosures with enhanced disclosure by lessor and lessee of information as
compared to previous requirements in FAS 8.
The Group is in process of assessing the impact of this standard on the consolidated financial statements.
(ii) Summary of significant accounting policies
(a) Basis of consolidation
Subsidiaries
Subsidiaries are companies in which the Group holds 50% or more of equity shares and as such exercises significant control over such
companies. Control is also presumed to exist if the Group has power to govern the financial and operating policies of a company with
the objective of obtaining benefits from its operations. Subsidiaries, including Special Purpose entities that are controlled by the Bank,
are consolidated from the date on which the Group obtains control and continue to be so consolidated until the date such control ceases.
For business combinations involving entities under common control, the directors of the Group are responsible for determining a suitable
accounting policy for such business combinations. The directors have elected to use the uniting of interests method to account for
business combinations involving entities under common control and to account for such business combinations prospectively, under the
predecessor basis of accounting. Under the uniting of interests method, there is no requirement to fair value the assets and liabilities of
the acquired entities and hence no goodwill arises on consolidation. The difference between the cost of the acquisition and the Group’s
share of the issued and paid up share capital of the acquired entity is recognised as share premium in equity.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 65

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
Intra-Group balances and minority interests
The consolidated financial statements include the assets, liabilities and results of operations of the Bank, its subsidiary companies after
adjustment for minority interests and equity of unrestricted investment accountholders managed by the Group for both subsidiaries and
associates. All significant intra-group balances and transactions are eliminated.
The financial statements of the subsidiaries are prepared on the same reporting periods as the Bank, using consistent accounting policies
(for group reporting purposes).

(b) Foreign currency transactions and balances

Functional and presentation currency
Items included in the consolidated financial statement of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates, which is Bahraini Dinars (the functional currency).
For group companies, items included in the consolidated financial statements of the Group’s entities are measured using the currency of
the primary economic environment in which the entity operates, which is Bahraini Dinars (the functional currency) and presented in US
Dollars (the presentation currency). Considering that the Bahraini Dinar is pegged to United States Dollars, the changes in presentation
currency does not have any impact on the consolidated statement of financial position, consolidated income statement, consolidated
statement of changes in owners’ equity, consolidated statement of cash flow and consolidated statement of changes in restricted
investment accounts.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions. 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 consolidated income
statement. Translation differences on non-monetary items carried at their fair value, such as certain investments carried at fair value
through equity are included in investments fair value reserve.
The results and financial position of all the group entities that have a functional currency different from the presentation currency are
translated into the presentation currency as follows:
1. Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement
of financial position;
2. Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable
approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are
translated at the rate on the dates of the transactions); and
3. All resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other
currency instruments designated as hedges of such investments, are taken to shareholders’ equity. Translation losses arising in the case of
severe devaluation or depreciation (other than temporary) of the currency of the net investment in a foreign operation when the latter is
translated at the spot exchange rate at the date of consolidated statement of financial position, are recognised in the first place as a charge
against any credit balance on the separate component of the shareholders’ equity and any remaining amount is recognised as a loss in the
consolidated income statement. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity
are recognised in the consolidated income statement as part of the gain or loss on sale.
Goodwill, and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity
and translated at the closing rate.
66 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(c) Accounting estimates and judgements
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year.
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectation of future
events that are believed to be reasonable under the circumstances.
1. Classification of investments
In the process of applying the Group’s accounting policies, management decides upon acquisition of an investment, whether it should be
classified as investments carried at fair value through income statement, held at amortised cost or investments carried at fair value through
equity. The classification of each investment reflects the management’s intention in relation to each investment and is subject to different
accounting treatments based on such classification.
2. Special purpose entities
The Group sponsors the formation of special purpose entities (SPEs) primarily for the purpose of allowing clients to hold investments.
The Group does not consolidate SPEs where it does not exercise control. In determining whether the Group exercises control over an SPE,
judgements are made about the objectives of the SPEs activities, its exposure to the risks and rewards, as well as about the Group’s ability
to obtain benefit from the SPE’s operations by having power to govern its financial and operational policies.
3. Impairment of goodwill and intangible assets
Goodwill other intangibles assets acquired through business combinations have been allocated to the cash-generating units of the acquired
entities for impairment testing purposes. The Group tests whether goodwill or intangible assets have suffered any impairment in accordance
with the impairment accounting policy.
The recoverable amount of the cash-generating units are generally determined based on higher of Value-in-Use (VIU) and Fair Value Less
Cost to Disposal (FVLCTD).
VIU calculations are determined using cash flow projections from financial budgets approved by the Group’s senior management covering a
three year period. The discount rate applied to cash flow projections represent the cost of capital adjusted for an appropriate risk premium
for these cash-generating units.
For FVLCTD calculations, the Comparable Companies Multiple (CCM) method is used, whereby the price to book value (P/B) multiple of the
comparable listed banks operating in the region were considered. The key assumptions used in estimating the recoverable amounts of cash-
generating units are assessed to ensure reasonableness of the FVLCTD.
The above methods require the use of estimates, which are subject to judgement. Changes in the underlying assumptions may impact the
reported numbers.
During the current period, the management used the higher of VIU or FVLCTD method in assessing the recoverable amount of the goodwill
and other intangible assets. As a result, the management used judgement in the percentage of the control premium and marketability
discount used in the calculation of the effective P/B multiple for the FVLCTD method.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 67

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(c) Accounting estimates and judgements (continued)
4. Impairment on financing assets and investments  
Each financing and investment exposure is evaluated individually for impairment. In assessing impairment, the Group exercises judgement
in the estimation of the amount and timing of future cash flows as well as an assessment of whether credit risk on the financial contracts
has increased significantly since initial recognition and incorporation of forward-looking information in the measurement of expected credit
losses (“ECL”) in accordance with impairment policy.
The staging and ECL of related party exposures is considered separately from the other financing assets. The ECL is assessed using the cash
shortfall method since the underlying collateral can be taken over without having to apply any haircut. Further, the increase in credit risk is
also assessed separately for related parties, given their commitment to honour the amounts due to the Group.
The economic uncertainties caused by COVID-19 have required the Group to update the inputs and assumptions used for the determination
of ECL as at 31 December 2020. ECL were estimated based on a range of forecast economic conditions available as at latest available date.
The judgements and associated assumptions have been made within the context of the impact of COVID-19 and reflect historical experience
and other factors that are considered to be relevant, including expectations of future events that are believed to be reasonable under the
circumstances. In relation to COVID-19, judgements and assumptions include the extent and duration of the pandemic, the impacts of actions
of governments and other authorities, and the responses of businesses and consumers in different industries, along with the associated
impact on the global economy. Accordingly, the Group's ECL estimates are inherently uncertain and, as a result, actual results may differ from
these estimates.
5. Liquidity mismatch
The Group constantly monitors the liquidity mismatch arising in the normal course of the business. Periodic stress tests are carried out
on liquidity position to assess the ability of the Group to meet its liquidity mismatch. The stress testing also incorporates judgement
based behavioural approach for various sources of funding, estimated inflows from disposal of assets and anticipated support from major
shareholder.
6. Significant increase in credit risk (SICR)
A SICR occurs when there has been a significant increase in the risk of a default occurring over the expected life of a financial instrument.
In the measurement of ECL, judgement is involved in setting the rules and trigger points to determine whether there has been a SICR since
initial recognition of a financing facility, which would result in the financial asset moving from ‘stage 1’ to ‘stage 2. The Group continues
to assess borrowers for other indicators of unlikeliness to pay, taking into consideration the underlying cause of any financial difficulty and
whether it is likely to be temporary as a result of COVID-19 or longer term.
During the year, in accordance with CBB instructions the Group has granted payment holidays to its eligible customers by deferring up to
six months instalments. These deferrals are considered as short-term liquidity to address borrower cash flow issues. The relief offered to
customers may indicate a SICR. However, the Group believes that the extension of these payment reliefs does not automatically trigger a SICR
and a stage migration for the purposes of calculating ECL, as these are being made available to assist borrowers affected by the COVID-19
outbreak to resume regular payments. The Group uses judgement to individually differentiate between a borrowers’ short-term liquidity
constraints taking into account of customers who requested for further deferment and a change in its lifetime credit risk.
7. Forward Looking Information
Judgement is involved in determining which forward looking information variables are relevant for particular financing portfolios and for
determining the sensitivity of the parameters to movements in these forward-looking variables. The Group derives a forward looking
economic scenario which reflects the Group’s view of the most likely future macro-economic conditions.
Any changes made to ECL to estimate the overall impact of COVID-19 is subject to high levels of uncertainty as limited forward-looking
information is currently available on which to base those changes. The Group has previously performed historical analysis and identified key
economic variables impacting credit risk and ECL for each portfolio. These economic variables and their associated impact on PD, EAD and
LGD vary by financial instrument.
Many of the macroeconoic variables which were used in the ECL model are updated or published by external agencies or government agencies.
The Group has reviewed its portfolio which is expected to be most impacted due to COVID-19 to determine if any provisions are necessary.
The Group continues to individually assess significant exposures to adequately safeguard against any adverse movements due to COVID-19.
68 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(d) Cash and cash equivalents
Cash and cash equivalents as referred to in the consolidated statement of cash flows comprise cash on hand, non-restricted balance with
central banks and other banks, and short term liquid investments on demand or with an original maturity of three months or less.

(e) Murabaha and other financings

Murabaha financing is stated at cost less allowance for doubtful receivables.
The Group considers the promise made in Murabaha to the purchase orderer as obligatory.
Other financings represent conventional loans and advances, which are non-derivative financial assets with fixed or determinable payments.
These are initially recorded at fair value and are subsequently carried at amortised cost using the effective yield method.
The Group receives collateral in the form of cash or other securities including bank guarantees, mortgage over property or shares and
securities for Murabaha and other financings where deemed necessary. The Group’s policy is to obtain collateral where appropriate. To ensure
that the market value of the underlying collateral remains sufficient, collateral is valued periodically.
Provision are made in accordance with FAS 30 in accordance with note 2

(f) Musharaka financing

Musharaka financing is stated at cost less provision for impairment.
Provision are made in accordance with FAS 30 in accordance with note 2

(g) Investments
1. Investments carried at amortised cost
An Investment instruments shall be measured at amortised cost if both the following conditions are met:
a. the investment is held within a business model whose objective is to hold such investments in order to collect expected cashflows till
maturity of the instrument; and
b. the investment represents either a debt type instrument or other investment instrument having reasonably determinable effective yield.
These investments are measured using effective profit method at initial recognition minus capital/redemption payments and minus any
reduction for impairment.
2. Investments carried at fair value through equity
An Investment will be measured at Fair Value through equity if both the following conditions are met:
a. the investment is held within a business model whose objective is achieved by not collecting the expected cashflows and selling the
investments; and
b. the investment represents a non monetary debt type instrument or other investment instrument having reasonably determinable effective
yield.
Any other investment instruments not classified as per amortised cost or fair value through equity, are classified as fair value through income
statement (FVIS).
On initial recognition, the Group makes an irrevocable election to designate certain equity instruments that are not designated at fair value
through income statement to be classified as investments at fair value through equity.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 69

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(g) Investments (continued)
Business model: the business model reflects how the Group manages the assets in order to generate cash flows. That is, whether the
Group’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows
arising from the sale of assets. If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets
are classified as part of ‘other’ business model and measured at FVIS. Factors considered by the Bank in determining the business model for
a group of assets include past experience on how the cash flows for these assets were collected, how the asset’s performance is evaluated
and reported to key management personnel, how risks are assessed and managed and how managers are compensated. For example, the
Bank’s business model for the Investments is solely to collect contractual cash flows. Another example is the debt investment securities,
which is held by the Bank as part of liquidity management and is generally classified within the hold to collect and sell business model.
3. Investments carried at fair value through income statement
An investment is classified as investment carried at fair value through income statement if acquired or originated principally for the purpose
of generating a profit from short term fluctuations in price or dealer’s margin. These investments are recognised on the acquisition date at
fair value. At the end of each reporting period, investments are re-measured at their fair value and the difference between carrying value
and fair value is recognised in the consolidated income statement. All other gains/ losses arising from these investments are recognized in
the consolidated income statement.
4. Investment in real estate
All properties held for earning periodical income or for capital appreciation purposes or both are classified as investment in real estate
(held-for-use).
Investment in real estate is initially recognised at cost and subsequently re-measured at fair value in accordance with the fair value model with
the resulting unrealised gains being recognised in the consolidated statement of changes in owner’s equity under investment in real estate fair
value reserves. Any unrealised losses resulting from re-measurement at fair value of investment in real estate carried at fair value are adjusted
in equity against the investment in real estate fair value reserve, taking into consideration the split between the portion related to owners’
equity and equity of investment accountholders, to the extent of the available credit balance of this reserve. In case such losses exceed the
available balance, the unrealised losses are recognised in the consolidated income statement. In case there are unrealised losses relating to
investment in real estate that have been recognised in the consolidated income statement in a previous financial period, the unrealised gains
relating to the current financial period are recognised to the extent of crediting back such previous losses in the consolidated income statement.
The realised profits or losses resulting from the sale of any investment in real estate are measured as the difference between the book value
(or carrying amount) and the net cash or cash equivalent proceeds from the sale for each investment separately. The resulting profit or loss
together with the available balance on the investment in real estate fair value reserve account is recognised in the consolidated income
statement for the current financial period.
All properties where decision is made to sell and the sale is expected to occur within 12 months of reporting date (subject to availability of
identified willing buyer) are classified as Investment in real estate Held-for-sale.
Investment in real estate Held-for-sale is measured at fair value in accordance with the fair value model.
5. Development properties
Development properties represent land held by the Group for development and sale in the ordinary course of business, and include
expenditure incurred in acquiring the properties and other costs incurred in bringing them to their existing condition.
Development properties are carried at lower of cost or estimated net realisable value. Estimated net realisable value is determined using the
estimated selling price in the ordinary course of business, less estimated development expenditure.
6. Mudaraba
Mudaraba investments are recorded at cost.
Share of the Group’s profit or loss from the Mudaraba are recognized in the consolidated income statement upon distribution or deduction
from Mudaraba capital (in case of losses).
70 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(g) Investments (continued)
7. Fair value
The fair value of quoted investments in active market is based on current bid price. If there is no active market for such financial assets,
the Group establishes fair values using valuation techniques. These include the use of recent arm’s length transactions and other valuation
techniques used by other participants. The Group also refers to valuations carried out by investment managers in determining fair value of
certain unquoted financial assets.
In certain rare circumstances where the Group is unable to determine reliable measure of fair value of equity instrument on a continuing
basis, the instrument is measured at cost.
(h) Assets acquired for leasing (Ijarah)
Assets acquired for leasing are stated at cost and are depreciated according to the Group’s depreciation policy for fixed assets or lease
term, whichever is lower.
Provision are made in accordance with FAS 30 in accordance with note 2
(i) Fixed assets
Fixed assets are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method to write off the cost
of each asset over its estimated useful life as follows:
Buildings 50 years
Leasehold improvement over the period of the lease
Furniture, equipment and motor vehicles 3-10 years

Depreciation is calculated separately for each significant part of an asset category. Where the carrying amount of an asset is greater than
its estimated recoverable amount, it is written down immediately to its recoverable amount. The asset’s residual value and useful life
are reviewed, and adjusted if appropriate, at each date of the statement of financial position.
Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is
probable that future economic benefits associated with the item will flow to the Group and the cost can be measured reliably. All other
repairs and renewals are charged to the consolidated income statement during the financial period in which they are incurred.
Gains and losses on disposal of property, plant and equipment are determined by comparing proceeds with carrying amounts.
(j) Intangible assets
1. Goodwill
Goodwill acquired at the time of acquisitions of subsidiaries is reported in the consolidated statement of the financial position as an asset.
Goodwill is initially measured at cost being the excess of the cost of acquisition over the fair value of the Group’s share of the net assets of
the acquired subsidiary undertaking at the date of acquisition. Subsequently, the goodwill is tested for an impairment on an annual basis.
At the end of the financial period, the goodwill is reported in the consolidated statement of financial position at cost less any accumulated
impairment losses.
Negative goodwill resulting from the acquisition of a business or entity is recognised in the consolidated income statement.
Acquisition of minority interests is accounted using the Economic Entity Method. Under the Economic Entity Method, the purchase of a
minority interest is a transaction with a shareholder. As such, any excess consideration over the Group’s share of net assets is recorded in
owners’ equity.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 71

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(j) Intangible assets (continued)
2. Computer software
Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These
costs are amortised on the basis of the expected useful lives (three to five years). Costs associated with maintaining computer software
programs are recognised as an expense as incurred.
Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will
probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include software
development employee costs and an appropriate portion of relevant overheads. Computer software development costs recognised as assets
are amortised using the straight line method over their expected useful lives.
3. Other acquired intangible assets
Other acquired intangible assets determined to have finite lives, such as core deposits, brand and customer relationships, are amortised
on a straight line basis over their estimated useful lives of up to twenty years. The original carrying amount of core deposits and customer
relationships is determined by independent appraisers, based on the profit rate differential on the expected deposit duration method.
Other acquired intangible assets are tested annually or more often if indicators exist for impairment and carried at cost less accumulated
amortization.
Other acquired intangible assets with infinite lives are tested annually for impairment and carried at cost less accumulated amortization.
(k) Current taxation
There is no tax on corporate income in the Kingdom of Bahrain. However, taxation related to the subsidiaries incorporated in tax jurisdictions
are recorded as per local regulations.
(l) Value Added Tax (VAT)
The Bank is subject to VAT at 5% on certain financial services as applicable from 1 January 2019. The amount of VAT liability is determined by
applying the VAT rate on eligible turnover, reduced by the VAT paid on eligible expenses (input VAT). The irrecoverable portion of input VAT
is recognized as expense in the consolidated income statement.
(m) Deferred taxation
Deferred taxation is recognised using the liability method for all temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes.
A deferred tax asset is recognised for all deductible temporary differences and carry forward of unused tax losses and tax credits to the extent
that it is probable that future taxable profit will be available against which the deductible temporary differences and unused tax losses and
tax credits can be utilised. Enacted tax rates are used to determine deferred income tax.
(n) Provision for staff benefits
Staff benefits and entitlements to annual leave, holiday air passage and other short-term benefits are recognised when they accrue to
employees. The Group’s contributions to defined contribution plans are charged to the consolidated income statement in the period to which
they relate. In respect of these plans, the Group has a legal and constructive obligation to pay the contributions as they fall due and no
obligation exists to pay future benefits.
In respect of end of service benefits, to which certain employees of the Group are eligible, costs are assessed in accordance with the labour
law requirements of the applicable jurisdiction.
72 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(n) Provision for staff benefits (continued)
For variable remuneration, a provision is recognised for the amount expected to be paid if the Group has a present legal or constructive
obligation to pay this amount as a result of past services provided by the employee and the obligation can be measured reliably.
For share incentive based variable remuneration, provision is recognized in accordance with the CBB guidelines, based on the adjusted net
asset value of the latest audited consolidated financial statements.
(o) Due to investors
Funds received from depositors who take the corporate risk of the Bank or its subsidiaries are classified as “Due to investors”
(p) Equity of unrestricted investment accountholders
Under the equity of unrestricted investment accountholders (URIA), the investment account holder authorizes the Group to invest the
accountholders’ funds in a manner which the Group deems appropriate without laying down any restrictions as to where, how and for what
purpose the funds should be invested.
Investment accounts are initially recognised at fair value of the consideration received at the date on which the contract becomes effective.
After initial recognition, subsequent measurement of investment accounts takes into account undistributed profits and other reserves created
specifically for the account of investment accountholders less any losses on assets attributable to investment accountholders.
(q) Profit Equalisation Reserve (PER)
PER is appropriated out of the income arising from owners or equity of unrestricted investment accountholders for the purpose of managing
rate of return risk (including displaced commercial risk).
Contribution to PER is recognised in consolidated income statement allocated to owners or unrestricted investment accountholders as
appropriate.
Utilization/ reversal of PER is recognised when the reserve is no longer needed as per management’s opinion. The reversal is recognised in
consolidated income statement allocated to owners or unrestricted investment accountholders as appropriate.
PER is disclosed as part of the equity of unrestricted investment accountholders or owners’ equity as appropriate.
The adequacy of PER is assessed on annual basis using quick update approach in accordance with the Bank’s risk management policies.
Adjustments or transfers between PER and IRR are accounted for when the underlying event occurs.
(r) Investment Risk Reserve (IRR)
IRR is appropriated out of the income arising from owners or equity of unrestricted investment accountholders for the purpose of creating
cushion against credit, market and equity investment risk mainly pertaining to residual future probable losses (after impairment and credit
losses accounted for under impairment policy).
Contribution to IRR is recognised in consolidated income statement allocated to owners’ equity or unrestricted investment accountholders
as appropriate.
Utilization/ reversal of IRR is recognised when the loss event occurs or the reserve is no longer needed as per management’s opinion. The
reversal is recognised in consolidated income statement allocated to owners or unrestricted investment accountholders as appropriate and
not netted off with the respective loss.
IRR is disclosed as part of the equity of unrestricted investment accountholders or owners’ equity as appropriate.
The adequacy of IRR is assessed on annual basis using quick update approach in accordance with the Bank’s risk management policies.
Adjustments or transfers between PER and IRR are accounted for when the underlying event occurs.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 73

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(s) Restricted investment accounts (off-balance sheet)
Under the restricted investment accounts (RIA), the investment accountholders impose certain restrictions as to where, how and for what
purpose the funds are to be invested. These accounts are disclosed separately in Statement of changed in RIA.
Investment accounts are initially recognised at fair value of the consideration received at the date on which the contract becomes effective.
After initial recognition, subsequent measurement of investment accounts takes into account undistributed profits and other reserves created
specifically for the account of investment accountholders less any losses on assets attributable to investment accountholders.
(t) Treasury shares
These shares are treated as a deduction from the owners’ equity. Gains and losses on sale of own shares are included in owners’ equity.
(u) Statutory reserve
In accordance with the Bahrain Commercial Companies Law, 10% of the Group’s consolidated net income for the year is transferred to a
statutory reserve until such time as reserve reaches 50% of the paid up share capital. The reserve is not distributable, but can be utilized as
stipulated in the Bahrain Commercial Companies Law and other applicable statutory regulations.
(v) Revenue recognition
1. Profit participation and management fees
Income from profit participation and management fees charged to funds managed by the Group is recognised on the basis of the Group’s
entitlement to receive such revenue from restricted and unrestricted investment accounts as defined in the Mudaraba agreement (trust
deed), except when the Group temporarily waives its entitlement.
2. Profit on Murabaha and other financings
Profit on Murabaha transactions is recognised by proportionately allocating the attributable profits over the period of the transaction where
each financial period carries its portion of profits irrespective of whether or not cash is received. However, profit accrual is suspended on
Murabaha transactions in respect of which repayment instalments are past due for more than ninety days, unless, in the opinion of the
management of the Bank, the accrual is justified.
Income from other financings is accrued based on the effective yield method over the period of the transaction. Where income is not
contractually determined or quantifiable, it is recognised when reasonably certain of realisation or when realised.
3. Income from assets acquired for leasing
Lease rental revenue is recognised on a time-apportioned basis over the lease term.
4. Income from Mudaraba contracts
Income from Mudaraba contracts are recognised when the Mudarib distributes profits. Any share of losses for the period are recognized to
the extent such losses are being deducted from the Mudaraba capital.
5. Profit on Musharaka contracts
In respect of Musharaka contracts that continue for more than one financial period, the Group’s share of profits are recognised when a partial
or final settlement takes place and its share of the losses are recognised to the extent that such losses are deducted from the Group’s share of
Musharaka capital. However, in respect of diminishing Musharaka transactions, profits or losses are recognised after considering the decline
in the Group’s share of the Musharaka capital and, consequently, its proportionate share of the profits or losses.
6. Income from investments carried at amortised cost
All gains or losses from investments carried at amortised cost are recognised in consolidated statement of income.
74 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(v) Revenue recognition (continued)
7. Income from investments carried at fair value through income statement
All gains or losses from investments carried at fair value through income statement are recognised in consolidated statement of income.
8. Income from investments carried at fair value through equity
The realised gains or losses along with the amounts previously recognised in equity are recognised in the consolidated income statement.
Dividend income is recognised in the consolidated statement of income when right to receive payment is established.
9. Fees and commissions
Fees and commissions are recognised when earned.
Commissions 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 Bank has fulfilled
all its obligations in connection with the related transaction.
(w) Profit allocation between group and investment accountholders
The Group holds separate books for assets financed by owners, unrestricted and restricted investment accounts. All income generated from
the assets financed by the investment accounts are allocated to the customers after deducting provisions, investment risk reserve, profit
equalisation reserves, mudarib’s share of profit and management fees.
Administrative expenses incurred in connection with the management of the funds are borne directly by the Group.
Some profit incentives are recognised based on term of the contracts with restricted account holders.
(x) Assets transfer between Owner’s equity, Unrestricted Investment Accounts and Restricted Investment Accounts
Assets are transferred between Owner’s equity, Unrestricted Investment Accounts and Restricted Investment Accounts at fair value.
(y) Shari’a compliant risk management instruments and hedge accounting
The Group uses certain shari’a compliant risk management instruments (similar to derivatives) to economically hedge exposures to foreign
exchange and profit rate risks. Such instruments are initially recognised at fair value on the date on which the contract is entered into and
are subsequently remeasured at their fair value. The fair value of a hedging instrument is the equivalent to its prevailing market rates or is
based on broker quotes. Instruments with positive market values are disclosed as assets and instruments with negative market values are
disclosed as liabilities in the statement of financial position.
In certain circumstances the Group enters into shari’a compliant risk management instruments to hedge foreign currency risks. Changes
in the fair value of derivative financial instruments that are designated, and qualify as fair value hedges, are included in the consolidated
income statement together with the corresponding change in the fair value of the hedged asset or liability that is attributable to the risk
being hedged. Unrealised gains or losses on hedged assets which are attributable to the hedged risk are adjusted against the carrying values
of the hedged assets or liabilities. For derivatives that are not designated in a qualifying hedge relationship, all changes in its fair value are
recognised immediately in the statement of changes in owners’ equity.
Cash flow hedging attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction
that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in statement of changes in
owners’ equity and presented in the hedging reserve. Any ineffective portion of changes in the fair value of the derivative is recognised
immediately in consolidated income statement. The Group currently has hedged cash flows to manage its profit rate risk on variable rate
financial liabilities.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 75

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(y) Shari’a compliant risk management instruments and hedge accounting (continued)
Hedges directly affected by variable profit rate benchmark reforms
For the purpose of evaluating whether there is an economic relationship between the hedged item(s) and the hedging instrument(s), the
Group assumes that the benchmark variable profit rate is not altered as a result of global variable profit rate benchmark reform.
For a cash flow hedge of a forecast transaction, the Group assumes that the benchmark variable profit rate will not be altered as a result
of variable profit rate benchmark reform for the purpose of assessing whether the forecast transaction is highly probable and presents an
exposure to variations in cash flows that could ultimately affect profit or loss. In determining whether a previously designated forecast
transaction in a discontinued cash flow hedge is still expected to occur, the Group assumes that the variable profit rate benchmark cash flows
designated as a hedge will not be altered as a result of variable profit rate benchmark reform.
The Group will cease to apply the specific policy for assessing the economic relationship between the hedged item and the hedging instrument
(i) to a hedged item or hedging instrument when the uncertainty arising from interest rate benchmark reform is no longer present with
respect to the timing and the amount of the variable profit rate benchmark-based cash flows of the respective item or instrument or (ii) when
the hedging relationship is discontinued. For its highly probable assessment of the hedged item, the Group will no longer apply the specific
policy when the uncertainty arising from variable profit rate benchmark reform about the timing and the amount of the variable profit rate
benchmark-based future cash flows of the hedged item is no longer present, or when the hedging relationship is discontinued.
(z) Impairment
Impairment of financial assets is assessed in accordance with FAS 30 “Impairment, credit losses & onerous commitments” as follows:
1. Financings & receivables
Financings, receivables (including off-balance sheet exposures) are measured using the Expected Credit Losses (ECL) model in accordance
with the Credit Losses Approach.
FAS 30 replaces the 'incurred loss' model with an 'expected credit loss' model (“ECL”). The new impairment model also applies to certain
financing commitments and financial guarantees. The allowance is based on the ECLs associated with the probability of default in the next
twelve months unless there has been a significant increase in credit risk since origination in which case the allowance is based on the change
in the ECLs over the life of the asset. Under FAS 30, credit losses are recognized earlier than under the previous standard.
Basis of Preparation - Measurement of the expected credit loss allowance
The measurement of the expected credit loss allowance of a receivable or exposure measured with the use of complex models and significant
assumptions about future economic conditions and credit behaviour (e.g. the likelihood of customers defaulting and the resulting losses).
A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as:
• Determining the criteria for significant increase in credit risk;
• Determining the criteria for definition of default;
• 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 receivables for the purpose of measuring ECL
ECL – Significant increase in credit risk (SICR)
To determine whether credit risk has significantly increased since initial recognition, the Bank will compare the risk of default at the
assessment date with the risk of default at initial recognition. This assessment is to be carried out at each assessment date.
For the Corporate portfolio, the Group assess for significant increase in credit risk (SICR) at a counterparty level as the internal rating is
currently carried out at a counterparty level and rating is not assigned at facility level. The Group maintains a facility level rating being the
counterparty’s internal rating at date of facility origination and date of assessment.
For the Retail portfolio, the Group currently manages its retail portfolio at a facility level, therefore assessment for SICR on the retail portfolio
is done on a facility level. Days past due (DPD) of individual facilities will reflect on the counterparty SICR assessment.
76 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(z) Impairment (continued)
1. Financings & receivables (continued)
Determining whether credit risk has increased significantly
In determining whether credit risk has increased significantly since initial recognition, the Group uses its internal credit risk grading system,
external risk ratings, delinquency status of accounts, restructuring, expert credit judgement and, where possible, relevant historical experience.
Using its expert credit judgement and, where possible, relevant historical experience, the Group may determine that an exposure has undergone
a significant increase in credit risk based on particular qualitative indicators that it considers are indicative of such and whose effect may not
otherwise be fully reflected in its quantitative analysis on a timely basis.
The Group considers that a significant increase in credit risk occurs no later than when an asset is more than 30 days past due. Days past due
are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received.
Due dates are determined without considering any grace period that might be available to the borrower. However due to CBB relaxation 74 days
past due has been considered as SICR.
The Group monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews and validations.
The Group classifies its financial instruments into stage 1, stage 2 and stage 3, based on the applied impairment methodology, as described below:
• Stage 1: for financial instruments where there has not been a significant increase in credit risk since initial recognition and that are not credit-
impaired on origination, the Group recognises an allowance based on the 12-month ECL.
• Stage 2: for financial instruments where there has been a significant increase in credit risk since initial recognition but they are not credit-
impaired, the Group recognises an allowance for the lifetime ECL for all financings categorized in this stage based on the actual / expected
maturity profile including restructuring or rescheduling of facilities.
• Stage 3: for credit-impaired financial instruments, the Group recognises the lifetime ECL. Default identification process i.e. DPD of 90 more
is used as stage 3.
Default
FAS 30 seeks to align accounting for impairment of financial instruments with the manner in which credit risk is internally managed within
the banks. In this context, the ‘risk of default’ of a financial instrument is a key component of the expected loss model under FAS 30.
In general, counterparties with facilities exceeding 90 days past due are considered in default.
Non-Retail:
The Group has set out the following definition of default (as provided by the Basel document and FAS 30 guidelines):
Non-retail customers with the following characteristics:
• All or any of the facility/ies in which any instalment or part thereof is outstanding for a period of 90 days or more
• All or any of the facility/ies put on non-accrual status (i.e. profit suspended)
• All or any of the facility/ies wherein ‘specific provision’ is set aside individually
Event driven defaults such as declaration of bankruptcy, death of borrower (in absence of succession plan or professional management), and
other specific events which would significantly impact the borrower’s ability the Group.
The Group will not consider the 90 days past due criteria in cases of technical defaults (e.g. facilities marked as 90+DPD due to administrative
reasons and not credit related concerns and there is no dispute regarding repayment).
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 77

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(z) Impairment (continued)
1. Financings & receivables (continued)
Retail:
The Group has set out the following definition of default:
All facilities in which any instalment or part thereof is outstanding for a period of 90 days or more
The Bank will not consider the 90 days past due criteria in cases of technical defaults (e.g. facilities marked as 90+DPD due to administrative
reasons and not credit related concerns and there is no dispute regarding repayment).
Measurement of ECL
ECL is a probability-weighted estimate of credit losses. It is measured as follows:
• financial assets that are not credit-impaired at the reporting date: as the value of all cash shortfalls (i.e. the difference between the cash
flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive);
• financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value
of estimated future cash flows;
• financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects to recover.
The Group measures an ECL at an individual instrument level taking into account the projected cash flows, PD, LGD, Credit Conversion
Factor (CCF) and discount rate. For portfolios wherein instrument level information is not available, the Bank carries out ECL estimation
on a collective basis.
The key inputs into the measurement of ECL are the term structure of the following variables:
I. Probability of default (PD);
II. Loss given default (LGD);
III. Exposure at default (EAD).
These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect
forward-looking information as described above.
PD estimates are estimates at a certain date, which are calculated based on statistical rating models, and assessed using rating tools tailored
to the various categories of counterparties and exposures. These statistical models are based on internally compiled data comprising both
quantitative and qualitative factors. If a counterparty or exposure migrates between ratings classes, then this will lead to a change in the
estimate of the associated PD.
LGD is the magnitude of the likely loss if there is a default. In case of non-availability of recovery data, the Bank uses LGD estimate based
on market practice.
EAD represents the expected exposure in the event of a default. The Group derives the EAD from the current exposure to the counterparty
and potential changes to the current amount allowed under the contract including amortization. The EAD of a financial asset is its gross
carrying amount. For lending commitments and financial guarantees, the EAD includes the amount currently outstanding.
The period of exposure limits the period over which possible defaults are considered and thus affects the determination of PDs and
measurement of ECLs (especially for Stage 2 accounts with lifetime ECL).
Subject to using a maximum of a 12-month PD for financial assets for which credit risk has not significantly increased, the Group measures
ECL considering the risk of default over the maximum contractual period over which it is exposed to credit risk, even if, for risk management
purposes, the Group considers a longer period. The maximum contractual period extends to the date at which the Group has the right to
require repayment of an advance or terminate a loan commitment or guarantee.
78 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(z) Impairment (continued)
1. Financings & receivables (continued)
Incorporation of forward looking information
The Group incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased
significantly since its initial recognition and its measurement of ECL. The Group annually source macro-economic forecast data from the
International Monetary Fund (IMF) and Economist Intelligence Unit (EIU) database for the relevant exposure country.
Management judgement is exercised when assessing the macroeconomic variables. The macro economic variables used for FAS 30 PD
modelling include, among others, GDP growth rate and oil price.
Generating the term structure of PD
Credit risk grades and days past due (DPD) are primary inputs into the determination of the term structure of PD for exposures. The Group
collects performance and default information about its credit risk exposures analyzed by type of borrower, days past due and as well as by
credit risk grading.
The Group employs statistical models to analyze the data collected and generate estimates of the remaining lifetime PD of exposures and
how these are expected to change as a result of the passage of time.
This analysis includes the identification and calibration of relationships between changes in default rates and macro-economic factors as
well as in-depth analysis of the impact of certain other factors (e.g. forbearance experience) on the risk of default. For most exposures, key
macro-economic indicators include: GDP growth rate and oil prices.
Based on consideration of a variety of external actual and forecast information, The Group calculates PiT PD estimates under three scenarios,
a base case, good case and bad case. An appropriate probability weighted ECL is then calculated by assigning probabilities, based on current
market conditions, to each scenario.
For Corporate portfolio, through the yearly review of the corporate portfolio, the Group observes yearly performances to compute a count
based PD over the one-year horizon for the past 5 years. These PDs are grouped as per internal risk ratings (i.e. from 1 to 7). An average
default rate of the 5 yearly observed default provides the through the cycle PDs.
The retail portfolio is segmented based on products that exhibit distinguished behavior into the following categories:
• Auto finance;
• Mortgage finance;
• Personal Finance; and
• Credit cards.
PDs for each segment are measured using Observed Default Estimation and thus PD is calculated based on DPD bucket level for each
segment separately. Under this analysis, the delinquency status of accounts is tracked at an interval of one year with a moving month cycle.
A minimum of 5 year DPD data is considered.
The PD’s derived are adjusted with forward looking information based on macro-economic variables and calibrated to derive the final PD’s
separately for Corporate and Retail portfolio.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 79

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(z) Impairment (continued)
1. Financings & receivables (continued)
Impairment
The Group recognizes loss allowances for ECL on the following type of financial instruments:
• All Islamic financing and certain other assets (including Commodity and Murabaha receivables)
• Debt instruments that are measured at amortised cost or at fair value through equity.
• Financing commitments that are not measured at fair value through profit and loss (FVTPL)
• Financial guarantee contracts that are not measured at fair value through profit and loss (FVTPL)
• Lease receivables and contract assets
• Balances with banks
• Related party balances
• Contingent liabilities
The Group measures loss allowances at an amount equal to lifetime ECL, except for the other financial instruments on which credit risk has
not increased significantly since their initial recognition, for which ECL is measured as 12-month ECL.
12-month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after
the reporting date.
Restructured financial assets
If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial
difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognized and ECL are measured as
follows:
• If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified
financial asset are included in calculating the cash shortfalls from the existing asset.
• If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated
as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash
shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the
original effective profit rate of the existing financial asset
Credit-impaired financial assets
At each reporting date, the Group assesses whether financial assets carried at amortized cost are credit-impaired. A financial asset is 'credit-
impaired' when one or more events that have 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 events:
• significant financial difficulty of the borrower or issuer;
• a breach of contract such as a default or past due event;
• the restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise; or
• it is becoming probable that the borrower will enter bankruptcy or other financial reorganization.
80 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

2. SIGNIFICANT GROUP ACCOUNTING POLICIES (continued)

(ii) Summary of significant accounting policies (continued)
(z) Impairment (continued)
1. Financings & receivables (continued)
Presentation of allowance for ECL in the statement of financial position
Loss allowances for ECL in case of financial assets measured at amortized cost: as a deduction from the gross carrying amount of
the assets.
Write-off
The Group’s existing policy remains the same under FAS 30. Financial assets are written off either partially or in their entirety only when the
Group has stopped pursuing the recovery. If the amount to be written off is greater than the accumulated loss allowance, the difference is
first treated as an addition to the allowance that is then applied against the gross carrying amount. Any subsequent recoveries are credited
to credit loss expense.
The Group writes off financial assets, in a whole or in part, when it has exhausted all practical recovery efforts and has concluded there is no
reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery (i) ceasing enforcement activity and (ii)
where the Group’s recovery method is foreclosing on a collateral and the value of the collateral is such that there is no reasonable expectation
of recovering in full. The Group may however write-off financial assets that are still subject to enforcement activity.
2. Investments
Development properties
Development properties are carried at lower of cost or estimated net realisable value in accordance with the Net realisable value approach.
This includes the situation when there is a possible indication of decline in the value of such properties. Estimated net realisable value is
determined using the estimated selling price in the ordinary course of business, less estimated development expenditure. Impairment losses
are recognised in the consolidated income statements.
Intangible assets
For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to the cash-
generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of
whether other assets or liabilities of the acquiree are assigned to those units or groups of units.
Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the
recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised in the consolidated
income statement.
Assets classified as Held for sale
An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell.
A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any
cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset
(or disposal group) is recognised at the date of derecognition.
Other investments
All other investments (excluding investments carried at fair value through income statement) are assessed for impairment in accordance
with the Impairment approach.
Impairment loss represents the amount by which an investment’s carrying value exceeds its recoverable amount.
In case of indications of possible impairment, the recoverable amount of an investment is determined as being the higher of its fair value
less costs of disposal and its value-in-use.
Impairment losses are recognised in the consolidated income statement, taking into account the split between owners and unrestricted
investment accounts.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 81

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

3. CASH AND BALANCES WITH BANKS AND CENTRAL BANKS

31 December 2020 31 December 2019

Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
Cash reserve with central banks 38,265 3,720 41,985 62,643 1,112 63,755
Cash and balances with banks and central banks 146,304 51,043 197,347 156,993 32,376 189,369
184,569 54,763 239,332 219,636 33,488 253,124

4. COMMODITY AND OTHER PLACEMENTS WITH BANKS, FINANCIAL AND OTHER INSTITUTIONS

31 December 2020 31 December 2019

Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
Commodity placements 80,933 4,743 85,676 123,284 4,411 127,695
Less: Provision for impairment (64) - (64) (93) - (93)
80,869 4,743 85,612 123,191 4,411 127,602

Cash and cash equivalents for the purpose of consolidated statement of cash flows are as under:

31 December 2020 31 December 2019

Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
Cash and balances with banks and central banks 184,569 54,763 239,332 219,636 33,488 253,124
Commodity and other placements with banks, financial and other
institutions 80,869 4,743 85,612 123,191 4,411 127,602
Less: Placement maturing after ninety days 64 (4,743) (4,679) - (4,411) (4,411)
Less: Balances with central bank relating to minimum reserve
requirement (38,265) (3,720) (41,985) (62,643) (1,112) (63,755)
227,237 51,043 278,280 280,184 32,376 312,560
82 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

5. MURABAHA AND OTHER FINANCINGS

31 December 2020 31 December 2019

Relating to Relating to
unrestricted unrestricted
Relating to investment Relating investment
owners accounts Total to owners accounts Total
Murabaha and other financings 955,985 530,847 1,486,832 1,137,602 490,852 1,628,454
Less: Provision for impairment (121,648) (17,847) (139,495) (121,026) (10,037) (131,063)

834,337 513,000 1,347,337 1,016,576 480,815 1,497,391

Other financings represents conventional loans and advances totalling BD301.5 million (31 December 2019: BD482.3 million) made by a
subsidiary of the Bank.

The movement in provision for impairment is as follows:

31 December 2020 31 December 2019

Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
At 1 January 121,026 10,037 131,063 131,029 12,874 143,903
Charge for the year 15,513 7,747 23,260 15,283 1,030 16,313
Write back during the year (3,469) (22) (3,491) (18,386) - (18,386)
Utilised during the year (11,619) - (11,619) (554) (3,676) (4,230)
Reclassification 2,194 79 2,273 - - -
Exchange differences and other movements (1,997) 6 (1,991) (6,346) (191) (6,537)
At 31 December 121,648 17,847 139,495 121,026 10,037 131,063
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 83

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

6. SUKUK AND INVESTMENT SECURITIES

31 December 2020 31 December 2019
Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
Investment securities at fair value through income statement
Held for trading
Debt-type instruments – unlisted 15,441 - 15,441 75,652 - 75,652
Equity-type securities – listed 1,451 - 1,451 222 - 222
16,892 - 16,892 75,874 - 75,874

Investment securities at fair value through equity

Debt-type instruments – listed 77,034 38,302 115,336 - - -
Debt-type instruments – unlisted 380,573 94,543 475,116 - - -
Equity-type securities – listed 22,572 - 22,572 21,482 - 21,482
Equity-type securities – unlisted 3,353 - 3,353 1,989 - 1,989
483,532 132,845 616,377 23,471 - 23,471
Provision for impairment (5,645) - (5,645) (3,990) - (3,990)
477,887 132,845 610,732 19,481 - 19,481

Investment securities carried at amortised cost

Sukuk – unlisted 1,254 23,427 24,681 79,647 72,732 152,379
Other debt-type instruments – listed - 102,141 102,141 37,256 - 37,256
Other debt-type instruments – unlisted 3,270 1,119 4,389 243,945 - 243,945
4,524 126,687 131,211 360,848 72,732 433,580
Provision for impairment (3,610) - (3,610) (5,233) - (5,233)
914 126,687 127,601 355,615 72,732 428,347
495,693 259,532 755,225 450,970 72,732 523,702
Sukuk and investment securities include conventional investments totalling BD494.4 million (31 December 2019: BD413.9 million) made by a
subsidiary of the Bank.
31 December 2020 31 December 2019
Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
At 1 January 9,223 - 9,223 9,447 - 9,447
Charge for the year 1,568 - 1,568 867 - 867
Write back during the year (1,205) - (1,205) (151) - (151)
Exchange differences and other movements (331) - (331) (940) - (940)
At 31 December 9,255 - 9,255 9,223 - 9,223
84 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

6. SUKUK AND INVESTMENT SECURITIES (continued)

FAS 25 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Group’s market assumptions. These
two types of inputs have created the following fair value hierarchy:
Level 1 – Quoted prices (unadjusted) in active markets for identical investments.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the investments, either directly (that is, as prices) or
indirectly (that is, derived from prices).
Level 3 – inputs for the investments that are not based on observable market data (unobservable inputs).
This hierarchy requires the use of observable market data when available. The Group considers relevant and observable market prices in its
valuations where possible.

Investments measured at fair value

Level 1 Level 2 Level 3 Total

At 31 December 2020
Investment securities at fair value through income statement
Debt-type instruments - 15,441 - 15,441
Equity-type securities – listed 1,451 - - 1,451

Investment securities at fair value through equity

Debt-type instruments – listed 113,552 - - 113,552
Debt-type instruments – unlisted - 476,413 - 476,413
Equity securities 14,496 6,271 - 20,767
129,499 498,125 - 627,624

Level 1 Level 2 Level 3 Total

At 31 December 2019
Investment securities at fair value through income statement
Debt-type instruments - 75,652 - 75,652
Equity-type securities – listed 222 - - 222
Investment securities at fair value through equity
Equity securities 19,286 195 - 19,481
19,508 75,847 - 95,355

There was no movement between level 1 and level 2 during the year
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 85

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

7. ASSETS ACQUIRED FOR LEASING

31 December 2020 31 December 2019

Accumulated Net book Accumulated Net book
Cost depreciation amount Cost depreciation amount
Property & Equipment 165,773 (20,427) 145,346 162,562 (14,478) 148,084
The net book amount of assets acquired for leasing is further analysed as follows:
31 December 31 December
2020 2019
Relating to owners 1,181 1,208
Relating to unrestricted investment accounts 144,165 146,876
145,346 148,084

8. OTHER ASSETS

31 December 2020 31 December 2019

Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
Accounts receivable 25,841 29,348 55,189 33,922 21,122 55,044
Due from related parties 5,121 - 5,121 8,209 - 8,209
Taxes – deferred 521 - 521 3,519 - 3,519
Taxes – current 66 - 66 4,589 - 4,589
Assets acquired against claims 2,912 - 2,912 3,103 - 3,103
34,461 29,348 63,809 53,342 21,122 74,464
Provision for impairment (11,355) (4,501) (15,856) (14,340) (4,580) (18,920)
23,106 24,847 47,953 39,002 16,542 55,544

The movement in provision for impairment is as follows:

31 December 2020 31 December 2019

Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
At 1 January 14,340 4,580 18,920 14,227 4,582 18,809
Charge for the year 744 - 744 259 - 259
Write back during the year (1,548) - (1,548) (33) - (33)
Reclassification (2,165) (79) (2,244) - - -
Exchange differences and other movements (16) - (16) (113) (2) (115)
At 31 December 11,355 4,501 15,856 14,340 4,580 18,920
86 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

9. DEVELOPMENT PROPERTIES

Relating to owners
31 December 31 December
2020 2019
Land 52,236 52,287
Development costs 21,123 23,551
73,359 75,838
Development costs represent the infrastructure costs incurred such as roads and networks, electricity stations and design and supervision
costs and the infrastructure cost. The infrastructure cost commitments are expected to be met by anticipated sale of plots. Based on this, the
management has estimated that the current carrying value is lower than the net realisable value, and accordingly, no impairment has been
considered necessary.
10. FIXED ASSETS
Relating to owners
31 December 2020 31 December 2019
Accumulated Net book Accumulated Net book
Cost depreciation amount Cost depreciation amount
Land and building 14,253 (3,697) 10,556 14,276 (3,719) 10,557
Leasehold improvements 13,185 (8,522) 4,663 12,244 (8,007) 4,237
Furniture and equipment 27,189 (20,627) 6,562 26,498 (19,459) 7,039
Motor vehicles 1,116 (623) 493 1,015 (613) 402
55,743 (33,469) 22,274 54,033 (31,798) 22,235
Depreciation charge for the year ended 31 December 2020 amounted to BD3 million (31 December 2019: BD2.7 million).
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 87

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

11. INTANGIBLE ASSETS

Relating to owners
31 December 2020
Accumulated Provision for Exchange Net book
Cost amortisation impairment differences amount
Goodwill 34,223 - (26,794) (4,591) 2,838
Customer relations 42,814 (29,459) - (5,088) 8,267
Core deposits 58,641 (42,152) - (6,659) 9,830
Others 17,936 (13,268) - - 4,668
153,614 (84,879) (26,794) (16,338) 25,603

Relating to owners
31 December 2019
Accumulated Provision for Exchange Net book
Cost amortisation impairment differences amount
Goodwill 34,223 - (22,809) (4,415) 6,999
Customer relations 42,814 (27,433) - (5,247) 10,134
Core deposits 58,641 (39,219) - (7,183) 12,239
Others 16,334 (12,130) - - 4,204
152,012 (78,782) (22,809) (16,845) 33,576
Amortisation charge for the year ended 31 December 2020 amounted to BD6 million (31 December 2019: BD6 million).

The carrying amount of goodwill has been allocated to cash-generating units as follows:
31 December 31 December
2020 2019
Business units of ex-Shamil Bank of Bahrain B.S.C. (C) - 3,985
Faysal Bank Limited 2,838 3,014
2,838 6,999
The recoverable amount of the cash-generating units were determined based on Value-in-Use (VIU) and Fair Value Less Cost to Sell (FVLCTS). VIU
calculations were determined using cash flow projections from financial budgets approved by the Group’s senior management covering a three
year period. The discount rate applied to cash flow projections represent the cost of capital adjusted for an appropriate risk premium for these
cash-generating units. For FVLCTS calculations, the Comparable Companies Multiple (CCM) method was used, whereby the price to book value
multiple of the listed Islamic banks operating in the region was considered. The key assumptions used in estimating the recoverable amounts
of cash-generating units were assessed to ensure reasonableness of the VIU and FVLCTS and resulting adjustment, if any, is recorded in the
consolidated income statement. The impact of every 0.1 times change in P/B multiple will result in reduction of goodwill by BD0.4 million.

12. CUSTOMERS’ CURRENT ACCOUNTS

Customers’ current accounts include balance relating to a counterparty amounting to BD84.1 million which is subject to sanctions under
US measures (31 December 2019: BD76.9 million).
88 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

13. DUE TO BANKS, FINANCIAL AND OTHER INSTITUTIONS

31 December 2020 31 December 2019

Relating to Relating to
Relating unrestricted unrestricted
to investment Relating to investment
owners accounts Total owners accounts Total
Due to banks 363,595 54,912 418,507 389,043 64,861 453,904
Due to financial and other institutions 17,257 - 17,257 47,712 - 47,712
380,852 54,912 435,764 436,755 64,861 501,616
Due to banks, financial and other institutions include balances totalling BD165.2 million from two counterparties which are subject to sanctions
under US measures (31 December 2019: BD161.4 million).
Due to banks, financial and other institutions include conventional deposits totalling BD106.5 million (31 December 2019: BD112.6 million),
accepted by a subsidiary of the Bank.
At 31 December 2020, there were collateralized borrowings in aggregate BD72.5 million (31 December 2019: BD86.3 million).
14. DUE TO INVESTORS

Relating to owners
31 December 2020 31 December 2019
Due to corporate institutions 268,850 291,881
Due to individuals 218,191 271,686
Due to financial institutions 27,193 25,983
514,234 589,550
Due to investors represent conventional deposits accepted by a subsidiary of the Group.
15. OTHER LIABILITIES

31 December 2020 31 December 2019

Relating to Relating to
Relating unrestricted unrestricted
to investment Relating to investment
owners accounts Total owners accounts Total
Accounts payable 70,334 32,615 102,949 78,848 26,000 104,848
Due to related parties 49 - 49 60 - 60
70,383 32,615 102,998 78,908 26,000 104,908
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 89

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

16. EQUITY OF UNRESTRICTED INVESTMENT ACCOUNTHOLDERS

The funds received from Unrestricted Investment Accountholders (URIA) are invested on their behalf without recourse to the Group as follows:

Notes 31 December 2020 31 December 2019

Cash and balances with banks and central banks 3 54,763 33,488
Commodity and other placements with banks, financial and other institutions 4 4,743 4,411
Murabaha and other financings 5 513,000 480,815
Musharaka financing 350,319 234,446
Sukuk and investment securities 6 259,532 72,732
Assets acquired for leasing 7 144,165 146,876
Other assets 8 24,847 16,542
Due from the Group (net) 272,483 299,648
1,623,852 1,288,958
Customers’ current accounts (261,163) (134,169)
Due to banks, financial and other institutions 13 (54,912) (64,861)
Other liabilities 15 (32,615) (26,000)
Equity of unrestricted investment accountholders 1,275,162 1,063,928
The assets attributable to unrestricted investment accountholders have been disclosed net of impairment provision amounting to BD26.3 million
(31 December 2019: BD16.9 million). The movement of impairment provision relating to unrestricted investment accountholders has been
disclosed in note 24.
Other liabilities include the profit equalization reserve and the movement is as follows:
31 December 31 December
2020 2019
At 1 January 7,351 8,313
Net addition/(utilisation) during the year (3,016) (962)
At 31 December 4,335 7,351
Other liabilities include investment risk reserve and the movement is as follows:
31 December 31 December
2020 2019
At 1 January - 566
Net addition/(utilisation) during the year - (566)
At 31 December - -

The average gross rate of return in respect of unrestricted investment accounts was 4.9% per annum for 2020 (2019: 4.6%) of which 3.2% per
annum (2019: 3.1%) was distributed to the investors and the balance was either set aside as provision for impairment, management fee of
BD0.9 million (up to 1.5% of the total invested amount per annum to cover administration and other expenses related to the management of
such funds) and/or retained by the Group as share of profits in its capacity as a Mudarib.
90 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

17. MINORITY INTERESTS

The consolidated financial statements include 100% of the assets, liabilities and earnings of subsidiaries. The ownership interests of the other
shareholders in the subsidiaries are called minority interests.
The following table summarises the minority shareholders' interests in the equity of consolidated subsidiaries.
31 December 2020 31 December 2019
Minority % Minority %
Faysal Bank Limited 33 43,770 33 39,338
Dilmunia Development Fund I L.P. 10 10,282 34 26,972
Sakana Holistic Housing Solutions B.S.C. (C) 50 997 50 997
55,049 67,307
Minority interests in the consolidated income statement of BD4.3 million (31 December 2019: BD3.8 million) represents the minority shareholders'
share of the earnings of these subsidiaries for the respective years.

18. SHARE CAPITAL

Number of shares
(thousands) Share capital
Authorised 7,540,000 754,000
Issued and fully paid
Total outstanding as at 1 January 2019 1,000,000 100,000
At 31 December 2019 (Audited) 1,000,000 100,000

Issued and fully paid

Total outstanding as at 1 January 2020 1,000,000 100,000
At 31 December 2020 (Audited) 1,000,000 100,000
The Bank’s total issued and fully paid share capital at 31 December 2020 comprises 1,000,000,000 shares at 100 fils per share amounting to
BD100,000,000. the Chief Executive Officer owns 1 share and remaining shares are held by Ithmaar Holding B.S.C. The share capital of the Bank
is denominated in Bahraini Dinars.
The Bank grants shadow shares to employees calculated based on the net asset value of the Bank since the Bank is not listed. The number of
shadow shares granted to employees as of 31 December 2020 was 10.5 million shares (31 December 2019: 10.5 million shares) of which the
unvested shadow shares amount to 3.4 million shares (31 December 2019: 6.1 million shares).

19. EARNINGS PER SHARE (BASIC & DILUTED)

Losses per share (Basic & Diluted) are calculated by dividing the net loss attributable to shareholders by the weighted average number of issued
and fully paid up ordinary shares during the year.

Year ended Year ended

31 December 31 December
2020 2019
Net loss attributable to shareholders (BD ’000) (15,294) (1,352)
Weighted average number of issued and fully paid up ordinary shares (’000) 1,000,000 1,000,000
Losses Earnings per share (Basic & Diluted) - Fils (15.29) (1.35)
Earnings per share on non-sharia compliant income and expenses is included under note 36.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 91

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

20. INCOME FROM MURABAHA AND OTHER FINANCINGS

Relating to owners Relating to owners
Year ended Year ended
31 December 31 December
2020 2019
Income from Islamic financings 9,629 10,122
Income from other financings 42,510 67,836
52,139 77,958

21. INCOME FROM OTHER INVESTMENTS

Relating to owners Relating to owners
Year ended Year ended
31 December 31 December
2020 2019
Income from investment securities at amortised cost 272 31,885
Income/(loss) from investment securities at fair value through equity 43,774 (153)
Income from investment securities at fair value through income statement 9,024 10,097
Income from investment in real estate 340 25
53,410 41,854

22. OTHER INCOME

Relating to owners Relating to owners
Year ended Year ended
31 December 31 December
2020 2019
Income from banking services 17,164 14,412
Income from commodity placements 3,726 7,666
Foreign exchange (loss)/income (239) 847
Other income 49 287
20,700 23,212

23. ADMINISTRATIVE AND GENERAL EXPENSES

Relating to owners Relating to owners

Year ended Year ended
31 December 31 December
2020 2019
Salaries and other benefits 28,582 26,373
Office expenses 22,262 21,732
Professional fees 4,308 2,585
Other administrative expenses 8,355 8,560
63,507 59,250
92 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

24. PROVISION FOR IMPAIRMENT

31 December 2020 31 December 2019
Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
At 1 January 171,798 16,914 188,712 176,184 18,830 195,014
Charge for the year 21,809 9,850 31,659 21,349 2,199 23,548
Write back during the year (6,222) (320) (6,542) (18,570) (63) (18,633)
Utilised during the year (11,619) - (11,619) (4,073) (3,676) (7,749)
Exchange differences (1,499) (98) (1,597) (3,092) (376) (3,468)
At 31 December 174,267 26,346 200,613 171,798 16,914 188,712

Provision utilised during the year represents write-offs during the period, which pertains to stage 3.

The allocation of the provision for impairment to the respective assets is as follows:

31 December 2020 31 December 2019

Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
Murabaha and other financings 121,648 17,847 139,495 121,026 10,037 131,063
Commodity and other placements with banks, financial and
other institutions 64 - 64 93 - 93
Musharaka financing - 3,998 3,998 - 2,297 2,297
Sukuk and investment securities 9,255 - 9,255 9,223 - 9,223
Other assets 10,698 4,501 15,199 13,782 4,580 18,362
Off-balance sheet related 657 - 657 558 - 558
Investment in real estate 5,151 - 5,151 4,307 - 4,307
Intangible assets 26,794 - 26,794 22,809 - 22,809
174,267 26,346 200,613 171,798 16,914 188,712
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 93

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

24. PROVISION FOR IMPAIRMENT (continued)

Loss allowance

The following table sets out information about the credit quality of financial assets measured at amortized cost. Unless specifically indicated, for
financial assets, the amounts in the table represent gross carrying amounts.

31 December 2020 Stage 1 Stage 2 Stage 3 Total

Financial assets - amortized cost
Cash, Commodity and other placements with banks, financial and other
institutions 325,008 - - 325,008
Financings (Funded and unfunded exposure) Corporate
Low risks (1-3) 254,605 25,545 - 280,150
Acceptable risks (4-6) 1,211,143 21,993 151 1,233,287
Watch list (7) - 43,950 - 43,950
Non performing (8-10) - - 113,916 113,916
Carrying amount - Corporate 1,465,748 91,488 114,067 1,671,303
Retail (un-rated) 489,158 51,457 37,992 578,607
Carrying amount including unfunded 1,954,906 142,945 152,059 2,249,910
Sukuk and investment securities 127,617 - 3,594 131,211
Other receivables 34,797 1,087 12,810 48,694
Loss allowance (36,416) (8,406) (118,873) (163,695)
Total Financial assets carrying amount 2,405,912 135,626 49,590 2,591,128

31 December 2019 Stage 1 Stage 2 Stage 3 Total

Financial assets - amortized cost
Cash, Commodity and other placements with banks, financial and other
institutions 380,781 - - 380,781
Financings (Funded and unfunded exposure) Corporate
Low risks (1-3) 366,113 15,680 - 381,793
Acceptable risks (4-6) 1,049,464 51,389 151 1,101,004
Watch list (7) - 40,756 - 40,756
Non performing (8-10) - - 159,480 159,480
Carrying amount - Corporate 1,415,577 107,825 159,631 1,683,033
Retail (un-rated) 506,051 7,404 21,395 534,850
Carrying amount including unfunded 1,921,628 115,229 181,026 2,217,883
Sukuk and investment securities 428,283 - 5,297 433,580
Other receivables 44,232 4,911 13,916 63,059
Loss allowance (38,184) (3,487) (116,414) (158,085)
Total Financial assets carrying amount 2,736,740 116,653 83,825 2,937,218

Gross financings (funded) as of 31 December 2020 amounted to BD1.1 billion, BD0.3 billion and BD0.2 billion for Stage 1, Stage 2 and Stage 3
respectively (31 December 2019: BD1.1 billion, BD0.3 billion and BD0.2 billion). Collateral coverage for gross financing as of 31 December 2020
was 80%, 40% and 48% for Stage 1, Stage 2 and Stage 3 respectively (31 December 2019: 83%, 46% and 49%).
94 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

24. PROVISION FOR IMPAIRMENT (continued)

Included in Stage 1 under “Acceptable risks (4-6)” is the financing extended to the Group’s affiliate, IB Capital, amounting to BD584 million. This
financing originated on 2 January 2017 as part of the reorganization pursuant to the Extraordinary General Meeting (EGM) held on 28 March 2016
where the shareholders approved to restructure the erstwhile Ithmaar Bank B.S.C into a holding company and two subsidiaries to segregate core
and non-core assets with IB Capital holding the non-core assets. The financing is collateralized by the underlying assets of IB Capital and the
recovery is based on the sale of these underlying assets through an asset sale plan approved by the Board of Directors of the Group.

As part of the Group’s staging policy to determine whether credit risk has significantly increased since initial recognition, the Group compared the
risk of default at the assessment date with the risk of default at initial recognition.Following factors were analyzed as part of this assessment:
• The recovery of the financing at initial recognition was based on the sale of the underlying assets by IB Capital.
• the delays in the sale of underlying assets during 2020 were mainly due to the COVID-19 pandemic. All principal and profit payments
are current.
• The ECL has been calculated under various stressed scenarios and the resulting impairment is within the existing ECL range.
Accordingly, the Group concluded that there has been no significant increase in credit risk of the exposure since initial recognition and classification
of the above financing in Stage 1 is appropriate as of 31 December 2020.

25. OVERSEAS TAXATION

Relating to owners
Year ended
31 December 2020 31 December 2019
Current taxes 9,139 12,178
Deferred taxes 728 (1,770)
9,867 10,408
The Group is subject to income taxes in some jurisdictions. Estimates are required in determining the provision for income taxes. There are some
transactions and calculations for which the ultimate tax determination is uncertain. Where the final tax outcome of these matters is different
from the amounts that were initially recorded, such differences impact the income tax and deferred tax provisions in the period in which such
determination is made.
Current tax receivable/(payable)
31 December 2020 31 December 2019
At 1 January 4,589 9,410
Charge for the year (9,139) (12,178)
Payments made 7,009 10,628
Exchange differences and other movements (2,393) (3,271)
At 31 December 66 4,589

Deferred tax asset/(liability)

31 December 2020 31 December 2019

At 1 January 3,519 3,664
Charge for the year (728) 1,770
Charges due to fair value reserve (1,406) (816)
Exchange differences and other movements (864) (1,099)
At 31 December 521 3,519
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 95

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

26. SEGMENTAL INFORMATION

The Group constitutes of three main business segments, namely;
i. Retail/ Commercial banking business, in which the Group receives customer funds and deposits and extends financing to its retail and corporate
clients.

ii. Asset Management/Investment Banking, in which the Group directly participates in investment opportunities.

31 December 2020 31 December 2019

Asset Asset
Retail & Management Retail & Management
Corporate / Investment Corporate / Investment
banking Banking Others Total banking Banking Others Total
Operating income 86,250 682 92 87,024 84,171 (360) (225) 83,586
Total expenses (69,840) (2,699) - (72,539) (64,954) (2,965) - (67,919)
Net income/(loss) before provision and overseas taxation 16,410 (2,017) 92 14,485 19,217 (3,325) (225) 15,667
Provision and overseas taxation (25,317) (137) - (25,454) (12,993) (194) - (13,187)
Net (loss)/income for the year (8,907) (2,154) 92 (10,969) 6,224 (3,519) (225) 2,480
Attributable to:
Equity holders of the Bank (13,877) (1,477) 60 (15,294) 1,104 (2,307) (149) (1,352)
Minority interests 4,970 (677) 32 4,325 5,120 (1,212) (76) 3,832
(8,907) (2,154) 92 (10,969) 6,224 (3,519) (225) 2,480
Total assets 3,015,551 77,720 1,506 3,094,777 2,894,497 82,694 1,755 2,978,946
Total liabilities and equity of unrestricted investment
account holders 2,980,370 9,527 - 2,989,897 2,819,800 - 12,668 2,832,468

The Group constitutes of two geographical segments which are Middle East & Asia
31 December 2020 31 December 2019
Middle East Middle East
& Africa Asia Total & Africa Asia Total
Operating income 10,826 76,198 87,024 14,520 69,066 83,586
Total expenses (26,458) (46,081) (72,539) (24,413) (43,506) (67,919)
Net income/(loss) before provision and overseas taxation (15,632) 30,117 14,485 (9,893) 25,560 15,667
Provision and overseas taxation (10,518) (14,936) (25,454) (2,850) (10,337) (13,187)
Net (loss)/income for the year (26,150) 15,181 (10,969) (12,743) 15,223 2,480
Attributable to:
Equity holders of the Bank (25,401) 10,107 (15,294) (11,485) 10,133 (1,352)
Minority interests (749) 5,074 4,325 (1,258) 5,090 3,832
(26,150) 15,181 (10,969) (12,743) 15,223 2,480
Total assets 1,420,563 1,674,214 3,094,777 1,500,169 1,478,777 2,978,946
Total liabilities and equity of unrestricted investment
account holders 1,416,147 1,573,750 2,989,897 1,483,168 1,349,300 2,832,468
96 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

27. ZAKAH
Zakah is directly borne by the owners and investors in restricted and equity of unrestricted investment accountholders. The Bank does not collect
or pay Zakah on behalf of its owners and its investment accountholders.
28. CONTINGENT LIABILITIES AND COMMITMENTS

Contingent liabilities

31 December 2020 31 December 2019

Acceptances and endorsements 25,215 22,257
Guarantees and irrevocable letters of credit 222,311 165,417
Customer and other claims 79,653 83,242
327,179 270,916

Commitments

31 December 2020 31 December 2019

Undrawn facilities, financing lines and other commitments to finance 601,813 540,196

29. CURRENCY RISK

Assuming that all other variables held constant, the impact of currency risk on the consolidated income statement/equity based on reasonable
shift is summarized below:
PKR EUR USD
As at 31 December 2020
Total currency exposure 168,815 15,142 223,709
Reasonable shift 6.48% 0.45% 0.36%
Total effect on income/equity 10,939 68 805

PKR EUR USD

As at 31 December 2019
Total currency exposure 194,024 85,392 205,511
Reasonable shift 7.51% 2.23% 0.19%
Total effect on income/equity 14,571 1,904 390

The basis for calculation of the reasonable shift is arrived at by comparing the foreign exchange spot rate as compared to the one year forward
rate for the same period.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 97

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

29. CURRENCY RISK (continued)

The currency exposure of the assets and liabilities, of the Group, including equity of unrestricted investment accountholders, is as follows:
United States Pakistan Bahraini UAE
31 December 2020 Dollar Rupee Dinar Euro Dirham Other Total
Cash and balances with banks and central banks 54,328 115,723 43,014 17,597 578 8,092 239,332
Commodity and other placements with banks, financial
and other institutions 8,947 11,766 63,199 1,700 - - 85,612
Murabaha and other financings 467,603 380,100 378,739 96,689 - 24,206 1,347,337
Musharaka financing - 350,420 - - - - 350,420
Sukuk and investment securities 41,557 651,532 62,136 - - - 755,225
Assets acquired for leasing - - 145,346 - - - 145,346
Other assets 9,210 16,381 19,733 989 450 1,190 47,953
Investment in real estate - 2,316 - - - - 2,316
Development properties - - 73,359 - - - 73,359
Fixed assets - 21,497 777 - - - 22,274
Intangible assets 21,163 4,440 - - - - 25,603
Total assets 602,808 1,554,175 786,303 116,975 1,028 33,488 3,094,777
Customer current accounts 72,765 391,697 97,645 88,692 40 10,900 661,739
Due to banks, financial and other institutions 93,292 138,084 39,928 41,214 123,242 4 435,764
Due to investors 22,684 487,065 - 1,250 - 3,235 514,234
Other liabilities - 58,494 14,712 961 935 27,896 102,998

Total liabilities 188,741 1,075,340 152,285 132,117 124,217 42,035 1,714,735

Equity of unrestricted investment accountholders 140,527 310,020 823,140 - - 1,475 1,275,162
Total liabilities and equity of unrestricted
investment accountholders 329,268 1,385,360 975,425 132,117 124,217 43,510 2,989,897
Contingent liabilities and commitments 283,199 566,657 24,615 24,751 653 29,117 928,992

31 December 2019
Total assets 651,418 1,428,148 831,943 36,044 581 30,812 2,978,946
Total liabilities and equity of unrestricted
investment accountholders 366,736 1,234,124 974,274 121,436 124,023 11,875 2,832,468
Contingent liabilities and commitments 165,318 566,657 24,615 24,751 653 29,118 811,112
98 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

30. MATURITY PROFILE

The contractual maturity profile of the assets and liabilities of the Group, including equity of unrestricted investment accountholders, is as follows:
Up to 1 1 to 3 3 months 1 to 5 Over 5
31 December 2020 month months to 1 year years years Total
Cash and balances with banks and central banks 239,332 - - - - 239,332
Commodity and other placements with banks, financial and
other institutions 71,624 9,245 4,743 - - 85,612
Murabaha and other financings 36,409 89,514 755,782 250,846 214,786 1,347,337
Musharaka financing 6,272 23,029 37,922 162,517 120,680 350,420
Sukuk and investment securities 149,764 287,238 41,712 62,387 214,124 755,225
Assets acquired for leasing 212 3 355 2,415 142,361 145,346
Other assets 34,877 34 10,760 - 2,282 47,953
Investment in real estate - - 2,316 - - 2,316
Development Properties - - - - 73,359 73,359
Fixed assets - - - 15,049 7,225 22,274
Intangible assets - - - - 25,603 25,603
Total assets 538,490 409,063 853,590 493,214 800,420 3,094,777
Customer current accounts 661,739 - - - - 661,739
Due to banks, financial and other institutions 178,671 59,877 178,517 8,117 10,582 435,764
Due to investors 355,543 70,835 85,989 1,854 13 514,234
Other liabilities 87,523 - 6,713 8,762 - 102,998
Total liabilities 1,283,476 130,712 271,219 18,733 10,595 1,714,735
Equity of unrestricted investment accountholders 637,730 155,132 334,955 147,345 - 1,275,162
Total liabilities and equity of unrestricted investment
accountholders 1,921,206 285,844 606,174 166,078 10,595 2,989,897
Net position (1,382,716) 123,219 247,416 327,136 789,825 104,880
Contingent liabilities and commitments 536,271 170,876 94,761 121,799 5,285 928,992

31 December 2019

Total assets 695,391 382,459 266,798 1,021,597 612,701 2,978,946

Total liabilities and equity of unrestricted investment
accountholders 1,585,708 465,134 520,817 260,809 - 2,832,468
Net position (890,317) (82,675) (254,019) 760,788 612,701 146,478
Contingent liabilities and commitments 450,883 143,485 102,711 111,852 2,181 811,112
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 99

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

31. CONCENTRATION OF ASSETS, LIABILITIES AND LETTERS OF CREDIT AND GUARANTEE

Assets and liabilities of the Group, including equity of unrestricted investment accountholders, and letters of credit and guarantee are distributed
over the following industry sectors and geographical regions:
Banks and Trading Property
Financial and Manu- and Cons-
31 December 2020 Institutions facturing truction Services individuals Textile Other Total
Cash and balances with banks and central
banks 239,332 - - - - - - 239,332
Commodity and other placements with
banks, financial and other institutions 85,612 - - - - - 85,612
Murabaha and other financings 593,490 266,864 41,763 87,476 286,450 27,892 43,402 1,347,337
Musharaka financing 510 177,723 4,818 78,289 62,045 12,232 14,803 350,420
Sukuk and investment securities 517,224 99,766 133,490 3,394 1,119 - 232 755,225
Assets acquired for leasing - 1,624 1,163 76 142,483 - - 145,346
Other assets 17,501 25,255 4,641 - - - 556 47,953
Investment in real estate - - 2,316 - - - - 2,316
Development Properties - - 73,359 - - - - 73,359
Fixed assets 21,497 - 777 - - - - 22,274
Intangible assets 25,603 - - - - - - 25,603
Total assets 1,500,769 571,232 262,327 169,235 492,097 40,124 58,993 3,094,777
Customer current accounts 3,296 217,787 39,741 84,263 157,792 5,643 153,217 661,739
Due to banks, financial and other institutions 364,539 20,043 - 51,182 - - - 435,764
Due to investors 27,193 158,110 17,649 88,839 113,621 16,118 92,704 514,234
Other liabilities 28,219 7,903 8,073 16,929 3,458 30,449 7,967 102,998
Total liabilities 423,247 403,843 65,463 241,213 274,871 52,210 253,888 1,714,735
Equity of unrestricted investment
accountholders 23,883 365,492 49,384 170,895 616,904 5,910 42,694 1,275,162
Total liabilities and equity of
unrestricted investment accountholders 447,130 769,335 114,847 412,108 891,775 58,120 296,582 2,989,897
Contingent liabilities and commitments 196,908 437,489 19,184 19,879 5,684 63,801 186,047 928,992

31 December 2019
Total assets 1,396,929 451,163 129,487 402,991 511,226 27,462 59,688 2,978,946
Total liabilities and equity of
unrestricted investment accountholders 574,021 596,431 100,785 350,542 818,556 7,920 384,213 2,832,468
Contingent liabilities and commitments 233,389 328,597 13,637 59,372 7,330 44,210 124,577 811,112
100 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

31. CONCENTRATION OF ASSETS, LIABILITIES AND LETTERS OF CREDIT AND GUARANTEE (continued)
31 December 2020 Asia / Pacific Middle East Europe Others Total
Cash and balances with banks and central banks 145,648 44,980 18,049 30,655 239,332
Commodity and other placements with banks, financial and other institutions 11,766 73,846 - - 85,612
Murabaha and other financings 415,457 926,008 5,872 - 1,347,337
Musharaka financing 350,420 - - - 350,420
Sukuk and investment securities 651,698 103,527 - - 755,225
Assets acquired for leasing - 145,346 - - 145,346
Other assets 16,396 31,557 - - 47,953
Investment in real estate 2,316 - - - 2,316
Development Properties - 73,359 - - 73,359
Fixed assets 21,497 777 - - 22,274
Intangible assets 4,440 21,163 - - 25,603
Total assets 1,619,638 1,420,563 23,921 30,655 3,094,777
Customer current accounts 440,771 134,485 83,449 3,034 661,739
Due to banks, financial and other institutions 138,084 284,455 13,225 - 435,764
Due to investors 514,234 - - - 514,234
Other liabilities 55,718 46,504 776 - 102,998
Total liabilities 1,148,807 465,444 97,450 3,034 1,714,735
Equity of unrestricted investment accountholders 324,328 950,703 - 131 1,275,162
Total liabilities and equity of unrestricted investment accountholders 1,473,135 1,416,147 97,450 3,165 2,989,897
Contingent liabilities and commitments 896,907 32,085 - - 928,992

31 December 2019
Total assets 1,478,777 1,467,163 28,615 4,391 2,978,946
Total liabilities and equity of unrestricted investment accountholders 1,349,300 1,401,253 79,047 2,868 2,832,468
Contingent liabilities and commitments 779,283 31,829 - - 811,112
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 101

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

32. RISK MANAGEMENT

The Bank's activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management
of some degree of risk or combination of risks. Taking risk is core to the banking business, and these risks are an inevitable consequence of
participating in financial markets. The Bank's aim is therefore to achieve an appropriate balance between risk and return and minimize potential
adverse effects on the Bank’s financial performance.
The Bank's risk management policies, procedures and systems are designed to identify and analyze these risks and to set appropriate risk
mitigants and controls. The Bank reviews its risk management policies and systems on an ongoing basis to reflect changes in markets, products
and emerging best practices.
Risk management is performed by the Risk Management Department under policies approved by the Board of Directors. The Risk Management
Department identifies and evaluates financial risks in close co-operation with the Group's operating units. The most important types of risks
identified by the Group are credit risk, liquidity risk, market risk, reputational risk and operational risk. Market risk includes currency risk, profit
rate risk, and price risk.
Credit Risk
Credit risk is considered to be the most significant and pervasive risk for the Bank. The Bank takes on exposure to credit risk, which is the risk that
the counter-party to a financial transaction will fail to discharge an obligation causing the Bank to incur a financial loss. Credit risk arises principally
from financing (credit facilities provided to customers) and from cash and deposits held with other banks and financial institutions. Further, there
is credit risk in certain off-balance sheet financial instruments, including guarantees, letters of credit, acceptances and commitments to extend
credit. Credit risk monitoring and control is performed by the Risk Management Department which sets parameters and thresholds for the Bank's
financing and off-balance sheet financial instruments.
Considering this evolving situation, the Group has taken preemptive measures to mitigate credit risk by adopting more cautious approach for
credit approvals thereby tightening the criteria for extending credit to impacted sectors. Payment holidays have been extended to customers,
including private and SME sector, in line with the instructions of CBB. These measures may lead to lower disbursement of financing facilities,
resulting in lower net financing income and decrease in other revenue.
The risk management department has also enhanced its monitoring of financing portfolio by reviewing the performance of exposures to sectors
expected to be directly or indirectly impacted by COVID-19 to identify potential Significant increase in Credit Risk (SICR).
The Group has updated its inputs and assumptions for computation of Expected Credit Losses (ECL) (refer to note 2).
On 11 March 2020, the COVID-19 outbreak was declared, a pandemic by the World Health Organization (WHO) and has rapidly evolved globally.
This has resulted in a global economic slowdown with uncertainties in the economic environment. Global equity and commodity markets, and
in particular oil prices, have also experienced great volatility and a significant drop in prices. The estimation uncertainty is associated with the
extent and duration of the expected economic downturn and forecasts for key economic factors including GDP, employment, oil prices etc. This
includes disruption to capital markets, deteriorating credit markets and liquidity concerns. Authorities have taken various measures to contain the
spread including implementation of travel restrictions and quarantine measures. The pandemic as well as the resulting measures and policies
have had some impact on the Group. The Group is actively monitoring the COVlD-19 situation, and in response to this outbreak, has activated its
business continuity plan and various other risk management practices to manage the potential business disruption on its operations and financial
performance.
The management and the Board of Directors (BOD) have been closely monitoring the potential impact of the COVlD-19 developments on the
Group’s operations and financial position; including possible loss of revenue, impact on asset valuations, impairment, review of onerous contracts
and debt covenants, outsourcing arrangements etc. The Group has also put in place contingency measures, which include but are not limited to
enhancing and testing of business continuity plans including its liquidity requirements.
In preparing the consolidated financial statements, judgements made by management in applying the Group’s accounting policies and sources
of estimation are subject to uncertainty regarding the potential impacts of the current economic volatility and these are considered to represent
management‘s best assessment based on available or observable information.
As of 31 December 2020, the Bank is compliant with the required Capital Adequacy Ratio, Net Stable Funding Ratio (NSFR) and Liquidity Coverage
Ratios (LCR). As of 31 December 2020, the Group had NSFR ratio of 119%.
102 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

32. RISK MANAGEMENT (continued)

Credit Risk (continued)

Modification loss net of Government assistance
During the current period, based on a regulatory directive issued by the CBB as concessionary measures to mitigate the impact of COVID-19, the
one-off modification losses amounting to BD16 million arising from the 6-month payment holidays provided to financing customers without
charging additional profits has been recognized directly in equity. The modification loss has been calculated as the difference between the net
present value of the modified cash flows calculated using the original effective profit rate and the current carrying value of the financial assets
on the date of modification. The Group provided payment holidays on financing exposures amounting to BD555 million as part of its support to
impacted customers.
Further, as per the regulatory directive, financial assistance amounting to BD1.2 million (representing specified reimbursement of a portion of
staff costs and waiver of fees, levies and utility charges) received from the government and/or regulators, in response to its COVID-19 support
measures, has been recognized directly in equity.
Credit Risk Mitigation
Bank uses a variety of tools to mitigate its credit risk, the primary one being that of securing the exposure by suitable collateral. While the
existence of collateral is not a precondition for credit, exposures are fully or partially collateralized as a second line of defense. The Bank has in
place a Credit Risk Mitigation policy which provides guidelines on the types of assets that may be accepted as collateral and the methodology
of valuation of these assets. In general, all collateral valued periodically depending on the collateral type. The legal validity and enforceability of
the documents used for collateral have been established by qualified personnel, including lawyers and Sharia scholars.
Bank’s credit portfolio is supported by various types of collateral such as real estate, listed equity, cash and guarantees. Bank prefers liquid and
marketable credit collateral; however other types of collateral are accepted provided that such collateral can be reasonably valued. Third party
guarantees are accepted as collateral only after analyzing the financial strength of the guarantors.
Collateral Valuation
Collateral when taken are identified as having reasonable value, their value would however change over a period of time due to prevailing
economic conditions, plant and machinery becoming obsolete due to technological advancements, due to passage of time and due to increase
in availability of similar collateralized securities. Listed securities are valued at monthly intervals, unlisted securities are valued at annual intervals,
real estate properties are valued at least once in two years’ intervals, and special assets of the nature of marine vessels and aircrafts are valued
at annual intervals. Value of collateral are accounted post assigning various levels of haircuts depending on the type of collateral, the same are
provided in the Credit Risk Mitigation Policy.
Guarantees
Guarantees are taken from individuals and Corporates. In cases where a letter of guarantee from the counterparty’s parent company or from a
third party is offered as credit risk mitigant, it is ensured that the guarantees must be irrevocable and unconditional. If the guarantor is located
outside Bahrain, legal opinion is obtained from a legal counsel domiciled in the country of guarantor (overseas) regarding the enforceability of
the guarantee. Further, the financial position of the guarantor is adequately analyzed to determine the value and commercial viability of the
guarantee.
Collateral Concentration
Bank has established internal limits to avoid over concentration on certain class of collateral. Prudent maximum limits have been set for the
acceptance of collateral as credit risk mitigation.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 103

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020

32. RISK MANAGEMENT (continued)

Liquidity risk
Liquidity risk is the risk that Bank is unable to meet its financial obligations as they fall due, which could arise due to mismatches in cash flows.
Liquidity risk arises either:
• From the inability to manage unplanned decreases or changes in funding sources; or
• from the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with
minimal loss in value.
Liquidity risk management ensures that funds are available at all times to meet the funding requirements, Funding and liquidity management
is performed centrally by the Asset and Liability Management Committee (ALCO). Group’s liquidity policies are designed to ensure it will meet
its obligations as and when they fall due, by ensuring it is able to generate funds from the market, or have sufficient High Quality Liquid Assets
(HQLAs) to sell and raise immediate funds without incurring unacceptable costs and losses. Bank regularly monitors the concentration in the
funding sources and ensures that the funding sources are adequately diversified.
The CBB has introduced Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) during 2019. The Bank maintains LCR of 147%
(31 December 2019: 160.73%) and NSFR of 119% (31 December 2019: 113%) which are above regulatory minimum of 100%.The 90 day
average LCR as of 31 December 2020 is 165% (31 December 2019: 145%) .
The effects of COVID-19 on the liquidity and funding risk profile of the banking system are evolving and are subject to ongoing monitoring and
evaluation. The CBB has announced various measures to combat the effects of COVID-19 and to ease the liquidity in banking sector. Following are
some of the significant measures that has an impact on the liquidity risk and regulatory capital profile of the Group:
− Payment holiday for 6 months to eligible customers;
− Concessionary repo to eligible banks at zero percent;
− Reduction of cash reserve ratio from 5% to 3%;
− Reduction of LCR and NSFR ratio from 100% to 80%;
− Aggregate of modification loss and incremental ECL provision for stage 1 and stage 2 from March to December 2020 to be
added back to Tier 1 capital for the two years ending 31 December 2020 and 31 December 2021. And to deduct this amount
proportionately from Tier 1 capital on an annual basis for three years ending 31 December 2022, 31 December 2023 and 31
December 2024.
The management of the Group has enhanced its monitoring of the liquidity and funding requirements.
Market risk
Market risk is the risk of potential loss arising from change in the value of any exposure due to adverse changes in the underlying benchmark
market rates, i.e. foreign exchange rates, equity prices and profit rates.
The Group has a profit rate swap in place with respect to its borrowing from a financial institution whereby the Group replaced its floating rate
profit to fixed rate profit. The change in the notional amount of the swap is recognized in the fair value reserve at the reporting date.
Management of market risk is the responsibility of the relevant business units with the Group companies with oversight by the Asset-Liability
Committee (ALCO).
104 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

32. RISK MANAGEMENT (continued)

Shari’a compliant risk management hedging instruments
Types of instruments:
2020 2019
Profit rate swaps - Liability 65,598 2,760 65,598 1,453
65,598 2,760 65,598 1,453

Profit rate swaps:

2020 2019
Less than one More than one Less than one More than one
year year year year
Net exposure 1,362 1,398 645 808
Average fixed profit rate 3.03% 3.03% 3.03% 3.03%

Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events which
includes but not limited to legal risk and Sharia compliance risk. This definition excludes strategic and reputational risks.
Through a control framework and by monitoring and responding to potential risks, Bank is able to manage the operational risks to an acceptable
level.
In response to COVID-19 outbreak, there were various changes in the working model, interaction with customers, digital modes of payment and
settlement, customer acquisition and executing contracts and carrying out transactions with and on behalf of the customers. The management
of the Group has enhanced its monitoring to identify risk events arising out of the current situation and the changes in the way business is
conducted.
Reputational Risk
The Reputational Risk Management is defined as the risk arising from negative perception on the part of customers, counterparties, shareholders,
investors, debt-holders, market analysts, other relevant parties or regulators that can adversely affect a bank’s ability to maintain existing, or
establish new, business relationships and continued access to sources of funding. The Bank has developed a framework and has identified various
factors that can impact its reputation. Management of reputation risk is an inherent feature of the Bank’s corporate culture which is embedded
as an integral part of the internal control systems.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 105

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

32. RISK MANAGEMENT (continued)

Credit risk
Non performing financing exposures are conservatively considered as financing exposures which have been past due beyond 90 days and the
profit on these assets is not recognized in the consolidated income statement. Following are the details of non performing financing exposures
relating to the Group and its unrestricted investment accountholders:
31 December 2020 31 December 2019
Relating to Relating to
unrestricted unrestricted
Relating to investment Relating investment
owners accounts Total to owners accounts Total
Gross exposure
Past due but performing financing exposures 89,895 87,155 177,050 50,413 36,400 86,813
Non performing financing exposures 76,758 74,848 151,606 96,357 88,358 184,715
166,653 162,003 328,656 146,770 124,758 271,528

Fair value of collateral

Past due but performing financing exposures 96,727 55,323 152,050 43,610 36,311 79,921
Non performing financing exposures 15,621 57,745 73,366 21,352 67,257 88,609
112,348 113,068 225,416 64,962 103,568 168,530

Included in the performing financing exposures of the Group are facilities which have been restructured during the year which are as follows:
31 December 2020 31 December 2019
Relating to Relating to
unrestricted unrestricted
Relating to investment Relating to investment
owners accounts Total owners accounts Total
Restructured financings 1,675 1,008 2,683 670 2,530 3,200

Financings restructured from non-performing portfolio and being classified as watchlist for a 12-month period from date of restructuing
(cooling period) as of 31 December 2020 amounted to BD4.1 million (31 December 2019: BD4.7 million).
106 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

32. RISK MANAGEMENT (continued)

Profit rate risk
The table below summarises the Group’s exposure to profit rate risk. It includes the Group’s financial instruments at carrying amounts, categorised
by the earlier of contractual repricing or maturity dates.
Up to one One-three Three-twelve One-five Over five Non rate
31 December 2020 month months months years years sensitive Total
Cash and balances with banks and central banks - - - - - 239,332 239,332
Commodity and other placements with banks,
financial and other institutions 68,336 12,533 4,743 - - - 85,612
Murabaha and other financings 123,123 89,514 754,688 271,359 108,653 - 1,347,337
Musharaka financing 6,272 23,029 37,922 204,166 79,031 - 350,420
Sukuk and investment securities 173,063 287,238 37,323 232,785 23,430 1,386 755,225
Assets acquired for leasing - - 484 2,414 142,448 - 145,346
Other assets - - - - - 47,953 47,953
Total financial assets 370,794 412,314 835,160 710,724 353,562 288,671 2,971,225
Customer current accounts - - - - - 661,739 661,739
Due to banks, financial and other institutions 262,825 59,526 90,643 22,770 - - 435,764
Due to investors 355,543 70,835 85,989 1,867 - - 514,234
Other liabilities - - - - - 102,998 102,998
Total financial liabilities 618,368 130,361 176,632 24,637 - 764,737 1,714,735
Equity of unrestricted investment accountholders 590,754 178,719 388,688 117,001 - - 1,275,162
Total financial liabilities and equity of
unrestricted investment accountholders 1,209,122 309,080 565,320 141,638 - 764,737 2,989,897
Total repricing gap (838,328) 103,234 269,840 569,086 353,562 (476,066) (18,672)

31 December 2019
Total financial assets 550,976 153,003 810,920 474,658 527,193 328,149 2,844,899
Total financial liabilities and equity of
unrestricted investment accountholders 1,152,669 309,068 546,464 140,727 6,166 677,374 2,832,468
Total repricing gap (601,693) (156,065) 264,456 333,931 521,027 (349,225) 12,431
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 107

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

32. RISK MANAGEMENT (continued)

Profit rate risk (continued)

USD PKR AED

As at 31 December 2020
Total profit rate exposure 252,377 140,562 123,189
Reasonable shift 1.54% 3.55% 1.69%
Total effect on income 3,887 4,990 2,082

USD PKR AED

As at 31 December 2019
Total profit rate exposure 254,483 166,754 123,442
Reasonable shift 1.06% 1.05% 1.14%
Total effect on income 2,698 1,751 1,407

The basis for calculation of the reasonable shift is arrived at by comparing the interbank lending rate at the beginning and the end of the year.

33. RELATED PARTY TRANSACTIONS AND BALANCES

Parties are considered to be related if one party has the ability to control the other party or to exercise significant influence or joint control over
the other party in making financial and operating decisions.
a. Directors and companies in which they have an ownership interest.
b. Major shareholders of the Bank, Ultimate Parent and companies in which Ultimate Parent has ownership interest and subsidiaries of such
companies (affiliates).
c. Associated companies of the Bank.
d. Senior management.
A related party transaction is a transfer of resources, services, or obligations between related parties, regardless of whether a price is charged.
108 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

33. RELATED PARTY TRANSACTIONS AND BALANCES (continued)

Significant balances with related parties comprise:
31 December 2020
Shareholders Associates and Directors and Senior
& Affiliates other investments related entities management Total
Assets
Murabaha and other financings 601,130 - - 812 601,942
Sukuk and investment securities 331 - - - 331
Other assets 4,926 - - 195 5,121
Liabilities
Customers’ current accounts 6,115 203 - 927 7,245
Due to banks, financial and other institutions 19,547 3,771 - - 23,318
Other liabilities 49 - - - 49
Equity of unrestricted investment accounts 20,394 - - 2,405 22,799
Commitments 1,281 - - - 1,281

31 December 2020
Shareholders Associates and Directors and Senior
& Affiliates other investments related entities management Total
Income
Return to unrestricted investment accounts (360) - - (72) (432)
Income from murabaha and other financings 9,736 - - - 9,736
Profit paid to banks, financial and other institutions (449) (695) - - (1,144)
Other Income - Management fees (510) - - - (510)
Expenses
Administrative and general expenses (206) - (19) - (225)

31 December 2019
Shareholders Associates and Directors and Senior
& Affiliates other investments related entities management Total
Assets
Murabaha and other financings 596,028 - 4,828 790 601,646
Sukuk and investment securities 331 - - - 331
Other assets 8,053 - - 156 8,209
Liabilities
Customers’ current accounts 4,592 4,004 - 311 8,907
Due to banks, financial and other institutions 40,668 27,194 - - 67,862
Other liabilities 60 - - - 60
Equity of unrestricted investment accounts 16,461 - - 1,564 18,025
Commitments 1,281 - - - 1,281
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 109

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

33. RELATED PARTY TRANSACTIONS AND BALANCES (continued)

31 December 2019
Shareholders Associates and Directors and Senior
& Affiliates other investments related entities management Total
Income
Return to unrestricted investment accounts (296) - - (47) (343)
Income from murabaha and other financings 9,971 - - - 9,971
Profit paid to banks, financial and other institutions (378) (1,304) - - (1,682)
Other income - Management fees expenses (595) - - - (595)
Expenses
Administrative and general expenses (205) - (20) - (225)

Certain collaterals amounting to BD27.8 million (31 December 2019: BD31 million) with respect to certain financing facilities are legally held by
related parties for the beneficial interest of the Group.
With respect to financing facility of BD4.8 million relating to a member of the board of directors, no profit is accrued since profit is linked to exit
of a specific investment (held as collateral).

34. CAPITAL MANAGEMENT

The Group’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of balance sheets, are:
− To comply with the capital requirements set by the regulators of the banking markets where the entities within the Group operate;
− To safeguard the Group’s ability to continue as a going concern so that it can continue to provide returns for shareholders and
benefits for other stakeholders; and
− To maintain a strong capital base to support the development of its business.
The table below summarises the composition of regulatory capital and the ratios of the Group for the year ended. The capital adequacy ratio has
been calculated in accordance with CBB guidelines & CBB directives incorporating credit risk, operational risk and market risk. The subsidiaries
comply with the directives of the respective local regulators for their capital management.
31 December 2020 31 December 2019
Tier 1 109,946 121,126
Tier 2 22,473 24,768
Total Capital Base 132,419 145,894
Total Risk-Weighted Exposures 1,046,552 1,079,303
Capital Adequacy Ratio 12.65% 13.52%

35. PROPOSED DIVIDEND

The Board of Directors has not proposed any dividend for the year ended 31 December 2020 (31 December 2019: Nil).
110 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

For the year ended 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

36. NON-SHARIA COMPLIANT INCOME AND EXPENSES

The Group has earned certain income and incurred certain expenses from conventional assets and liabilities. These conventional assets and
liabilities are in accordance with the Sharia Compliance Plan. The details of the total income and total expenses are as follows:

Year ended
31 December 2020 31 December 2019
INCOME
Income from other financings 42,510 67,836
Income from investments 53,240 41,856
Other income 6,568 8,448
Gross income 102,318 118,140
Less: profit paid to banks, financial and other institutions - note (ii) (51,779) (61,327)
Total income 50,539 56,813
EXPENSES
Administrative and general expenses - note (ii) (28,110) (30,056)
Depreciation and amortisation (4,001) (4,161)
Total expenses (32,111) (34,217)
Net income before provision for impairment and overseas taxation 18,428 22,596
Provision for impairment (net) (5,562) (2,965)
Net income before overseas taxation 12,866 19,631
Overseas taxation (5,689) (10,179)
NET INCOME FOR THE YEAR 7,177 9,452
Attributable to:
Equity holders of the Bank 4,778 6,292
Minority interests 2,399 3,160
7,177 9,452
Basic and diluted earnings per share Fils 4.78 Fils 6.29

Note (i) – Expenses relate to entities which are consolidated line by line and exclude associates.
Note (ii) – One of the subsidiaries presently operating as a conventional bank has increased the number of its Islamic branches during the year
to 500 (2019: 414) out of total 576 branches (2019: 555).

37. SOCIAL RESPONSIBILITY

The Group discharges its social responsibilities through donations to charitable causes and organizations.

38. SUBSEQUENT EVENT

There have been no events subsequent to 31 December 2020 that would significantly impact the amounts reported in the consolidated financial
statements as at 31 December 2020.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 111

Public Disclosures
At 31 December 2020

Contents
1. Background 112
2. Basel III Framework 112
3. Capital management 112
4. Approaches adopted for determining regulatory capital requirements 113
5. Regulatory Capital components 113
6. Tier one capital ratios and Total capital ratios 116
7. Risk Management 116
8. Disclosure of the regulatory capital requirements for credit risk under standardized approach 122
9. Gross credit exposures 123
10. Geographical distribution of credit exposures 123
11. Industrial distribution of credit exposures 124
12. Contractual Maturity breakdown of credit exposures & funding liabilities 124
13. Related-party balances under credit exposure: 125
14. Past due and impaired financings and related provisions for impairment 125
15. Past due and impaired financings by geographical areas 126
16. Details of credit facilities outstanding that have been restructured during the year 126
17. Credit exposures which are covered by eligible financial collateral 126
18. Market Risk 127
19. Disclosure of regulatory capital requirements for market risk under the standardized approach 128
20. Currency risk: 129
21. Equity position in Banking book 129
22. Profit Rate Risk in the Banking Book 129
23. Operational Risk 130
24. Disclosure of regulatory capital requirements for operational risk under the basic indicator approach 132
25. Liquidity Risk 132
26. Legal contingencies 135
27. Displaced Commercial Risk 135
28. Gross income from Mudaraba and profit paid to Unrestricted Investment Accountholders 136
29. Average declared rate of return on General Mudaraba deposits 136
30. Movement in Profit Equalization Reserve and Investment Risk Reserve 137
31. Other disclosures 137
112 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

PUBLIC DISCLOSURES
At 31 December 2020

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), CBB Rule Book, Volume II for Islamic Banks. The disclosures in this report are in addition to the disclosures set
out in Ithmaar Bank B.S.C (C)’s (Ithmaar Bank/Bank/Group) consolidated financial statements for the year ended 31 December 2020, presented
in accordance with Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organisation for Islamic Financial Institutions
(AAOIFI).

2. Basel III Framework

CBB has issued Basel III guidelines for the implementation of Basel III capital adequacy framework for Banks incorporated in the Kingdom
of Bahrain.
The Basel III framework provides a risk based approach for calculation of regulatory capital. The Basel III framework is expected to strengthen
the risk management practices across the financial institutions..
The Basel III framework is based on three pillars as follows:-
– Pillar I: Minimum capital requirements including calculation of the capital adequacy ratio
– Pillar II: Supervisory review process which includes the Internal Capital Adequacy Assessment Process
– Pillar III: Market discipline which includes the disclosure of risk management and capital adequacy information.

3. Capital management
Ithmaar Bank’s Internal Capital Adequacy Assessment Process (ICAAP) policy provides the required guidelines and methodologies to assess the
Bank’s capital requirements for Pillar 1 and Pillar 2 risks and thereby ensures that the Bank meets the capital requirements as mandated by the
CBB in line with the Capital Adequacy (CA) module for Pillar 1 risks and the ICAAP Module for all pillar 2 risks. Capital management also ensures
that shareholders’ value is protected and enhanced.
The Bank adopts a Pillar I + Pillar II approach for capital estimation as recommended under CBB guidelines. Under this approach, the Bank
calculates the Pillar I capital or minimum regulatory capital requirements in accordance to CBB’s capital adequacy guidelines as prescribed in
the CA module of the CBB rulebook. Secondly, additional capital or pillar II capital requirement is calculated separately based on an “add-on”
approach, where the additional capital requirements are added onto the calculated Pillar I capital requirements, to arrive at the Bank’s internal
capital requirements as per CBB guidelines. To ensure that the business model is thoroughly examined and subject to sufficient analysis, ICAAP
is supported with comprehensive Stress Testing.
A comprehensive risk assessment of the Business and Budget Plans is independently performed by the Risk Management Department (RMD),
which among others, assesses the capital requirement of Ithmaar Bank supporting both current and future activities. Ithmaar Bank’s capital
position is monitored on a regular basis and reported to the Asset Liability Management Committee (ALCO), the Audit, Governance and Risk
Management Committee (AGRMC) and the Board of Directors..

Capital Adequacy Methodology:

As per the requirements of CBB’s Basel III capital adequacy framework, the method for calculating the consolidated capital adequacy ratio for
the Group is summarized as follows:
– Line by line consolidation is performed for the risk exposures and eligible capital of all the Financial Institutions subsidiaries within the Group
with the exception of the Bank’s banking subsidiaries incorporated outside Kingdom of Bahrain which are operating under Basel III compliant
jurisdictions, where full aggregation is performed of the risk weighted exposures and eligible capital as required under CA module of CBB
rulebook.
– All significant investments in commercial entities are risk weighted if these are within 15% of the capital base at individual level and 60%
at aggregate level. Any exposure over and above the threshold of 15% are risk weighted at 800%..
– All exposures exceeding the large exposure limit as per Credit Risk Management (CM) module of CBB rulebook are risk weighted 800%.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 113

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

4. Approaches adopted for determining regulatory capital requirements

The approach adopted for determining regulatory capital requirements under CBB’s Basel III guidelines is summarised as follows:

Credit Risk Standardised approach

Market Risk Standardised approach
Operational Risk Basic Indicator approach

5. Regulatory Capital components

Step 1: Disclosure of Balance Sheet under Regulatory scope of Consolidation
The Bank’s subsidiaries (consolidated line by line for accounting purposes) have the following treatment for regulatory purposes.

Principal
Total Total Country of business Regulatory
Name assets Equity Ownership Incorporation activity Treatment
Faysal Bank Limited 1,600,333 126,257 67% Pakistan Banking Aggregation
Dilmunia Development
78,399 58,800 90% Cayman Islands Real estate Risk weight
Fund I L.P.

The reconciliation from published financial information to regulatory return is as follows:

Balance sheet as per published financial statements 3,094,777

FAS 30 Transitional impact 21,630
Modification loss & ECL transitional impact 18,403
Aggregation 42,555
Balance sheet as in Regulatory Return 3,177,365
114 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

5. Regulatory Capital components (Continued)

Step 2: Reconciliation of published financial balance sheet to regulatory reporting as at 31 December 2020
As per published As per
Assets financial statements Consolidated PIRI
Cash and balances with banks and central banks 239,332 239,332
Commodity and other placements with banks, financial and other institutions 85,612 85,612
Murabaha and other financings 1,347,337 1,347,337
Musharaka financing 350,420 350,420
Sukuk and investment securities 755,225 755,225
Assets acquired for leasing 145,346 145,346
Other assets 47,953 47,953
Investment in real estate 2,316 2,316
Development Properties 73,359 73,359
Fixed assets 22,274 22,274
Intangible assets 25,603 25,603
FAS 30 Transitional impact - 21,630
Modification loss & ECL transitional impact - 18,403
Aggregation - 42,555
Total Assets 3,094,777 3,177,365

Liabilities & Unrestricted Investment Accounts (URIA)

Unrestricted Investment Accounts 1,275,162 1,275,162
Other liabilities 1,714,735 1,714,735
Total Liabilities & URIA 2,989,897 2,989,897

Minority Interest 55,049 55,049

Owners' Equity
Share capital 100,000 100,000
Reserves (34,033) (34,033)
of which eligible for CET1 - (19,969)
Accumulated losses (16,136) (16,136)
of which eligible for CET1 - (35,649)
FAS 30 Transitional impact - 21,630
Modification loss & ECL transitional impact - 18,403
Aggregation - 42,555
Total Owners' Equity 49,831 132,419
Total Liabilities + Owners' Equity 3,094,777 3,177,365
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 115

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

5. Regulatory Capital components (Continued)

Step 3: Common disclosure template as at 31 December 2020

Common Equity Tier 1 capital: instruments and reserves: Amount

Directly issued qualifying common share capital plus related stock surplus 100,000
Retained earnings (35,649)
of which Modification loss 18,403
of ECL provisions relating to stage 1 & 2 2,375
Expected Credit Losses (ECL) Stages 1 & 2 (52,762)
of which FAS 30 Transitional impact 21,630
Reserves (19,969)
Aggregation & deductions 78,293
Common Equity Tier 1 capital before regulatory adjustments 109,946
Total regulatory adjustments to Common equity Tier 1 109,946
Tier 1 capital (T1 = CET1 + AT1) 109,946
Tier 2 capital: instruments and provisions:
FAS 30 Transitional impact 10,483
Aggregation & deductions 11,990
Tier 2 capital (T2) 22,473
Total capital (TC = T1 + T2) 132,419
Total Risk Weighted Assets (RWA) 1,046,942
Capital ratios and buffers:
Common Equity Tier 1 (as a percentage of risk weighted assets) 10.50%
Tier 1 (as a percentage of risk weighted assets) 10.50%
Capital Adequacy Ratio (CaR) 12.65%
Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical
buffer requirements plus D-SIB buffer requirement, expressed as a percentage of risk weighted assets)
of which: capital conservation buffer requirement 2.5
of which: bank specific countercyclical buffer requirement N/A
of which: D-SIB buffer requirement N/A
National minimum including CCB (where different from Basel III)
CBB Common Equity Tier 1 minimum ratio 9.0
CBB Tier 1 minimum ratio 10.5
CBB total capital minimum ratio 12.5
116 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

6. Tier one capital ratios and Total capital ratios:

Tier One Total
Capital Capital
Ratio (including Ratio (including
conservation buffer) conservation buffer)

Bank's consolidated 10.50% 12.65%

Significant Bank subsidiaries whose regulatory capital amounts to over 5% of group
consolidated regulatory capital whether on a stand-alone or sub-consolidated basis are
as follows:
Faysal Bank Limited 15.95% 18.67%

7. Risk Management
7.1 Risk Management Objectives
Risk is an integral part of Ithmaar Bank’s business and managing it is critical to Ithmaar’s continuing success and profitability. The essence of
effective risk management is to enhance shareholders’ and Investment Account Holders’ value through business profits commensurate with the
risk appetite of Ithmaar Bank and seeks to minimize the potential adverse effects on its financial performance. Ithmaar Bank has over the years,
developed risk management into a core competency and remains well positioned to meet imminent challenges. Risk Management at Ithmaar
has always been prudent and proactive with the objective of achieving the optimum balance between risk and expected returns.
Ithmaar Bank has adopted an integrated risk management framework to proactively identify, assess, manage and monitor risks in its decisions
and operations. The Bank’s risk management framework is based on guidelines issued by the CBB, sound principles of risk management issued
by Bank of International Settlements, international best practices and AAOIFI wherever applicable.

7.2 Strategies, Processes and Internal Controls

7.2.1 Risk Management Strategy
Ithmaar Bank’s Risk Management Charter lays the foundations for a risk governance structure. The risk strategy in terms of the overall risk appetite,
risk tolerance levels and risk management methodologies are assimilated in the various risk policies and the ICAAP report of Ithmaar Bank. The
risk strategy is reviewed annually in line with the Bank’s business strategy. The Board also oversees the establishment and implementation of
risk management systems and policies for all processes and risk exposure.
The process of risk management is carried out by an independent control function; the Risk Management Department (RMD) headed by the
Chief Risk Officer with a direct reporting line to the AGRMC. The Department is mandated with identifying, quantifying and assessing all risks
and recommending appropriate prudential limits and risk management methodologies within the parameters of the overall risk management
strategy approved by the Board.
A well-defined governance structure is implemented where authority levels are clearly laid down for all transactions. Furthermore, the culture
of risk is embedded in the business through a rigorous set of controls, checks and balances. As part of Ithmaar Bank’s continuous improvement
initiatives, Ithmaar Bank reviews existing risk policies and procedures and develops new policies and procedures by benchmarking the same to
changes or new requirements in the regulatory and external environment. The Board reviews and approves the Business Discretionary Powers
policy which establishes the approval authorities and limits for specific transactions.
7.2.2 Equity Risk in Banking Book
Ithmaar Bank’s exposure to equity risk in the Banking book relates to its investment exposures. Ithmaar Bank has a dedicated Asset Management
Department for managing the existing investments. The Board has established an Asset Management Policy which establishes the guidelines
relating to management of investments.
All investment exposures are reviewed annually and presented to the management committee or Board level committees depending on the
asset value.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 117

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020

7. Risk Management (Continued)

7.2.3 Material Transactions- Board Approval
All financing and investment exposures above a defined value requires the approval of the Board. Additionally, all related party transactions and
irrespective of their value require the approval of the Board.
7.3 Risk Measurement and Reporting System
The risk appetite of Ithmaar Bank is approved by the Board. To enable the effective monitoring of the activities of the Bank and to be compliant
with the risk appetite approved by the Board, appropriate measurement processes, monitoring of exposures vis-à-vis limits as provided in the
various risk management policies are in place. The risk policies set guidelines to limit concentration risk within the portfolio by large exposure,
connected counterparty, country, industry, tenor and products. Ithmaar Bank uses a robust management information system to monitor its
exposures and concentrations by various dimensions. Exceptions to the limits as provided in the policies are escalated to the appropriate authority.

7.4 Credit Risk

Capital charge for credit risk is computed under the Standardized Approach.
7.4.1 Credit Risk Management Structure
Credit risk management structure in Ithmaar Bank includes all levels of authorities, organizational structure, people and systems required for the
smooth functioning of Credit risk management processes.
The Bank has a well-defined organizational structure with clearly articulated roles and responsibilities for the Credit risk management function
in the Bank.
The Bank has proper processes in place, not only to apprise but also regularly monitor credit risk. Ithmaar Bank has established a General
Financing Policy which details the core business principles, which are central to the Bank’s Credit culture, as well as general guidelines for
permitted and restricted transactions. The policy states the Credit assessment methodology and the detailed standards for documentation of
client information.
Ithmaar Bank manages its Credit risk arising from its banking exposures by implementing robust policies and procedures with respect to
identification, measurement, mitigation, monitoring and controlling the risks.
7.4.1.1 Corporate credit risk (including financial institutions)
Corporate credit risk represents the potential financial loss as a consequence of a customer’s inability to honor the terms and conditions of the
credit facility. Corporate credit risk is managed by proper assessment of risks inherent in an individual credit proposal and also ongoing review
of the corporate credit portfolio to ensure its compliance to the credit risk appetite of Ithmaar Bank. In addition to the rigorous credit analysis,
the covenants for each facility are strictly monitored by the Credit Administration Department.
Ithmaar Bank has proper processes in place, not only to appraise but also regularly monitor credit risk. Regular reviews are carried out for each
account and risks identified are mitigated in a number of ways, which includes obtaining collateral, assignment of receivables and counter-
guarantees. The corporate accounts are rated on a internal credit risk rating model, this enhances the process of credit review and ensures
timely identification of any deterioration of the corporate’s status and corrective actions can be implemented. The internal credit risk rating
model incorporates both quantitative and qualitative risk parameters for the grading and classification of corporate customers. The Bank has in
place policy guidelines to map the external ratings to internal ratings.
A centralized credit risk management system is in place where all corporate credit and financial institutions proposals are independently
reviewed by the Risk Management Department (RMD) before the same are approved by appropriate approval authorities.
All credits exposures are at least reviewed and rated annually and appropriate provisions are maintained for any classified account as per
the provisioning policy in line with relevant CBB guidelines. However, each investment exposure is evaluated individually for impairment
assessment on its merits, strategy, and estimated recoverability.
In respect of corporate performing accounts, provisioning based on the guidelines of FAS30 – Expected Credit Losses (ECL) is provided. The Bank
has in place an automated application for the computation of ECL based on risk parameters configured in the application.
All provisioning requirements for financing and investment exposures are discussed and approved by the Provisioning Committee of the Bank.
118 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020

7. Risk Management (Continued)

7.4.1.2 Retail credit risk
Retail credit is offered to customers primarily based on approved product programs which defines the risk acceptance criteria. Overdue amounts
in the retail credit portfolio are closely monitored to mitigate the possibility of the individual accounts from slipping into non-performing
status. The retail credit product programs are regularly reviewed to ensure their compliance with existing regulatory guidelines and enhance
marketability.
The retail credit portfolio is reviewed at monthly intervals.
In respect of retail performing accounts, provisioning based on the guidelines of FAS30 – Expected Credit Losses (ECL) is provided. The Bank has
in place an automated application, for the computation of ECL based on risk parameters configured in the application.
Unrestricted FUM assets
The Funds under Management Policy provides detailed guidelines for the assets suitable for funding by unrestricted investment accounts, it
clearly provides that the funds in unrestricted investment account will be used for funding low risk assets.
7.4.2 Concentration Risk
The risk policies set guidelines to limit concentration risk within the portfolio by larger exposure, connected counterparty, country, industry, tenor
and products. Ithmaar Bank uses a robust management information system to monitor its exposures and concentrations by various dimensions.
The Risk Appetite Framework is in place, this policy provides guidelines on the threshold limits. As per CBB’s single obligor regulations, banks
incorporated in Bahrain are required to obtain CBB’s prior approval for any proposed exposure to a single counterparty, or group of connected
counterparties, exceeding 15% of the regulatory capital base.

7.4.3 Credit Portfolio Management

Portfolio management is an integral part of the credit risk management process that enables Ithmaar Bank to limit concentrations, reduce
volatility, increase liquidity and achieve optimum earnings. It does so by incorporating portfolio strategy and planning, performance assessment
and reporting functions into one comprehensive management process. The Risk Management Department is responsible for carrying out
the activities in relation to credit risk portfolio management in coordination with business and support departments. The Risk Management
Department seeks information from different business and support units on a regular basis to perform this function. The Risk Management
Department undertakes the review, monitoring and control of limits structures based on the portfolio diversification parameters.

7.4.4 Country Exposure

The Risk Appetite Framework provides exposure limits for countries; the limits are based on the ratings assigned to the country by the External
Credit Assessment Institutions (ECAIs). Exposure vis-à-vis limits assigned to the countries are monitored on an on-going basis and status thereof
is submitted to the AGRMC at quarterly intervals.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 119

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020

7. Risk Management (Continued)

7.4.5 Credit Risk Mitigation
Ithmaar Bank uses a variety of tools to mitigate its credit risk, the primary one being that of securing the exposure by suitable collaterals.
While the existence of collaterals is not a precondition for credit, exposures are fully or partially collateralized as a second line of defense. The
Bank has in place a Credit Risk Mitigation policy which provides guidelines on the types of assets that may be accepted as collateral and the
methodology of valuation of these assets. In general, all collaterals are valued periodically depending on the collateral type. The legal validity
and enforceability of the documents used for collateral have been established by qualified personnel, including lawyers and Sharia scholars.
Ithmaar Bank’s credit portfolio is supported by various types of collateral such as real estate, listed equity, cash and guarantees. Ithmaar prefers
liquid and marketable credit collateral; however other types of collateral are accepted provided that such collateral can be reasonably valued.
Third party guarantees are accepted as collateral only after analyzing the financial strength of the guarantors.
The following types of collateral are accepted by the Bank:
• Primary Collaterals
• Collateral Support
Primary Collaterals constituting assets of the type Real Estate properties, fixed charge over Moveable properties and Cash Collaterals are required
to meet the following essential conditions:
• It is a tangible or an intangible (financial) asset;
• A ready secondary market is easily identifiable;
• A monetary-value can be easily attached to the asset;
• Can be easily converted into cash without incurring additional costs (such as dismantling costs);
• Can be legally assigned or mortgaged to the Bank within applicable laws; and
• The Bank can maintain unquestionable control over the asset.
In case of assets pledged as part of Ijara contracts, the Bank considers the pledged assets as collateral at a value determined post the valuation
of the assets. The valuation guidelines and the haircuts applied on the pledged assets are as per the Credit Risk Mitigation Policy of the Bank.
Collateral Support are assets that do not meet the essential conditions stipulated in Primary Collaterals above. These assets may be accepted by
the Bank as means to control the counterparty’s exposure rather than basing credit decisions on their values.
These following assets are considered as Collateral Support:
• Pledge or mortgage of saleable goods or plant and machinery provided the charge can be legally registered;
• Fixed charges over moveable assets, not legally registered or difficult to reasonably value;
• Second charge on real estate properties and moveable assets;
• Pledge of unlisted securities such as shares, bonds and debentures;
• Registered assignment of life insurance endowment policies - to the extent of cash surrender-value;
• Third-party or Corporate guarantees issued by individuals / institutions other than banks;
• Assignment of contract proceeds, lease, or rent;
• Investments in Restricted Investment Accounts managed by the Bank other than those already obtained as collateral against existing
exposures.
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At 31 December 2020

7. Risk Management (Continued)

7.4.5.1 Collateral valuation
Collaterals when taken are identified as having reasonable value, their value would however change over a period of time due to prevailing
economic conditions, plant and machinery becoming obsolete due to technological advancements, due to passage of time and due to increase
in availability of similar collateralized securities. Listed securities are valued at Quarterly intervals, unlisted securities are valued at annual
intervals, Real estate properties are valued at least once in two years’ intervals, and special assets of the nature of marine vessels and aircrafts
are valued at annual intervals. Value of collaterals are accounted post assigning various levels of haircuts depending on the type of collateral,
the same are provided in the Credit Risk Mitigation Policy.

7.4.5.2 Guarantees
Guarantees are taken from individuals and Corporates. In cases where a letter of guarantee from the counterparty’s parent company or from a
third party is offered as credit risk mitigant, it is ensured that the guarantees must be irrevocable and unconditional, If the guarantor is located
outside Bahrain, legal opinion is obtained from a legal counsel domiciled in the country of guarantor (overseas) regarding the enforceability
of the guarantee, further the financial position of the guarantor is adequately analyzed to determine the value and commercial viability of the
guarantee.

7.4.5.3 Collateral Concentration

Ithmaar Bank has established internal limits to avoid over concentration on certain class of collaterals. Prudent maximum limits have been set
for the acceptance of collaterals as credit risk mitigation.

7.4.5.4 Collateral Management

Documents related to collaterals provided to Ithmaar Bank is managed by the Credit Administration department. Appropriate policies and
procedures are in place for the management of the collateral, in respect of valuation, maintenance of the original documents, temporary release
and permanent release of such collaterals. An adequate MIS supporting the management of the collateral is in place.
The Bank has defined practices for disposal or enforecement of collateral. On the Debtors default, the Bank (i.e. the secured party) can either
take possession of the collateral or file a case against the debtor for enforcement of security. The Bank sends a reasonable authenticated
notification of disposal through the court. The notice is intended to provide the debtor and other interested parties , an opportunity to monitor
the disposition of the collateral. A specific amount of time is normally given to the borrowers during which they can pay off the debt or the
property will be sold through the court. The final settlement of the matter will be in line with the decision taken by the court/judge.

7.4.6 Classification of credit exposures

The Bank has in place a detailed policy for Classification Provisioning and Write-Off, this policy provides detailed guidelines for classification and
provisions of credit facilities.
All credit exposures are classified as past due and impaired when any installment is past due for 90-days or more. However, each investment
exposure is evaluated individually for impairment assessment on its merits, strategy, and estimated recoverability. Accounts with past dues
over a 90 days’ period are classified into categories Sub-Standard, Doubtful and Loss assets. Appropriate provisions are maintained for any
classified account as per the provisioning policy in line with relevant CBB guidelines. Ithmaar Bank follows, except the subsidiary entities which
may follow their own regulatory guidelines, a time-based criteria of past due days to estimate the specific provisioning requirements, and past
due accounts are reviewed periodically.
In respect of General Provisions, the Bank has subscribed to the provisions of FAS30 for the computation of Expected Credit Losses (ECL), as per
the directives of Central Bank of Bahrain. In order to enable the computation of the ECL, a detailed policy FAS30 Expected Credit Policy’ is in
place. The Bank has automated the computation of the ECL by implementing a software application called the Loan Impairment Calculator with
effect from 1 January 2018.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 121

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At 31 December 2020

7. Risk Management (Continued)

7.4.7 Counterparty Credit Risk
Counterparty is defined as an individual, legal entity, guarantor being financed by Ithmaar Bank. Definition also includes Issuer of securities held
as collateral by Ithmaar Bank. The Bank had adopted the Standardized Approach to allocate capital for counterparty credit risk. The Credit Risk
Mitigation Policy provides guidelines for securing the exposures to Counterparties. Limits for Connected Counter parties of Ithmaar Bank and
Country and Industry limits are also in place. In case of deterioration in the counterparty’s credit rating, additional collateral may be called for
or the exposure to the counterparty is reduced. The Classification, Provisioning and Write-off Policy provides detailed guidelines for classification
and provisioning for exposures to counterparty’s which are classified.
Policy guidelines for expected credit losses is enumerated in the ‘FAS30 – Expected Credit Losses’ policy of the Bank.
7.4.8 ECAI Ratings
Ithmaar Bank has subscribed to the CBB guidelines for the utilization of external ratings, where available, by External Credit Assessment Institutions
(ECAI) for the purpose of risk assessment. In case multiple ECAI ratings are available for a single counterparty, the lowest of them is taken to assign
the relevant risk category. Standard and Poors, Moodys and Fitch ratings are considered while assigning the corresponding risk weights for the
exposures. The Bank complies with all the qualitative requirements stipulated by the CBB for the recognition process and eligibility criteria of ECAI
rating in the Credit Risk Management policy. ECAI ratings are applied, where applicable, to all credit and investment exposures.
7.4.9 Related party transactions
As per the Bank’s policies, connected counterparties’ includes companies or persons connected with the Bank, including, in particular; controllers
of the Bank (and their appointed board representatives) as defined in Chapter GR-5 of the CBB Rulebook; subsidiaries, associates and related
parties of the Bank as defined by IFRS; holders of controlled functions in the Bank as defined by Module LR-1A of the CBB Rulebook and their
close family members as defined by IFRS - IAS 24; members of the Shari’a Supervisory Board.
The erstwhile Ithmaar Bank B.S.C. (now Ithmaar Holding B.S.C.) has undergone major reorganization in 2017. As part of this reorganization,
Ithmaar Holding B.S.C. and its wholly owned subsidiaries Ithmaar Bank B.S.C. (C) and IB Capital B.S.C.(C) have executed certain contracts
between three entities and as most of the Directors are common for all three entities, there is an apparent conflict of interest as these contracts
were approved by Directors who represented both entities who were party to the contracts. Given the reorganization requirements, ownership
structure and Directors being common, contracts between these entities are considered as related party transactions but the conflict of interest
is not considered to be applicable to ensure minimum quorum for voting.
Declarations of Interest:
On taking office, Members of the Board of Directors of the Bank are required to disclose all interests and relationships which could or might
be seen to affect their ability to perform their duties as a Member of the Board of Directors. Any such interests declared shall be recorded in
the Board of Director’s Register of Interests, which are maintained by the shareholders affairs unit. This declaration of interest is updated on an
annual basis.

Approval of Related Party Transactions:

• All related party transactions are approved by the Board of Directors.
• Where applicable, persons who have interests in the transaction under discussion abstain from voting on the approval of the proposed related
party transaction, except where the transaction is required as part of the reorganization.
• Approval of a transaction shall be considered irrespective of the settlement method, whether settled in cash or otherwise.
• Certain related party transactions may require advance notice to and approval by the CBB and / or any other applicable regulatory authority
as per CBB rulebook and the Limit Management Policy of the Bank.
• In particular, Members of the Board of Directors of the Bank disclose all relevant information which might give rise to a conflict of interest,
or a perceived conflict of interest. Each Member of the Board of Directors inform the Bank when there are changes in his / her interests, and
the Shareholders affairs unit update the Register of Interests at least on an annual basis.
During 2020, Directors having conflict of interests in the transaction under discussion abstained from voting on the approval of the proposed
related party transaction, except where the transaction is required as part of the reorganization.
122 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

8. Disclosure of the regulatory capital requirements for credit risk under standardized approach:
Exposure funded by Self Finance

Risk weighted Capital

assets requirement
Claims on banks 30,458 3,807
Claims on corporate portfolio 50,260 6,283
Investments in equity securities 1,556 195
Holding of real estate 45,393 5,674
Regulatory retail portfolio 199 25
Past due facilities 1,858 232
Other assets 7,455 932
Aggregation 560,270 70,034
Total 697,449 87,182

Exposure funded by Unrestricted Investment Accounts (URIA)

Risk weighted Capital
assets requirement
Claims on corporate portfolio 33,651 4,206
Regulatory retail portfolio 93,988 11,749
Past due facilities 13,553 1,694
Total 141,192 17,649

URIA assets are risk weighted as per the counterparty classification in line with CBB regulations using alpha factor of 30% in accordance with
CA module CA-1.1.11.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 123

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At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

9. Gross credit exposures:

Gross credit Average gross
exposure credit exposure
Credit risk exposure relating to on balance sheet assets are as follows:
Cash and balances with banks and central banks 239,332 246,228
Commodity and other placements with banks, financial and other institutions 85,612 106,607
Murabaha and other financings 1,347,337 1,422,364
Musharaka financing 350,420 294,936
Assets acquired for leasing 145,346 146,715
Investments 757,541 641,821
Other assets 47,953 51,749
Development Properties 73,359 74,599
Fixed assets 22,274 22,255
Intangible assets 25,603 29,590
Total on balance sheet credit exposure 3,094,777 3,036,864
Credit risk exposure relating to off balance sheet items are as follows:
Financial guarantees and irrevocable letters of credit, acceptance and endorsements 247,526 217,600
Financing commitments, Undrawn facilities and other credit related liabilities 681,466 652,452
Total off balance sheet credit exposure 928,992 870,052
Total credit exposure 4,023,769 3,906,916
Total credit exposure financed by URIA 1,623,852 1,456,405
Total credit exposure financed by URIA (%) 40.36% 37.28%
The average gross credit exposure represent average balances for 2019 and 2020
Exposures amounting to BD3.6 million are covered by guarantee.

10. Geographical distribution of credit exposures:

Asia Middle East Europe Others Total
On-balance sheet items
Cash and balances with banks and central banks 145,648 44,980 18,049 30,655 239,332
Commodity and other placements with banks,
financial and other institutions 11,766 73,846 - - 85,612
Murabaha and other financings 415,457 926,008 5,872 - 1,347,337
Musharaka financing 350,420 - - - 350,420
Assets acquired for leasing - 145,346 - - 145,346
Investments 654,014 103,527 - - 757,541
Other assets 16,396 31,557 - - 47,953
Development Properties - 73,359 - - 73,359
Fixed assets 21,497 777 - - 22,274
Intangible assets 4,440 21,163 - - 25,603
Total on balance sheet items 1,619,638 1,420,563 23,921 30,655 3,094,777
Off balance sheet items 896,907 32,085 - - 928,992
Total credit exposure 2,516,545 1,452,648 23,921 30,655 4,023,769

The Group uses the geographical location of the credit exposures as the basis to allocate to the respective geographical region as shown above.
124 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

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At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

11. Industrial distribution of credit exposures:

Banks and Trading Property
Financial and and
Institutions manufacturing construction Services Individuals Textile Others Total
On-balance sheet items
Cash and balances with banks and
central banks 239,332 - - - - - - 239,332
Commodity and other placements
with banks, financial and other institutions 85,612 - - - - - 85,612
Murabaha and other financings 593,490 266,864 41,763 87,476 286,450 27,892 43,402 1,347,337
Musharaka financing 510 177,723 4,818 78,289 62,045 12,232 14,803 350,420
Assets acquired for leasing - 1,624 1,163 76 142,483 - - 145,346
Investments 517,224 99,766 135,806 3,394 1,119 - 232 757,541
Other assets 17,501 25,255 4,641 - - - 556 47,953
Development Properties - - 73,359 - - - - 73,359
Fixed assets 21,497 - 777 - - - - 22,274
Intangible assets 25,603 - - - - - - 25,603
Total on balance sheet items 1,500,769 571,232 262,327 169,235 492,097 40,124 58,993 3,094,777
Off balance sheet items 196,908 437,489 19,184 19,879 5,684 63,801 186,047 928,992
Total credit exposure 1,697,677 1,008,721 281,511 189,114 497,781 103,925 245,040 4,023,769

12. Contractual Maturity breakdown of credit exposures & funding liabilities:

Up to 1-3 3-12 1-5 5-10 10-20 Over 20
1 Month Months Months Years Years Years Years Total
On-balance sheet items
Cash and balances with banks and
central banks 239,332 - - - - - - 239,332
Commodity and other placements with
banks, financial and other institutions 71,624 9,245 4,743 - - - - 85,612
Murabaha and other financings 36,409 89,514 755,782 250,846 214,741 45 - 1,347,337
Musharaka financing 6,272 23,029 37,922 162,517 108,078 12,602 - 350,420
Assets acquired for leasing 212 3 355 2,415 6,145 61,500 74,716 145,346
Investments 149,764 287,238 44,028 62,387 214,124 - - 757,541
Other assets 34,877 34 10,760 - 2,282 - - 47,953
Development Properties - - - - 73,359 - - 73,359
Fixed assets - - - 15,049 7,225 - 22,274
Intangible assets - - - - 4,667 18,097 2,839 25,603
Total on balance sheet items 538,490 409,063 853,590 493,214 630,621 92,244 77,555 3,094,777
Off balance sheet items 536,271 170,876 94,761 121,799 5,285 - - 928,992
Total credit exposure 1,074,761 579,939 948,351 615,013 635,906 92,244 77,555 4,023,769
Customers’ current accounts 661,739 - - - - - - 661,739
Due to banks, financial and other institutions 178,671 59,877 178,517 8,117 10,582 - - 435,764
Due to investors 355,543 70,835 85,989 1,854 13 - - 514,234
Equity of unrestricted investment
accountholders 637,730 155,132 334,955 147,345 - - - 1,275,162
1,833,683 285,844 599,461 157,316 10,595 - - 2,886,899
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 125

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At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

13. Related-party balances under credit exposure:

A number of banking transactions are entered into with related parties in the normal course of business. The related party balances included
under credit exposure at 31 December 2020 were as follows:

Affiliated companies 606,387

Directors & key management 1,007
Total 607,394

14. Past due and impaired financings and related provisions for impairment:
Gross Impairment Net
exposure provisions exposure
Analysis by industry
Manufacturing 40,939 31,202 9,737
Agriculture 2,992 2,209 783
Construction 4,930 3,859 1,071
Finance 20,516 19,982 534
Trade 40,526 23,308 17,218
Personal 24,769 6,117 18,652
Real estate 3,657 1,193 2,464
Other sectors 13,277 3,670 9,607
Total 151,606 91,540 60,066
Ageing analysis
Over 3 months up to 1 year 39,740 17,320 22,420
Over 1 year up to 3 years 32,242 14,902 17,340
Over 3 years 79,624 59,318 20,306
Total 151,606 91,540 60,066
Relating to
unrestricted
Details of impairment provisions Relating to investment
at 31 December 2020 owners accounts Total
At 1 January 86,676 6,260 92,936
Charge for the year 6,324 9,798 16,122
Write back during the year (3,469) (320) (3,789)
Utilised during the year (11,619) - (11,619)
Exchange differences and other movements (1,996) (114) (2,110)
At 31 December 75,916 15,624 91,540
126 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

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At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

15. Past due and impaired financings by geographical areas:

Gross Impairment Net
Analysis by Geography exposure Provisions exposure
Asia 111,275 54,793 56,482
Middle East 40,331 36,747 3,584
Total 151,606 91,540 60,066

16. Details of credit facilities outstanding that have been restructured during the year
Restructured financings during the year ended 31 December 2020 aggregated to BD2.7 million (31 December 2019: BD3.2 million). This
restructuring had an impact of BD0.1 million (31 December 2019: BD0.3 million) on present earnings during the year ended 31 December
2020. Further, this restructuring is expected to have positive impact of BD0.2 million (31 December 2019: BD0.2 million).on the Group’s future
earnings. Extension of maturity dates was the basic nature of concessions given to all the restructured facilities.

17. Credit exposures which are covered by eligible financial collateral:

Exposure funded by Self Finance
Eligible
Gross Financial
Exposure Collateral
Corporate portfolio 278,028 6,910
Regulatory retail portfolio 313 48
Past due financings 2,472 614
Total 280,813 7,572

Exposure funded by Unrestricted Investment Accounts

Eligible
Gross Financial
Exposure Collateral
Corporate portfolio 439,588 15,065
Regulatory retail portfolio 417,747 21
Past due financings 35,859 38
Total 893,194 15,124

Counterparty Credit Risk (CCR)

Gross Positive Net Value
Fair Value of Netting Credit Risk Exposure at Risk Weighted
Contracts Benefit Mitigation Default Assets
Profit Rate Contracts 17 - - 17 8
Foreign Exchange Contracts 3,561 - - 3,561 2,848
Total 3,578 - - 3,578 2,856
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 127

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At 31 December 2020

18. Market Risk

Market risk is the risk of potential loss arising from change in the value of any exposure due to adverse changes in the underlying benchmark
market rates, i.e. foreign exchange rates, equity prices and profit rates..
The Market Risk Management Policy address all aspects of market risk. Implementation of the policy, procedures and monitoring of regulatory
and internal limits for Ithmaar Bank is the responsibility of the relevant business units with oversight by the Asset-Liability Committee (ALCO)
and the AGRMC.
The capital charge for market risk is computed as per the standardized approach.
18.1 The key market risk factors that the Bank is exposed to are discussed below
18.1.1 Foreign exchange risk:
Foreign exchange risk is the risk that the foreign currency positions taken may be adversely affected due to volatility in foreign exchange rates.
The responsibility for management of foreign exchange risk rests with the Treasury Department. Foreign exchange risk management in Ithmaar
Bank is ensured through regular measurement and monitoring of open foreign exchange positions.
18.1.2 Profit rate risk:
Profit rate risk is the risk that Ithmaar Bank will incur a financial loss as a result of mismatch in the profit rate on the assets, investment account
holders and customer liabilities. The profit distribution is based on profit sharing agreements instead of guaranteed return to investment account
holders. However, the profit sharing arrangements will result in displaced commercial risk when Ithmaar Bank’s results may not allow Ithmaar
to distribute profits in line with the market rates.
18.1.3 Price risk:
Investment price risk is the risk of reduction in the market value of Ithmaar Bank’s portfolio as a result of diminution in the market value of
individual investment.
18.1.4 Commodity risk:
The Bank does not have exposure to the commodity market.
18.2 Market risk management strategy
The market risk strategy is approved by the Board and amendments to the policies are approved by the Board. The senior management is
responsible for implementing the risk strategy approved by the Board, and continually enhancing the policies and procedures for identifying,
measuring, monitoring and controlling risks.
Strategies for market risk management includes:
1. The Bank will comply with the provisions of the market risk strategy while assuming any market risk exposures.
2. A limit structure has been established to monitor and control the market risk in its portfolio.
3. Each new product/process is reviewed to manage the market risk.
4. Appropriate measurement techniques are in place to proactively measure and monitor market risk.
5. Stress testing is conducted regularly to assess the impact of changes in the market variables.
6. Sufficient capital will be held at all times to meet the capital requirements in line with CBB Basel III Pillar I requirements.
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At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

18. Market Risk (Continued)

18.3 Market risk management measurement and monitoring
The various techniques used by the Bank for the purposes of measuring and monitoring of market risk are as follows:
• Overnight forex open positions
• Profit rate gap analysis
• Earnings at Risk
• Economic Value
Risk Management Department of the Bank monitors the positions vis-à-vis the limits approved by the Board.

18.4 Limits monitoring

Regulatory/In-House Policy Limits and guidelines as approved by the Board are strictly adhered to, deviations if any are immediately escalated
and action taken wherever necessary.

18.5 Portfolio review process

As part of the risk review process, Risk Management Department monitors Ithmaar Bank’s overall exposure to market risk. Reports of such
review is submitted to the ALCO and the AGRMC.

18.6 Management Information System

Reports on market risk are a calendar item at the meetings of the ALCO and AGRMC. The reports provide Ithmaar Bank’s ALCO and AGRMC an
update on the market risk exposure in the books.

18.7 Stress Testing

Ithmaar Bank conduct stress testing of its portfolio as part of the ICAAP process in accordance with stress testing module of the CBB
The Bank’s stress testing framework is embedded in the overall risk management process. The Bank has established an adequate governance
process for effective oversight and implementation of the stress testing framework.

19. Disclosure of regulatory capital requirements for market risk under the standardized approach:
Risk weighted assets Capital requirement
31 December Maximum Minimum 31 December Maximum Minimum
2020 Value Value 2020 Value Value
Foreign exchange risk 11,299 9,278 5,360 1,412 1,160 670
Aggregation
Foreign exchange risk 1,818 222 763 227 28 95
Profit Rate Risk
(Trading Book) 21,779 41,883 25,451 2,722 5,235 3,181
Equity Position Risk 28,070 22,467 16,614 3,509 2,808 2,077
Total 62,966 73,850 48,188 7,871 9,231 6,023
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 129

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At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

20. Currency risk:

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Substantial portion of the
Group’s assets and liabilities are denominated in US Dollars, Bahraini Dinars, UAE Dirhams and Pakistani Rupee. Bahraini Dinars and UAE Dirhams
are pegged to US Dollars and as such currency risk is minimal. The Bank’s investment in FBL is in Pak Rupees (PKR) and exposes the Bank to
foreign exchange risk. The cumulative foreign exchange loss as of 31 December 2020 amounted to BD39.3 million (31 December 2019: BD37.2
million) (included in the foreign exchange translation reserve statement of changes in equity).
The significant net foreign currency positions at 31 December 2020 were as follows:
Long/(Short)
Pakistani Rupee 168,815
United States Dollars 223,709

21. Equity position in Banking book

At 31 December 2020, the Group’s sukuk and investment securities aggregated to BD738.3 million (31 December 2019: BD447.8 million). Out
of the total investment securities, BD258.5 million (31 December 2019: BD54.8 million) were listed investment securities and the remaining
BD479.8 million (31 December 2019: BD393 million) represented unlisted investment securities.
Cumulative realized loss from sale of investment securities during the year ended 31 December 2020 amounted to BD42.8 million (31
December 2019: BD1.2 million). Total unrealized loss recognized in the consolidated statement of changes in owners’ equity amounted to BD7.3
million (31 December 2019: BD5.2 million).
At 31 December 2020, capital requirements using standardized approach aggregated to BD0.3 million (31 December 2019: BD0.3 million) for
listed investment securities and BD0.08 million (31 December 2019: BD0.1 million) for unlisted investment securities after aggregation/pro-rata
aggregation of investments in Banking and other financial entities.

22. Profit Rate Risk in the Banking Book

Profit rate risk in Ithmaar Bank’s banking book is the risk of adverse changes in expected net earnings and economic value of the balance sheet
resulting from the impact of changes in profit rates on mismatched maturity and repricing assets and liabilities in the banking book.
22.1. Following are the sources of profit rate risk:
• Maturity mismatch: The non-alignment of maturities/re-pricing dates of assets and liabilities gives rise to profit rate risk. In the case of fixed
profit rates, maturities are considered whereas for floating or variable profit rates the re-pricing/rollover dates are considered.
• Basis value risk: Assets and liabilities with similar maturities/re-pricing dates and highly, though imperfectly, correlated profit rate benchmarks
(USD-LIBOR and BIBOR) are exposed to basis risk.
• Profit rate curve risk: Changes to the values, slope and shape of the profit rate curve that impact the assets and liabilities of Ithmaar Bank in
a dissimilar manner gives rise to profit rate risk.
• Risk of counterparty’s options underlying assets: The availability of options, with Ithmaar Bank’s counterparties, to make prepayments or early
withdrawals can leave Ithmaar Bank with excess or deficit funds that need to be invested or funded again at unknown profit rates.
22.2. Profit rate risk strategy
The Board of Ithmaar Bank approves and reviews the profit rate risk strategy and amendments to the Market risk policies. The ALCO is
responsible for implementing the profit rate risk strategy approved by the Board. As a strategy the following measures are initiated:
• Strive to maintain appropriate spread between cost of funds and yield on financing
• Reduce the maturity/repricing mismatch gap between assets and liabilities
• Review the profit rate offered on liabilities products to remain competitive in the market
• Identify profit rate sensitive products Ithmaar Bank wishes to engage in
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PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

22. Profit Rate Risk in the Banking Book (Continued)

22.3. Measurement of profit rate risk
The Bank has adopted the following methods for profit rate risk measurement in the banking book:
• Re-pricing gap analysis: measures the gap between the Rate Sensitive Assets (RSAs) and Rate Sensitive Liabilities (RSLs).
• Economic value of equity (EVE) – Duration Gap: This measures the loss in value of the portfolio due a small change in profit rates. Ithmaar
Bank will adopt EVE measure using duration (weighted-average term to- maturity of the security’s cash-flows) estimates for various time
bands. Assumptions for the computation of economic value are subscribed from Basel II guidelines and international best practices.
• Income Effect - Earnings-at-risk (EaR): Earnings perspective involves analyzing the impact of changes in profit rates on accrual or reported
earnings in the near term. In the earnings perspective, the focus of analysis is the impact of changes in profit rates on accrual or reported
earnings. Ithmaar Bank also performs a stress testing of the impact of 200 basis points on the capital of the Bank.
22.4. Profit rate risk monitoring and reporting
Profit rate risk is monitored by reviewing the repricing profile of the Rate Sensitive Assets and Rate Sensitive Liabilities.
MIS on profit rate risk, including the impact of shift in profit rates on the earnings and economic value is presented to the ALCO and the AGRMC.
22.5. Disclosure of Profit rate risk:
Profit rate risk is the risk that the value of the financial instrument will fluctuate due to changes in the market profit rates. The impact of every
200 basis point change is as follows:
USD PKR AED
Total profit rate exposure 252,377 140,562 123,189
Rate shock (assumed) (+/-) 2.00% 2.00% 2.00%
Total estimated impact (+/-) 5,048 2,811 2,464
23. Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events which
includes but not limited to legal risk and Sharia compliance risk. This definition excludes strategic and reputational risks.
Ithmaar Bank cannot expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential
risks, Ithmaar Bank is able to manage the operational risks to an acceptable level.
23.1 Operational risk management strategy
The Bank has in place a robust framework for the management of Operational Risk. Policies and Procedures on Operational Risk provide detailed
guidelines for management of Operational Risks in Ithmaar Bank.
All new products and processes are reviewed to identify the operational risks therein and mitigants are put in place.
The approach to Operational Risk includes emphasis on:
• Establishment of an effective governance structure with clear reporting lines and segregation of duties.
• Maintenance of an effective internal control environment.
• Escalation and resolution of risk and control incidents and issues.
23.2 Operational risk monitoring and reporting
Report on Operational Risk events is submitted by the support and business departments, the events are reviewed and discussed, and
shortcomings are resolved, external loss events are also recorded and reviewed in terms of its relevance to Ithmaar Bank’s operations.
A robust Risk Control and Self-Assessment process has been implemented; whereby significant risks in a process are identified and evaluated
taking into consideration the inherent risk and residual risk.
Key Risk Indicators (KRIs) for all the significant risk areas have been developed and trends thereof are being monitored. Ithmaar Bank has also
established bank-wide Key Risk Indicators (KRI) which are constantly monitored to assess the overall operational risk profile.
The Bank has an Operational Risk Management Committee (ORMC) which supervises the effective implementation of the Operational Risk
across all banking activities. Results of all Operational Risk monitoring and management activites and initiatives are presented to the ORMC.
The AGRMC is periodically updated on the operational risk profile which include the review of the operational risk events, KRI monitoring and
details of any operational risk event leading to financial or reputational loss.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 131

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020

23. Operational Risk (Continued)

23.3 Operational risk mitigation and control
The Operational Risk management process through RCSA, KRI and loss reporting is complemented by the department-level procedures which
ensure that concerned staffs are well aware of their responsibilities and processes associated with their responsibilities.
The RCSA process also helps to identify the material operational risks and decision on appropriate controls to be implemented to mitigate the
risks is arrived at. At times a decision is taken whether to accept the risks, reduce the level of activity involved, transfer the risk, or withdraw
from the associated activity completely jointly by the Risk Management Department along with the concerned business/support department.
The Risk Management Department in consultation with the Legal department monitors the pending legal cases against Ithmaar Bank. Wherever
required Risk Management Department in coordination with the Legal Department assesses the impact of legal cases on the Operational and
Reputational risk profile.

23.4 Business Continuity Plan

Ithmaar Bank has in place a Business Continuity Policy which deals with policy initiatives to ensure that Ithmaar continues its critical activities
following a disastrous event.
This provides the plan for continuity of business operations at all times in case of any potential disruptions resulting from unanticipated loss of
services or infrastructure.
Disaster Recovery Sites has been set up at Galali Branch and West-Riffa Branch. The premises are well equipped with the required infrastructure.
A Business Continuity Steering Committee has been set up, which oversee the implementation of the Business Continuity Plan in Ithmaar Bank.

23.5 Information Security

Ithmaar Bank’s Information Security and compliance function within RMD role is to prevent disruptions of the Information Security systems as
it would impact Bank’s business objective, its operations and also impede the main pillars of Information Security (Confidentiality, Integrity, and
Availability).
The function continually strengthens and improves the overall capabilities of the information security management system by ensuring that
Ithmaar Bank’s Information Security process is complete, reliable and adhering to international standards.
It is also ensured that information security related operations continue to be carried out in line with international standards such as (IEC/ISO
27001 and PCI-DSS). It is also ensured that on-going training and awareness on information security is provided to the employees of the Bank.
Towards this end on-line training and awareness sessions on information security is provided to the employees of the Bank.
The Bank is IEC/ISO 27001 and PCI-DSS certified, this reflects the importance assigned to information security by the Bank.
The Information Security Function actively preforms various task in terms of:
• Cyber and Information security training
• Security Certification compliance and assurance
• Review and preparation of Information security policies and procedures
• Incident response management
• Active monitoring and auditing of Applications and systems
• Provides reports and assistance to the information security steering committee
• Engagement in Bank’s on-going projects
• Bank’s compliance with Bahrain Information security laws and Regulatory requirements
132 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020

23. Operational Risk (Continued)

23.6 Reputation Risk
The Reputational Risk Management is defined as the risk arising from negative perception on the part of customers, counterparties, shareholders,
investors, debt-holders, market analysts, other relevant parties or regulators that can adversely affect a bank’s ability to maintain existing,
or establish new, business relationships and continued access to sources of funding. Reputational risk is multidimensional and reflects the
perception of other market participants. Furthermore, it exists throughout the organization and exposure to reputational risk is essentially a
function of the adequacy of the bank’s internal risk management processes, as well as the manner and efficiency with which management
responds to external influences on bank-related transactions. Reputational risk also may affect a bank’s liabilities, since market confidence and
a bank’s ability to fund its business are closely related to its reputation.
The Bank has developed a framework and has identified various factors that can impact its reputation. Management of reputation risk is an
inherent feature of the Bank’s corporate culture which is embedded as an integral part of the internal control systems. Besides identification
and management of risks, the internal control system also incorporates as an ethos the maintenance of business practices of the highest quality
towards its customers, shareholders, regulators, general public and fiduciary/ nonfiduciary clients.
The Bank also adopts risk mitigation approaches that refer to shaping products, business transactions and other processes that may result in
a reputational risk.

24. Disclosure of regulatory capital requirements for operational risk under the basic indicator approach:
For regulatory reporting, the capital requirement for operational risk is calculated based on basic indicator approach. According to this approach,
the Bank’s average gross income over the preceding three financial years is multiplied by a fixed alpha coefficient.
The alpha coefficient has been set at 15% under CBB Basel III guidelines. The capital requirement for operational risk at 31 December 2020
aggregated to BD18.3 million (31 December 2019: BD16.9 million).

25. Liquidity Risk

Liquidity risk is the risk that Ithmaar Bank is unable to meet its financial obligations as they fall due, which could arise due to mismatches in
cash flows.
Liquidity risk arises either:
• From the inability to manage unplanned decreases or changes in funding sources; or
• from the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss
in value.
Liquidity risk management ensures that funds are available at all times to meet the funding requirements, Funding and liquidity management is
performed centrally by the Treasury, with oversight from the ALCO. ALCO is responsible for setting the framework and for effective monitoring
of Ithmaar Bank’s liquidity risk. Ithmaar Bank’s liquidity policies are designed to ensure it will meet its obligations as and when they fall due, by
ensuring it is able to generate funds from the market, or have sufficient High Quality Liquid Assets (HQLAs) to sell and raise immediate funds
without incurring unacceptable costs and losses. The Bank regularly monitors the concentration in the funding sources and ensures that the
funding sources are adequately diversified.
The Liquidity Risk Management Policy also sets out the minimum acceptable standards for the management of Ithmaar Bank’s assets and
liabilities including maintenance of HQLAs, prudent assets and liabilities maturity mismatch limits, and a mechanism of monitoring liquidity risk
in the Bank.

25.1. Liquidity risk monitoring and reporting

ALCO monitors liquidity risk, including liquidity mismatch limits, maintenance of regulatory and internal liquidity ratios including Liquidity
Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) and various other liquidity ratios as required under the provisions of the LM Module
and the funding maturity profile on a regular basis. Risk Management Department submits a quarterly report to the AGRMC which includes an
analysis of Ithmaar Bank’s adherence to various liquidity risk metrics established in the Risk Appetite Framework of the Bank.
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 133

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

25. Liquidity Risk (Continued)

25.2. Liquidity Stress Testing
Stress testing of the liquidity risk profile of Ithmaar Bank based on certain Board approved parameters is also performed and presented to the
AGRMC on a quarterly basis.
25.3. Liquidity Contingency Management
Ithmaar Bank has also a Liquidity Contingency Policy which provides guidelines to manage either temporary or longer-term disruptions in its
ability to fund some or all of its activities in a timely manner and at a reasonable cost.
25.4. Liquidity ratios:
31 December 2020
Liquid assets to total assets 25.97%
Short term assets to short term liabilities 64.02%
25.5. Liquidity ratios:
The LCR of Ithmaar Bank as of 31 December was 147%. The average 90 day LCR as of 31st December 2020 was 165%. The detailed breakdown
of the average 90 day LCR as of 31st December 2020 is detailed below.
Total Unweighted Total Weighted
Value Value
Description (average) (average)
HIGH-QUALITY LIQUID ASSETS (HQLA)
1 Total HQLA - 472,930
CASH OUTFLOWS
2 Retail deposits and deposits from small business customers, of which:
3 Stable deposits 222,237 6,667
4 Less stable deposits 958,792 94,589
5 Unsecured wholesale funding, of which: - -
6 Operational deposits (all counterparties) and deposits in networks of cooperative banks 91,788 22,947
7 Non-operational deposits (all counterparties) 490,714 236,925
8 Unsecured debt - -
9 Secured wholesale funding - -
10 Additional requirements, of which: - -
11 Outflows related to derivative exposures and other collateral requirements 1,947 1,947
12 Outflows related to loss of funding on debt products - -
13 Credit and liquidity facilities 173,528 14,570
14 Other contractual funding obligations 58,995 58,995
15 Other contingent funding obligations 521,329 26,066
16 TOTAL CASH OUTFLOWS - 462,707
CASH INFLOWS
17 Secured lending (eg reverse repos) 10,267 -
18 Inflows from fully performing exposures 258,564 176,786
19 Other cash inflows - -
20 TOTAL CASH INFLOWS 267,831 176,786
21 TOTAL HQLA - 472,930
22 TOTAL NET CASH OUTFLOWS - 285,921
23 LIQUIDITY COVERAGE RATIO (%) - 165%
134 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

25. Liquidity Risk (Continued)

25.6. Net Stable Funding Ratio:
The Net stable Funding Ratio (NSFR) of the Bank as of 31 December 2020 was 119%. The detailed breakdown of the NSFR as of 31 December
2020 is detailed below.

Unweighted Values (i.e. before applying relevant factors)

More than 6
months and Total
Nov specified Less than 6 less than Over weighted
No. Item maturity months one year one year value
Available Stable Funding (ASF):
1 Capital: 109,946 - - 22,473 132,419
2 Regulatory Capital 109,946 - - - 109,946
3 Other Capital Instruments - - - 22,473 22,473
4 Retail deposits and deposits from small
business customers: - 1,290,180 252,994 136,144 1,539,199
5 Stable deposits - 263,952 20,037 9,758 279,547
6 Less stable deposits - 1,026,228 232,957 126,386 1,259,652
7 Wholesale funding: - 426,472 314,705 379,194 655,427
8 Operational deposits - - - - -
9 Other wholesale funding - 426,472 314,705 379,194 655,427
10 Other liabilities: - 254,162 - 7,293 7,293
11 NSFR Shari’a-compliant hedging contract
liabilities - 22,948 - - -
12 All other liabilities not included in the above
categories - 231,214 - 7,293 7,293
13 Total Available Stable Funding (ASF): - - - - 2,334,338
Required Stable Funding (RSF):
14 Total NSFR high-quality liquid assets (HQLA) - - - - 14,720
15 Deposits held at other financial institutions
for operational purposes - - - - -
16 Performing loans and securities: - 441,285 89,939 1,403,025 1,472,963
17 Performing loans to financial institutions
secured by Level 1 HQLA - - - - -
18 Performing loans to financial institutions
secured by non-Level 1 HQLA and unsecured
performing loans to financial institutions - 94,184 13,422 586,190 607,028
19 Performing loans to non- financial corporate
clients, loans to retail and small business
customers, and loans to sovereigns, central
banks and PSEs, of which: - 347,101 76,517 613,646 733,408
20 - With a risk weight of less than or equal to
35% as per the CBB Capital Adequacy Ratio
guidelines - - - 184,993 120,245
21 Performing residential mortgages, of which: - - - - -
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 135

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

25. Liquidity Risk (Continued)

25.6. Net Stable Funding Ratio (Continued)

Unweighted Values (i.e. before applying relevant factors)

More than 6
months and Total
Nov specified Less than 6 less than Over weighted
No. Item maturity months one year one year value
22 '- With a risk weight of less than or equal to
35% under the CBB Capital Adequacy Ratio
Guidelines - - - 16,995 11,047
23 Securities that are not in default and do not
qualify as HQLA, including exchange-traded
equities - - - 1,201 1,235
24 Other assets: - 432,783 - - 432,783
25 Physical traded commodities, including gold - - - - -
26 Assets posted as initial margin for
Shari’a-compliant hedging contracts and
contributions to default funds of CCPs - - - - -
27 NSFR Shari’a-compliant hedging assets - - - - -
28 NSFR Shari’a-compliant hedging contract
liabilities before deduction of variation
margin posted - 4,590 - - 4,590
29 All other assets not included in the above
categories - 428,193 - 428,193
30 Off Balance Sheet items - 684,017 - - 34,201
31 Total RSF 1,954,667
32 Net Stable Funding Ratio (%) 119%

26. Legal contingencies

At 31 December 2020, the Group had contingent liabilities towards customer and other claims aggregating to BD79.7 million (31 December
2019: BD83.2 million). The management is of the view that these claims are not likely to result into potential liabilities.
During the period, the Bank was subject to financial penalty of Nil (31 December 2019: BD60,000) relating to disclosures on certain charges.

27. Displaced Commercial Risk

Ithmaar Bank is exposed to rate of return risk in the context of its Profit Sharing Investment Accounts (PSIA) fund management. An increase in
benchmark rates may result in Investment Account Holder (IAH)s’ having expectations of a higher rate of return. As per mudaraba agreement,
IAHs are eligible for the actual return earned on the assets and all losses in normal course of business on PSIA are borne by the IAHs, Ithmaar
Bank may however, under market pressure pay a return that exceeds the rate that has been actually earned on assets funded by IAHs.
This increased rate of return risk may result in displaced commercial risk where Ithmaar Bank may forgo its share of profits as modareb to match
the IAHs.
136 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

27. Displaced Commercial Risk (Continued)

27.1 The following mechanism / guidelines are followed to avoid the displaced commercial risk in the Bank:
Expected Rate of Returns to IAHs
ALCO on periodic basis reviews the expected rates offered to IAHs to revise and adjust them with the benchmark rates. Business units offering
PSIAs products monitors benchmark rates being offered by the relevant competitors and overall trend and recommend changes in the expected
rates offered by Ithmaar Bank. This pro-active approach of adjusting the expected profit rates minimizes the displaced commercial risk.

Profit Equalization and Investment Risk Reserves (PER & IRR)

A central principle of Islamic finance is that an investor participating in a Modaraba contract must bear all losses in normal course of business and
are eligible for actual rate of returns earned on the assets. However, Ithmaar Bank, to fulfill its fiduciary responsibility or to match benchmark
rates or to avoid displaced commercial risk, creates reserves to make good such losses or meet the shortfall in expected returns. These reserves
may be in the form of Profit Equalization Reserve and Investment Risk Reserves for PSIA Funds.

28. Gross income from Mudaraba and profit paid to Unrestricted Investment Accountholders:
31 December 2020 31 December 2019 31 December 2018 31 December 2017
Percentage Percentage Percentage Percentage
to URIA to URIA to URIA to URIA
assets Amount assets Amount assets Amount assets Amount
Income from unrestricted
investment accounts 5.6% 91,603 6.4% 82,551 5.9% 67,949 5.1% 62,190
Less: return to unrestricted
investment accounts & provisions -3.4% (55,655) -4.2% (54,359) -3.6% (40,959) -2.7% (33,214)
Group’s share of income from
unrestricted investment accounts
as a Mudarib 2.2% 35,948 2.2% 28,192 2.4% 26,990 2.4% 28,976

For the year ended 31 December 2020 the return generated from unrestricted investment accountholders based on the average balance
outstanding during the year stood at 4.9% per annum (2019: 4.6%). The return paid to unrestricted investment accountholders based on the
average balance outstanding during the year at 3.2% per annum (31 December 2019: 3.1%).

29. Average declared rate of return on General Mudaraba deposits:

31 December 31 December 31 December 31 December
2020 2019 2018 2017
30 Days 1.27 1.41 1.20 1.10
90 Days 1.55 1.81 1.60 1.60
180 Days 1.80 2.06 1.85 1.85
360 Days 2.45 2.80 2.50 2.50
3 Years 2.75 3.04 2.70 2.70
 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020 137

PUBLIC DISCLOSURES CONTINUED

At 31 December 2020
(Expressed in thousands of Bahraini Dinars unless otherwise stated)

30. Movement in Profit Equalization Reserve and Investment Risk Reserve:

31 December
2020
Profit Equalization Reserve 7,351
Net utilisation during the year (3,016)
As at 31 December 2020 4,335
Investment Risk Reserve -
As at 31 December 2020
At 31 December 2020, the ratio of profit equalization reserve and provisions against equity of unrestricted investment accountholders stood at
0.3% and 2% respectively.
31 December 2020, the ratio of financings to URIA stood at 79%.

31 December 2020, the percentage of each type of Islamic financing to total URIA financing was as follows:
Percentage
Financing to Total
URIA Financing
Murabaha and other financings 50.92%
Musharaka financing 34.77%
Assets acquired for leasing 14.31%
The following table summarizes the breakdown of URIA and impairment provisions
31 December
2020
Exposure : Banks 327,246
Exposure : Non-Banks 1,296,606
Provisions : Non-Banks (26,346)

31. Other disclosures

The audit fees charged and non-audit services provided by external auditors will be made available to the shareholders as and when requested.
Such details will be made available to the Bank’s shareholders as per their specific request provided that these disclosures would not negatively
impact the Bank’s interest and its competition in the market.
Deposits and Unrestricted Investment Accounts held with the Bank in the Kingdom are covered by the Regulation Protecting Deposits and
Unrestricted Investment Accounts issued by the CBB in accordance with Resolution No.(34) of 2010.
138 ITHMAAR BANK B.S.C. (c) ANNUAL REPORT 2020

CORPORATE INFORMATION

Name of Company Ithmaar Bank B.S.C. (Closed)

Ithmaar Bank B.S.C. (Closed) is a Bahrain-based Islamic retail bank that is licensed and regulated by the
Central Bank of Bahrain and provides retail, commercial, treasury and financial institutions, and other
Legal Form banking services.

Company Registration Number CR 99336

Registered Office Seef Tower, Building 2080, Road 2825, Al Seef District 428, P.O. Box 2820, Manama, Kingdom of Bahrain

Telephone +973 17585000

Facsimile +973 17585151

Email [email protected]

Website www.ithmaarbank.com

Accounting Year End 31 December

Compliance Officer Balu Tiruvilandur Ramamurthy – Head, Compliance and AML

Company Secretary Ali Ahmed Mohamed – Board Secretary

Auditors PricewaterhouseCoopers ME Limited, P.O. Box 60771, Manama, Kingdom of Bahrain