Financial instruments of the group represent the group’s financial assets and liabilities. Financial assets include cash and bank balances, placements with financial and other institutions, investment securities portfolios, derivative financial instruments, financing assets, certain assets of a subsidiary held for sale and certain other assets of the group. Financial liabilities include certain liabilities of a subsidiary held for sale, due to banks, financing liabilities, derivative financial instruments and certain other liabilities. Accounting policies for financial instruments are set out in note 2 in these consolidated financial statements.
The group has exposure to various risks from its use of financial instruments. These risks can be broadly classified as:
- Credit risk;
- Liquidity risk;
- Market risk;
- Operational risk; and
- Regulatory and legal risks.
This note presents information about the group’s exposure to each of the above risks, the group’s objectives, policies and processes for measuring and managing risk, and the group’s management of capital.
Risk management & governance framework of the group
The group’s risk management process is an integral part of the organization’s culture, and is embedded into the organization’s practices as well as in all those involved in the risk management process. The Board of Directors (“Board”), Board Risk, Audit and Compliance Committee (“BRACC”), senior management, risk officers, and line managers contribute to the effective group-wide risk management.
The risk governance structure is headed by the Board of Directors and the Sharia’a Supervisory Board (“SSB”) of the group. The risk appetite and the risk strategy for the group are developed at this level.
The next level of the Board committees has delegated powers for monitoring the risk taking activities of the group. These committees are the Board Risk, Audit and Compliance Committee, the Board Investment Committee (“BIC”), and the Nomination and Remuneration Committee. In turn, the risk appetite and risk tolerance set by the Board are cascaded across the institution and are taken into account in developing business goals and objectives.
As part of an effective system of control, key management decisions are made by more than one individual, in the form of non-board management committee, as follows::
Steering Committee (“STC”) is the primary executive committee of the group that is responsible for the following:
- General management issues including performance review against the budget, and oversight on implementation of the strategic business plan.
- Evaluates proposals for investments and credits, divestiture of assets and valuation of investments. The committee also ensures compliance with investment criteria as well as investment procedures at each phase of the investment process.
- Oversees management of market risks, translates investment strategy directions into asset allocation guidelines, and reviews and manages the capital adequacy, liquidity position and funding alternatives.
- Reviews the effectiveness of the operational risk management processes and procedures in respect of IT, Compliance, and AML, with the purpose of mitigating these risks.
Asset and Liability Management Committee (“ALCO”) is a sub-committee of the STC responsible for setting and implementing the ALM policy, capital planning and proactive management of liquidity risk and market risk to which the Firm is exposed. The authority of ALCO includes
- Active management of the funding profile in line with firms objectives, with a focus on the entire balance sheet;
- Balance sheet and cash flow review and forecasting;
- Design and implementation of foreign exchange and profit-rate hedging strategy;
- Periodic review Treasury Money Market limits and placement strategy;
- Review and approval of derivative exposure limits.
- Design and implementation of the liquidity and capital strategy of the firm.
The risk management functions are carried out by the identified control departments who liaise with the Chief Executive Officer for the day to day management of specific risks. These control departments include Risk Management, Compliance, Legal and Finance, and are manned by dedicated risk specialists in various disciplines to deal with the pertinent business risk exposures of the group. In line with suitable governance policies, Risk Management and Compliance department have independent reporting lines to the BRACC that allow to provide its impartial view on the business activities taken by the group.
Credit risk is the risk that an obligor or counterparty will fail to meet its contractual obligations in accordance with the agreed terms. For risk management reporting purposes, the group considers and consolidates all elements of credit risk exposure (such as individual obligor exposure, business line exposure, country and economic sector risk etc.).
Management of credit risk
The Board has granted approval to the group to engage in credit and investment related activities for approved products and is ultimately responsible for approving and periodically reviewing the credit and investment strategies and policies of the group along with the SSB. The Board defines and sets the group’s overall levels of risk appetite, risk diversification and asset allocation strategies applicable to each Islamic financing instrument, economic activity, geographical spread, currency and tenor. The SSB has the responsibility to ensure that the business is conducted according to Islamic principles. The SSB reviews and approves the credit/investment products developed by the group and used by the group in its business along with the credit risk and investment policies.
The Board has delegated its responsibility of overall risk management to various Board and senior management committees. The BIC of the Board of Directors is responsible for evaluating and granting credit facilities and approving the group’s investment activities within authorized limits as set by the Board and within the scope of activities approved by the QFCRA. The STC evaluates credit and investment proposals and also exercises oversight on compliance with investment criteria, limits and investment procedures. The Risk Management Department is responsible for reviewing and scrutinizing the Bank’s risk management policies and procedures. The STC also reviews proposed guidelines on all risk and governance issues.
The Risk Management Department (“RMD”) is responsible for the oversight and monitoring of the Group’s group’s credit risk, including:
- Formulating credit and investment policies in consultation with business units, covering credit and investment assessment, and risk reporting. RMD also facilitates establishment of the authorization structure for the approval and renewal of credit facilities. Approval / authorization limits are also allocated to Executive Management. Larger facilities require approval by BIC and/or the Board of Directors based on the authority limits structure of the group.
- Reviewing and assessing credit and investment exposures prior to investments or facilities being committed. Exercising oversight for limiting concentrations of exposure to counterparties, countries and economic sectors.
- Exercising oversight on ongoing monitoring of credit and investment exposures, market risk exposures and operational risk management.
- Providing advice, guidance and specialist skills to business units to promote best practice throughout the group in the management of investment and credit risk.
- The RMD works alongside the investment banking department at all stages of a deal cycle from pre-investment, due diligence, exit and provides an independent review of every transaction. A fair evaluation of investments takes place every two months with input from the investment banking department. Bi-monthly updates of investments are reviewed by RMD. The STC conducts quarterly reviews. Regular audits of business units and group credit process are undertaken by Internal Audit.