WINNING ELEVATED - soharinternational.com€¦ · was structured with the ultimate purpose of instilling a saving culture within the nation helping customers, communities and people

Sohar International 2019 1

W I N N I N G E L E V A T E D

A N N U A L R E P O R T 2 0 1 9

Sohar International 20192 Sohar International 2019 3


LATE HIS MAJESTYSULTAN QABOOS BIN SAID

HIS MAJESTYSULTAN HAITHAM BIN TARIK

If we are, Countrymen, to take pride in the great heritage that we have received from our ancestors, this pride must not be our ultimate aim. We should not live in the past. That is the character of those who have no determined attitude towards the future. And that is certainly not the character of the Omani. He possesses the vibrant energy and active spirit that can carry him forward to the furthest horizons. Nothing can deter him. It was therefore our duty to our forefathers to emulate and surpass their achievement. Those achievements act as the stimulus to attain more development, in harmony with modern life and scientific evolution.

Nation building and development are a public responsibility that requires the commitment of all, without exempting any one from their role, in their respective specialties, and within their capabilities. Oman has been founded, and its civilization has been established through the sacrifices of its people who used their utmost in preserving its dignity and strength, exhibiting their loyalty in performing their national duties and advancing national interests to personal interests. This is what we are resolved to consolidate and protect, so that we could attain the level of development that we aspire for, the prosperity which we will work to realize and the decency that must prevail in all sectors and become firm grounds for all that we will do.


G R E AT W I N SA R E B U I LT O N A S O L I DFO U N DAT I O N-

To be a world-leading Omani

service company, that helps

customers, communities and

people to prosper and grow.

VISION-

VALUES-• Be straight up Act with honesty, courage and kindness.

• Be open minded Listen openly. Encourage ideas. Embrace innovation. Welcome feedback.

• Do the right thing Take responsibility. Make the tough calls. Think of others.

• Make it better Find or create solutions - step up, own it, do it.

VISION &VALUES-


INTRODUCTION-W E LCO M ETO A N E W STA N DA R D O F W I N N I N G-At Sohar International, we take

winning to new heights and

are determined to raise the

bar in everything we do. As

a result, we’ve elevated the

banking sector and have created

next-level wins.


FINANCIAL STATEMENTS - SOHAR ISLAMIC 192

Auditors’ Report on Financial Statements 194

Statement of Financial Position 195

Statement of Comprehensive Income 196

Statement of Owner’s Equity 197

Statement of Cash Flows 198

Notes to the Financial Statement 199

REGULATORY DISCLOSURES - SOHAR ISLAMIC 248

Auditors’ Report on Regulatory Disclosures

under Basel II and Basel III 250

Regulatory Disclosures

under Basel II and Basel III Framework 251

CONTACTS 284

Branch Network, Contact Details & ATM Locations 286

BOARD OF DIRECTORS 12

Chairman’s Report 16

CORPORATE GOVERNANCE 20

Auditors’ Report on Corporate Governance 22

Corporate Governance Report 23

MANAGEMENT 36

Management Team 38

Chief Executive Officer's Message 40

Management Discussion and Analysis 43

FINANCIAL STATEMENTS - SOHAR INTERNATIONAL 50

Auditor’s Report on Financial Statements 52

Statement of Financial Position 57

Statement of Comprehensive Income 58

Statement of Changes in Equity 60

Statement of Cash Flows 64

Notes to the Financial Statement 65

TABLE OF CONTENTS-

REGULATORY DISCLOSURES - SOHAR INTERNATIONAL 150

Auditors’ Report on Regulatory Disclosures

under Basel II and Basel III 152

Regulatory Disclosures

under Basel II and Basel III Framework 153

SOHAR ISLAMIC 180

Shari’ah Supervisory Board 182

Shari’ah Supervisory Board Report 184

List of Fatwas 186


BOARD OF DIRECTORS-

TA K I N G W I N N I N G TO T H E N E X T L E V E L-


Mr. Said Ahmed SafrarDirector

Mr. Abdullah Salim Al HarthyDeputy Chairman

Mr. Tareq Mohammed Al MugheiryDirector

Left to Right Left to Right

Mr. Mohammed Mahfoudh Al-ArdhiChairman

Engr. Ahmed Hamed Al SubhiDirector

Mr. Salim Mohamed Al MashaikyDirector

Mr. Bipin Dharamsey NenseyDirector


Mohammed Mahfoudh Al Ardhi

ChairmanI am privileged to present Sohar International’s (the “Bank”) financial performance, and significant achievements for the year ended 31 December 2019.

FINANCIAL PERFORMANCE

In 2019, the Bank increased net profit by 17.2% to achieve a record net profit for the year of RO 34.406 million compared to RO 29.366 million last year. The Board of Directors proposed a cash dividend of 6% for the year, which corresponds to 6 baizas per share. Subsequently Central Bank of Oman (CBO), approved a cash dividend of 3% of share capital (3 baizas per share) and bonus shares of 3% of share capital (3 shares for every 100 shares held).

Net interest income for the year increased by 23.9% to RO 70.191 million (2018: RO 56.651 million). Operating income increased by 10.8% to RO 104.659 million, (2018: RO 94.438 million). Operating expenses increased by 13.5% to RO 45.286 million (2018: RO 39.885 million), reflecting our continued investment in people and core infrastructure. Operating profit increased by 8.8% to RO 59.373 million (2018: RO 54.553 million).

Total assets increased for the year by 15.1% to RO 3.505 billion (2018: RO 3.046 billion). Net loans and advances increased by 9.0% to RO 2,454 million (2018: RO 2,252 million). Customer deposits increased by 15.3% to RO 2,097 million (2018: RO 1,818 million). As at end of October 2019, the Bank’s market share of private sector credit increased to 11.38% from 10.48% in December 2018, and its share of private sector deposits increased from 7.93% to 8.60% over the same period.

The ratio of non-performing loans and advances to gross loans and advances increased from 3.29% in December 2018 to 4.82% in December 2019 reflecting the deterioration in asset quality of certain corporate customers. The Bank continues to focus on the proactive management of credit exposures in line with its credit risk management policies.

The Bank continues to focus on enhancing shareholder value in line with its strategic objectives.

SUSTAINABILITY & MILESTONES

Sohar International’s solid foundation enabled it to have been rated in parity to other Omani Banks by renowned rating agency Moody’s. Of particular note, and despite a challenging operating environment, the Bank was highly successful in raising funds through Tier 1 Perpetual Bonds worth RO 100 million within a mere one-month time frame, an enviable

achievement within the banking sector. The Bank was also successful in completing a rights issue resulting in an increase in shareholder’s equity of RO 40 million. The oversubscribed issuance reflects the confidence the shareholders have in the Bank’s ability to continue on a growth trajectory and deliver on its strategic imperatives.

EMBEDDING A WINNING CULTURE

The year 2019, witnessed the Bank being awarded an advisory mandate for one of the largest textile manufacturers in Oman for their expansion into the Sultanate. The advisory mandate includes forming a capital structure for the expansion, raising of funds and offering of shares on the Muscat Securities Market (MSM) through an Initial Public Offering (IPO).

Congruent to its purpose of ‘helping people win’, Sohar International conducted countless draws under its prize scheme across the Sultanate. The incentivized campaign was structured with the ultimate purpose of instilling a saving culture within the nation helping customers, communities and people to prosper and grow.

Extending the ‘winning’ culture to the workplace and employees, Sohar International introduced ‘Erteqa’a Plus’ Training Program – a leadership training program organized in association with Harvard Business Publishing.

EXPANDING DIGITAL FOOTPRINT

With the zeal of redefining banking, Sohar International rolled out its eco-system of contactless products to ease the transaction processes for customers and merchants making it the first Bank in Oman to provide complete support to contactless payments as issuer and acquirer. Increasing efficiencies, the Bank also introduced a ‘Recycler’ Automated Teller Machine (ATM) for the first time in the Sultanate.

Sohar International has been constantly adapting to new technologies with a view to extend professional and efficient financial services to various segments of society. Early 2019, the Bank had collaborated with Omantel to launch ‘eFloos’ – a digital wallet that delivers secure, fast, and convenient e-payment facility. The Bank has since collaborated with several new business groups to offer mobile payment through the eFloos platform. Furthermore and with a view to offer simple and convenient navigation to all visitors, Sohar International unveiled a new corporate website.

SERVING OUR CUSTOMERS

To enhance banking experience for customers and working environment for employees, Sohar International relocated its head office from the MBD to Water-Front building in Shatti Al Qurum. The new location makes the Bank more accessible and convenient, enabling the Bank to interact in an environment that is more welcoming and equipped with state-of-the-art technology to support and enhance customer experience.

Recognizing the need for customized financial services and advisory for high net worth individuals, Sohar International unveiled its wealth management advisory services. Under this proposition, the Bank focuses on offering fiduciary advice and highly customized financial and non-financial services, covering savings and investments schemes, borrowings, future protection schemes and day-to-day transactions.

Besides the investment in digital initiatives, the Bank also adopted automation in its processes to improve service turnaround-time and streamline process applications to offer market-leading service delivery time on account opening, personal loans, housing loans, letters of credit and letters of guarantee.

Bringing the best of the world to Oman, Sohar International partnered with European Financial Group (EFG) International, one of the largest and best-capitalized Swiss private banks with an international footprint. As part of this agreement, both institutions combine expertise to provide financial institutions, sovereign wealth funds, family offices, pension funds, and high net worth individuals with exclusive access to global investment opportunities and innovative products.

CONNECTING WITH OUR COMMUNITY

Under the government’s Omanization strategy and as a part of increasing ‘In-Country Value’, Sohar International continued to help create thousands of jobs for Omanis by supporting multimillion-dollar Greenfield projects. The Bank itself has been an active employer and is currently one of the largest private organizations with over 90% Omanization.

Reiterating its position as an active player in enhancing the Sultanate’s economy and driving positive change, Sohar International continued to organize ‘Viewpoints – Chairman’s Forum’ that promotes a thought-provoking series of talks from world-renowned leaders.

Empowering the female community, Sohar International commemorated the contributions of Omani women to the progress of the Sultanate on the Omani Women’s Day by sponsoring a special draw and grand event at the Ministry of Education. An internal event was also organized to acknowledge the female employees for their outstanding contribution to the success of the Bank with an announcement of several women-oriented policy changes within the organization.

Expanding on its community and staff engagement initiatives during the holy month of Ramadan, the Bank launched a novel social media campaign - #WinningTogether, with the aim of highlighting the act of giving. In line with the spirit of #WinningTogether, Sohar International extended a helping hand to those in need by providing essential food items to low-income families throughout the holy month.

Reflecting its spirit of winning under the new brand strategy, Sohar International became the exclusive sponsors of Shihab Al Habsi, the 15-year-old racing sensation who has been promoted to Formula 3 racing, as well as sponsored Nadhira Al Harthy, the first Omani woman to climb Mount Everest.

COMMITMENT TO OMANI YOUTH

Providing a stepping stone to the youth of the nation, Sohar International had earlier launched ‘Tomohi’ Graduation Program with the objective of enhancing employment opportunities of Omani college and university graduates. The year witnessed the graduation and completion of the first batch of candidates allowing the floor to be open for the next batch.

As a pro-youth organization and a facilitator of socio-economic growth and progress, Sohar International has constantly been supporting youth-related initiatives that help enhance the skill set of the Omani youth through sponsorships such as the sponsoring of ‘Jalsat Al Mulhimoon’ – a platform to inspire the youth of tomorrow. The Bank also extended its support by sponsoring Injaz’s Signature Curriculum for the academic year 2019/2020 that aims at empowering 1,000 Omanis to the concept of entrepreneurship. In continuity, the Bank collaborated with the Higher College of Technology as Chief Sponsors of the second Inter-Collegiate Forum for Innovation and Entrepreneurship – ‘Ideathon’ 2019.

Besides furthering the academic scenario in the nation by promoting young adults, the Bank empowered the youth representing different professional fields including healthcare and sports. During the year, Sohar International sponsored the graduation ceremony of the Oman College of Health Sciences and Higher Institute of Health Specialists as well as supported platforms such as Chartered Financial Analysts’ (CFA) Society of Oman to strengthen their role as a facilitator of socio-economic growth and progress.

Reinforcing the idea of investing in youth, the Bank constantly thrives by extending support to the younger generation in several championships and tournaments that raise the country’s name at both local and international levels. Sohar International has also held several social media competitions over the year to reach out to its stakeholders.

SOHAR ISLAMIC DEVELOPMENTS

To provide easier access and convenience to customers and provide ample space and better working environment to staff, Sohar Islamic relocated its offices to Ghala. During the year, Sohar Islamic sponsored and participated in the 2nd Salalah International Financial Islamic Conference, which brought together international industry experts to share knowledge and the latest research regarding the Islamic financial sector and products.

Moreover, the year 2019 witnessed Sohar Islamic sign a Memorandum of Understanding (MoU) with the Ministry of Endowments and Religious Affairs for providing innovative, smart, and convenient solutions in its various endowment sectors. As part of the MoU, the entities organized a seminar that saw valuable knowledge sessions.

AWARDS AND ACCOLADES

Sohar International was honored and acknowledged with various awards and accolades for their business leadership, growth, and CSR initiatives. The Bank was recognized for business excellence by the Oman Economic Review (OER) magazine; and has won two accolades at the AIWA awards, including the Best Performing Company award in the Large Segment Category and Best Corporate Social Responsibility Campaign award. For the new launch of its identity, the brand was conferred with the prestigious ‘Excellence in New Brand Identity Award’ at the Oman Banking & Finance Awards 2019, and has been adjudged as a frontrunner under the Innovative Custom Components category at the fifth edition of the Infosys Finacle Client Innovation Awards.

CHAIRMAN’SREPORT-


NEW FRONTIERS

Continuing on its ambitious plan and fulfilling its vision of becoming a global and world-leading Omani service company, Sohar International announced and revealed plans for its landmark new headquarters, unveiling a scale model together with a walk-through video of the exteriors and interiors. The state-of-the-art facility will help the Bank deliver a seamless and rewarding experience to its customers while providing its employees with a high-performance and agile workplace. Poised to become an architectural centerpiece of the city, the cutting-edge design will capture the Bank’s vision to connect with customers worldwide. The new headquarters will also be emblematic of the Bank’s growing strength and will pay testimony to its commitment and conviction in the future of the nation.

CORPORATE GOVERNANCE

The Bank includes a comprehensive report on corporate governance duly certified by the statutory auditors within the annual report. This report is issued in line with the directives provided for the same under the Code of Corporate Governance promulgated by the Capital Market Authority (CMA).

The Bank continues to adhere to the best practices of corporate governance and ensures adequate disclosures and accountabilities. The Bank’s internal control systems and processes are designed to identify and effectively manage the principal risks inherent within its operations thereby providing reasonable assurance to the Bank’s customers, Board of Directors and shareholders that the Bank’s assets are safeguarded.

LOOKING AHEAD

We see continued demand for financing in the near future despite oil prices at current levels due to the commitment of the government to continue focusing on infrastructure projects along with investments in sectors identified as key in the economic diversification plan. Despite economic headwinds, Sohar International is well positioned to further build on its market excellence, capitalize on upcoming opportunities, play a positive role in enhancing the national economy, and continue to create sustainable value for its stakeholders.

RECOGNITION

In conclusion, I would like to thank and appreciate all our stakeholders in their support towards the Bank that has ultimately resulted in the outstanding performance. I would especially like to thank the Bank’s shareholders and valued customers for their continued confidence, as well as the management and employees for their sincerity and hard work to achieve these impressive results.

For their invaluable contribution supporting the banking sector in the Sultanate, I would also like to thank and appreciate the Central Bank of Oman (CBO) and the Capital Market Authority (CMA). It is their ongoing guidance and application of international standards to the highest level in banking and governance that has helped us achieve global confidence in the Sultanate’s economic sector.

The developments witnessed by the banking sector in the Sultanate are the result of the long-term, insightful vision of the Late His Majesty Sultan Qaboos Bin Said - may Allah rest his Soul in eternal peace. The progress of our beloved nation since 1970 under his wise leadership was one with exponential

growth, which was witnessed within all sectors including developmental, social, economical, and security aspects.

Following the footsteps of our late Sultan, the march of progress and development of this great country will continue. By Allah’s will, the stride towards progress will be reconciled under the conscious and wise leadership of His Majesty Sultan Haitham Bin Tarik. In this prosperous era, Oman will continue the march of progress and development, reigned by His Majesty’s directives, to raise the flag of Oman high among the nations, and allow its people to enjoy prosperity, security, and progress.

Mohammed Mahfoudh Al ArdhiChairman


CORPORATE GOVERNANCE-

M A I N TA I N I N GT H E H I G H E ST L E V E L S O F T R A N S PA R E N CY-


1. PHILOSOPHY ON CORPORATE GOVERNANCE

The Corporate Governance Philosophy in Sohar International Bank SAOG (the “Bank” and/or Sohar International) has been developed within the directives and guidelines of the Central Bank of Oman (CBO), the Capital Market Authority (CMA) and the Commercial Companies Law of Oman (CCL). The four universal values synonymous with corporate governance – accountability, fairness, responsibility and transparency are an integral part of it.

Corporate governance is a set of processes, customs, policies, laws and practices affecting the manner in which the organization – namely Sohar International is directed, administered or controlled. Corporate governance also covers the relationships between the many parties or stakeholders involved in the Bank and the aims and objectives for which the Bank is governed. The principal relationships at the Bank are between the shareholders of the Bank, the management and the Board of Directors. Other relationships include the customers, employees of the Bank, regulators, suppliers, the environment and the community in which the Bank exists. An additional aspect of governance is that of an economic efficiency view, through which the governance system of the Bank also aims to optimize economic results, thereby placing emphasis on the shareholder’s welfare.

The Board of Directors of the Bank is committed to the highest standards of Corporate Governance. The Bank is committed to raising the bar even further so as to set a leading example of commitment with the letter and spirit of the Code of Corporate Governance laid out by the CMA and the regulations for Corporate Governance of Banking and Financial Institutions issued by CBO. The CMA Code of Corporate Governance for Public Listed Companies and the CBO circular BM 932, Corporate Governance of Banking and Financial Institutions are the principal codes and drivers of Corporate Governance practices in the Sultanate of Oman. The Bank has complied with all of their provisions, except for certain instances which are stated in the ‘Statement of Compliance’ section of this report. The CMA Code of Corporate Governance can be found at the following website ww.cma.gov.om.

The basic framework of the Bank’s corporate governance requires that the Board of Directors, Shari’ah Supervisory Board (SSB) for its Islamic Banking Window (Sohar Islamic) and management shall:

• Maintain the highest standards of corporate governance and regulatory compliance.• Promote transparency, accountability, responsiveness and social responsibility. • Conduct its affairs with its stakeholders, customers, employees, investors, vendors, government and the society at large in

fairness and in an open manner.• Create an image of the Bank as a legally and ethically compliant entity.

2. BOARD OF DIRECTORS

The Bank’s Board of Directors (the Board) is the highest governing authority within the Bank’s structure. Its role is to ensure that the Bank conducts itself in accordance with its core values and develops them further on a continuous and sustainable basis. The Board consists of professionals from various fields and professions and gives representation to the stakeholders and administrators in the process of decision-making. The predominance of independent directors has enabled the Board to have meaningful discussions and take an unbiased and qualitative view on matters placed before it. There is a clear segregation between the ownership of the Bank and the management. The roles of the Chairman of the Board and the Chief Executive Officer (CEO) are separated with a clear division of responsibilities at the head of the Bank between the running of the Board and the executive management responsibility for running the Bank’s business. The Board is responsible for overseeing how management serves the long-term interests of shareholders and other key stakeholders.

2.1 Composition and classification of the Board

The constitution of the Board, election process for Board members and shareholders’ interests are areas of prime concern for the good governance commitment of the Bank. Details of the elected Board members are outlined in “Table 1”.

Table 1: Composition and classification of the Board

Name of Director Category Represents

Mr. Mohammed Bin Mahfoodh Alardhi Chairman Non-Executive Independent

Mr. Abdullah Al HarthiDeputy Chairman Non-Executive Independent

Mr. Salim Mohammed Al Mashaikhy Non-Executive Independent

Mr. Said Ahmed Safrar Non-Executive Independent

Engr. Ahmed Hamed Al Subhi Non-Executive Non- Independent

Mr. Tareq Al Mugheiry Non-Executive Independent

Mr. Bipin Dharamsey Nensey Non-Executive Independent


2. BOARD OF DIRECTORS (CONTINUED)

2.2 Profile of Directors

Mr. Mohammed Bin Mahfoodh Al Ardhi - Chairman

The Executive Chairman of the global investment firm Investcorp www.investcorp.com

A retired Air Vice Marshal by profession, Mr. Al Ardhi joined the Royal Air Force of Oman in 1978, and was subsequently appointed as Chief of Omani Air Force. In 2000, he was awarded the “Order of Oman” by Late His Majesty Sultan Qaboos Bin Said.

Two years after taking up his role at Investcorp, and under his mandate and new vision of growth, Investcorp doubled its assets under management to USD 22 billion.

Mr. Alardhi holds a Bachelor of Science degree in Military Science from the Royal Air Force Staff College in Bracknell, UK and a Master’s in Public Policy from John F. Kennedy School of Government, Harvard University USA. He also graduated from the Royal Air Force Military Academy in Cranwell, UK and the National Defense University in Washington D.C., USA.

Mr. Al Ardhi regularly speaks on international trade, the relationship between the Middle East and the West and the security of the Gulf. He is also the author of three books: “Arabs Down Under”, “Pearls from Arabia” and “Arabs Unseen”.

Current affiliations:• International Advisory Board of The Brookings Institution in Washington, D.C.• Trustee for the Eisenhower Fellowship in Philadelphia• Member of Community Chairmen Group, World Economic Forum• Member of Harvard Kennedy School Dean’s Council• Member of The Arab Gulf States Institute in Washington

In addition to his position as the Chairman of the Board of Directors at the Bank, he also holds the position of the Chairman of the Executive, Nomination and Remuneration committee (ENRC).

Mr. Abdullah Al Harthi – Deputy Chairman

Mr. Abdullah Al Harthi is Chief Financial Officer of State General Reserve Fund (SGRF) and leads the finance and investment operations. With his role, Al Harthi is also responsible for overseeing Business Strategy, Corporate Planning, and Information Management departments.

With over 16 years of career with SGRF, Al Harthi occupied several positions in the investment and business strategy departments. In 2010, he headed the Business Strategy unit which developed the fund’s asset allocation framework, built economic research capabilities in addition to managing internal and external portfolio mandates. From 2005, he has engaged in many initiatives which aimed at setting up investment platforms including joint ventures in Vietnam, Brunei and Uzbek-Oman Investment.

Al Harthi is currently chairing the board of directors of Uzbek-Oman Investment (UOIC). He also chaired the board of Vietnam Oman Investment Company (VOI) for 11 years and was a member of Oman Trading International and he’s the Vice Chairman of Muscat National Development and Investment Company (ASAAS). He is also a member of the board of directors of Dubai Mercantile Exchange, Oman Investment Corporation (OIC) and Al Khawthar Fund, which invest in securities listed in GCC markets.

Al Harthi holds a Master of Business Administration (MBA) from IMD Business School, Switzerland and a Bacherlor’s degree in Finance from Sultan Qaboos University in 2001. He is a Chartered Financial Analyst (CFA) since 2004, and a member of the CFA Institute.

Al Harthi currently holds the position of the Deputy Chairman of Sohar International, Chairman of the Audit Committee, member of the Board Risk Committee (BRC), as well as the Executive, Nomination and Remuneration committee (ENRC).

Mr. Salim Mohamed Masaud Al Mashaiky – Director

Mr. Salim Mohamed Masaud Al Mashikhi Holds a Bachelor's Degree in Mathematics, he is currently employed in the Expenditure Department of the Royal Court Affairs. Mr. Salim Al Mashaikhy is the Deputy Chairman of Oman Fixed Income Fund (OMFI). Mr. Salim Al Mashaiky is a member of the Board Audit Committee, and the Board Risk Committee (BRC).


2.2 Profile of Directors (continued)

Mr. Said Ahmed Safrar – Director

Mr. Said Ahmed Safrar holds a Master in Business Administration (MBA) from the University of Hull in the UK, a Business Management Diploma from King’s College Bournemouth in the UK and a Specialized Diploma from the Arab Academy for Banking and Financial Science in Jordan.

Mr. Said has over 24 years of experience in the Banking and Telecommunications’ Sector, he is Board member of The Financial Corporation (FINCORP) and Dhofar Power. Currently Mr. Said holds the position of Chief Executive Officer of Oman Investment & Finance Co. SAOG.

In addition to his role as a member of the Bank’s Board of Directors, Mr. Said Safrar is also the Chairman of the Credit Approval Committee (CAC) and member of Executive, Nomination and Remuneration Committee (ENRC).

Engr. Ahmed Hamed Al Subhi – Director

Engr. Ahmed Hamed Al Subhi is the Chief Executive Officer of ACWA Power Barka SAOG.

Engr. Ahmed Hamed Al Subhi holds an MBA from the University of Strathclyde, two postgraduate diplomas in Engineering and Honours Degree in Electrical Power Engineering.

Engr. Ahmed Al Subhi is widely recognized in the power generation and desalination industry. He has been actively involved in developing and implementing of Mega Independent Power and Desalination Project and other such projects in the region.

Ahmed has been involved in many transformations and restructuring of private companies based in his solid operational experience working with many multinational organizations.

Currently, he is the Chairman and member of Board of Directors of few listed Companies in Muscat Securities Market.

In addition to his role as a member of the Bank’s Board of Directors, Engr. Ahmed Al Subhi is also the Chairman of the Board Risk Committee (BRC) and member of the Board Audit Committee.

Mr. Tareq Al Mugheiry – Director

Mr. Tareq Al Mugheiry is the Chief Investment Officer of Oman Investment Corporation SAOC (OIC). Prior to joining OIC, Mr. Tareq Al Mugheiry worked with a number of international companies including: Philips Electronics in corporate strategy and mergers & acquisitions; J.P. Morgan in investment banking covering the European technology sector; and Oman LNG’s project finance team. He holds a Bachelor of Law (LLB) and Bachelor of Commerce (B. Com) from the University of Western Australia. Mr. Tareq Al Mugheiry serves on the boards of Innovation Development Oman, Takaful Oman Insurance, Sembcorp Salalah O&M Company and TMK GIPI.

Mr. Tareq Al Mugheiry is a member of the Credit Approval Committee (CAC), and the Executive, Nomination and Remuneration committee (ENRC).

Mr. Bipin Dharamsey Nensey - Director

Mr. Bipin Dharamsey Nensey holds a Bachelor’s Degree in Accounting and Finance. He is the Director of Dharamsey Nensey Company since 1977. He is currently Independent Non-Executive Director of Al Suwadi Power Company SAOG as well as Muscat Insurance Company SAOG since 14th July 2007. He served as the Vice Chairman of one of the local banks for over 15 years. In Sohar International, he is a member of the Credit Approval Committee.

2.3 Board of Directors – Executive Powers

Sohar International’s Board of Directors: • Is vested with the powers of general superintendence, direction and management of the affairs and business of the Bank. • Has the ultimate responsibility for the overall compliance and management of the Bank. • Guides the Bank to achieve its objectives in a prudent and efficient manner. • Is primarily responsible for ensuring that all financial transactions are legal and that all disclosures are made as per regulations. • Lays down a comprehensive code of conduct for all Board Members and Senior Management of the Bank, to be followed

under all circumstances. • Approves the delegation of power to the executive management as well as nominee members of the subcommittee and

specify their roles, responsibilities and power. • Authorizes the management to implement the strategy for the Bank that is designed to deliver increasing value to the

shareholders. • Develops strategies for managing risks associated with the business and for meeting challenges posed by competitors. • Develops vision to anticipate crisis and to act proactively when necessary. • Ensures that information flows upward and that authority flow downward and thus the Bank is under their control, direction

and superintendence.



2.3 Board of Directors – Executive Powers (continued)

During the year under review, the Board has: • Reviewed and approved the Bank’s financial objective, plans and actions. • Reviewed the Bank’s performance. • Evaluated whether the business is properly managed according to the Bank’s objectives. • Ensured compliance with laws and regulations through proper internal systems of controls. • Reviewed the efficiency and adequacy of the internal control systems and confirmed its compliance with internal rules and

regulations.

The Board of Directors has approved the Code of Conduct, including the Standards of Professional Conduct, which covers the standards of conduct expected from the directors and the senior management of the Bank. The purpose of this code is to articulate highest standards of honesty, integrity, ethical and law abiding behavior.

The Board has approved the three quarterly reports and the annual financial statements and report to the shareholders on the annual report about the ongoing concern status of the Bank with supporting assumptions and qualifications as necessary.

The Board has taken steps to comply with rules, regulations and international best practice, reviewed compliance reports prepared by the Bank’s management of all applicable provisions of the law.

Sohar International’s Board of Directors has exercised all such powers and performed all such acts as the Board is authorized to exercise and do.

The Bank prepares a Management Discussion and Analysis report which is included as a separate section in the Annual Report.

During the year, the Bank issued 380,952,381 shares through rights issue to its existing shareholders at a price of 107 baizas per share consisting of nominal value of 100 baizas per share plus premium of 5 baizas and 2 baizas per share to cover the rights issue expenses, resulting in increase in share capital of the Bank by RO 38.095 million and share premium by RO 1.905 million.

2.4 Meetings and Remuneration of the Board

The Board of Directors meets regularly, monitors the executive management, and exercises necessary control over the Bank’s functioning. The Board conducts its business in formal meetings. In Board meetings, the “majority” is computed as the absolute majority of the directors present in person or proxy, whether or not they participate in the voting process.

The total number of meetings of the full Board during the year 2019 was seven. The maximum interval between any two meetings was in compliance with rule (10) of the 2nd principle of the CMA’s Code of Corporate Governance, which requires meetings to be held within a maximum time gap of four months. The dates of the meetings of the Board of Directors, and its subcommittee during year 2019 were as follows:

Table 2: Board Meetings held in 2019 and dates on which they were held

Name of Director 27-Jan-19 30-Jan-19 31-Mar-19 21-Apr-19 29-Jul-19 28-Oct-19 15-Dec-19

Mr. Mohammed Al Ardhi -

Mr. Abdullah Al Harthi

Mr. Salim Al Mashaikhy - -

Mr. Said Ahmed Safrar -

Engr. Ahmed Al Subhi

Mr. Tareq Al Mugheiry -

Mr. Bipin Dharamsey Nensey - -

Sitting fee remuneration is paid to the Directors for attending the Board or its subcommittee meetings. The fee is within the limits stipulated by the Commercial Companies Law and the directives of the Capital Markets Authority.


2.4 Meetings and Remuneration of the Board (continued)

Table 3: Attendance & Remuneration – Board of Directors

Name of Director

No of Board Meetings Attended

Board Subcommittee memberships

Name of Subcommittee

No of Subcommittee

meetings attended

Total Sitting Fees (Board &

Subcommittees)

Attendance of AGM - March

2019

Mr. Mohammed Al Ardhi 6 1 ENRC 4 4600.00 Present

Mr. Abdullah Al Harthi 7 3 ENRC, AC, BRCENRC 4 / AC 4 /

BRC 5 8700.00 Present

Mr. Salim Al Mashaikhy 5 2 AC, BRC AC 4 / BRC 3 5300.00 Present

Mr. Said Ahmed Safrar 6 2 ENRC, CAC ENRC 5 / CAC 5 7000.00 Present

Mr. Ahmed Al Subhi 7 2 BRC, AC BRC 5/ AC 3 6700.00 Absent

Mr. Tareq Al Mugheiry 6 2 ENRC, CAC ENRC 5 /CAC 5 7000.00 Present

Mr. Bipin Dharamsey 5 1 CAC CAC 4 4100.00 Present

An amount of RO 156,600 was paid in 2020 as board remuneration for the year 2019. The remuneration paid was within the limit prescribed by the Commercial Law No. (4/1974) as amended by Royal Decree No. (99/2005).

Sitting fees paid to Directors during 2019 is given below:

Sl. No Name Sitting fees paid during 2019 (RO)

1 Mr. Mohammed Mahfoodh Al Ardhi 4600

2 Mr. Abdullah Salim Al Harthi 8700

3 Mr. Salim Mohammed Al Mashaikhy 5300

4 Mr. Said Ahmed Safrar 7000

5 Engr. Ahmed Hamed Al Subhi 6700

6 Mr. Tareq Mohamed Al Mugheiry 7000

7 Mr. Bipin Dharamsey Nensey 4100

Total 43,400

2.5 Board Evaluation

In March 2019, the shareholders approved the engagement of KPMG to appraise the performance of the board in accordance with the standards and benchmark approved by the general meeting in line with the requirements of Code of the Corporate Governance for public listed companies. The Board Evaluation report has been issued and will be presented at the AGM.

2.6 Committees of the Board

The Board of Directors has created various subcommittees for specific purposes with clearly defined terms of reference and responsibilities. The committees’ mandate is to ensure focused and specialized attention to specific issues related to the Bank’s governance. The various subcommittees of the Board together with the Internal Audit and Compliance department form an important tool in the process of corporate governance. The subcommittees and their primary responsibilities were as follows:

The Corporate Governance Structure of Sohar International Bank SAOG is depicted below:

Board of Directors

Audit committee

Executive Nominations & Remuneration

Committee

Credit Approval Committee

Board Risk Committee



2.6 Committees of the Board (continued)

Table 4: Board Subcommittee meetings held in 2019/ number of meetings attended

Name of Director

Executive, Nomination & Remuneration

Committee (ENRC)Audit

CommitteeCredit Approval

CommitteeBoard Risk Committee

Mr. Mohammed Al Ardhi 4 - - -

Mr. Abdullah Al Harthi 4 4 - 5

Mr. Salim Mohammed Al Mashaikhy - 4 - 3

Mr. Said Ahmed Safrar 5 - 5 -

Mr. Ahmed Al Subhi - 3 - 5

Mr. Tareq Al Mugheiry 5 - 5 -

Mr. Bipin Dharamsey Nensey - - 4 -

2.6a Executive Nomination & Remuneration Committee

The Board Executive, Nomination and Remuneration Committee (ENRC) is a subcommittee of the Board of Directors and, as such, assists the Directors to discharge the Board’s responsibilities of oversight and governance in relation to:

(1) General Performance aspects of the Bank such as strategy setting and implementation,banking business, annual budget recommendations, information technology and generally to assist the board in reviewing business proposals and other related issues that require a detailed study and analysis. (2) HR, Nomination and Remuneration issues such as to provide direction and guidance to have the right CEO and senior management team and provide support and direction to the Bank and its stakeholders and ensure their interests are protected, etc.

2.6b Audit Committee

The main functions of Audit Committee are to assess and review the financial reporting system of the Bank to ensure that the financial statements are correct, sufficient and credible. The Committee reviews with the Management the quarterly/annually financial statements before their submission to the Board for adoption. The Committee also reviews the adequacy of regulatory compliance, regulatory reporting, internal control systems and structure of Internal Audit and Compliance Departments. The Committee also holds discussions with the internal auditors/external auditors on significant finding on the control environment.

The role of Head of Internal Audit is to provide reasonable assurance that the management control framework used within the Bank is operating effectively. The role of Head of Compliance is to ensure that the Bank complies with all the Laws, rules and regulations as applicable under the regulatory framework in Sultanate of Oman and international best practices. Both heads report directly to the Audit Committee of the Board.

2.6c Credit Approval Committee

The Board Credit Approval Committee (CAC) is a sub committee of the Board of Directors and as such approves loans which are above the lending mandate of Executive Credit Committee (ECC) of the management, reviewing credit product policies, credit policy, credit portfolio and existing credit facilities on annual basis.

2.6d Board Risk Committee

The Board Risk Committee (BRC) assists the Directors to discharge the Board’s responsibilities of oversight and governance in relation to the risk performance of the Bank. The Committee is responsible for making recommendations to the Board of Directors on the risk appetite of the Bank in relation to credit, interest rate, market, liquidity and operational risk.

The committee ensures the implementation of risk strategy and policy in addition to ensuring that a robust risk framework is in place within the Bank which optimises the quality and return on deployment of assets. The Committee also provides guidance and direction on all credit, market, interest rate, liquidity and operational risk policy matters.

3. SHARI’AH SUPERVISORY BOARD OF SOHAR ISLAMIC (ISLAMIC BANKING WINDOW OF SOHAR INTERNATIONAL BANK SAOG)

Profile of the Shari’ah Supervisory Board Members:

Dr. Hussain Hamed Hassan (Chairman)

Honorable Dr. Hussain is a Professor of Shari'ah and Comparative Law at Cairo University, he did his PhD in the Faculty of Shari’ah from Al Azhar University, Egypt and Master of Comparative Jurisprudence from University of New York, USA and graduated in Law and Economics from University of Cairo, Egypt, and he has an honorable PhD in Civil Law from Durham University in United Kingdom. He has over 50 years of experience in Islamic Banking and is the Chairman of Shari’ah Supervisory Boards of more than 30 banks and financial institutions. He is also the author of more than 50 books and research papers, has written over 400 extensive articles and has also supervised the grand plan of translating 200 Islamic books into different languages. Additionally, he has successfully converted many conventional banks and financial institutions into Islamic ones.

Dr. Mudassir Siddiqui (Deputy Chairman)

Dr. Mudassir Siddiqui is an internationally renowned expert of Islamic Studies and Western laws. He did his PhD in law from Chicago Kent College of Law, USA; Master of Law from Harvard Law School, USA; and Islamic Studies from, Islamic University of al-Madina al-Munawwarah, Kingdom of Saudi Arabia. He is a member of the AAOIFI Shari'ah Standards Committee; the Fiqh Council of North America; and a Research Fellow at the International Shari’ah Research Academy for Islamic Finance in Malaysia. He has more than 30 years of experience in providing Shari’ah and Law consultancy, Islamic banking documentation, research, lectures and arbitration for more than 40 worldwide organizations, universities and research centers.

Sheikh Azzan bin Nasir Farfoor Al Amri (Member)

Holding Bachelor’s degree in Islamic Studies and with a specialization in Judiciary, Sheikh Azzan bin Nasir Farfoor Al Amri has been working as the secretary to the Grand Mufti of the Sultanate of Oman in the Fatwa Section since 2001. He is also well versed in Shari’ah Law, having done numerous courses in relevant fields and participated in many related workshops and conferences.

Sheikh Fahad Mohamed Hilal Al Khalili (Member)

Sheikh Fahad graduated from the Florida Atlantic University USA after which he joined the Central Bank of Oman (CBO), where he was part of Treasury and Investment Division. Thereafter, Sheikh Fahad joined Al Madina Investment where he quickly became the Deputy General Manager of Investment Banking. His key responsibilities included portfolio management, promotion of Greenfield ventures and handling high net worth individuals. Recently, Sheikh Fahad founded Bayan Investment House, which is focused on building long-term relationships by provided investment banking and advisory services.

Meeting and Sitting Fees for Shari'ah Supervisory Board

Table 5: Attendance & Remuneration – Shari’ah Supervisory Board

Name of Shari’ah Board Members 21-April-19 11-Jul-19 13-Oct-19 26-Jan-20

No. of Board

Meetings Attended

Total annual fees including

Sitting Fees

Dr. Hussain Hamed Hassan 4 RO 16,940

Dr. Mudassir Siddiqui 4 RO 13,090

Sheikh Azzan bin Nasir Farfoor Al Amri 4 RO 9,240

Sheikh Fahad Mohamed Hilal Al Khalili 4 RO -9,240


4. MANAGEMENT TEAM (CONTINUED)

4.1 Profile Senior Management Team1 (continued)

Mr. Mujahid Said Al-Zadjali DGM – IT & Alternate Channels

Prior to joining Bank Sohar in 2006, Mr. Mujahid had worked for Bank Dhofar. He is a pioneer in setting up Bank Sohar’s Information Technology Department (ITD). He was also instrumental in setting up state of the art Technology with many accolades viz; First Bank in the Sultanate with ISO/IEC 27001:2005 certification for ITD and fastest Core Banking System implementation which was recognized and awarded in the Banking Technology Award from London. Mr. Mujahid holds a Bachelor’s degree in Computer Science from India and had completed his higher studies in the United Kingdom (UK) to be a Masters holder in Business Administration from Luton University. He has over 20 years of experience in Banking Technology sector in Oman. He has also completed General Management Program from Harvard Business School, U.S.A. in 2013 and graduated the National CEO Program under the patronage of the Diwan of Royal Court in May 2017.

Mr. Kamran Haider Sr. AGM & Head – Internal Audit

Mr. Kamran is a qualified Chartered Certified Accountant and Certified Internal Auditor with over 16 years of experience in the Financial Services Sector. Before joining the Bank, he served as Deputy Head of Internal Audit of Alawwal Bank in the Kingdom of Saudi Arabia. Mr. Kamran has previously worked at Big4 audit firms, such as KPMG in Saudi Arabia & Pakistan and PwC Ireland. Kamran gained extensive experience of financial accounting, financial reporting, internal controls framework, Sarbanes-Oxley, internal audit, external audit, IFRS and group consolidation during his career.

Mr. Craig Barrington BellChief Financial Officer

Mr. Craig Barrington Bell joined Sohar International as Chief Financial Officer in January 2019 bringing with him over 25 years of banking experience; 15 of which have been in CFO roles with HSBC and Deutsche Bank including three years as CFO of the Saudi British Bank. Mr. Bell has extensive finance background and deep experience of managing complex international businesses across dynamic and changing markets. Commencing his banking career with Citibank in 1985, Mr. Bell has a plethora of technical and management skills in financial and regulatory reporting, management reporting, financial analytics, system infrastructure & controls, balance sheet management, strategic planning, investor relations and tax. Prior to joining Sohar International, Mr. Bell served for over two years as CFO with Al Hilal Bank (Abu Dhabi). He is a distinguished member of the Institute of Chartered Accountants of Australia & New Zealand and graduated from Auckland University with a Bachelor of Commerce degree majoring in Accounting.

Mr. Karim Fayek Mohamed Sr. AGM & Head – Risk Management

Mr. Karim is a Professional Banker holding over 20 years of experience in global Banking and Financial risk management, during which time he acquired expertise in both conventional and Islamic banking sectors across the GCC/MENAP regions.

He has worked in the entire spectrum of Commercial, SMEs, Retail and Investment Banking including Shari’ah-compliant banking. He has diverse and extensive banking background, gleaned from a prodigious career that includes: Credit Risk Management, Operational Risk Management, Market Risk Management, Liquidity Risk Management, Assets-Liability Management, Business Continuity Management, Capital Planning, Risk Analytics & Frameworks, the articulation of Risk Appetite & Risk Regulatory Governance so as to transform and spread Risk-Based Culture across organizations.

His last held position was at Union National Bank (UNB) as a Senior Vice President - Head of Risk Management Division. Mr. Karim holds a Doctorate Degree in Banking and Financial Systems Stability with ESLSCA Business School, Paris, France, and an MBA in Financial Management from the Arab Academy for Banking and Financial Sciences.

Mr. Khalid Khalfan Rashid Al Subhi AGM and Head of Compliance

Mr. Khalid Khalfan Rashid Al Subhi is AGM & Head of Compliance. Before joining the service of the Bank, Mr. Khalid Al Subhi associated with Central Bank of Oman for last 19 years’ experience in banking. He has worked as a Bank Examiner conducting on-site examinations of Banks and Finance and Leasing Companies, including Islamic Banks and the operations of Islamic banking windows. Mr. Khalid holds a Bachelor in Banking and Financial Sciences from Arab Academy for Banking and Financial Sciences.

Mr. Elsamawal Abdulhadi IdrisAGM - Head of Legal Affairs & Board Secretary

Before joining the service of the Bank, Mr. Elsamawal worked for major banks and law firms in Sudan. He has around 18 years of extensive legal experience. He holds Master’s degree ‘LLM’ and Bachelor’s degree ‘LLB’ in the field of law from the University of Khartoum.

4.2 Remuneration of senior managers for the year 2019

The total remuneration paid/accrued to the top seven (7) management executives of the Bank for the year 2019 was Rial Omani 2,140,894. This remuneration includes salary, allowances, gratuity, pensions and performance-related incentives.

4. MANAGEMENT TEAM

The management of the Bank has been entrusted by the Board to a management team. The top management team has over 200 years of banking expertise between them. The top management keeps the Board of Directors informed on all issues concerning the operations of the Bank and takes directions from the Board on matters that concern and affect the business of the Bank and the objectives it should pursue. In the interest of good governance, the top management places all the key information before the Board, where it forms part of the agenda papers.

4.1 Profile Senior Management Team1

Mr. Ahmed Jafar Al Musalmi Chief Executive Officer

Mr. Ahmed Al Musalmi’s distinguished career spans more than two decades and has included senior leadership roles at several organizations. His extensive banking experience covers Retail Banking and Wealth Management, Corporate Banking, SME, Trade Finance, Capital Markets, IT, HR and Strategy & Business Planning.

Mr. Al Musalmi is the Deputy Chairman of Oman Bankers Association, a member of the College of Banking and Financial studies’ board, and is a committee member of the Bank Deposits Insurance Scheme (BDIS) at the Central Bank of Oman. He also sits on the boards of a number of prominent institutions including Oman Aviation Group, Special Economic Zone of Duqm (SEZAD), Majan College, and Oman Takaful.

Mr. Ahmed Al Musalmi completed the Harvard Business School Advanced Management Program and holds an MBA with distinction from the University of Luton, UK as well as an International Diploma in Financial Services. He is a Chartered Market Analyst with Financial Analyst Designate, Chartered Portfolio Manager and Chartered Wealth Manager. He is a fellow of the American Academy of Financial Management and has attended a number of advanced programs including an intensive high performance leadership Program at the IMD business school in Switzerland.

Mr. Khalil Salim Al Hedaifi GM- Chief Retail Banking Officer

Mr. Khalil Salim Al Hedaifi enjoys an experience of more than 18 years in banking business in general and the areas of Retail Banking, Wealth Management, Strategic Planning, Product Management, and People Management, in particular. Mr. Khalil holds an MBA qualification from Northampton University and his last position was the DGM – Deputy Chief Retail Banking Officer in one of the local banks.

Mr. Manish DhamejaChief Wholesale Banking Officer

Mr. Manish is a seasoned banking professional with over 23 years of working experience, during which he worked in UAE, Africa and across various cities in India. He is an Engineer, MBA & CFA. He has earlier worked in Standard Chartered Bank, where he held multiple leadership roles and led many businesses & large teams. Mr. Manish strength lies in establishing and growing new and large businesses, improved business profitability, client connections & team engagement.

Mr. Abdul Wahid Al MurshidiChief Islamic Banking Officer

Mr. Abdul Wahid has been associated with Sohar International since July 2019. He has over 18 years of professional experience across different functions of the Banking sector including Audit, Finance, Investment, and Islamic Banking. Prior to his role in Sohar International, he was the Deputy General Manager at one of the prominent local Islamic banks.

Mr. Abdul Wahid holds an EMBA degree from London Business School and has completed his Bachelors in Science from Sultan Qaboos University (SQU)

Mr. Abdulali Abdullah Al LawatiSr. AGM & Acting Head, HR & Corporate Support

Mr. Abdulali Abdullah Al Lawati joined the Bank in 2008 with decades of experience in many management functions. He has 38 years of varied experience in Education, Administration, Corporate Governance, Corporate Support, IT and Management. He is currently heading the HR & Corporate Support Division and is involved in most of the strategic initiatives of the Bank.

Mr. Abdulali Abdullah Al Lawati completed his ILM IMQ Diploma in Management. He was subsequently awarded ‘The Level 7 Diploma in Strategic Management and Leadership’ from the Chartered Management Institute (CMI), UK and is a member and fellow of CMI. Due to his wide experience and exposure, he was involved in the re-structuring, implementation of strategies and in facilitating change management in the Bank. He is a certified Islamic Banker and was a part of the Islamic Banking Formation Committee.

Considering his involvement in many aspects of business and his commitment and dedication, Mr. Abdulali Abdullah Al Lawati was appointed as Acting Head – HR & Corporate Support after functioning as Senior AGM Corporate Support and Secretary to the Board for over 5 years.

1 As of 31 December 2019 1 As of 31 December 2019


8. CHANNELS OF CONTACT WITH SHAREHOLDERS AND INVESTORS

Sohar International has endeavored to establish meaningful relations with its shareholders and investors. The Bank is committed to ensure timely disclosure and communication of all material to the shareholders and the market regulators. The Bank has provided investor related information in the quarterly, half-yearly reports and the Annual Report as per the statutory guidelines and the terms of the Bank’s listing agreement.

The Annual Report includes inter alia, the report of the Board of Directors, Corporate Governance report, Management Discussion and Analysis report and the Audited Financial results. The management has taken the responsibility for the preparation, integrity and fair presentation of the financial statements and other information in the Annual Report of the Bank. The summary of Annual Report will be sent to all shareholders of the Bank in line with the rules for the same as stipulated by the Capital Markets Authority.

Additionally the bank has posted the financial statements on its website www.soharinternational.com.

8.1 Sohar International Shares - Market Price

Monthly share prices of Sohar International’s shares quoted at the Muscat Securities Market (MSM) and the bands for the banking sector stocks on the MSM. (This information is available from news agencies and it is a published information. This is given here as part of the requirements of the Code of Corporate Governance for MSM listed companies. This is not a solicitation in any manner to subscribe to the Bank’s shares.)

The following table represents monthly share prices of Sohar International SAOG as listed with Muscat Security Market “MSM” (Par value of share is 100 Baizas/share)

Table 6: Sohar International Shares - Market Price

Month 2019

Sohar International Share price Rial OmaniMSM Banks & Investment

Index closingHigh Low Closing

Jan, 2019 0.123 0.110 0.112 6,697.13

Feb, 2019 0.118 0.107 0.115 6,691.07

Mar, 2019 0.119 0.112 0.115 6,541.28

Apr, 2019 0.117 0.109 0.111 6,337.99

May, 2019 0.113 0.108 0.112 6,342.51

Jun, 2019 0.113 0.106 0.106 6,283.35

Jul, 2019 0.109 0.104 0.106 6,110.32

Aug, 2019 0.116 0.105 0.112 6,534.26

Sep, 2019 0.113 0.109 0.111 6,557.59

Oct, 2019 0.116 0.111 0.112 6,489.14

Nov, 2019 0.113 0.109 0.111 6,426.84

Dec, 2019 0.111 0.104 0.110 6,349.26

8.2 Distribution of share ownership

The authroized share capital of the Bank is 4,000,000,000 shares of RO 0.100 each (31 December 2018: 2,000,000,000 of RO 0.100 each). The issued and paid up share capital of the Bank is 2,363,598,772 shares of RO 0.100 each (31 December 2018: 1,982,646,391 shares of RO 0.100 each). As of 31 December 2019, the following shareholders held 5% or more of the Bank’s capital:

Name of Shareholder Percentage of Shareholding

OIFC 15.36909%

Royal Court Affairs 14.56903%

Seventh Moon Investment LLC 9.02803%

Neptune National Investment company LLC 7.81079%

Western Sea Investments LLC 7.60147%

MARS Development and Investment LLC. 6.37899%

5. PROCEDURES FOR STANDING AS CANDIDATE FOR THE BOARD OF DIRECTORS

The Board of Directors is elected by the shareholders of the Bank at the Annual General Meeting. The term of office of the Board of Directors is for a maximum period of three years, subject to re-election. The Board reports to the shareholders at the Annual General Meeting (AGM) or specially convened general meetings of the shareholders. The meetings of the shareholders are convened after giving adequate notice and with detailed agenda notes being sent to them. The Board comprised of seven members, elected by the shareholders at the Bank’s AGM on 31 March 2019 for a period of three years. The Board exercised its right to appoint alternate directors to fill vacant seats of the Board.

The election process is through direct secret ballot by the shareholders of the bank, where each shareholder shall have a number of votes equal to the number of shares held by them. Every shareholder shall have the right to vote in entirety to one candidate or divide the shares amongst the nominees, subject to the stipulation that the total votes cast shall not exceed the number of shares owned by such shareholders.

The entire process of nomination and election of the Board of Directors, including the eligibility criteria, is governed by Articles 19 to 21 of the Bank’s Articles of Association, as well as in compliance with the relevant provisions of the Commercial Companies Law of the Sultanate of Oman, the Code of Corporate Governance for General Omani Joint Stock Companies (S.A.O.G.) issued by the Capital Market Authority and the relevant guidelines issued by the Central Bank of Oman.

6. DIVIDEND POLICY

The Bank’s dividends policy complies with the CBO & CMA guidelines. The Board of Directors follow a conservative dividend policy and recommend on the distribution of the dividends to the shareholders after due consideration of the regulatory guidelines, the future growth expectations and other factors.

7. STATEMENT ON COMPLIANCE

The Board of Directors of the Bank have been appointed in line with the guidelines of the Commercial Companies Law of Oman and in accordance with the regulations of the Central Bank of Oman. The Board of Directors has complied with all the guidelines for the appointment of Directors prescribed by the Commercial Companies Law of Oman and the Central Bank of Oman’s regulations with reference to eligibility.

The Board of Directors of the Bank consists of seven directors from among shareholders and non-shareholders. The Directors of the Bank affirm that no member of the Board:

• Is an employee of the Bank or an employee of any other bank in the Sultanate of Oman.

• Is on the Board of any other Bank registered in the Sultanate of Oman.

• Sits on the Board of more than four joint stock companies registered in Oman.

• Is a Chairman of more than two joint stock companies registered in Oman.

During the year under report, the Bank has complied with the directives of the CMA, Rules and Guidelines on Disclosure by Issuer of Securities and Insider Trading, the Guidelines of the Commercial Companies Law and the Code of Corporate Governance of the Capital Markets Authority for listed companies except for the following:

• The Chairman of the Board Audit Committee is also a member of the Board Risk Management Committee and the Executive, Nomination and Remuneration committee. This is due to the limited number of Board Members as compared to the number of board committees, required to be formed by the Board of Directors..

In the last three years, the Bank paid a total amount of RO 127,451 in penalties to both the Central Bank of Oman “CBO” and the Capital Market Authority “CMA”. The CBO penalties for the year 2019 were in the medium to low risk categories; mainly for non-compliance with asset related ceilings, charges, outsourcing controls, policy reviews and system related matters. The Bank has addressed most of the issues and is taking time-bound action on the remaining points.


9. STATUTORY ACCOUNTS

The Bank has adopted the International Financial Report Standards (IFRS) in the preparation of its accounts and financial statements.

10. AUDITOR’S PROFILE

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About Deloitte & Touche (M.E.)

(DME) is a licensed member firm of Deloitte Touche Tohmatsu Limited (and is a leading professional services firm established in the Middle East region with uninterrupted presence since 1926 DME's presence in the Middle East region is established through its affiliated independent legal entities, which are licensed to operate and to provide services under the applicable laws and regulations of the relevant country. DME's affiliates and related entities cannot oblige each other and/or DME, and when providing services, each affiliate and related entity engages directly and independently with its own clients and shall only be liable for its own acts or omissions and not those of any other affiliate.

During the year an amount of RO 93,000 was charged by external auditors against the services rendered by them to the organization (RO 77,000 for audit of bank’s conventional and Islamic banking operations, RO 14,000 for Shari'ah audit and RO 2,000 for tax services).

11. RIGHTS OF SHAREHOLDERS

All the Bank’s shares shall carry equal rights which are inherent in the ownership thereof, namely the right to receive dividends declared and approved at the general meeting, the preferential right of subscription for new shares, the right to a share in the distribution of the Bank’s assets upon liquidation, the right to transfer shares in accordance with the law, the right to inspect the Bank’s statement of financial position, statement of comprehensive income and register of shareholders, the right to receive notice of and the right to participate and vote at general meetings in person or by proxy, the right to apply for annulment of any decision by the general meeting or the Board of Directors, which is contrary to the law or the Articles of the Bank or regulations, and the right to institute actions against the directors and auditors of the Bank on behalf of the shareholders or on behalf of the Bank pursuant to the provisions of the Commercial Companies Law and its amendments. Sohar International gives minority shareholders prime importance in terms of safeguarding their interests and ensuring that their views are reflected in shareholders’ meetings. The “one share one vote” principle applies to all shareholders so that minority shareholders can nominate members of the Board and can take action against the Board or the management if the actions of the Board or management are in any way prejudicial to their interests.

12. RELATED PARTY TRANSACTIONS, DEALINGS AND POLICY

There is a comprehensive policy on related party dealings, and processes and procedures laid down which are followed in the matter of all loans and advances given to directors and their related parties and also any transactions with companies in which directors have a significant/ controlling interest. Details of loans and advances, if any, given to any Director or his related parties are furnished with full details in the notes to the financial statements given in the annual report as public disclosures. Any other transactions with Directors carried in the normal course of business and without any preferential treatment are disclosed to the shareholders along with the agenda notes for the AGM.

13. CONCLUSION

The Board of Directors acknowledge that the preparation of the Annual Report of the Bank together with the Management Discussion and Analysis Report, the Corporate Governance Report and the audited financial statements has been done with their full knowledge and in line with the standards for accounting and the statutory rules governing disclosure by the Capital Markets Authority and the Central Bank of Oman.

The Board of Directors also acknowledge that there is no material information and material things that will in any way affect the continuation of the business of the Bank in the coming financial year.


MANAGEMENT- M A K I N G W I N N I N G A TO P P R I O R I T Y-


BACK ROW (Left to Right)

FIRST ROW (Left to Right)

BACK ROW (Left to Right)

Mr. Manish Dhameja Chief Wholesale Banking Officer

Mr. Ahmed Al MusalmiChief Executive Officer

Ms. Mahira Al RaisiAGM & Head - Human Resources

Mr. Mujahid Said Al ZadjaliDGM – IT & Alternate Channels

Mr. Khalil Salim Al HedaifiChief Retail Banking Officer

Mr. Kamran HaiderChief Internal Audit Officer

FIRST ROW (Left to Right)

Mr. Abdul Wahid Mohamed Al MurshidiChief Islamic Banking Officer

Mr. Abdulali Abdullah Al Lawati Acting Chief Human Resource Officer

Dr. Karim Fayek MohamedChief Risk Officer

Mr. Elsamawal AbdulhadiChief Legal Officer

Mr. Khalid Khalfan Al SubhiChief Compliance Officer

Mr. Craig Barrington BellChief Financial Officer


This progressive and futuristic vision isn’t new as the rapid development of Oman has been a result of the visionary and farsighted policies of Late His Majesty Sultan Qaboos bin Said. Since his ascension to the throne, his remarkable leadership enabled the transformation of Oman to a modern and progressive nation, while remaining rooted to its tradition, heritage and historical identity. The late His Majesty has left an indelible imprint that will remain in the hearts and minds of people for generations to come. His Majesty Sultan Haitham bin Tarik, who was sworn in as the new Sultan of Oman, has vowed to continue the journey started by his predecessor ensuring all round efforts to maintain the development and progress of the country. His Majesty Sultan Haitham bin Tarik also called upon all citizens to join hands furthering the cause of economic development and to bring in enhanced prosperity.

A strong regulatory and legal framework has been a salient feature of Oman since the beginning of the Blessed Renaissance. The year 2019 brought about a number of new laws and ushered in path breaking changes to existing ones such as the Public Private Partnerships Law, Foreign Capital Investment Law, and the Commercial Companies Law. These laws offer foreign and domestic investors a range of incentives, privileges, and guarantees. The regulatory changes will enhance Oman’s attractiveness as a business and investment destination, boosting its local economy.

THE BANKING SECTOR

The Omani banking sector remains resilient and maintained a steady growth in 2019 despite a challenging operating environment. Organic growth and strengthened capital buffers with sufficient liquidity have allowed banks to provide adequate credit and other services efficiently to all segments of the economy while posting reasonable profits. The International Monetary Fund, in its recent report projected a nominal growth of 2.7% and real growth of 3.7% for Oman in 2020. The recovery in economic activity will create higher demand for credit and other banking services enabling a further improvement in the banking sector’s performance during 2020.

In 2019, the banking sector made reasonable progress across all spheres where the aggregate deposits held increased by 1.7%. In terms of financial soundness, the banking sector’s capital adequacy ratio (CAR) stood at 18.1% in September 2019 as against the mandated 13.5%, displaying robustness. Excess CAR provides ample headroom to banks for extending additional credit as demand picks up with recovery in non-oil economic activities. The key challenges have been the rising cost of funds, cost of credit, cost of capital and cost of compliance. Nonetheless, banks have been taking prudent and corrective measures to effectively deal with the challenges head on.

While consolidation in the banking sector in challenging economic conditions may be a good thing ultimately strengthens the overall banking sector and improves competitiveness against larger regional banks, the key to success is customer centricity. As most of the financial institutions in the Sultanate offer similar banking products and services, banks continue to shift their focus on offerings a variety of products and services to meet growing customer expressed and latent demands. In an interconnected world, customers are increasingly benchmarking locally-available products against international marketplace and the winners will be those who are customer centric. Hence, customer-centricity is the new trend and it is encouraging banks to explore additional avenues of creating value for customers.

THE YEAR THAT WAS

With a vision of becoming a world-leading Omani service company that helps customers, communities and people to prosper and grow, Sohar International has persistently delivered robust growth, reflecting the Bank’s capabilities underpinned by our continued investment in key growth initiatives. Driven by the desire to build an organization that has the capability to withstand the vagaries business cycles and deliver long-term sustainable growth we continue to follow an institutional building approach for the future.

Despite expected challenges experienced across all sectors of the economy, we have continued to support our valued customer base, reiterating the Bank’s leadership in the local industry. We continue to grow our clientele base through innovative and responsive banking services that offers to provide more vision, more value, and more velocity. By elevating our focus to international standards through the continued review and enhancement of existing policies and procedures, we have continued to deliver excellence and build market trust. With almost 11 percent market share, serving hundreds of thousands of customers, Sohar International has become the fastest growing commercial bank in Oman.

We have achieved a strong financial performance in 2019, which is a testament to the strategy that has been set forth by its leadership, the organization’s approach to business, and collective performance of its workforce. The core operating income for Sohar International increased by 10.8% to RO 104.659 million, in comparison to RO 94.438 million in 2018 showing a healthy increase in business. Operating profit registered an increase of 8.8% to RO 59.373 million from RO 54.553 million in 2018 enabling us to maintain our key focus areas and margins. With continuous investments in key projects and the recruitment of world-class professionals, operating expenses increased by 13.5% from RO 39.885 million in 2018 to RO 45.286 million. The results have led the bank to attain an overall increase of more than 17% in net profits to achieve RO 34.406 million when compared to year 2018 reflecting a healthy trajectory for Sohar International in financial year 2019.

The Year 2019 has also been a year of major strategic partnerships and collaborations with well-established financial and non-financial institutions in offering personalized customer convenience in terms of products and services. We unveiled our wealth management advisory services with a focus on offering fiduciary advice and highly customized financial and non-financial services for our customers. The Bank has partnered with European Financial Group (EFG) International, one of the largest and best-capitalized Swiss private banks to offer our high net worth customers with exclusive access to global investment opportunities and innovative products.

Given the changes in lifestyle and adoption of technology by customers in their daily lives, we have made a calibrated effort to digitize the Bank’s processes to stay ahead of competition in today’s progressive market. In pursuance of this goal we have introduced multiple value propositions to offer a secure, easy, and faster banking experience to its customers. This has helped in improving our products and services by harnessing the convenience of digital technology with a friendly and reassuring human touch.

Our new long-term strategy is aimed at achieving excellence, setting the organization on a sustainable growth path and contributing to the national economy. Given our commitment to Omanization and building Oman’s In-Country-Value roadmap, we have helped create thousands of jobs for Omanis by supporting multimillion dollar Greenfield projects in the

CHIEF EXECUTIVE OFFICERMESSAGE-Ahmed Al Musalmi

ChairmanAt Sohar International, we strongly believe that it’s not only about what and how we do; it’s about why and who we do it for. We are proud to have embarked upon a journey to achieve bigger wins for the people of Oman and the nation at large by providing banking for their ever-changing world. With a clear vision of becoming a world-leading Omani Service Company that helps customers, communities and people grow and prosper. We aim to deliver more value, more vision, and more velocity to all our stakeholders.

It gives me great pleasure to provide an insight to a successful year for the organization and the economy it operates in marking the implementation of our 5-year strategy as well as significant strides and milestones that have been achieved by Sohar International as it continues to redefine banking.

THE OPERATING ENVIRONMENT

During 2019, the environment globally continued to be challenging dominated by powerful forces that are fundamentally reshaping the global economy and shifting the centre of economic gravity. Unfortunately, the local and regional economies, being largely dependent on oil and gas, continue to be under stress following the persistent fluctuations in the global oil prices.

Oman’s real GDP growth was estimated to decelerate to 0.3% in 2019 as oil production remained capped by the OPEC+ production cut agreement according to a report published by the World Bank in October 2019. With the production cuts extended until March 2020, and the possibility of a further extension, growth prospects remain moderate.

Given strong economic headwinds, the government has accelerated its endeavor to diversify Oman’s economy. The diversification of the economy is progressing apace in line with the Tanfeedh program, which envisions a new direction for prioritizing capital expenditure, encouraging private investment and creating jobs for nationals in the private sector. The Sultanate has undertaken a number of reforms to increase investments in the priority sectors identified under Tanfeedh program such as tourism, manufacturing, logistics, agriculture and fisheries and mining. In addition, retail, healthcare, education, residential housing, and the financial sectors are expected to grow the non-oil economy by 1.5%

in 2020. The government’s long-term strategic Vision 2040 and the tenth five year development plan from 2021–2025, is expected to accelerate Oman’s growth, diversification, and job creation initiatives. The government’s efforts coupled with the demographic dividend that Oman enjoys owing to a young populace augurs well for future growth.

While most of the developed economies struggle with the growing aging population, Oman enjoys a strategic advantage as 40% of Oman’s 4.8 million-strong population is under 25 years of age. This poses a great opportunity for the local economy. The significance of youth population, coupled with high literacy levels and growing skills of young Omanis is immensely beneficial to productivity and growth.

Oman also boasts millions of young, digitally connected consumers with one of the highest mobile penetration rates in the world, which bodes well for the development of a digital economy in the Sultanate. With its 2030 Digital Oman Strategy or “eOman”, the country has already taken remarkable strides in its digital strategy. As the world rapidly adapts cutting-edge technologies such as smart cities, blockchain, Internet of Things (IoT), and Artificial Intelligence, Oman - with its Vision 2040 - is prepared to install an advanced technological infrastructure to transform its economy, society, and government.

Oman has taken a number of strides towards environment sustainability by developed projects that employ renewable energy sources like solar and wind power. The 50-megawatt wind farm in Dhofar governorate and the upcoming 100-megawatt solar power project by the state-owned oil company Petroleum Development Oman (PDO) are prime examples of such initiatives. Research and development coupled with high-technology services related to renewable energy is expected to create new businesses and help in country’s diversification efforts. Besides this, digitization and rapid adoption of technology has contributed in bringing about transparency and faster processing with other benefits such as enabling the country to go paperless as a natural outcome. These have furthered the government’s effort in protecting the environment and working towards sustainability. Sohar International Bank’s green lending efforts are a contribution to this pressing global concern.


MANAGEMENT DISCUSSION AND ANALYSIS-OPERATING ENVIRONMENT

Oman’s economy is largely dependent on the hydrocarbon sector as it contributes close to 72% of the government’s revenue. As a result, global oil prices play an important role in the economy of Oman and the region at large. As international oil prices trade between the $55-$65 range, Oman’s economy continues to diversify itself. We expect non-oil sectors to gain traction in the coming years based on policy initiatives such as Tanfeedh.

Looking ahead, Sohar International is optimistic about the government’s economic diversification plans. With the government’s directive of achieving Tanfeedh goals for economic diversification, 2020 is expected to be a turnaround year for some of the identified sectors, namely Manufacturing, Logistics and Transport, Tourism, Mining and Agriculture and Fisheries. Investment in these sectors by the government and the private sector will help promote these sectors, creating more job opportunities.

Since 2016, with the implementation of the 9th Five Year Plan, the government has kept its focus on the development and promotion of non-hydrocarbon sectors. The success of the plan will help the Supreme Council of Planning to better formulate the 10th Five–Year Plan scheduled between 2021 and 2025 as the first implementation plan for Oman Vision 2040. The vision focuses on four main objectives for work, Man and Society, Economy and Development, Governance and Institutional Performance, and the Environment of Work. In total, there are 12 National Priorities, which contain 75 Strategic Aims and 68 Indicators to measure this performance.

The Omani banking sector has remained resilient and robust, and maintained a steady growth in 2019 despite economic challenges. Organic growth and strengthened capital buffers have allowed banks to provide adequate credit and other services efficiently to all segments of the economy while posting reasonable profits. The sector witnessed a healthy 6% to 7% growth in credit year-on-year, touching approximately RO 34 billion by the end of 2019. The banks posted a promising performance despite the rising interest rates and challenging operating conditions. The prudent and farsighted policies of the Central Bank of Oman (CBO) combined with better than budgeted global oil prices helped steady the banking sector further. In terms of challenges, the banking sector in the short term may face issues such as rising cost of credit and cost of funds. Besides these, the rising interest rates and fluctuating global oil prices also pose potential challenges to the sector.

ROBUST FINANCIAL PERFORMANCE

The Bank has shown significant growth in its profit for the year ending 31 December 2019 amounting to RO 34.406 million, representing an increase of 17.2% compared to the previous year outperforming the sector as well as reflecting its strong capabilities in navigating the local, regional, and international economic headwinds. The Bank's core business continued to witness healthy growth reflecting an increase of 23.9% to RO 70.191 million in Net Interest Income from RO 56.651 million in 2018 despite raising cost of funds and challenges in market liquidity. In spite of the

significant investments done in manpower and operations, the Bank also witnessed a double-digit growth of 10.8% overall in net operating income amounting to RO 104.659 million compared to RO 94.438 million in 2018.

Based on the overall results, the Board of Directors proposed a cash dividend of 6% of share capital which corresponds to 6 baizas per share. CBO subsequently approved a cash dividend of 3% of share capital (3 baizas per share) and bonus shares of 3% of share capital (3 shares for every 100 shares held). The robust performance of the Bank validates its strategic direction and efforts being taken to give customers value added benefits.

As part of its ongoing strategy to continue focusing on sound asset quality to ensure long term sustainability of the bank, Sohar Internationals asset book witnessed a healthy increase of 15.1% to RO 3.505 billion compared to RO 3.046 billion in year 2018, where net loans and advances increased by 9.0% to RO 2,454 million compared to RO 2,252 million in year 2018.

Sultanate. We have also maintained a strong Omanization ratio exceeding government mandated quotas in both our conventional and Islamic Banking entities. At the end of 2019, we reported an Omanization ratio of over 90%, underlining our commitment to provide job and development opportunities to young and qualified Omanis.

In 2019, we announced and revealed plans on our landmark new headquarters, hallmarking a new milestone in our transformational journey of becoming a business enterprise. The state-of-the-art facility will help us deliver a seamless and rewarding experience for customers while providing employees with a high-performance and agile workplace. Poised to become an architectural centerpiece of the city, the cutting-edge design will capture the company’s vision to connect with customers worldwide. Our new headquarters will also be emblematic of the Bank’s growing strength and will pay testimony to our commitment and conviction regarding the future of the nation.

I am proud to share that during the past year we received prestigious awards and accolades for business leadership, growth, and CSR initiatives. The bank was recognized for business excellence by the Oman Economic Review (OER) magazine at their ‘Top 20 Awards,’ it also won two accolades at the AIWA awards, including the ‘Best Performing Company’ Award in the Large Segment Category and ‘Best Corporate Social Responsibility Campaign’ Award for its Ramadan initiative.

We were conferred with the prestigious ‘Excellence in New Brand Identity Award’ at the Oman Banking & Finance Awards 2019 and were adjudged as a frontrunner under the Innovative Custom Components category in the fifth edition of the Infosys Finacle Client Innovation Awards. This winning streak is a further testament of our journey towards becoming a world-leading Omani service company that helps communities and people to prosper and grow.

With a industry-leading executive management team, plans to utilize state-of-the-art technologies to transform the customer’s banking experience, a customer-centric business model aligned with the new vision to become a world-leading Omani service company that helps customers, communities and people to prosper and grow, we are set to become a market leader in service efficiency and superior customer experience for retail and corporate customers alike. Overall, our vision is to ensure that the Bank’s strategic transformational agenda contributes positively to the national economy and the country’s socioeconomic development efforts.

BUSINESS CONTINUITY MANAGEMENT

Sohar International’s Business Continuity Management (BCM) Program has been developed and established to mitigate risks of disruption to activities, and impacts caused by unforeseen circumstances. The program undergoes significant testing annually, and the year 2019 was no exception wherein the BCM testing was completed successfully within the defined scope in preparation for the year 2020. Similar to any and all activities within the bank, the BCM program continues to be improved on par with international best practices which includes the review of Business Continuity Plans (BCP) and Disaster Recovery Plans (DRP) at least once annually. These regular reviews enable the bank to address areas of improvement by putting into motion appropriate plans and the necessary infrastructure updates, while taking capacity and resource requirements into consideration.

Sohar International has a dedicated team that maintains the BCM Program, that has a direct positive impact on internal and external stakeholders. The program includes a BCM Policy approved by the Board, together with written BCP and DRP plans, and procedures that are independently reviewed. Although the specific details of our BCM arrangements are confidential for security reasons, Sohar International maintains BCPs that address risk scenarios and events of varying scope including but not limited to loss of services or infrastructure, denial of access, cyber-attacks, pandemics, and regional crises. BCPs are focused on maintaining critical processes, including treasury, capital & liquidity, and payment services, providing customers with uninterrupted access to their funds, and maintaining effective communications with customers, staff and all other stakeholders.


BUSINESS BANKING (CONTINUED)

Over the years, the Business Banking Division has established a reputation for its unmatched turnaround time, focused approach, corporate advisory and tailor-made facilities. The division has taken rapid strides in providing solutions and structuring appropriate facilities in order to ensure smooth operation of any company within its scope of business.

In constant endeavor to stay ahead of its competitors, Sohar International has been working on building a world-class ecosystem of services that fulfil customers’ ever-changing world. More relevant to the business banking, Transaction Banking continues to leverage strengths of Digital Banking and is well in line to the Bank’s strategy of providing a unified banking platform to its corporate customers and customizing its services based on their financial requirements. Transaction Banking offers a full suite of commercial banking products and services for both; corporates and financial institutions, including domestic and cross-border payments, risk mitigation, international trade finance, as well as trust, agency, depositary, custody and related services. It comprises of cash management, trade finance and trust & securities services. The globalization of trade, increasing importance of liquidity management and a heightened emphasis on securing relationships in a world where both competition and clients are becoming more global and sophisticated has enhanced the importance of Transaction Banking and the Bank is serving its customers in these areas. Such focus on key areas of development play a vital role in contributing to Sohar International’s strategy to diversify sources of revenue.

CUSTOMER SEGMENTATION

Large Corporate Banking (LCB) has witnessed continued growth earning Sohar International its reputation as one of the most preferred corporate banks in the country. LCB delivers financial services and solutions to various large corporates operating in various sectors such as oil & gas sector, large infrastructure projects, retail projects, and mining projects, in addition to others that comprise the backbone of Oman’s economy. The Bank has further provided impetus to national plans for economic diversification in the Sultanate through its involvement in large value hospitality, healthcare and educational projects. Sohar International continues to extend majority of its efforts into various primary areas of focus, including oil & gas, infrastructure, government projects, tourism, healthcare and education, while furthering the government’s efforts to diversify into non-oil industries.

The Mid Sector Corporate Banking (MSC) caters to the Banking requirements of mid-size corporates that are neither considered as large corporate nor as SMEs, but have specialized requirements. These corporates, often in the early growth phase of their business, require specific support and guidance in liability management, trade finance, foreign exchange, receivable management and cash management. Through the MSC department, the Bank is able to create an impact with its focus on extending value-added products and services to medium-size corporate clients. The MSC department proactively supports medium-size enterprises and traders for key economic sectors such as oil and gas, contracting firms, trading companies, and sub-contractors associated with big infrastructure projects as well as high-end services requirements to other reputed organizations. These initiatives by the Bank help in creating employment opportunities for Omanis and contributing to the overall socioeconomic scene in Oman.

The department continues to diversify and grow its lending portfolio to corporates with businesses in sectors identified under the Tanfeedh initiative and associated with such infrastructure projects. The department considers itself as a business partner of its clients consistently providing them with services specifically catering to the segment, sharing experience and knowledge, and providing this niche market with customized products and solutions in terms of their growth and daily business requirements.

PROMOTING SMALL AND MEDIUM ENTERPRISES (SME)

The primary focus of the SME Unit has been to handhold enterprises from the SME Sector as a trusted advisor. The Bank’s SME Unit played a vital role to nurture nascent industrial clusters in Oman and it has emerged as a trusted guide, continuing to focus its vision on following the government's directives in diversifying from an oil-dependent economy and helping unlock the potential of the SME sector. The SME Unit is positioned as a knowledge partner, providing total business solutions to budding entrepreneurs, and introduce SMEs to entry-level risk management by educating them on early warning signs. Promoting the ‘One Bank Approach’ to ensure cross-selling of products has been another key aspect to further assist them financially. As such, SME desks have been functioning at all of the Bank’s branches.

INSTITUTIONAL BANKING

Under the Business Banking Service, the Bank’s dedicated team caters to the needs of government entities and thus, is well equipped to meet their varied banking requirements with greater efficiency in credit approval processes and overall service delivery. The unit continues to partner with leading local Omani Banks on syndications that address the financial requirements of large sized projects of national importance in various economic sectors including shipping, hospitality, oil and gas, and beyond.

The Government Institution unit’s core responsibilities rest on the marketing and management of asset and liability products for the aforementioned stakeholder group, notably institutions owned and operated by the government of the Sultanate of Oman such as the ministries and other authorized offices, as well as public sector units such as companies in which the government is a majority stakeholder directly or indirectly. The unit also continues to work closely with other departments of Sohar International, especially the Retail Banking Division, to provide tailor-made products and solutions for the government institutions. By combining retail and business banking offerings, the unit meets the specific needs and requirements of its valued clients as well as their staff. The division continues to identify new growth prospects in line with the national drive for economic diversification.

ROBUST FINANCIAL PERFORMANCE (CONTINUED)

In a relatively small market, the Bank has also successfully managed to attract a vast number of depositors reflecting an increase in deposits of 15.3% to RO 2,097 million compared to RO 1,818 million in year 2018. As at end of October 2019, the Bank’s market share of private sector credit increased to 11.38% from 10.48% in December 2018 and its share of private sector deposits increased from 7.93% to 8.60% over the same period.

With a clear vision and strategy, the Bank retains its focus on diversifying its income streams and increasing its fee based income for further suitability and long-term overall health of the organization. With this underpinning the various activities of the Bank, Sohar International’s operating income amounted to RO 104.659 million compared to RO 94.438 million in 2018, an increase of 10.8%.

On the back of the on-going investment in its internal capabilities and manpower, other operating expenses witnessed an increase 13.5% from RO 39.885 million in 2018 to RO 45.286 million in 2019. Although the operating expenses have increased, the cost-to-income ratio has still maintained below market average indicating that the Bank is on the right path of growth and long-term profitability.

The capital adequacy ratio, calculated in accordance with the guidelines set by the Bank of International Settlements (BIS) was 18.86% as at 31 December 2019 after considering the impact of the proposed cash dividend of 3% of share capital and bonus shares of 3% of share capital. While the capital adequacy requirement as per BIS is 8%, Central Bank of Oman’s regulations stipulate that Banks maintain a BIS ratio of 13.5% (including a capital conservation buffer of 2.5%) or more. Tier 1 capital was RO 521.9 million and Tier 2 capital was RO 46.1 million.

STRATEGIC GROWTH

The past year has been remarkable for Sohar International as it continues to stride ahead on its defined long-term strategy under the new management. The Bank is pursuing a five-year working plan incorporating all its objectives. The five-year plan adds a year at the end of every financial year ensuring consistency and continuity. The Bank has displayed persistence in delivering robust growth, reflecting the Bank’s capabilities underpinned by its continued investment in key growth initiatives. Aspiring to be a world-leading Omani Service Company, Sohar International has continued to demonstrate that it has the right strategy, the right cohesive global culture, and the right principles to deliver consistent and sustained value to help customers, communities, and people to prosper and grow. Continuing its legacy of market excellence, Sohar International is set to grow by delivering an enhanced performance and continue contributing to the national economy.

The Bank’s efforts have been globally lauded by credit rating agencies such as Moody's and Fitch having rated Sohar International in parity with peer banks in Oman. The ratings continue to reflect the Bank's strong ownership structure, healthy capitalization, strong market position and comfortable resource profile.

The over-subscription of the Bank’s RO 100 million Perpetual Bonds is a significant step towards building a successful strategy for growing its market share and expanding liquidity. In addition, it has also strengthened its capital base through a Rights Issue of an additional RO 40 million. The oversubscribed issuance reflects the confidence that shareholders have in the Bank's ability to continue its growth trajectory and deliver on its strategic imperatives. This outcome reaffirms Sohar International’s strengthening market position and investor confidence, despite a challenging operating environment.

In an endeavor to have a sustainable business model, Sohar International is pursuing the diversification of its sources of income. To become a world-class Omani services company, the Bank believes not only in generating funds through the conventional methods of balance sheet lending, but also by sustainable and recurring sources of income such as fee-based income in the form of providing a wide range of value proposition to its customers. The Bank also continues to invest in its infrastructure to ensure that it is well-geared to provide customers with an ecosystem of products and services to help them ‘win’ in this ever-changing world.

WEALTH MANAGEMENT

Acknowledging the need for customized financial services and advisory for High Net Worth Individuals in the Sultanate, Sohar International unveiled its Wealth Management Advisory Services in 2019. Designed exclusively for increasingly judicious High Net Worth customers, the Bank offers fiduciary advice and highly customized financial and related services, covering savings and investments schemes, borrowings, future protection schemes and day-to-day transactions. These customized solutions from Sohar International have been well received by HNI customers and has helped the Bank’s strategy of diversifying its revenue streams by providing banking as well as value added service, bettering the experience of customers as well as enhancing the overall contribution to the sector.

BUSINESS BANKING

The Business Banking Division caters to the various requirements of corporates and institutions by providing them with universal banking solution and inversely making a positive impact on the local and national economy. They have helped to address the requirements of a broad range of customers and apply a more focused approach on domestic business, ranging from large, medium, emerging corporate to SMEs.

Manned by a cohesive and knowledgeable team of professionals, the Bank is more than capable of guiding companies on services that most efficiently meet their desired financial requirements. In fact, the division and its products are tailored in such a way as to effectively nurture and evolve a company through each of the ascending levels of growth efficiently guiding them from being an SME, mid-sized company to a large corporate eventually. Furthermore, the team is well-geared to handle large projects that require syndication capabilities.


BRINGING THE BEST OF THE WORLD TO OMAN

Strategic partnerships are a crucial part of Sohar International’s new strategy and business model. These partnerships help in sharing knowledge, capabilities and information to better its offerings in the market. Sohar International’s Investment Banking provides comprehensive financial advisory and capital raising solutions to local and international clients including mergers, acquisitions, divestitures, financial restructurings, underwriting and distributing equity, debt, and derivative securities.

Furthermore, Sohar International entered into a strategic alliance with European Financial Group (EFG) International - one of the world’s best-capitalized Swiss private banks to create superior value propositions and product platforms like the Wealth Management Platform for its customers. This helps the Bank to broaden its existing investment advisory business portfolio and wealth management platform with EFG’s capability to provide its customers with access to global markets and products.

Through such partnerships, Sohar International strives to generate synergies for all its partners and thereby develop new business models based on alliances. These partnerships also promote sharing of best practices and support for innovations, benefiting all participants and making it possible for the Bank to serve its customers more efficiently and effectively.

DIGITIZATION

Embracing change and continuously preparing itself for the future, Sohar international has been a forerunner with digital initiatives. It has been a key thrust area of investment for the Bank and has helped Sohar International be at the forefront of technology. The Bank is currently focusing on key strategic projects that would ultimately benefit the customer and the way business is done whilst continuing to redefine banking furthering flexibility and understanding customers.

In the past year, Sohar International enhanced its mobile services platform with biometric capabilities, enabling customers the ease of accessing their accounts, using biometric features like fingerprints, and make transactions or get balance confirmation without entering their full credentials each time. In 2019, the Bank also launched its first ‘Recycler ATM’ – the Sultanate’s first cash-recycling ATM thus furthering its agenda of increasing efficiency and convenience for customers.

Besides expansion of its digital services, Sohar International has been constantly adapting to newer technologies in terms of infrastructure with a view and objective of extending professional and efficient financial services to various segments of the society. This has led the Bank to become one of the early adopter and market leaders for digital payment methods in the Sultanate by synergising efforts with its affiliates in developing applications that expand payment portfolios for existing retail businesses and creating new faster and easier payment possibilities for customers and merchants alike. The launch of eFloos, the bank’s mobile payment service in partnership with Omantel, reinforces its position in offering customers with digital, modern, secure and simplified solutions to pay for their purchases, strengthening its role in taking care of what is valuable to its customers.

Furthering its drive to harness technological initiatives and digitization to better its service offerings and simplification of process, Sohar International unveiled a new corporate website, offering simple and convenient navigation, based on the needs of its customer’s everyday lifestyle.

Actions developed in synergy with early digital adaptations have helped companies to enhance their traditional product offerings, expanding existing businesses and creating possibilities for the development of new products and services that are safer and more agile, improving customer experiences.

SOCIAL CONSCIENCE

Sohar International recognizes that since its sphere of activity and influence extends beyond the boundaries of the ¬financial system, it needs to serve the society for its upliftment through various CSR initiatives. The organization is committed into running its business in a way that generates sustainable value for all its stakeholders including customers, clients, shareholders and employees.

With the belief that the educated and skilled youth are the country’s true strength, Sohar International took a momentous step towards encouraging generation next by becoming the exclusive sponsor of Shihab Al Habsi, the young Omani racing sensation who is competing and winning at Formula 4 races around the world. Being a pro-youth organization, Sohar International has continuously progressed as a community focused organization and a frontrunner in contributing towards sporting events that encourage professionalism, sportsmanship and teamwork within the community. The Bank also sponsored Nadhira Al Harthy, the first Omani woman to climb Mount Everest.

Tomohi - Sohar International’s one-year internship program, which aims at skilling Omani youth to enhance their chances of employability, is a first of its kind initiative in the Sultanate to make young Omanis future ready. Besides this, Sohar International has been constantly supporting the betterment of education standards for the youth through sponsorships of educational platforms that such as ‘Jalsat Al Mulhimoon’ and Injaz’s Signature Curriculum. The Bank collaborated with the Higher College of Technology as the Chief Sponsor of the second ‘Inter-Collegiate Forum for Innovation and Entrepreneurship – Ideathon 2019.’

Besides furthering academia in the nation, Sohar International has empowered youngsters representing different professional fields including healthcare and finance by sponsoring the graduation ceremony of the Oman College of Health Sciences and Higher Institute of Health Specialists. The Bank has also supported platforms such as Chartered Financial Analysts’ (CFA) Society of Oman to strengthen their role as a facilitator of socio-economic growth and progress.

Over the years, the Bank has extended its commitment to a broad range of charitable organizations as well as socially relevant programmes that have helped improve the lives of the differently abled and underprivileged sections of society. This has been ensured through direct donations, event sponsorships, essential equipment contributions and volunteer programmes. In 2019, during the holy month of Ramadan, the Bank launched a novel social media campaign - #WinningTogether, with the aim of highlighting the act of giving, depicting that even the smallest contribution, can have a far-reaching social impact. The campaign met with success and came in for across the board appreciation.

INVESTMENT BANKING

The Investment Banking Division caters to financial advisory solutions, as well as handling Asset Management. In 2019, Sohar International was awarded an advisory mandate for one of the largest textile manufacturers in Oman for their expansion in the Sultanate. The advisory mandate included forming a capital structure for the expansion, raising funds and offering shares on the Muscat Securities Market (MSM) through an Initial Public Offering (IPO). The IPO also supports the Capital Market Authority’s (CMA) vision of becoming an engine for sustainable economic growth and wealth creation in the Sultanate. Apart from this, the Bank has established a robust team to look into upcoming clients’ needs of asset management and investment banking to help them with Financial Restructuring, Mergers and Acquisitions, IPO Mandates, Advisory on Trade Products, and Fund Hedging.

SOHAR ISLAMIC

Islamic Banking has been one of the highest growth areas within the banking industry of Oman providing customers with options of wealth in accordance with the principles of Shari'ah. Under Sohar International’s vision and strategy, Sohar Islamic realigns itself to provide the right mix of products, people, and systems to help drive its next phase of growth. The dedicated offices for Sohar Islamic have been shifted to a more prominent location in Ghala, Muscat for convenience of customers and employees alike.

In 2019, Sohar Islamic entered into a Memorandum of Understanding (MoU) with the Ministry of Endowments & Religious Affairs as its financial and strategic partner to provide innovate smart and easy solutions to the ministry in its various endowment sectors. As part of the agreement, the Bank organized a seminar in partnership with the Rustaq General Waqf Foundation that saw knowledge sessions including keynotes, presentations, panel discussions and the launch of the foundation’s new identity, which will have a significant impact on the communities it serves and more importantly suitability.

OPERATIONAL EXCELLENCE

Operational Efficiency remains a key factor for Sohar International’s growth in terms of Sales, Profit and Operational Costs. Prudent allocation of funds plays a vital role in managing critical operations, with core responsibilities including the control of transactions relating to various products, provision of services and maintenance of a centralized customer database.

The Bank understands that its teams and people are the key differentiators that make up a brand and thus invests heavily to provide its employees with extensive training to enhance their skillsets along with technological upgradation of systems and processes to enable most efficient utilization and development of talents.

With Sohar International’s redefined strategy in place, customer-centricity has been the fulcrum of all its efforts in products and services. With the customer-centric culture spanning across the organization, the Bank places renewed thrust on increasing employee engagement in line with its ‘Customer First’ approach and has undertaken various initiatives to create a customer centric mind-set to ensure more velocity, more value, and more vision for its customers.

As means of ensuring customer excellence and adoption of automation technology, the bank has been able to improve its service turnaround-time to meet the demands related to a modern lifestyle and other needs of its customers. Streamlining internal processes has helped in reducing the overall turnaround time for opening accounts to 5 minutes; personal loan approval and fund disbursement in 24 hours; housing loan approval and disbursement in 72 hours; and issuing letters of credit and guarantee in 30 minutes. By refining these key processes, Sohar International streamlined service protocols and reduced the amount of errors made while maintaining high level of efficiency in flagging and resolving new faults. This initiative aligns seamlessly with Sohar International’s principles of having more velocity, more value and more vision in all its endeavors.

Furthermore, Sohar International set new standards of leadership in the areas of contactless banking and payments by implementing a robust 100% contactless ecosystem to make banking and payments hassle-free and intuitive for its customers. The contactless ecosystem, built for the convenience of its customers required wide adoption and a strong acceptance network. This drove the Bank to continue its quest of increasing its number of contactless payment acceptance points, which included payment for fuel and purchase of goods and services at their retail partners groups.

To enhance the in-person banking experience for its customers and the working environment for its employees, Sohar International relocated its Head Office from the Muttrah Business District (MBD) to the new Water-Front building in Shatti Al Qurum. The new Head Office made the Bank more accessible and convenient to customers, enabling them to interact with the Bank in an environment that is more friendly and equipped with state-of-the-art technology to support their banking experience.

In a step change, Sohar International announced and revealed plans for its landmark new headquarters in 2019. The state-of-the-art facility will help the Bank deliver a seamless and rewarding experience to its customers while providing its employees with a high-performance and agile workplace. Poised to become an architectural centerpiece of the city, the cutting-edge design will capture the Bank’s vision to connect with customers worldwide. The new headquarters will also be emblematic of the Bank’s growing strength and will pay testimony to its commitment and conviction in the future of the nation.


THOUGHT LEADERSHIP

In a world where ‘Knowledge is Power’, the importance of ideas, information and thought can hardly be overstated. Sohar International believes that financial success of its customers goes hand in hand with broadening their horizons and with a view to bring in positive change and promoting thought leadership in Oman, Sohar International initiated Viewpoints – Sohar International’s Chairman’s Forum in 2018. The Forum aims to bring in global ideas to Oman for a transformative impact on Oman’s economy and society. In 2019 Viewpoints Sohar International’s Chairman’s Forum hosted Mr. George Yeo Yong-Boon, a former minister politician, business executive, and Senior Advisor to Kuok Group and Kerry Logistics Network from Singapore. Mr. Young-Boon inspired young Omanis to read voraciously and acquire knowledge as the path to success. He also shared key insights on global economic and political crosscurrents. Viewpoints has a strategic consonance with the core values of Sohar International like blending in the best of global standards with local excellence and building a sustainable economy based on knowledge, best practices and cutting-edge offerings.

OUR PEOPLE - THE CORNERSTONE OF SUCCESS

Employees are the first point of call for customers to experience the Bank’s personality of being sharp, human and unstoppable and their importance can hardly be overstated. Sohar International assigns the highest importance to employee welfare and empowerment as it recognizes them as the organizations biggest strength. The Bank has undertaken a number of measures to provide them with - growth opportunities, a vibrant and nourishing working environment and takes care of their personal requirements.

An integrated Performance Management & Capability Development System – Erteqa’a, delivered in partnership with Harvard Business Publishing was initiated for capacity-building and fostering a high performance culture. Erteqa’a offers capability development interventions for employees across various departments and levels. During 2019, over 100 employees underwent a 6-month extensive training program, which were customized in accordance with their grade and the challenges of their specific roles.

Sohar International accords the highest value to acquiring the right people, providing them with an enabling and growth environment and retaining them by looking after their personal and self-actualization goals. These measures have helped the Bank become an employer of choice in the Sultanate. Employees are treated as the organizations best brand ambassadors and are encouraged to provide international quality product and services to customers.

With a strong focus on building a strong ‘winning’ culture, the Bank has put in place robust performance measurement metrics systems and outstanding efforts are highlighted and felicitated on a regular basis. One such intervention is an Employee Reward & Recognition Program that fosters a positive culture and recognizes employees for going beyond their call of duty.

Sohar International is committed to Omanization and sees this as a key pillar of its five-year plan. The organization has promoted Omanis and is led and managed by a local workforce across all levels. It is committed to growing national talent and creating more employment opportunities for Omani youth both within the Bank and in the larger community that it serves.

WAY FORWARD

Similar to all other sectors within any economy, we have seen transformational trends within the banking sector. With the overwhelming advancements within the digital and technological front, it has become an essential part of any business to ensure that these innovations are harnessed and invested into wisely, keeping in relevance with the Bank’s processes, products and services. Sohar International has constantly adapted new technologies to improve operational efficiencies and enhance customer-centricity. This has helped in harnessing the convenience of digital technology with a friendly and reassuring human touch.

Despite the adaptation of technology, Sohar International stays true to the belief that great customer service is still driven by human interaction. In 2019, the Bank continued to invest in broadening its network by increasing physical presence within the market besides having a dedicated digital team to make full use of digital tools. These efforts have helped the Bank to stay ahead of its competitors in customer service and relationship banking standpoint.

Though the global and regional economic environment remains challenging Sohar International is confident about Oman’s steady growth under the visionary leadership of His Majesty Sultan Haitham bin Tarik. Oman’s 2040 Vision and the diversification objectives set by the Tanfeedh program will strengthen the economy in the years ahead.

Moving ahead the Bank will strike a balance between continuity and change. It is committed to stay true to its values of More Velocity, More Value and More Vision. At an operational level, it will work towards simple and faster service, staying connected to customers by offering them relevant products and services for their needs at every life stage and moving forward with a progressive and liberating mind-set. Overall, the Bank will offer customers with ‘Winning’ opportunities.

The five-year rolling plan will bring in new products in sync with changing customer needs, enhanced service standards and technological adoption. The Bank will set new benchmarks as a thought leader and an institution with a social conscience by promoting growth opportunities for young Omanis and contributing to the society. Sohar International will work closely with regulatory authorities to strengthen the banking sector in Oman.

Overall, Sohar International’s vision, strategy and brand revolves around innovative and disruptive thinking to fundamentally redefine banking within the Sultanate, and will continue challenging conventional thinking to drive positive change in the lives of its customers and communities helping them ‘Win’.


FINANCIAL STATEMENTSSOHAR INTERNATIONAL

-

T H E H I G H P O I N T S O F W I N N I N G-




The accompanying notes A1 to E2 form an integral part of these financial statements

STATEMENT OF FINANCIAL POSITIONAS AT 31 DECEMBER 2019

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

Note

ASSETS

188,197 232,655 Cash and balances with Central Bank B1 89,572 72,456

315,332 514,901 Due from banks and other money market placements B2 198,237 121,403

5,849,169 6,374,423 Loans, advances and financing, net B3 2,454,153 2,251,930

1,383,816 1,655,779 Investment securities B4 637,475 532,769

51,107 99,712 Property, equipment and fixtures B5 38,389 19,676

7,532 7,532 Investment properties B6 2,900 2,900

117,582 219,166 Other assets B7 84,379 45,269

7,912,735 9,104,168 TOTAL ASSETS 3,505,105 3,046,403══════ ══════ ══════ ══════

LIABILITIES

1,875,483 1,909,769 Due to banks and other money market borrowings B8 735,261 722,061

4,722,995 5,447,558 Customer deposits B9 2,097,310 1,818,353

219,907 261,101 Other liabilities B10 100,524 84,664

91,927 91,927 Subordinated loans B11 35,392 35,392

1,322 1,322 Certificates of deposit B12 509 509

6,911,634 7,711,677 TOTAL LIABILITIES 2,968,996 2,660,979

SHAREHOLDERS’ EQUITY

514,974 613,922 Share capital B13 236,360 198,265

46,849 51,797 Share premium B13 19,942 18,037

63,312 74,075 Legal reserve B14 28,519 24,375

2,566 2,566 General reserve B15 988 988

(5,517) (5,748) Fair value reserve B16 (2,213) (2,124)

18,182 36,364 Subordinated loans reserve B13 14,000 7,000

100,995 100,034 Retained earnings 38,513 38,883

741,361 873,010 TOTAL SHAREHOLDERS’ EQUITY 336,109 285,424

259,740 519,481 Perpetual Tier 1 capital securities B17 200,000 100,000

1,001,101 1,392,491 TOTAL EQUITY 536,109 385,424

7,912,735 9,104,168 TOTAL LIABILITIES AND EQUITY 3,505,105 3,046,403══════ ══════ ══════ ══════

1,260,109 1,020,026 CONTINGENT LIABILITIES B19.a 392,710 485,142

1,141,153 946,078 COMMITMENTS B19.b 364,240 439,344

Cents Cents Baizas Baizas

37.39 36.94 Net assets per share B18 142.20 143.96

The financial statements were approved and authorized for issue by the Board of Directors on 27 January 2020 and signed on

their behalf by:

____________________________ ____________________________

Chairman Board member


31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

76,275 89,366 Profit for the year 34,406 29,366

(3,545) (1,945)

Other comprehensive income that will not be reclassified to the income statementRevaluation losses on equity instruments held at fair value through other comprehensive income (FVOCI) (749) (1,365)

(3,545) (1,945)Total other comprehensive loss that will not be reclassified to the income statement (749) (1,365)

Other comprehensive income that will be reclassified to the income statement

Debt instruments at FVOCI:

16 - Net changes in allowance for expected credit losses - 6

16 -Total other comprehensive income that will be reclassified to the income statement - 6

(3,529) (1,945) Total other comprehensive loss for the year, net of income tax (749) (1,359)

72,746 87,421 Total comprehensive income for the year, net of income tax 33,657 28,007══════ ══════ ══════ ══════

STATEMENT OF COMPREHENSIVE INCOME (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2019


STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2019

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

Note

338,501 381,005 Interest income C1 146,687 130,323

(191,356) (198,691) Interest expense C2 (76,496) (73,672)

147,145 182,314 Net interest income 70,191 56,651

12,099 15,205 Net income from Islamic financing and investing activities C3.b 5,854 4,658

86,049 74,322 Other operating income C4 28,614 33,129

245,293 271,841 TOTAL OPERATING INCOME 104,659 94,438

(61,911) (73,706) Staff costs (28,377) (23,836)(35,782) (37,348) Other operating expenses C5 (14,379) (13,776)

(5,904) (6,571) Depreciation B5 (2,530) (2,273)

(103,597) (117,625) TOTAL OPERATING EXPENSES (45,286) (39,885)

141,696 154,216NET OPERATING INCOME BEFORE IMPAIRMENT PROVISIONS 59,373 54,553

(52,268) (48,949) Loan impairment charges and other credit risk C6 (18,845) (20,123)provisions (net)

89,428 105,267 PROFIT BEFORE TAX 40,528 34,430

(13,153) (15,901) Income tax expense C7.a (6,122) (5,064)

76,275 89,366 PROFIT FOR THE YEAR 34,406 29,366══════ ═════ ══════ ══════ ══════ ══════

Profit for the year74,880 85,449 Conventional banking 32,898 28,829

1,395 3,917 Islamic banking 1,508 537

76,275 89,366 34,406 29,366══════ ══════ ══════ ══════

Cents Cents Baizas Baizas

2.83 2.74 Basic earnings per share for the year C8 10.536 10.874



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A1 LEGAL STATUS AND PRINCIPAL ACTIVITIES

Bank Sohar SAOG (“the Bank”) was established in the Sultanate of Oman on 4 March 2007 as a public joint stock company and is primarily engaged in commercial, investment and Islamic banking through a network of 30 commercial banking branches and eight Islamic banking branches within the Sultanate of Oman. The Bank operates under commercial, investment and an Islamic banking license issued by the Central Bank of Oman (CBO) and is covered by its deposit insurance scheme. The Bank started commercial operations from 9 April 2007. The registered address of the Bank is PO Box 44, Hai Al Mina, Postal Code 114, Muscat, Sultanate of Oman. The Bank has its primary listing on the Muscat Securities Market.

With effect from 30 April 2013, the Bank obtained a license to operate an Islamic Banking Window (“Sohar Islamic”). Sohar Islamic offers a full range of Islamic banking services and products. The principal activities of the Window include accepting Shari’ah-compliant customer deposits, providing Shari’ah-compliant financing based on Murabaha, Mudaraba, Musharaka, Ijarah, Istisna’a, Salam and providing commercial banking services, investment and other activities permitted under Islamic Banking Regulatory Framework (IBRF).

On 18 December 2018, an extraordinary meeting of the shareholders of Bank Sohar SAOG was held and the shareholders of the Bank passed a resolution to amend Section (1) of the Articles of Association of the Bank to change the name of the Bank from ‘Bank Sohar SAOG’ to ‘Sohar International Bank SAOG’ (hereinafter referred to as the ‘Bank’). This has been confirmed by Ministry of Commerce and Industry on 14 January 2019 by issuing new set of Company documents.

The Bank employed 871 employees as of 31 December 2019 (31 December 2018: 804).

A2 BASIS OF PREPARATION

A2.1 Statement of compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), relevant requirements of the Commercial Companies Law of Oman, Capital Market Authority and the applicable regulations of the CBO.

In accordance with the Royal Decree 69/2012 regarding the amendment in the Banking Law 2000, CBO has issued circular no. IB - 1 under which a complete Islamic Banking Regulatory Framework (IBRF) has been promulgated. The framework identifies the permissible form of trade-related modes of financing including purchase of goods by banks from their customers and immediate resale to them at appropriate profit in price on deferred payment basis. The purchases and sales arising under these arrangements are not reflected in these financial statements as such, but are restricted to the amount of facility actually utilized and the appropriate portion of profit thereon.

The financial results of the Islamic Banking Window have been reflected in these financial statements for reporting purposes after eliminating inter branch transactions/balances. A complete set of standalone financial statements of Sohar Islamic, prepared under AAOIFI, is included in the Bank’s annual report.

A2.2 Basis of measurement

The financial statements have been prepared under the historical cost convention except for the following:

• Derivative financial instruments are measured at fair value; • Financial instruments classified as at fair value through profit or loss (FVTPL) are measured at fair value; • Financial assets at fair value through other comprehensive income.

The statement of financial position is presented in descending order of liquidity as this presentation is more appropriate to the Bank’s operations.

A2.3 Functional and presentation currency

These financial statements are presented in Rial Omani, which is the Bank’s functional currency and also in US Dollars, for the convenience of readers. The US Dollar amounts, which are presented in these financial statements have been translated from the Rial Omani amounts at an exchange rate of US Dollar 1 = RO 0.385 and RO 1 = 1000 baizas. All financial information presented in Rial Omani and US Dollars has been rounded to the nearest thousands, unless otherwise indicated.

A2.4 Use of estimates and judgments

In preparation of the Bank’s financial statements, management requires to make certain estimates and assumptions that affect the reported amount of financial assets and liabilities and the resultant allowances for impairment and fair values. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowances required for impaired loans and receivables as well as allowances for impairment provision for unquoted investment securities. Estimates and judgments are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

NOTES TO FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2019STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2019

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000OPERATING ACTIVITIES

89,428 105,267 Profit before tax 40,528 34,430Adjustments for:

5,904 6,571 Depreciation 2,530 2,27352,268 48,949 Loan impairment charges and other credit risk provisions, net 18,845 20,123

5,465 2,374 Net losses on investments held at fair value through profit or loss (FVTPL) 914 2,10418 (5) (Profit)/Loss on sale of fixed assets (2) 7

(2,416) (3,213) Income from Islamic investment activities (1,237) (930)(35,255) (45,925) Interest on investments (17,681) (13,573)

88 6,364 Interest accrued on subordinated loans and compulsorily convertible bonds 2,450 34────── ────── ────── ──────

115,501 120,382 Cash from operating activities before changes in operating assets and liabilities

46,347 44,468

42,145 15,805 Due from banks and other money market placements 6,085 16,226(460,556) (576,283) Loans, advances and financing (221,869) (177,314)

33,182 (9,309) Investment in held for trading securities (3,584) 12,775(56,166) (100,501) Other assets (38,693) (21,624)837,439 (543,852) Due to banks and other money market borrowings (209,383) 322,414

455,868 724,551 Customer deposits 278,952 175,509(46,764) - Certificates of deposit - (18,004)

127,210 31,987 Other liabilities 12,315 48,976────── ────── ────── ──────1,047,859 (337,220) Cash from operating activities (129,830) 403,426

(10,693) (3,364) Income tax paid (1,295) (4,117)────── ────── ────── ──────1,037,166 (340,584) Net cash (used in)/from operating activities, net of tax (131,125) 399,309══════ ══════ ══════ ══════

INVESTING ACTIVITIES(183,403) (155,265) Purchase of investments, net (59,777) (70,610)

25,735 31,571 Proceeds from sale/redemption of investments 12,155 9,908(12,590) (55,169) Acquisition of property, equipment and fixtures (21,240) (4,847)

1,673 3,816 Income from Islamic investment activities 1,469 64435,255 45,925 Interest received on investments 17,681 13,573

────── ────── ────── ──────(133,330) (129,122) Net cash used in investing activities (49,712) (51,332)══════ ══════ ══════ ══════

FINANCING ACTIVITIES(23,177) (30,899) Dividends paid (11,896) (8,923)

(140) (6,364) Interest paid on subordinated loans and compulsorily convertible bonds (2,450) (54)- 98,948 Issue of rights shares 38,095 -- 4,948 Share premium received 1,905 -- 1,829 Rights issues expense (B13) 704 -- 259,740 Issue of perpetual Tier 1 capital securities 100,000 -

(20,130) (29,951) Interest paid on perpetual Tier 1 capital securities (11,531) (7,750)(145) (587) Issue expenses of perpetual Tier 1 capital securities (226) (56)

────── ────── ────── ──────

(43,592) 297,664 Net cash from/(used in) financing activities 114,601 (16,783)══════ ══════ ══════ ══════

860,244 (172,042) NET CHANGE IN CASH AND CASH EQUIVALENTS (66,236) 331,19435,106 895,351 CASH AND CASH EQUIVALENT AT BEGINNING OF THE YEAR 344,710 13,516

────── ────── ────── ──────895,350 723,309 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 278,474 344,710══════ ══════ ══════ ══════

REPRESENTING:186,896 231,356 Cash and balances with Central Bank (other than capital deposit) (note B1) 89,072 71,955

306,935 533,353 Due from banks and other money market placements with OM of 90 days (note B2) 205,341 118,170711,992 857,210 Investments securities with original maturity (OM) of 90 days (note B4.b) 330,026 274,117

(310,473) (898,610) Due to banks and other money market borrowings with OM of 90 days (note B8) (345,965) (119,532)────── ────── ────── ──────

895,350 723,309 278,474 344,710══════ ══════ ══════ ══════



NOTES TO FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2019 (CONTINUED)


A3 APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (CONTINUED)

A3.1 Standards, amendments and interpretations effective in 2019 and relevant for the Bank’s operations (continued)

A3.1.b New and amended IFRS applied with no material effect on the financial statements

The following new and revised IFRS, which became effective for annual periods beginning on or after January 1, 2019, have been adopted in these financial statements. The application of these revised IFRS has not had any material impact on the amounts reported for the current and prior years but may affect the accounting for future transactions or arrangements.

New and revised IFRS Effective for annual periods beginning on or after

Amendments to IFRS 9 Prepayment Features with Negative Compensation and Modification of financial liabilities.

January 1, 2019

The amendments to IFRS 9 clarify that for the purpose of assessing whether a prepayment feature meets the SPPI condition, the party exercising the option may pay or receive reasonable compensation for the prepayment irrespective of the reason for prepayment. In other words, prepayment features with negative compensation do not automatically fail SPPI.

The amendment applies to annual periods beginning on or after January 1, 2019, with earlier application permitted. There are specific transition provisions depending on when the amendments are first applied, relative to the initial application of IFRS 9.

Amendments to IAS 28 Investment in Associates and Joint Ventures: Relating to long-term interests in associates and joint ventures.

January 1, 2019

Annual Improvements to IFRS 2015-2017 Cycle Amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs.

January 1, 2019

Annual Improvements to IFRS 2015-2017 Cycle Amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income Taxes and IAS 23 Borrowing Costs.

January 1, 2019

The Annual Improvements include amendments to four standards.

IAS 12 Income TaxesThe amendments clarify that an entity should recognize the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized the transactions that generated the distributable profits. This is the case irrespective of whether different tax rates apply to distributed and undistributed profits.

January 1, 2019

IAS 23 Borrowing costsThe amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalization rate on general borrowings.

January 1, 2019

IFRS 3 Business CombinationsThe amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, the entity applies the requirements for a business combination achieved in stages, including re-measuring its previously held interest (PHI) in the joint operation at fair value. The PHI to be re-measured includes any unrecognized assets, liabilities and goodwill relating to the joint operation.

January 1, 2019

IFRS 11 Joint ArrangementsThe amendments to IFRS 11 clarify that when a party that participates in, but does not have joint control of, a joint operation that is a business obtains joint control of such a joint operation, the entity does not re-measure its PHI in the joint operation.

January 1, 2019

Amendments to IAS 19 Employee Benefits Plan Amendment, Curtailment or Settlement The amendments to IAS 19 Employee Benefits clarify the accounting for defined benefit plan amendments, curtailments and settlements.

January 1, 2019

A2 BASIS OF PREPARATION (CONTINUED)

A2.4 Use of estimates and judgments (continued)

The estimates and underlying assumptions are reviewed on a regular basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Estimates considered by the Bank to have a significant risk of material adjustment in subsequent periods are discussed in note A5.

A3 APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

A3.1 Standards, amendments and interpretations effective in 2019 and relevant for the Bank’s operations

For the year ended 31 December 2019, the Bank has adopted all of the new and revised standards and interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for periods beginning on 1 January 2019.

A3.1.a New and amended IFRS applied with material effect on the financial statements

Adoption of IFRS 16 Leases

The Bank for the first time has applied IFRS 16 Leases (as issued by the IASB in January 2016) as of 1 January 2019, the same date as the effective date of the standard. IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to lease accounting by removing the distinction between operating and finance leases. It requires the recognition of a right-to-use asset and a lease liability at the commencement date for all leases, except for short-term leases (i.e., leases with a lease term of twelve months or less) and leases of ’low-value’ assets (e.g. personal computers). In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged.

Impact on Lessee Accounting:

The management has opted to use a “Cumulative catch-up approach” which requires calculating outstanding lease liabilities for existing operating leases using incremental borrowing rate at date of transition and carry forward existing finance lease liabilities and measure asset at an amount equal to liability adjusted for any accruals or prepayments with no effect on the opening retained earnings on transition. Adopting IFRS 16 as of 1 January 2019, the Bank has:

• Recognized right-to-use assets and lease liabilities in the statement of financial position, initially measured at the present value of future lease payments measured at the incremental borrowing rate for all existing operating leases as per residual contractual period.

• Recognized depreciation of right-to-use assets and interest on lease liabilities in the statement of comprehensive income. Both these expenses are included within other operating expenses in the statement of comprehensive income.

• The Bank excluded all existing operating leases that will be vacated and are not renewable under twelve months. • For leases that will not be renewed, the Bank has opted to recognize a lease expense on a straight line basis as permitted by

IFRS 16. This expense is presented within other operating expenses in the statement of comprehensive income.

The adoption of the above did not result in any changes to previously reported net profit or equity of the Bank.

The Bank has recognized RO 2.3 million under right-to-use assets and additional lease liabilities as at 1 January 2019 in the financial statements. The right-to-use assets are reported under Other Assets and Lease Liability is reported as part of Other Liabilities in the statement of financial position.




A4 SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently by the Bank to all periods presented in these financial statements.

A4.1 Foreign currency transactions

Transactions in foreign currencies are translated into functional currency at the spot exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into the functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for the effective interest and payments during the period, and the amortized cost in the foreign currency translated at the spot exchange rate at the end of the period. The non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date the fair value was determined. Foreign currency differences arising on retranslation are recognized in the statement of comprehensive income, except for non-monetary financial assets, such as equities classified as fair value through other comprehensive income, which are included in other comprehensive income. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

A4.2 Revenue and expense recognition

A4.2.a Interest income and expense

Interest income and expense is recorded using the effective interest rate (EIR) method for all financial instruments measured at amortized cost and financial instruments designated at FVTPL. Interest income on interest-bearing financial assets measured at FVOCI is recorded by using the EIR method. The EIR is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.

The EIR (and therefore, the amortized cost of the asset) is calculated by taking into account any discount or premium on acquisition, fees and costs that are an integral part of the EIR. The Bank recognizes interest income using a rate of return that represents the best estimate of a constant rate of return over the expected life of the loan. Hence, it recognizes the effect of potentially different interest rates charged at various stages, and other characteristics of the product life cycle (including prepayments, penalty interest and charges).

Interest income that is doubtful of recovery is included in impairment allowance and excluded from income until it is received in cash.

When a financial asset becomes credit-impaired (as set out in Note A4.3.f) and is, therefore, regarded as ‘Stage 3’, the Bank calculates interest income by applying the effective interest rate to the net amortized cost of the financial asset.

A4.2.b Fair value gains and losses

Fair value changes on derivatives held for risk management purposes and FVOCI are presented in other comprehensive income.

Net income from financial assets measured at FVTPL, including all realized and unrealized fair value changes, interest, dividend and foreign exchange differences are presented in the income statement for the year.

A4.2.c Dividend income

Dividend income is recognized when the right to receive dividend is established.

A4.2.d Fees and commission

The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income, which is not an integral part of the effective interest rate of a financial instrument, is accounted for in accordance with IFRS 15 ‘Revenue from Contracts with Customers’. Under the IFRS 15, fee income is measured by the Bank based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Bank recognizes revenue when it transfers control over a product or service to a customer.

Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income including account or loan servicing fees, advisory fee, investment management fees and sales commission are recognized as the related services are performed. Loan syndication fees and placement fees are recognized when the loan has been arranged. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognized as an adjustment to the EIR on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognized over the commitment period on a straight line basis.

A3 APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) (CONTINUED)

A3.1 Standards, amendments and interpretations effective in 2019 and relevant for the Bank’s operations (continued)

A3.1.b New and amended IFRS applied with no material effect on the financial statements (continued)


IFRIC 23 Uncertainty over Income Tax TreatmentsThe interpretation addresses the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. It specifically considers:• Whether tax treatments should be considered collectively;• Assumptions for taxation authorities’ examinations;• The determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits

and tax rates; and• The effect of changes in facts and circumstances.

January 1, 2019

Definition of Material - Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

January 1, 2019

The new definition states that, ‘Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.’

A3.2 Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Bank:


Definition of a Business – Amendments to IFRS 3 Business CombinationsThe amendments clarify that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. IASB also clarify that a business can exist without including all of the inputs and processes needed to create outputs. That is, the inputs and processes applied to those inputs must have ‘the ability to contribute to the creation of outputs’ rather than ‘the ability to create outputs’.

January 1, 2020

Amendments to References to the Conceptual Framework in IFRS StandardsAmendments to References to the Conceptual Framework in IFRS Standards related IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22, and SIC-32 to update those pronouncements with regard to references to and quotes from the framework or to indicate where they refer to a different version of the Conceptual Framework.

January 1, 2020

IFRS 7 Financial Instruments: Disclosures and IFRS 9 — Financial InstrumentsAmendments regarding pre-replacement issues in the context of the IBOR reform

January 1, 2020

IFRS 17 Insurance ContractsIFRS 17 requires insurance liabilities to be measured at a current fulfillment value and provides a more uniform measurement and presentation approach for all insurance contracts. These requirements are designed to achieve the goal of a consistent, principle-based accounting for insurance contracts. IFRS 17 supersedes IFRS 4 Insurance Contracts as at January 1, 2022.

January 1, 2022

Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011) relating to the treatment of the sale or contribution of assets from and investor to its associate or joint venture.

Effective date deferred indefinitely. Adoption is still permitted.

The Board of Directors anticipate that these new standards, interpretations and amendments will be adopted in the Bank’s financial statements as and when they are applicable and adoption of these new standards, interpretations and amendments, may have no material impact on the financial statements of the Bank in the period of initial application.




A4 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A4.3 Financial instruments (continued)

A4.3.c. Measurement categories of financial assets and liabilities (continued)

(i) Due from banks and other money market placements, loans, advances and financing and, financial investments at amortized cost

The Bank only measures due from banks and other money market placements, loans, advances and financing and other financial investments at amortized cost if both of the following conditions are met:

• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows;

• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

The details of these conditions are outlined below.

On initial recognition of an equity investment that is not held for trading, the Bank may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis. All other financial assets are classified and measured at FVTPL.

In addition, on initial recognition, the Bank may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost or FVOCI as FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

Business model assessment

The Bank makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes:

═• The stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets;

• How the performance of the portfolio is evaluated and reported to the Bank’s management;═• the risks that affect the performance of the business model (and the financial assets held within that business model) and how

those risks are managed;═• How managers of the business are compensated – e.g. whether compensation is based on the fair value of the assets managed

or the contractual cash flows collected; and═• The frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales

activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Bank’s stated objective for managing the financial assets is achieved and how cash flows are realized.

The business model assessment is based on reasonably expected scenarios without taking ‘worst case’ or ‘stress case’ scenarios into account. If cash flows after initial recognition are realized in a way that is different from the Bank’s original expectations, the Bank does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

Assessment whether contractual cash flows are solely payments of principal and interest (The ‘SPPI’ test)

For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin.

In assessing whether the contractual cash flows are solely payments of principal and interest, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Bank considers:


A4.2 Revenue and expense recognition (continued)

A4.2.e Provisions

A provision is recognized if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are equivalent to the amortized value of the future liabilities that are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the liability.

A4.2.f Offsetting of income and expense

Income and expenses are presented on a net basis only when permitted by the IFRS, or for gains and losses arising from a group of similar transactions such as those within the Bank’s trading activity.

A4.2.g Temporary significant influence

The Bank is exempt from applying the equity method when significant influence over an associate is intended to be temporary. The temporary significant influence infers that there is evidence that an associate is acquired with the intention to reduce its stake that it no more has a significant influence on the investee company by soliciting investors to inject fresh capital to the investee company. The investment is classified as available for sale in the financial statements.

A4.3 Financial instruments

A4.3.a Date of recognition and initial measurement

The Bank initially recognizes loans and advances, deposits, debt securities issued and subordinated liabilities on the date on which they originated. All other financial instruments (including regular-way purchases and sales of financial assets) are recognized on the trade date, which is the date on which the Bank becomes a party to the contractual provisions of the instrument.

A financial asset or financial liability is measured initially at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. When the fair value of financial instruments at initial recognition differs from the transaction price, the Bank accounts for the Day 1 profit or loss, as described below.

A4.3.b Day 1 profit or loss

When the transaction price of the instrument differs from the fair value at origination and the fair value is based on a valuation technique using only inputs observable in market transactions, the Bank recognizes the difference between the transaction price and fair value in net trading income. In those cases where fair value is based on models for which some of the inputs are not observable, the difference between the transaction price and the fair value is deferred and is only recognized in profit or loss when the inputs become observable, or when the instrument is derecognized.

A4.3.c Measurement categories of financial assets and liabilities

The Bank classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms, measured at either:

• Amortized cost, as explained in note A4.3.c (i);• FVOCI, as explained in notes A4.3.c (iv) and A4.3.c (v); or• FVTPL, as explained in note A4.3.c (vii)

Financial liabilities, other than loan commitments and financial guarantees, are measured at amortized cost or at FVTPL when they are held for trading and derivative instruments at the fair value designation.

The Bank classifies and measures its derivative and trading portfolio at FVTPL. The Bank may designate financial instruments at FVTPL, if so doing eliminates or significantly reduces measurement or recognition inconsistencies.






A4.3.c Measurement categories of financial assets and liabilities (continued)

(iii) Debt instruments at FVOCI The Bank applies the new category under IFRS 9 of debt instruments measured at FVOCI when both of the following conditions are met: The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and

selling financial assets; and

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

These instruments largely comprise assets that had previously been classified as financial investments available for sale under IAS 39.

For debt securities measured at FVOCI, gains and losses are recognized in OCI, except for the following, which are recognized in profit or loss in the same manner as for financial assets measured at amortized cost:

Interest revenue using the effective interest method; ECL and reversals; and Foreign exchange gains and losses.

When debt securities measured at FVOCI are derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss.

(iv) Equity instruments at FVOCI

Upon initial recognition, the Bank occasionally elects to irrevocably classify some of its equity investments as equity instruments at FVOCI when they meet the definition of Equity under IAS 32 Financial Instruments: Presentation and are not held for trading. Such classification is determined on an instrument-by-instrument basis.

Gains and losses on these equity instruments are never recycled to profit. Dividends are recognized in profit or loss as other operating income when the right of the payment has been established, except when the Bank benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment.

(v) Debt issued and other borrowed funds

After initial measurement, debt issued and other borrowed funds are subsequently measured at amortized cost. Amortized cost is calculated by taking into account any discount or premium on issued funds, and costs that are an integral part of the EIR. A compound financial instrument that contains both a liability and an equity component is separated at the issue date.

(vi) Financial assets and financial liabilities at fair value through profit or loss

Financial assets and financial liabilities in this category are those that are not held for trading and have been either designated by management upon initial recognition or are mandatorily required to be measured at fair value under IFRS 9. Management only designates an instrument at FVTPL upon initial recognition when one of the following criteria is met. Such designation is determined on an instrument-by-instrument basis:

The designation eliminates, or significantly reduces, the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis.

(vii) Financial assets and financial liabilities at fair value through profit or loss

The liabilities are part of a group of financial liabilities or financial assets, or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

The liabilities containing one or more embedded derivatives, unless they do not significantly modify the cash flows that would otherwise be required by the contract, or it is clear with little or no analysis when a similar instrument is first considered that separation of the embedded derivative(s) is prohibited.




(i) Due from banks and other money market placements, loans, advances and financing and, financial investments at amortized cost (continued)

Contingent events that would change the amount and timing of cash flows; Leverage features; Prepayment and extension terms; Terms that limit the Bank’s claim to cash flows from specified assets (e.g. non-recourse asset arrangements); and features that

modify consideration of the time value of money, e.g. periodical reset of interest rates.

The Bank holds a portfolio of long-term fixed rate loans for which the Bank has the option to revise the interest rate at periodic reset dates. These reset rights are limited to the market rate at the time of revision. The borrowers have an option to either accept the revised rate or redeem the loan at par without penalty. The Bank has determined that the contractual cash flows of these loans are solely payments of principal and interest because the option varies the interest rate in a way that is consideration for the time value of money, credit risk, other basic lending risks and costs associated with the principal amount outstanding.

Contractual terms that introduce a more than de-minimize exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at FVPL.

(ii) Derivatives recorded at fair value through profit or lossA derivative is a financial instrument or other contract with all three of the following characteristics:

Its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract (i.e., the ‘underlying’).

It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts expected to have a similar response to changes in market factors.

It is settled at a future date.

The Bank enters into derivative transactions with various counterparties. These include interest rate swaps, futures, cross-currency swaps, forward foreign exchange contracts and options on interest rates, foreign currencies. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. The notional amount and fair value of such derivatives are disclosed separately in Note B22. Changes in the fair value of derivatives are included in net trading income unless hedge accounting is applied. Hedge documentation, effectiveness assessment, and discontinuation accounting disclosures are provided in Note A4.3.n.

Embedded derivatives:

Derivatives may be embedded in another contractual arrangement (a host contract). The Bank accounts for an embedded derivative separately from the host contract when:

The host contract is not an asset in the scope of IFRS 9; The host contract is not itself carried at FVTPL; The terms of the embedded derivative would meet the definition of a derivative if they were contained in a separate contract; The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and

risks of the host contract.

Separated embedded derivatives are measured at fair value, with all changes in fair value recognized in profit or loss unless they form part of a qualifying cash flow or net investment hedging relationship. Separated embedded derivatives are presented in the statement of financial position together with the host contract.






A4.3.e Offsetting of financial assets and financial liabilities

Financial assets and financial liabilities are only offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and the Bank intends to either settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards or for gains and losses arising from a group of similar transactions.

A4.3.f Impairment of financial assets

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

Financial assets that are debt instruments; Financial guarantee contracts issued; ═ Loan commitments issued.

No impairment loss is recognized on equity investments. The Bank measures loss allowances at an amount equal to lifetime ECL, except for other financial instruments on which credit risk has not increased significantly since their initial recognition which they are 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 twelve months after the reporting date.

(i) Measurement of ECL

ECL is a probability-weighted estimate of credit losses. They are measured as follows:

Financial assets that are not credit-impaired at the reporting date: as the present 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 Bank 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;

Undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Bank if the commitment is drawn down and the cash flows that the Bank expects to receive;

Financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Bank expects to recover.

(ii) Overview of the ECL principles

The Bank has been recording the allowance for expected credit losses for all loans and other debt financial assets not held at FVTPL, together with loan commitments and financial guarantee contracts, in this section all referred to as ‘financial instruments’. Equity instruments are not subject to impairment under IFRS 9.

The ECL allowance is based on the credit losses expected to arise over the life of the asset (the lifetime expected credit losses or LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the twelve months expected credit loss (12mECL).

The 12mECL is the portion of LTECL that represent the ECL that result from default events on a financial instrument that are possible within the twelve months after the reporting date.

Both LTECL and 12mECL are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments.

The Bank has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument.

Based on the above process, the Bank groups its loans into Stage 1, Stage 2, Stage 3 and Purchased or Originated and Credit Impaired (POCI), as described below:

Stage 1 When financing are first recognized, the Bank recognizes an allowance based on 12 month ECL. Stage 1 financing exposure also include facilities where the credit risk has improved and the financing exposure has been reclassified from Stage 2.

Stage 2When a financing exposure has shown a significant increase in credit risk since origination, the Bank records an allowance for the LTECL. Stage 2 financing exposures also include facilities, where the credit risk has improved and the financing exposure has been reclassified from Stage 3.




(viii) Financial guarantees, letters of credit and undrawn loan commitments

The Bank issues financial guarantees, letters of credit and loan commitments.

Financial guarantees are initially recognized in the financial statements at fair value, being the premium received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amount initially recognized less cumulative amortization recognized in the statement of comprehensive income and an Expected Credit Loss (ECL) provision as set out in Note A4.3.f.

The premium received is recognized in the statement of comprehensive income in net fees and commission income on a straight line basis over the life of the guarantee.

Undrawn loan commitments and letters of credits are commitments under which, over the duration of the commitment, the Bank is required to provide a loan with pre-specified terms to the customer.

The nominal contractual value of financial guarantees, letters of credit and undrawn loan commitments, where the loan agreed to be provided is on market terms, are not recorded in the statement of financial position.

(ix) Financial liabilities

IFRS 9 largely retains the existing requirements of IAS 39 for the classification of financial liabilities. However, although under IAS 39 all fair value changes of liabilities designated under the fair value option were recognized in profit or loss, under IFRS 9 fair value changes are generally presented as follows:

The amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in OCI; and

The remaining amount of change in the fair value is presented in profit or loss.

The amount presented separately in OCI related to changes in own credit risk of a designated financial liability at FVTPL is not recycled to profit or loss, even when the liability is derecognized and the amounts are paid. Instead, own credit gains and losses should be reclassified to retained earnings within equity upon derecognition of the relevant liability.

A4.3.d Derecognition

(i) Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when:

The rights to receive cash flows from the asset have expired; or The Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash

flows in full without material delay to a third party under a ‘pass–through’ arrangement; and either:═ • The Bank has transferred substantially all the risks and rewards of the asset; or═ • The Bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control

of the asset

When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass–through arrangement, and has neither transferred nor retained substantially all of the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank’s continuing involvement in the asset. In that case, the Bank also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

For derecognition due to substantial modification, refer note A4.3p.

(ii) Financial liabilities

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognized in profit or loss.






A4.3.f Impairment of financial assets (continued)

(vi) Purchased or originated credit impaired financial assets (POCI)

For POCI financial assets, the Bank only recognizes the cumulative changes in LTECL since initial recognition is in the loss allowance.

(vii) Credit cards and other revolving facilities

The Bank’s product offering includes a variety of corporate and retail overdraft and credit cards facilities, in which the Bank has the right to cancel and/or reduce the facilities with one day notice. The Bank does not limit its exposure to credit losses to the contractual notice period, but instead calculates ECL over a period that reflects the Bank’s expectations of the customer behavior, its likelihood of default and the Bank’s future risk mitigation procedures, which could include reducing or cancelling the facilities.

The ongoing assessment of whether a significant increase in credit risk has occurred for revolving facilities is similar to other lending products. This is based on shifts in the customer’s internal credit grade, but greater emphasis is also given to qualitative factors such as changes in usage.

The interest rate used to discount the ECL for credit cards is based on the average effective interest rate that is expected to be charged over the expected period of exposure to the facilities. This estimation takes into account that many facilities are repaid in full each month and are consequently charged no interest.

(viii) Forward-looking information

In its ECL models, the Bank relies on a broad range of forward-looking information as economic inputs, such as:

Gross domestic product Savings and investment Inflation Trade statistics Demographics Revenue and expenditure Public debt Real estate Composite indicators Oil prices and production

The inputs and models used for calculating ECLs may not always capture all characteristics of the market at the date of the financial statements. To reflect this, qualitative adjustments are made as temporary adjustments to ECL when such differences are considered by management to be significant.

(ix) Collateral valuation

To mitigate its credit risks on financial assets the Bank seeks to use collateral where possible. The collateral comes in various forms such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. Collateral, unless repossessed, is not recorded on the Bank’s statement of financial position. However, the fair value of collateral affects the calculation of ECL. It is generally assessed, at a minimum, at inception and re-assessed periodically based on the type of asset, for example, cash or securities relating to margining requirements, is valued daily.

To the extent possible, the Bank uses active market data for valuing financial assets held as collateral. Non-financial collateral, such as real estate, is valued by certified third party valuers.

(x) Write-offs

Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. This is generally the case when the Bank determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due.



A4.3.f Impairment of financial assets (continued)

Stage 3 Financing exposure considered credit-impaired. The Bank records an allowance for the LTECL.

At initial recognition of a financial asset, the Bank recognizes a loss allowance equal to 12-month expected credit losses. After initial recognition, the three stages under the proposals would be applied as follows:

POCI is a restructured financial exposure which results in a net present value of the future cash flows from the restructured arrangement exceeding the original carrying value by greater than 30%.

Stage 1

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

Stage 2

Credit risk has increased significantly since initial recognition – recognize lifetime expected credit losses (this is recognizing a provision earlier than under IAS 39 Financial assets: Recognition and Measurement) with revenue being calculated based on the gross amount of the asset.

Stage 3

There is objective evidence of impairment as at the reporting date to recognize lifetime expected credit losses, with revenue being based on the net amount of the asset (i.e. based on the impaired amount of the asset).

(iii) The calculation of ECL

The Bank calculates ECL based on three probability-weighted scenarios to measure the expected cash shortfalls, discounted at an approximation to the EIR. A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive.

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

PD - The Probability of Default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognized and is still in the portfolio.

EAD - The Exposure at Default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued interest from missed payments.

LGD - The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the Bank would expect to receive, including from the realization of any collateral. It is usually expressed as a percentage of the EAD.

(iv) Presentation of allowance for ECL in the statement of financial position

Loss allowances for ECL are presented in the statement of financial position as follows:

Financial assets measured at amortized cost: as a deduction from the gross carrying amount of the assets; Loan commitments and financial guarantee contracts: generally, as a provision; Where a financial instrument includes both a drawn and an undrawn component, and the Bank cannot identify the ECL on the

Loan commitment component separately from those on the drawn component: the Bank presents a combined loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision;

Debt instruments measured at FVOCI: no loss allowance is recognized in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognized in the fair value reserve.

(v) Debt instruments measured at fair value through OCI

The ECL for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortized cost is recognized in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. The accumulated loss recognized in OCI is recycled to the profit and loss upon derecognition of the assets.






A4.3.j Fair value measurement (continued)

The principal or the most advantageous market must be accessible to the Bank. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or

indirectly observable Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Bank determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

At each reporting date, the Bank analyzes the movements in the values of assets and liabilities which are required to be re-measured or re-assessed as per the Bank’s accounting policies. For this analysis, the Bank verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents.

The Bank also compares the changes in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable.

For the purpose of fair value disclosures, the Bank has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

A4.3.k Cash and cash equivalents

Cash and cash equivalents consist of cash in hand, unrestricted balances held with central banks and highly liquid financial assets with original maturities of up to three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in management of its short-term commitments. Cash and cash equivalents are carried at amortized cost in the statement of financial position.

A4.3.l Repurchase and resale agreements

Securities sold with a commitment to repurchase (repos) at a specified future date are recognized in the statement of financial position and are measured in accordance with accounting policies for trading securities or investment securities. The counterparty liability for amounts received under these agreements is included in ‘due to banks and other money market borrowings’. The difference between sale and repurchase price is treated as interest expense and accrued over the life of the repo agreement.

Securities purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognized in the statement of financial position and the amounts paid under these agreements are included in ‘due from banks and other money market placements’. The difference between purchase and resale price is treated as interest income and accrued over the life of the reverse repo agreement.

A4.3.m Acceptances

Acceptances are disclosed on the statement of financial position under other assets with corresponding liability disclosed under other liabilities. Therefore, there is no off-balance sheet commitment for acceptances.



A4.3.g 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 restructuring does 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 restructuring does result in derecognition of the existing asset, then the expected amortized 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 interest rate of the existing financial asset.

A4.3.h Credit-impaired financial assets

At each reporting date, the Bank assesses whether financial assets carried at amortized cost and debt financial assets carried at FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.

Evidence that a financial asset is credit-impaired includes the following observable data:

═ 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;═ It is becoming probable that the borrower will enter bankruptcy or other financial reorganization; or═ The disappearance of an active market for a security because of financial difficulties.

A loan that has been renegotiated due to a deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered impaired.

In making an assessment of whether an investment in sovereign debt is credit-impaired, the Bank considers the following factors.

═ The market’s assessment of creditworthiness as reflected in the bond yields;═ The rating agencies’ assessments of creditworthiness;═ The country’s ability to access the capital markets for new debt issuance;═ The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt

forgiveness;═ The international support mechanisms in place to provide the necessary support as ‘lender of last resort’ to that country, as

well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This includes an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there is the capacity to fulfil the required criteria.

A4.3.i Amortized cost measurement

The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest rate of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment.

A4.3.j Fair value measurement

A number of the Bank’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on a number of accounting policies and methods. Where applicable, information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability.





A4.4 Property, equipment and fixtures

Items of property, equipment and fixtures are measured at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the asset and preparing the asset for its intended use. Depreciation is provided on a straight line basis over the estimated useful lives of property, equipment and fixtures, except freehold land. The estimated useful lives for the current year are as follows:

Asset Years

Motor vehicles 5

Furniture and fixtures 6-7

Office equipment 6-7

Production software 10

Land and capital work in progress are not depreciated, but tested for impairment. The assets’ residual values, useful lives and depreciation methods are reviewed and adjusted if appropriate at each reporting date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within ‘other operating income’ in the statement of comprehensive income.

Subsequent costs are included in the asset’s carrying amount or recognized 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 of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the profit or loss during the financial period in which they are incurred.

A4.5 Investment properties

Investment properties comprise plots of land received by the Bank as grant from the Government of Sultanate of Oman during the year 2008. These are currently held for an undetermined business use and not occupied by the Bank. These are carried at the average valuation of the two professional valuators carried out during 2008. Subsequent to initial measurement, these properties are carried at cost less accumulated impairments, if any.

A4.6 Deposits, debt securities issued and subordinated liabilities

All money market and customer deposits are initially measured at fair value plus transaction cost and subsequently carried at amortized cost. Deposits, debt securities issued and subordinated liabilities are measured at their amortized cost using the effective interest method. The Bank classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument.

A4.7 Taxation

Taxation is provided in accordance with Omani fiscal regulations. Income tax comprises current and deferred tax. Income tax expense is recognized in the statement of comprehensive income except to the extent that it relates to items recognized directly in equity or other comprehensive income.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax assets/liabilities are calculated using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary difference when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.



A4.3.n Derivatives held for risk management purposes

Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or trading liabilities. Derivatives held for risk management purposes are measured at fair value in the statement of financial position. The treatment of changes in their fair value depends on their classification into the following categories:

(i) Fair value hedge

When a derivative is designated as a hedge of the change in fair value of a recognized asset or liability or a firm commitment, changes in the fair value of the derivative are recognized immediately in statement of comprehensive income together with changes in the fair value of the hedged item that are attributable to the hedged risk.

If the derivative expires or is sold, terminated, or exercised, no longer meets the criteria for fair value hedge accounting, or the designation is revoked, hedge accounting is discontinued. Any adjustment up to that point, to a hedged item for which the effective interest method is used, is amortized to profit or loss as part of the recalculated effective interest rate of the item over its remaining life.

(ii) Cash flow hedge

When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or a 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 recognized in other comprehensive income in hedging reserve. The amount recognized in other comprehensive income is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the statement of comprehensive income. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.

If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then the hedge accounting is discontinued prospectively. In a discontinued hedge of a forecast transaction the cumulative amount recognized in other comprehensive income from the period when the hedge was effective is reclassified from the equity to statement of comprehensive income as a reclassification adjustment when the forecast transaction occurs and affects profit or loss. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is reclassified immediately to profit or loss as a reclassification adjustment.

(iii) Other non-trading derivative

When a derivative is not held for trading, and is not designated in a qualifying hedge relationship, all changes in its fair value are recognized immediately in statement of comprehensive income.

A4.3.o Reclassifications

The Bank does not reclassify its financial assets subsequent to their initial recognition, except in the period after the Bank changes its business model for managing financial assets. Financial liabilities are never reclassified. The Bank did not reclassify any of its financial assets or liabilities in 2019.

A4.3.p Modifications of financial assets and liabilities

Financial assets If the terms of a financial asset are modified, the Bank evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, the original financial asset is derecognized and a new financial asset is recognized at fair value. If the cash flows are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Bank recalculates the gross carrying amount of the financial asset and recognizes the amount arising from adjusting the gross carrying amount as a modification gain or loss in the statement of comprehensive income. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income.

If the terms of a financial asset were modified because of financial difficulties of the borrower and the asset was not derecognized, then impairment of the asset was measured using the pre-modification interest rate.

Financial liabilities The Bank derecognizes a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognized at either amortized cost or fair value. The difference between the carrying amount of the financial liability derecognized and the new financial liability with modified terms is recognized in the statement of comprehensive income.





A4.12 Earnings per share

The Bank presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise convertible notes or similar instruments.

A4.13 Dividend on ordinary shares

Dividends on ordinary shares are recognized as a liability and deducted from equity when they are approved by the shareholders. Interim dividends are deducted from equity when they are paid.

Dividends for the year that are approved after the reporting date are disclosed as an event subsequent to balance sheet date.

A4.14 Segment reporting

An operating segment is the component of the Bank that engages in business activities from which it may earn revenues and incur expenses, including revenue and expenses that relate to transactions with any of the Bank’s other components, whose operating results are reviewed regularly by the Bank’s CEO (being the chief operating decision maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available.

A4.15 Directors’ remuneration and sitting fees

The Directors’ remuneration is governed by the Commercial Companies Law regulations issued by the Capital Market Authority and the Articles of Association of the Company.

The Annual General Meeting determines and approves the remuneration and the sitting fees for the Board of Directors and its sub-committees provided such fees, in accordance with Article 106 of the Commercial Companies Law of Oman of 1974 as amended, shall not exceed 5% of the annual net profit after deduction of the legal reserve and the optional reserve and the distribution of dividends to the shareholders provided that such fees does not exceed RO 200,000. The sitting fee for each Director does not exceed RO 10,000 in any one year.

A4.16 Perpetual Tier 1 Capital Securities

The Bank classifies Perpetual Tier 1 Capital Securities as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the Tier 1 Capital Securities. The Bank’s Perpetual Tier 1 Capital Securities are not redeemable by holders and bear an entitlement to distribution that is non-cumulative and at the discretion of the Board of Directors. Accordingly, they are presented as component of total equity.

A5 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The resulting accounting estimates will, by definition, seldom equal the related actual results.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The Bank’s significant accounting estimates are on:

A5.1 Financial instruments

Judgments made in applying accounting policies that have most significant effects on the amounts recognized in the financial statements of the year pertain to the changes introduced as a result of adoption of IFRS 9: Financial instruments which impact:

Classification of financial assets: assessment of business model within which the assets are held and assessment of whether the contractual terms of the financial assets are solely payment of principal and interest of the principal amount outstanding.

Calculation of ECL changes to the assumptions and estimate on uncertainties that have a significant impact on ECL for the year pertain to the changes introduced as a result of adoption of IFRS 9: Financial instruments. The impact is mainly driven by inputs, assumptions and techniques used for ECL calculation under IFRS 9 methodology.


A4.8 Fiduciary assets

Assets held in trust or in a fiduciary capacity are not treated as assets of the Bank and accordingly are not included in these financial statements.

A4.9 Leases

Operating lease payments are recognized as an expense in the statement of comprehensive income on a straight-line basis over the lease term.

IFRS 16 results in accounting for most leases by a lessee within the scope of the standard in a manner similar to that in which finance leases were accounted for under IAS 17 ‘Leases’. Lessees recognize a ‘right of use’ asset and a corresponding financial liability on the statement of financial position. The right of use asset is amortized over the length of the lease, and the financial liability is measured at amortized cost. Lessor accounting remains substantially the same as under IAS 17. The Bank applied the IFRS 16 standard using a modified retrospective approach and therefore comparatives are not restated.

The Bank initially measures the right-of-use asset at cost; and the lease liability at the present value of the future lease payments. The amount is discounted using the interest rate implicit in the lease if this can be readily determined; otherwise, the incremental borrowing rate. The commencement date is the date on which a lessor makes an underlying asset available for use. After initial recognition, the Bank measures the right-of-use asset at cost less accumulated amortization and accumulated impairment losses.

After initial recognition, the Bank measures the lease liability by (a) increasing the carrying amount to reflect interest on the lease liability; (b) reducing the carrying amount to reflect the lease payments made; and (c) re-measuring the carrying amount to reflect any reassessment or lease modifications, or to reflect revised in-substance fixed lease payments. Interest on the lease liability is the amount that produces a constant periodic rate of the interest on the remaining balance of the lease liability. The periodic rate of interest is the rate used to discount the lease payments to calculate the lease liability.

A4.10 Financial guarantees

Financial guarantees are contracts that require the issuer to make specified payments to reimburse the beneficiary for a loss incurred because the debtor fails to make payments when due, in accordance with the terms of the debt. Such guarantees are given to banks, financial institutions or other entities on behalf of the customers.

Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was issued. Subsequent to initial recognition, the Bank’s liabilities under such guarantees are measured at the higher of initial measurement, less amortization calculated to recognize in the statement of comprehensive income the fee income earned on the straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the reporting date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of management. Any increase in the liability relating to guarantees is taken to the statement of comprehensive income.

A4.11 Employee benefits

A4.11.a Terminal benefits

End of service benefits are accrued in accordance with the terms of employment of the Bank’s employees at the reporting date, having regard to the requirements of the Oman Labor Law 2003, as amended.

Contributions to a defined contribution retirement plan and occupational hazard insurance for Omani employees in accordance with the Omani Social Insurances Law of 1991 are recognized as an expense in the statement of comprehensive income as incurred.

A4.11.b Short-term benefits

Short-term benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A provision is recognized for the amount expected to be paid if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.




B1 CASH AND BALANCES WITH CENTRAL BANK

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

63,309 70,044 Cash 26,967 24,374

1,312 1,312 Capital deposit with CBO 505 505

123,576 161,299 Balance with CBO 62,100 47,577

188,197 232,655 89,572 72,456══════ ══════ ══════ ══════

(i) The Capital deposit with CBO cannot be withdrawn without CBO approval.

(ii) During the year, average minimum balance to be kept with CBO as statutory reserves is RO 76.89 million (2018: RO 72.42 million).

B2 DUE FROM BANKS AND OTHER MONEY MARKET PLACEMENTS

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

12,987 12,990Local currency: Money market placements 5,001 5,000

12,987 12,990 5,001 5,000

Foreign currency:

245,109 465,044 Money market placements 179,042 94,367

22,509 6,605 Lending to banks 2,543 8,666

35,875 32,381 Demand balances 12,467 13,812

303,493 504,030 194,052 116,845

316,480 517,020 199,053 121,845

(1,148) (2,119) Expected credit loss allowance (816) (442)

315,332 514,901 198,237 121,403══════ ══════ ══════ ══════

A5 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (CONTINUED)


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

The measurement of impairment losses both under IFRS 9 and IAS 39 across all categories of financial assets requires judgment, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgments and estimates include:

The Bank’s internal credit grading model, which assigns PD to the individual grades; The Bank’s criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should

be measured on a LTECL basis and the qualitative assessment; The segmentation of financial assets when their ECL is assessed on a collective basis; Development of ECL models, including the various formulas and the choice of inputs; Determination of associations between macroeconomic scenarios and economic inputs, such as unemployment levels and

collateral values, and the effect on PD, EAD and LGD; Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into

the ECL models.

A5.2 Fair value of derivatives and other financial instruments

The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. The Bank uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at the end of each reporting period. The Bank uses expected cash flow analysis for certain FVOCI that are not traded in active markets.

A5.3 Fair value estimation of unquoted securities

In cases where the underlying assets are fair valued such as private equity funds, management uses net assets value. Management believes that net assets values of these investments are representative of their fair values as the majority of the underlying assets are fair valued and the reported net assets of those entities takes into account the updated fair values changes.

A5.4 Fee and commission income

The recognition of fee and commission income depends on the purpose for which fees are assessed and the basis of accounting for any associated financial instrument. Management applies certain assumptions and judgments to determine the fees that are an integral part of the effective interest rate of a financial instrument, fees that are earned as services are provided, and fees that are earned on the execution of a significant act.

A5.5 Taxation

Uncertainties exist with respect to the interpretation of tax regulations and the amount and timing of future taxable income. Given the wide range of business relationships and nature of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Bank establishes provisions, based on reasonable estimates, for possible consequences of finalization of tax assessments of the Bank. The amount of such provisions is based on various factors, such as experience of previous tax assessments and differing interpretations of tax regulations by the taxable entity and the responsible tax authority.

Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies.




B3 LOANS, ADVANCES AND FINANCING, NET

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

4,099,281 4,333,712 Corporate 1,668,479 1,578,223

1,980,355 2,340,275 Retail 901,006 762,437

6,079,636 6,673,987 Gross loans, advances and financing 2,569,485 2,340,660

(206,101) (258,878) Expected credit loss allowance (99,668) (79,349)

(24,366) (40,686) Contractual interest not recognized (15,664) (9,381)

(230,467) (299,564) (115,332) (88,730)

5,849,169 6,374,423 Net loans, advances and financing 2,454,153 2,251,930══════ ══════ ══════ ══════

Gross loans, advances and financing include RO 216.59 million (31 December 2018: RO 183.21 million) under Islamic mode of financing through Sohar Islamic financing activities.

Loans, advances and financing comprise:

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

5,327,545 6,015,829 Loans 2,316,094 2,051,105

332,260 276,379 Overdrafts 106,406 127,920

279,810 244,426 Loans against trust receipts 94,104 107,727

140,021 137,353 Bills discounted 52,881 53,908

6,079,636 6,673,987 Gross loans, advances and financing 2,569,485 2,340,660

(206,101) (258,878) Expected credit loss allowance (99,668) (79,349)

(24,366) (40,686) Contractual interest not recognized (15,664) (9,381)

(230,467) (299,564) (115,332) (88,730)

5,849,169 6,374,423 Net loans, advances and financing 2,454,153 2,251,930══════ ══════ ══════ ══════

B2 DUE FROM BANKS AND OTHER MONEY MARKET PLACEMENTS (CONTINUED)

The analysis of changes in the gross carrying amount and corresponding ECL allowance on due from banks and other money market placements is as follows:

Gross carrying amount31 December

2019RO’000

31 December2018

RO’000

Stage 1 Stage 2 Stage 3 Total Total

As at 1 January 113,298 8,547 - 121,845 105,242

New assets originated or purchased 84,831 - - 84,831 16,603

Assets derecognized or matured - (7,623) - (7,623) - ══════

As at 31 December 2019 198,129 924 - 199,053 121,845

Gross carrying amount31 December

2019USD’000

31 December2018

USD’000


As at 1 January 294,281 22,200 - 316,481 273,356

New assets originated or purchased 220,340 - - 220,340 43,124

Assets derecognized or matured - (19,801) - (19,801) - ══════

As at 31 December 2019 514,621 2,399 - 517,020 316,480

ECL31 December

2019RO’000

31 December2018

RO’000


As at 1 January 232 210 - 442 1,039

Impact of adopting IFRS 9 - - - - 281 ══════

As at 1 January 2018 (restated) 232 210 - 442 1,320

Loan written off against ECL allowance - - - - (966)

Net (release)/charge for the year (C6) 555 (181) - 374 88 ══════

As at 31 December 2019 787 29 - 816 442

ECL 31 December

2019USD’000

31 December2018

USD’000


As at 1 January 603 545 - 1,148 2,699

Impact of adopting IFRS 9 - - - - 730 ══════

As at 1 January 2018 (restated) 603 545 - 1,148 3,429

Loan written off against ECL allowance - - - - (2,509)

Net (release)/charge for the year (C6) 1,441 (470) - 971 228 ══════

As at 31 December 2019 2,044 75 - 2,119 1,148




B3 LOANS, ADVANCES AND FINANCING, NET (CONTINUED)

Gross carrying amount Stage 1USD’000

Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2019 4,742,210 1,137,470 199,956 6,079,636

New assets originated or purchased 2,135,309 440,234 47,304 2,622,847

Assets derecognized or repaid (1,507,636) (469,790) (51,070) (2,028,496)

Transfers to Stage 1 323,964 (319,681) (4,283) -

Transfers to Stage 2 (184,699) 189,143 (4,444) -

Transfers to Stage 3 (75,132) (59,413) 134,545 -

As at 31 December 2019 5,434,016 917,963 322,008 6,673,987

ECL Stage 1USD’000

Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2019 (Note A6 i) 32,974 87,348 85,779 206,101

New assets originated or purchased 7,865 54,533 30,600 92,998

Assets derecognized or repaid (25,600) (15,704) (727) (42,031)

Loans brought back from memorandum accounts - - 1,810 1,810

Transfers to Stage 1 16,327 (14,951) (1,376) (1)

Transfers to Stage 2 (2,371) 4,351 (1,980) 1


As at 31 December 2019 28,081 108,429 122,368 258,878


Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2018 3,869,919 1,549,748 160,153 5,579,821

New assets originated or purchased 1,815,187 365,273 21,218 2,201,678

Assets derecognized or repaid (1,176,766) (508,239) (16,857) (1,701,862)



Transfers to Stage 3 (499) (44,969) 45,468 -

As at 31 December 2018 4,742,210 1,137,470 199,956 6,079,636


Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2018 - - - 111,548

Impact of adopting IFRS 9 - - - 49,215

Restated ECL allowance as at 1 January 2018 15,628 73,857 71,278 160,763


Transfers to Stage 2 (60) 2,956 (2,896) -


Net charge for the year (C6) 6,769 21,465 17,104 45,338

As at 31 December 2018 32,974 87,348 85,779 206,101


The analysis of changes in the gross carrying amount and corresponding ECL allowance on loans, advances and financing is as follows:

Gross carrying amount Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2019 1,825,751 437,926 76,983 2,340,660

New assets originated or purchased 822,094 169,490 18,212 1,009,796

Assets derecognized or repaid (580,440) (180,869) (19,662) (780,971)




As at 31 December 2019 2,092,096 353,416 123,973 2,569,485

ECL Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2019 12,695 33,629 33,025 79,349



Loans brought back from memorandum portfolio - - 697 697

Transfers to Stage 1 6,286 (5,756) (530) -

Transfers to Stage 2 (913) 1,675 (762) -


As at 31 December 2019 10,811 41,745 47,112 99,668


Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2018 1,489,919 596,653 61,659 2,148,231






As at 31 December 2018 1,825,751 437,926 76,983 2,340,660

ECL Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2018 - - - 42,946

Impact of adopting IFRS 9 - - - 18,948



Transfers to Stage 2 (23) 1,138 (1,115) -

Transfers to Stage 3 (12) (635) 647 -

Net charge for the year (C6) 2,606 8,264 6,585 17,455

As at 31 December 2018 12,695 33,629 33,025 79,349





The following table compares the provision held as per IFRS 9 versus CBO circular BM 977

31 December 2019

Classification:

CBO IFRS 9

Gross carrying amount

RO’000

CBO Provision RO’000

IFRS9 Provisions

RO’000Difference

RO’000

Net carrying amount

RO’000

IFRS9 Reserve interest

RO’000

CBO Reserve interest

RO’000

(1) (2) (3) (4)=(2)-(3) (5)=(1)-(3)

Standard Stage 1 2,048,238 26,718 9,297 17,421 2,038,941 - -

Stage 2 96,916 1,269 7,263 (5,994) 89,653 - -

Stage 3 219 2 78 (76) 141 - -

Subtotal 2,145,373 27,989 16,638 11,351 2,128,735 - -

Special mention Stage 1 39,108 460 1,400 (940) 37,708 - -

Stage 2 260,068 7,305 34,511 (27,206) 225,557 - -

Stage 3 9 - 2 (2) 7 - -

Subtotal 299,185 7,765 35,913 (28,148) 263,272 - -

Substandard Stage 1 4 - - - 4 - -

Stage 2 12 - 2 (2) 10 - -

Stage 3 35,321 8,568 9,727 (1,159) 25,594 1,164 1,164

Subtotal 35,337 8,568 9,729 (1,161) 25,608 1,164 1,164

Doubtful Stage 1 448 - 5 (5) 443 - -

Stage 2 24 - 3 (3) 21 - -

Stage 3 27,148 11,230 9,105 2,125 18,043 531 531

Subtotal 27,620 11,230 9,113 2,117 18,507 531 531

Loss Stage 1 369 - 4 (4) 365 - -

Stage 2 325 - 71 (71) 254 - -

Stage 3 61,276 37,668 43,864 (6,196) 17,412 13,969 13,969

Subtotal 61,970 37,668 43,939 (6,271) 18,031 13,969 13,969

Gross Loans, advances and financing

Stage 1 2,088,167 27,178 10,706 16,472 2,077,461 - -

Stage 2 357,345 8,574 41,850 (33,276) 315,495 - -

Stage 3 123,973 57,468 62,776 (5,308) 61,197 15,664 15,664

Subtotal 2,569,485 93,220 115,332 (22,112) 2,454,153 15,664 15,664

Stage 1 1,424,740 12 3,250 (3,238) 1,421,490 - -

*Due from banks, Stage 2 109,776 - 1,982 (1,982) 107,794 - -

Investment securities, Stage 3 1,339 - 41 (41) 1,298 - -

Loan commitments & Financial guarantees

Total 1,535,855 12 5,273 (5,261) 1,530,582 - -

Total Stage 1 3,512,907 27,190 13,956 13,234 3,498,951 - -

Stage 2 467,121 8,574 43,832 (35,258) 423,289 - -

Stage 3 125,312 57,468 62,817 (5,349) 62,495 15,664 15,664

Total 4,105,340 93,232 120,605 (27,373) 3,984,735 15,664 15,664

*Other items not covered under CBO circular BM 977 and related instructions


The analysis of the changes in contractual interest not recognized is as follows:

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

Contractual interest not recognized

16,979 24,366 Balance at beginning of year 9,381 6,537

9,849 20,675 Not recognized during the year 7,960 3,792

(2,462) (4,355) Written back due to recovery (1,677) (948)

24,366 40,686 Balance at end of the year 15,664 9,381══════ ══════ ══════ ══════

All loans and advances require payment of interest, some at fixed rates and others at rates that reprice prior to maturity. Interest reserve account is maintained to comply with rules, regulations and guidelines issued by CBO on loans, advances and financing that are impaired. As of 31 December 2019, loans and advances on which interest was not being accrued or where interest was reserved amounted to RO 123.973 million. (31 December 2018: RO 76.986 million).

Additional disclosures on non-performing financial assets impairment coverage as per CBO circular BM 1149 is given below:

As at 31 December 2019 As per CBO RO’000

As per IFRS 9RO’000

DifferenceRO’000

Impairment loss charged to statement of comprehensive income 19,337 18,845 (492)

Provisions 108,896 120,605 11,709

Gross NPL ratio (percentage)* 4.86 4.82 (0.04)

Net NPL ratio (percentage)* 2.11 2.49 0.38

*NPL ratios are calculated on the basis of funded non-performing loans and advances.





The following table compares the provision held as per IFRS 9 versus CBO circular BM 977

31 December 2019

Classification:

CBO IFRS 9


USD’000

CBO Provision USD’000

IFRS9 Provisions USD’000

Difference USD’000

Net carrying amount

USD’000


USD’000


USD’000

(1) (2) (3) (4)=(2)-(3) (5)=(1)-(3)

Standard Stage 1 5,320,099 69,397 24,148 45,249 5,295,951 - -

Stage 2 251,730 3,296 18,865 (15,569) 232,865 - -

Stage 3 569 5 203 (198) 366 - -

Subtotal 5,572,398 72,698 43,216 29,482 5,529,182 - -

Special mention Stage 1 101,579 1,195 3,636 (2,441) 97,943 - -

Stage 2 675,501 18,974 89,639 (70,665) 585,862 - -

Stage 3 23 - 5 (5) 18 - -

Subtotal 777,103 20,169 93,280 (73,111) 683,823 - -

Substandard Stage 1 10 - - - 10 - -

Stage 2 31 - 5 (5) 26 - -

Stage 3 91,743 22,255 25,265 (3,010) 66,478 3,023 3,023

Subtotal 91,784 22,255 25,270 (3,015) 66,514 3,023 3,023

Doubtful Stage 1 1,164 - 13 (13) 1,151 - -

Stage 2 62 - 8 (8) 54 - -

Stage 3 38,140 13,517 10,306 3,211 27,834 725 725

Subtotal 39,366 13,517 10,327 3,190 29,039 725 725

Loss Stage 1 958 - 10 (10) 948 - -

Stage 2 844 - 184 (184) 660 - -

Stage 3 159,158 97,839 113,932 (16,093) 45,226 36,283 36,283

Subtotal 160,960 97,839 114,126 (16,287) 46,834 36,283 36,283

Gross Loans, advances and financing

Stage 1 5,423,810 70,592 27,807 42,785 5,396,003 - -

Stage 2 928,169 22,270 108,701 (86,431) 819,467 - -

Stage 3 322,008 149,268 163,054 (13,786) 158,953 40,686 40,686

Subtotal 6,673,985 242,130 299,562 (57,432) 6,374,423 40,686 40,686

Stage 1 3,700,623 31 8,442 (8,411) 3,692,181 - -

*Due from banks, Stage 2 285,132 - 5,148 (5,148) 279,984 - -

Investment securities, Stage 3 3,478 - 106 (106) 3,372 - -

Loan commitments & Financial guarantees

Total 3,989,233 31 13,696 (13,665) 3,975,537 - -

Total Stage 1 9,124,433 70,623 36,249 34,374 9,088,184 - -

Stage 2 1,213,300 22,270 113,849 (91,579) 1,099,451 - -

Stage 3 325,485 149,268 163,160 (13,892) 162,325 40,686 40,686

Total 10,663,218 242,161 313,258 (71,097) 10,349,960 40,686 40,686

*Other items not covered under CBO circular BM 977 and related instructions


31 December 2018

Classification :

CBO IFRS 9


RO’000


IFRS9 Provisions

RO’000Difference

RO’000

Net carrying amount

RO’000


RO’000


RO’000

(1) (2) (3) (4)=(2)-(3) (5)=(1)-(3)

Standard Stage 1 1,825,031 22,231 12,685 9,546 1,812,346 - -

Stage 2 227,790 2,756 9,801 (7,045) 217,989 - -

Stage 3 199 2 81 (79) 118 - -

Subtotal 2,053,020 24,989 22,567 2,422 2,030,453 - -

Special mention Stage 1 16 - - - 16 - -

Stage 2 209,849 10,951 23,791 (12,840) 186,058 - -

Stage 3 12 - 3 (3) 9 - -

Subtotal 209,877 10,951 23,794 (12,843) 186,083 - -

Substandard Stage 1 99 - 1 (1) 98 - -

Stage 2 152 - 22 (22) 130 - -

Stage 3 12,001 2,984 3,739 (755) 8,262 275 275

Subtotal 12,252 2,984 3,762 (778) 8,490 275 275

Doubtful Stage 1 227 - 3 (3) 224 - -

Stage 2 81 - 5 (5) 76 - -

Stage 3 21,625 10,754 11,238 (484) 10,387 417 417

Subtotal 21,933 10,754 11,246 (492) 10,687 417 417

Loss Stage 1 375 - 6 (6) 369 - -

Stage 2 54 - 9 (10) 44 - -

Stage 3 43,149 23,475 27,345 (3,870) 15,804 8,689 8,689

Subtotal 43,578 23,475 27,361 (3,886) 16,217 8,689 8,689

Total Stage 1 1,825,748 22,231 12,695 9,536 1,813,053 - -

Stage 2 437,926 13,707 33,629 (19,922) 404,297 - -

Stage 3 76,986 37,215 42,406 (5,191) 34,580 9,381 9,381

Total 2,340,660 73,153 88,730 (15,577) 2,251,930 9,381 9,381





31 December 2018

Classification:

CBO IFRS 9


RO’000


IFRS9 Provisions

RO’000Difference

RO’000

Net carrying amount

RO’000


RO’000


RO’000

(1) (2) (3) (4)=(2)-(3) (5)=(1)-(3)Stage 1 - - - - - - -

Classified as performing Stage 2 55,972 8,396 9,515 (1,119) 46,457 - -Stage 3 - - - - - - -

Subtotal 55,972 8,396 9,515 (1,119) 46,457 - -Classified as non-performing Stage 1 - - - - - - -

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

Subtotal - - - - - - -Total Stage 1 - - - - - - -

Stage 2 55,972 8,396 9,515 (1,119) 46,457 - -Stage 3 - - - - - - -

Total 55,972 8,396 9,515 (1,119) 46,457 - -

31 December 2019

Classification:

CBO IFRS 9


USD’000

CBO Provision USD’000



Net carrying amount

USD’000


USD’000


USD’000

(1) (2) (3) (4)=(2)-(3) (5)=(1)-(3)Stage 1 164,922 1,065 455 610 164,467 - -



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

Subtotal - - - - - - -Total Stage 1 164,922 1,065 455 610 164,467 - -

Stage 2 430,364 20,387 62,810 (42,423) 367,554 - -Stage 3 - - - - - - -

Total 595,286 21,452 63,265 (41,813) 532,021 - -

31 December 2018

Classification:

CBO IFRS 9


USD’000

CBO Provision

USD’000



Net carrying amount

USD’000


USD’000


USD’000

(1) (2) (3) (4)=(2)-(3) (5)=(1)-(3)Stage 1 - - - - - - -



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

Subtotal - - - - - - -Total Stage 1 - - - - - - -

Stage 2 145,382 21,808 24,714 (2,906) 120,668 - -Stage 3 - - - - - - -

Total 145,382 21,808 24,714 (2,906) 120,668 - -


31 December 2018

Classification:

CBO IFRS 9


USD’000

CBO Provision

USD’000



Net carrying amount

USD’000


USD’000


USD’000

(1) (2) (3) (4)=(2)-(3) (5)=(1)-(3)

Standard Stage 1 4,740,340 57,743 32,948 24,795 4,707,392 - -

Stage 2 591,662 7,158 25,457 (18,299) 566,205 - -

Stage 3 517 5 210 (205) 306 - 3

Subtotal 5,332,520 64,906 58,616 6,291 5,273,904 - 3

Special mention Stage 1 42 - - - 42 - -

Stage 2 545,062 28,444 61,795 (33,351) 483,268 - -

Stage 3 31 - 8 (8) 23 - -

Subtotal 545,135 28,444 61,803 (33,358) 483,332 - -

Substandard Stage 1 257 - 3 (3) 255 - -

Stage 2 395 - 57 (57) 338 - -

Stage 3 31,171 7,751 9,711 (1,960) 21,460 714 714

Subtotal 31,823 7,751 9,771 (2,020) 22,052 714 714

Doubtful Stage 1 590 - 8 (8) 582 - -

Stage 2 210 - 13 (13) 197 - -

Stage 3 56,169 27,932 29,189 (1,257) 26,980 1,083 1,083

Subtotal 56,969 27,932 29,210 (1,278) 27,759 1,083 1,083

Loss Stage 1 974 - 16 (16) 958 - -

Stage 2 140 - 23 (26) 117 - -

Stage 3 112,075 60,974 71,026 (10,052) 41,049 22,569 22,569

Subtotal 113,189 60,974 71,065 (10,094) 42,124 22,569 22,569

Total Stage 1 4,742,203 57,743 32,974 24,769 4,709,229 - -

Stage 2 1,137,470 35,603 87,348 (51,745) 1,050,122 - -

Stage 3 199,964 96,662 110,145 (13,483) 89,819 24,366 24,366

Total 6,079,636 190,008 230,467 (40,459) 5,849,169 24,366 24,366

Loans with renegotiated terms are defined as loans that have been restructured due to deterioration in the borrower’s financial position, for which the Bank has made concessions by agreeing to terms and conditions that are more favorable for the borrower than the Bank had provided initially and that it would not otherwise consider. A loan continues to be presented as part of loans with renegotiated terms until maturity, early repayment or write-off.

31 December 2019

Classification:

CBO IFRS 9


RO’000


IFRS9 Provisions

RO’000Difference

RO’000

Net carrying amount

RO’000


RO’000


RO’000

(1) (2) (3) (4)=(2)-(3) (5)=(1)-(3)

Classified as performing Stage 1 63,495 410 175 235 63,320 - -

Stage 2 165,690 7,849 24,182 (16,333) 141,508 - -

Stage 3 - - - - - - -

Subtotal 229,185 8,259 24,357 (16,098) 204,828 - -

Classified as non-performing Stage 1 - - - - - - -

Stage 2 - - - - - - -

Stage 3 - - - - - - -

Subtotal - - - - - - -

Total Stage 1 63,495 410 175 235 63,320 - -

Stage 2 165,690 7,849 24,182 (16,333) 141,508 - -

Stage 3 - - - - - - -

Total 229,185 8,259 24,357 (16,098) 204,828 - -




B4 INVESTMENT SECURITIES (CONTINUED)

B4.b Held at FVOCI

Carrying / fair value

31 December 2019

RO’000

Cost31 December

2019RO’000

Carrying /fair value

31 December 2018

RO’000

Cost31 December

2018RO’000

Unquoted securities - 34 - 34

Quoted securities 6,357 8,535 18,909 21,022

6,357 8,569 18,909 21,056

Treasury bills 330,026 330,572 274,117 273,350

Expected credit loss allowance (28) - - -

329,998 330,572 274,117 273,350

336,355 339,141 293,026 294,406

Carrying / fair value

31 December 2019

USD’000

Cost31 December

2019USD’000

Carrying /fair value

31 December 2018

USD’000

Cost31 December

2018USD’000

Unquoted securities - 88 - 88

Quoted securities (including equity securities) 16,511 22,169 49,115 54,603

16,511 22,257 49,115 54,691

Treasury bills 857,211 858,629 711,992 710,000

Expected credit loss allowance (73) - - -

857,138 858,629 711,992 710,000

873,649 880,886 761,107 764,691

Stage 1RO’000

Stage2RO’000

Stage3RO’000

TotalRO’000

As at 1 January 2019 23 - - 23

New assets originated or purchased 5 - - 5

As at 31 December 2019 28 - - 28

Treasury bills include investments in USD Treasury bills of RO 330.572 million (31 December 2018: RO 273.35 million) assigned as collaterals against the Bank’s borrowings.

In 2019, the Bank received dividends of RO 1.37 million from its FVOCI equities (2018: RO 1.18 million), recorded as other operating income.


Concentration of gross loans and advances by economic sector:

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

1,980,356 2,340,281 Personal 901,008 762,437

1,109,468 991,834 Construction 381,856 427,145

694,421 870,779 Wholesale and retail 335,250 267,352

955,117 1,003,345 Services 386,288 367,720

144,738 230,309 Financial institutions 88,669 55,724

101,283 157,545 Transport and communication 60,655 38,994

421,647 611,758 Manufacturing 235,527 162,334

128,904 33,016 International trade 12,711 49,628

226,278 163,922 Mining and quarrying 63,110 87,117

197,488 215,416 Electricity, gas and water 82,935 76,033

108,470 50,104 Non–resident 19,290 41,761

6,512 - Agriculture and allied activities - 2,507

4,956 5,678 Other 2,186 1,908

6,079,636 6,673,987 2,569,485 2,340,660══════ ══════ ══════ ══════

B4 INVESTMENT SECURITIES

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

256,083 263,034 Held at FVTPL 101,268 98,592

761,107 873,649 Held at FVOCI 336,355 293,026

366,626 519,096 Held at amortized cost 199,852 141,151

1,383,816 1,655,779 637,475 532,769══════ ══════ ══════ ══════

B4.a Held at FVTPL

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

224,078 230,834 Government development bonds – Oman 88,871 86,270

21,036 21,052 Sukuk trust certificates – secured 8,105 8,099

6,494 6,494 Unquoted securities 2,500 2,500

4,475 4,654 Others 1,792 1,723

256,083 263,034 Total 101,268 98,592══════ ══════ ══════ ══════

As at 31 December 2019, unquoted securities includes an investment of RO 2.50 million in the Oman Development Fund SAOC (“Fund”). The Fund was incorporated on 7 May 2014 under license no. 1196427 with the Bank being the founder shareholder. The purpose of the Fund is to identify mid-segment industrial and manufacturing sectors that leverage Oman’s unique advantages such as its infrastructure, tax treaties, geography and natural mineral resources for potential investment opportunities. The Bank currently holds a 12.66% stake in the Fund (31 December 2018: 12.66%). The Bank has an Investment Management Agreement with the Fund.





B4.c Held at amortized cost (continued)


Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2019 306,753 62,460 - 369,213

New assets originated or purchased 143,452 10,348 - 153,800

As at 31 December 2019 450,205 72,808 - 523,013

ECLStage 1

USD’000Stage 2

USD’000Stage 3

USD’000Total

USD’000

As at 1 January 2019 828 1,759 - 2,587

New assets originated or purchased 777 553 - 1,330

As at 31 December 2019 1,605 2,312 - 3,917


Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2018 238,312 - - 238,312

New assets originated or purchased 130,901 - - 130,901

Transfers to Stage 2 (62,460) 62,460 - -

As at 31 December 2018 306,753 62,460 - 369,213


Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2018 - - - -

Impact of adopting IFRS 9 862 - - 862

Restated ECL allowance as at 1 January 2018 862 - - 862

Transfers to Stage 2 (429) 429 - -

Net charge for the year (C6) 395 1,330 - 1,725

As at 31 December 2018 828 1,759 - 2,587


B4.c Held at amortized cost

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

369,213 523,013 Quoted 201,360 142,147

369,213 523,013 201,360 142,147

(2,587) (3,917) Expected credit loss allowance (1,508) (996)

366,626 519,096 Total 199,852 141,151══════ ══════ ══════ ══════

The analysis of changes in the fair value and the corresponding ECL allowance on debt investments classified as held at amortized cost is as follows:


Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2019 118,100 24,047 - 142,147

New assets originated or purchased 55,229 3,984 - 59,213

As at 31 December 2019 173,329 28,031 - 201,360

ECLStage 1

RO’000Stage 2

RO’000Stage 3

RO’000Total

RO’000

As at 1 January 2019 319 677 - 996

New assets originated or purchased 299 213 - 512

As at 31 December 2019 618 890 - 1,508


Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2018 91,750 - - 91,750



As at 31 December 2018 118,100 24,047 - 142,147

ECL Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2018 - - - -




Net charge for the year (C6) 152 512 - 664

As at 31 December 2018 319 677 - 996




B6 INVESTMENT PROPERTIES

Investment properties represent two plots of land received by the Bank as a grant from the Government of Sultanate of Oman during the year 2008. The Bank has recorded the land based on the average valuation carried out during 2008 by two professional valuators. The plots of land are currently held vacant. The fair value of these properties as at 31 December 2019 is RO 3.0 million (31 December 2018: RO 3.0 million).

As at 31 December 2019 and 2018, the fair values of the properties are based on valuations performed by an accredited independent valuer. The valuation was conducted on an open market basis. These properties have been classified as level 3 investments.

B7 OTHER ASSETS

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

78,577 167,223 Acceptances (i) 64,381 30,252

5,730 5,506 Prepayments 2,120 2,206

3,839 195 Receivables 75 1,478

4,891 15,865 Positive fair value of derivatives (B21) 6,108 1,883

- 9,940 Right-to-use assets 3,827 -

24,545 20,437 Others 7,868 9,450

117,582 219,166 84,379 45,269══════ ══════ ══════ ══════

(i) Disclosure on ECL on acceptances B10 (i).

B8 DUE TO BANKS AND OTHER MONEY MARKET BORROWINGS

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

Local currency:

25,977 19,870 Money market borrowings 7,650 10,001

12,816 14,930 Demand balances 5,748 4,934

38,793 34,800 13,398 14,935

Foreign currency:

1,033,309 1,623,322 Money market borrowings 624,979 397,824

306 - Demand balances - 118

803,075 251,647 Syndicated borrowings 96,884 309,184

1,836,690 1,874,969 721,863 707,126

1,875,483 1,909,769 735,261 722,061══════ ══════ ══════ ══════

Foreign currency borrowings include bank borrowings amounting to RO 354.20 million (2018: RO 296.45 million) with underlying collateral in the form of USD Treasury bills of RO 330.57 million (2018: RO 273.35 million).

Applicable financial covenants for the syndicated borrowings include the requirement for a minimum tangible net worth of the Bank and a minimum capital adequacy ratio to be maintained by the Bank.

B5 PROPERTY, EQUIPMENT AND FIXTURES

Freehold land

RO’000

Computer softwareRO’000

Furniture and

fixturesRO’000

Office equipment

RO’000

Motor vehiclesRO’000

Capital work –in-progressRO’000

TotalRO’000

Cost:

As at 1 January 2019 4,100 17,223 5,466 7,043 929 3,789 38,550

Additions 16,409 539 575 867 16 2,843 21,249

Transfers/disposals - 979 1,291 85 - (2,361) (6)

As at 31 December 2019 20,509 18,741 7,332 7,995 945 4,271 59,793

Accumulated depreciation:

As at 1 January 2019 - 8,521 4,256 5,347 750 - 18,874

Depreciation - 1,407 516 542 65 - 2,530

As at 31 December 2019 - 9,928 4,772 5,889 815 - 21,404

Net book value as at

As at 31 December 2019 (RO’000) 20,509 8,813 2,560 2,106 130 4,271 38,389

As at 31 December 2019 (USD’000) 53,270 22,891 6,649 5,470 338 11,094 99,712

Freehold land

RO’000


Furniture and fixtures

RO’000

Office equipment

RO’000

Motor vehiclesRO’000

Capital work –in-progressRO’000

TotalRO’000

Cost:

At 1 January 2018 4,100 15,307 5,174 6,368 822 2,076 33,847

Additions - 1,051 364 747 107 3,678 5,947

Transfers/(disposals) - 865 (72) (72) - (865) (144)

Written off (C5) - - - - - (1,100) (1,100)

At 31 December 2018 4,100 17,223 5,466 7,043 929 3,789 38,550

Accumulated depreciation:

At 1 January 2018 - 7,209 3,929 4,929 671 - 16,738

Depreciation - 1,312 393 489 79 - 2,273

Disposals - - (66) (71) - - (137)

As at 31 December 2018 - 8,521 4,256 5,347 750 - 18,874

Net book value as at

31 December 2018 (RO’000) 4,100 8,702 1,210 1,696 179 3,789 19,676

31 December 2018 (USD’000) 10,649 22,603 3,143 4,405 465 9,842 51,107

i) During 2018, design cost amounting to RO 1.1 million previously capitalized, and no longer associated with the underlying project have been written off.

ii) Included in capital work in progress are costs incurred towards a new head office project.




B10 OTHER LIABILITIES

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

78,577 167,223 Acceptances 64,381 30,252

9,587 14,132 Staff entitlements 5,441 3,691

12,956 25,135 Income tax payable 9,677 4,988

9,616 1,060 Negative fair value of derivatives (B25) 408 3,702

1,255 1,613 Deferred tax liabilities 621 483

95,937 37,619 Other accruals and provisions 14,483 36,936

11,979 7,587 Expected credit loss allowance on loan commitments and financial guarantees

2,921 4,612

- 6,732 Lease liability on right of use assets 2,592

219,907 261,101 Total 100,524 84,664══════ ══════ ══════ ══════

Staff entitlements:

1,416 1,582 End of service benefits 609 545

8,171 12,550 Other liabilities 4,832 3,146

9,587 14,132 5,441 3,691══════ ══════ ══════ ══════

Movement in the end of service benefits liability

1,717 1,416 As at 1 January 545 661

354 389 Expenses recognized in the profit or loss 150 136

(655) (223) End of service benefits paid (86) (252)

1,416 1,582 609 545══════ ══════ ══════ ══════

(i) The analysis of changes in the gross carrying amount and corresponding ECL allowance on loan commitments, financial guarantees and acceptances is as follows:

Outstanding exposure Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2019 659,775 104,841 1,642 766,258

New assets originated or purchased 350,042 9,512 (54) 359,500



Transfers to Stage 2 (5,138) 5,151 (13) -


Amounts written off (6) - 6 -

As at 31 December 2019 750,257 53,821 1,338 805,416

ECL Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2019 2,654 1,948 10 4,612

New assets originated or purchased 548 (194) 10 364

Assets derecognized or repaid (1,450) (604) (1) (2,055)

Transfers to Stage 1 71 (71) - -



As at 31 December 2019 1,817 1,063 41 2,921

B9 CUSTOMER DEPOSITS

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

2,635,782 2,447,629 Term deposits 942,337 1,014,776

1,321,065 2,233,023 Demand deposits 859,714 508,610

718,244 735,561 Saving deposits 283,191 276,524

47,904 31,345 Margin deposits 12,068 18,443

4,722,995 5,447,558 2,097,310 1,818,353══════ ══════ ══════ ══════

31 December 2019 31 December 2018

Conventional bankingRO’000

IslamicbankingRO’000

TotalRO’000

Conventional bankingRO’000

IslamicbankingRO’000

TotalRO’000

Term deposits 833,134 109,203 942,337 893,856 120,920 1,014,776

Demand deposits 797,715 61,999 859,714 497,353 11,257 508,610

Saving deposits 254,009 29,182 283,191 235,787 40,737 276,524

Margin deposits 6,942 5,126 12,068 10,532 7,911 18,443

Total 1,891,800 205,510 2,097,310 1,637,528 180,825 1,818,353══════ ══════ ══════ ══════ ══════ ══════


Conventional banking

USD’000

Islamicbanking

USD’000Total

USD’000

Conventional banking

USD’000

Islamicbanking

USD’000Total

USD’000

Term deposits 2,163,985 283,644 2,447,629 2,321,704 314,078 2,635,782

Demand deposits 2,071,987 161,036 2,233,023 1,291,826 29,239 1,321,065

Saving deposits 659,764 75,797 735,561 612,434 105,810 718,244

Margin deposits 18,031 13,314 31,345 27,356 20,548 47,904

Total 4,913,767 533,791 5,447,558 4,253,320 469,675 4,722,995══════ ══════ ══════ ══════ ══════ ══════




B10 OTHER LIABILITIES (CONTINUED)

Outstanding exposure Stage 1USD’000

Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2018 1,583,119 453,984 5,050 2,042,153

New exposures 871,779 89,452 226 961,457

Exposure derecognized or matured/lapsed (919,859) (172,577) (7,499) (1,099,935)


Transfers to Stage 3 - (6,527) 6,527 -

As at 31 December 2018 1,627,078 272,322 4,275 1,903,675


Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2018 - - - -

Impact of adopting IFRS 9 (Note A6 i) 1,956 1,849 2,670 6,475



Transfers to Stage 3 - (3) 3 -

Net charge for the year (C6) 4,481 3,670 (2,647) 5,504

As at 31 December 2018 6,893 5,060 26 11,979

B11 SUBORDINATED LOANS

The Bank had raised unsecured subordinated loans of RO 35 million during the year 2016 with a maturity of 7 years. These instruments are unlisted, non-transferable, and non-negotiable and non-convertible with no early call option and carries a fixed rate of interest. The principal amount of the subordinated loans is repayable on maturity in 2023 while interest is payable semi-annually. The Bank is required to create a subordinated loan reserve equal to 20% of the issue value annually during the last five years of the term of the subordinated loans. This reserve is created at the end of each financial year from retained earnings. Accordingly, during the year 2019 a reserve of RO 7.0 million (2018: RO 7.0 million) was created. The outstanding of this subordinated loan with accrued interest as of 31 December 2019 stands at RO 35.392 million (2018: RO 35.392 million).

According to the Regulations of CBO, the amount of subordinated loans as reduced by subordinated loan reserve is considered as Tier II capital for capital adequacy purposes.

B12 CERTIFICATES OF DEPOSIT

The outstanding balance as of 31 December 2019 of RO 509,000 (2018: RO 509,000) relates to Certificates of Deposit that were issued in 2016 with a maturity of five years. These are unsecured, denominated in Rial Omani and carry a fixed interest rate.

B13 SHARE CAPITAL AND SHARE PREMIUM

The authorized share capital of the Bank is 4,000,000,000 shares of RO 0.100 each (31 December 2018: 4,000,000,000 of RO 0.100 each). The issued and paid up share capital of the Bank is 2,363,598,772 shares of RO 0.100 each (31 December 2018: 1,982,646,391 shares of RO 0.100 each). The share capital of the Bank is RO 236.360 million (31 December 2018: RO 198.265 million).

On 25 July 2019, the Bank issued 380,952,381 shares through rights issue to its existing shareholders at a price of 107 baizas per share consisting of nominal value of 100 baizas per share plus premium of 5 baizas and 2 baizas per share to cover the rights issue expenses, resulting in increase in share capital by RO 38.095 million and share premium by RO 1.905 million respectively. The balance of rights issue expenses of RO 704 thousand has been transferred to legal reserve.

As of 31 December 2019, the following shareholders held 10% or more of the Bank’s capital, either individually or together with related parties:

Number of shares % Holding

Oman Investment & Finance Co. SAOG 363,263,536 15.37

The Royal Court of Affairs 344,353,500 14.57


Outstanding exposure Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2018 609,501 174,784 1,944 786,229

New assets originated or purchased 335,635 34,439 87 370,161

Exposure derecognized or matured/lapsed (354,146) (66,442) (2,887) (423,475)


Transfers to Stage 3 - (2,513) 2,513 -

As at 31 December 2018 626,425 104,844 1,646 732,915

ECL Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2018 - - - -

Impact of adopting IFRS 9 753 712 1,028 2,493

Restated ECL allowance as at 1 January 2018 753 712 1,028 2,493


Transfers to Stage 3 - (1) 1 -

Net charge for the year (C6) 1,725 1,413 (1,019) 2,119

As at 31 December 2018 2,654 1,948 10 4,612

Outstanding exposure Stage 1USD’000

Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2019 1,713,701 272,314 4,266 1,990,281

New assets originated or purchased 909,200 24,706 (140) 933,766



Transfers to Stage 2 (13,345) 13,379 (34) -

Transfers to Stage 3 (434) (597) 1,031 -

Amounts written off (16) - 16 -

As at 31 December 2019 1,948,719 139,795 3,476 2,091,990


Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2019 6,893 5,060 26 11,979

New assets originated or purchased 1,424 (504) 26 946





As at 31 December 2019 4,719 2,762 106 7,587




B19 CONTINGENT LIABILITIES AND COMMITMENTS

B19.a Contingent liabilities

Standby letters of credit and guarantees commit the Bank to make payments on behalf of customers, contingent upon the failure of the customer to perform under the terms of a specified contract.

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

984,512 788,057 Guarantees 303,402 379,037

275,597 231,969 Documentary letters of credit 89,308 106,105

1,260,109 1,020,026 392,710 485,142══════ ══════ ══════ ══════

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

715,003 615,686 Construction 237,039 275,276

255,538 137,919 Financial institution 53,099 98,382

99,049 96,322 International trade 37,084 38,134

91,340 65,055 Services 25,046 35,166

35,849 52,979 Manufacturing 20,397 13,802

21,730 10,042 Government 3,866 8,366

11,761 13,867 Transport and communication 5,339 4,528

434 421 Mining and quarrying 162 167

23,522 18,491 Electricity, gas and water 7,119 9,056

5,883 9,244 Others 3,559 2,265

1,260,109 1,020,026 392,710 485,142══════ ══════ ══════ ══════

B19.b Commitments

Credit related commitments include commitments to extend credit, standby letters of credit and guarantees that are designed to meet the requirements of the Bank’s customers. Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiry dates or other termination clauses and require the payment of a fee. Since commitments may expire without being drawn upon, the total contracted amounts do not necessarily represent future cash obligations.

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

4,306 41,338 Capital commitments 15,915 1,658

1,136,847 904,740 Credit related commitments 348,325 437,686

1,141,153 946,078 364,240 439,344══════ ══════ ══════ ══════

B19.c Litigation

Litigation is a common occurrence in the banking industry due to the nature of the business it undertakes. The Bank has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Bank makes provision for such loss within its financial statements. No provision (2018: None) has been made as at 31 December 2019, as professional advice indicates that it is unlikely that any significant loss will arise.

B13 SHARE CAPITAL AND SHARE PREMIUM (CONTINUED)

B13.a Proposed dividend

For the year 2019, the Board of Directors have proposed a cash dividend of 3% of the share capital (3 baizas per share) amounting to RO 7,090,800 and bonus shares of 3% of share capital, (3 shares for every 100 shares held) amounting to RO 7,090,800 (31 December 2018: cash dividend of 6% of the share capital (6 baizas per share) amounting to RO 11,895,900). The proposed dividend is subject to approval of the shareholders at the Annual General Meeting.

B14 LEGAL RESERVE

In accordance with the Commercial Companies Law of Oman of 1974, an annual appropriation of 10% of the profit for the year is required to be made to legal reserve until such time that the accumulated reserve is equal to at least one third of the Bank’s issued share capital.

B15 GENERAL RESERVE

General reserve of RO 988,000 (31 December 2018: RO 988,000) was created to cover the losses incurred by Sohar Islamic window for the year 2013 and 2014. It commenced reporting profits from 2015 and accordingly; no further transfer was made post 2014.

B16 FAIR VALUE RESERVE

The fair value reserve includes the cumulative net change in the fair value of the investment securities held as FVOCI net of applicable income tax until the investment is derecognized, sold or impaired.

B17 PERPETUAL TIER 1 CAPITAL SECURITIES

The Bank issued its first Perpetual Tier 1 Capital Securities amounting to RO 100 million on 25 September 2017. These securities bear interest on their nominal amount from the issue date to the first call date at a fixed annual rate of 7.75% with the interest rate reset at five-year intervals. Interest will be payable semi-annually in arrears and treated as a deduction from equity.

On 14 March 2019, the Bank issued its second Perpetual Tier 1 Capital Securities amounting to RO 100 million. These securities bear interest on their nominal amount from the issue date to the first call date at a fixed annual rate of 7.50% with interest rate reset at five year intervals. Interest will be payable semi-annually in arrears and treated as a deduction from equity.

Both the securities constitute direct, unconditional, subordinated and unsecured obligations of the Bank and are classified as equity in accordance with IAS 32: Financial Instruments – Classification. They do not have a fixed or final maturity date. The Bank may at its discretion and after prior consent from the relevant regulatory authority, exercise its option to redeem the securities in full (not in part) on the first Call Date, i.e. the fifth anniversary of the Issue Date, and on every fifth anniversary thereafter, again subject to the prior consent of the regulatory authorities. The Bank at its sole discretion may elect not to distribute interest. This is not considered as an event of default. If the Bank does not pay interest, on a scheduled interest payment date (for whatever reason), it cannot make any other distribution or payment on or with respect to its ordinary shares or any of its other Common Equity Tier 1 instruments or securities, ranking junior to or pari-passu with the Perpetual Tier 1 Capital Securities unless and until it has paid one interest payment in full on the securities. The terms of the Perpetual Tier 1 Capital Securities issuance allow the Bank to write-down (in whole or in part) any amounts due to the holders of the securities under certain circumstances.

RO 11.531 million was paid as coupon during 2019 (2018: 7.750 million) and is recognized in the statement of changes in equity.

B18 NET ASSETS PER SHARE

The calculation of net assets per share is based on net assets of RO 336.11 million as at 31 December 2019 (31 December 2018: RO 285.42 million) attributable to ordinary shareholders of 2,363,598,772 ordinary shares (31 December 2018: 1,982,646,391 ordinary shares), being the number of shares outstanding as at 31 December 2019.




B20 RELATED PARTY TRANSACTIONS (CONTINUED)

The aggregate amount of balances and the income and expenses generated with shareholders holding 10% or more of the Bank’s shares are as follows:

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

10,390 21,958 Loans, advances and financing at the end of year 8,454 4,000

10,390 21,956 Loans disbursed during the year 8,453 4,000

- - Loans repaid during the year - -

6,221 5,197 Deposits at the end of the year 2,001 2,395

5,218 3 Deposits received during the year 1 2,009

(2,273) (1,026) Deposits matured/paid during the year (395) (875)

109 613 Interest income during the year 236 42

31 221 Interest expense during the year 85 12

As at 31 December 2019, no loans to related parties are classified under stage 3 (31 December 2018: nil).

B21 FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

i) In the accessible principal market for the asset or liability; or ii) In the absence of a principal market, in the most advantageous accessible market for the asset or liability.

The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments:

Level 1: quoted prices in active markets for the same instrument without modification or repacking; Level 2: quoted prices in active markets for similar assets and liabilities or other valuation techniques for which all significant

inputs are based on observable market data; and Level 3: valuation techniques for which any significant input is not based on observable market data.

The Bank considers that the fair value of financial instruments was not significantly different to their carrying value (including accrued interest) at each of those dates. The table below sets out the classification and fair value of each class of financial assets and liabilities including accrued interest.

B20 RELATED PARTY TRANSACTIONS

In the ordinary course of business the Bank enters into transactions with certain of its directors, shareholders, senior management, Shari’ah Supervisory Board, Shari’ah reviewer and companies in which they have a significant interest. These transactions are conducted on an arm’s length basis and are approved by the Bank’s management and Board of Directors.

The aggregate amount of balances and the income and expenses generated with such related parties are as follows:

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

Directors & Senior Management


429 1,397 Loans disbursed during the year 538 165

(790) (945) Loans repaid during the year (364) (304)

2,558 3,603 Deposits at the end of the year 1,387 985

1,065 1,595 Deposits received during the year 614 410

(348) (1,678) Deposits matured/paid during the year (646) (134)

257 265 Interest income during the year 102 99

- 36 Interest expense during the year 14 -

478 494 Directors’ sitting fees and remuneration 190 184

130 122 Shari’ah Supervisory Board members 47 50

Other related parties


227,412 44,525 Loans disbursed during the year 17,142 87,554

(11,590) (16,800) Loans repaid during the year (6,468) (4,462)

20,684 18,193 Deposits at the end of the year 7,004 7,963

21,317 17,114 Deposits received during the year 6,589 8,207

(9,405) (7,569) Deposits matured/paid during the year (2,914) (3,621)

6,247 8,330 Interest income during the year 3,207 2,405

125 143 Interest expense during the year 55 48

Key management compensation

Key management comprises of 7 (2018:7) senior management executives. The Bank considers these members to be key management personnel for the purpose of IAS 24 Related Party Disclosure.

In the ordinary course of business, the Bank conducts transactions with certain of its key management personnel and companies in which they have a significant interest. The balances in respect of these related parties as at the reporting date are as follows:

1,338 112 Loans as at end of the year 43 515

340 987 Deposits as at the end of the year 380 131

55 5 Interest Income during the period 2 21

- 21 Interest expense during the period 8 -

3,987══════ 5,499══════ Salaries and other short term benefits 2,117══════ 1,535══════

301 62 Post-employment benefits 24 116




B21 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

As at 31 December 2019Amortized

costUSD’000

FVOCI USD’000

FVTPLUSD’000

Total carrying /fair valueUSD’000

Assets

Cash and balances with Central Bank 232,655 - - 232,655

Due from banks and other money market placements 514,901 - - 514,901

Loans, advances and financing 6,374,423 - - 6,374,423

Investments 519,096 873,649 263,034 1,655,779

Other assets (excluding prepayments) 213,660 - - 213,660

Total 7,854,735 873,649 263,034 8,991,418

Liabilities

Due to banks and other money market borrowings 1,909,769

Customer deposits 5,447,558

Other liabilities (excluding other accruals & provisions) 223,483

Subordinated loans 91,927

Certificates of deposit 1,322

Total 7,674,059


costUSD’000

FVOCI USD’000

FVTPLUSD’000

Total carrying/fair value

USD’000

Assets




Investments 366,626 761,107 256,083 1,383,816


Total 6,831,176 761,107 256,083 7,848,366

Liabilities

Due to banks and other money market borrowings 1,875,483

Customer deposits 4,722,995

Other liabilities (excluding other accruals & provisions) 123,969

Subordinated loans 91,927

Certificates of deposit 1,322

Total 6,815,696



costRO’000

FVOCI RO’000

FVTPLRO’000

Total carrying /fair value

RO’000

Assets




Investments 199,852 336,355 101,268 637,475


Total 3,024,073 336,355 101,268 3,461,696

Liabilities

Due to banks and other money market borrowings 735,261 - - 735,261

Customer deposits 2,097,310 - - 2,097,310

Other liabilities (excluding other accruals & provisions) 86,041 - - 86,041

Subordinated loans 35,392 - - 35,392

Certificates of deposit 509 - - 509

Total 2,954,513 - - 2,954,513


costRO’000

FVOCI RO’000

FVTPLRO’000

Total carrying/fair valueRO’000

Assets




Investments 141,151 293,026 98,592 532,769


Total 2,630,003 293,026 98,592 3,021,621

Liabilities

Due to banks and other money market borrowings 722,061 - - 722,061

Customer deposits 1,818,353 - - 1,818,353

Other liabilities (excluding other accruals & provisions) 47,728 - - 47,728

Subordinated loans 35,392 - - 35,392

Certificates of deposit 509 - - 509

Total 2,624,043 - - 2,624,043





Financial instruments measured at fair value at the end of the reporting year:

As at 31 December 2019 Investment securities

RO’000

Positive fair value of

derivatives RO’000

Negative fair value of

derivativesRO’000

TotalRO’000

Level 1 6,357 - - 6,357

Level 2 428,766 6,108 (408) 434,466

Level 3 2,500 - - 2,500

437,623 6,108 (408) 443,323

As at 31 December 2018Investment

securitiesRO’000


derivatives RO’000


derivativesRO’000

TotalRO’000

Level 1 7,360 - - 7,360

Level 2 381,758 1,883 (3,702) 379,939

Level 3 2,500 - - 2,500

391,618 1,883 (3,702) 389,799

Level 3 investments are investments in shares of an unquoted company, the shares of which are thinly traded. The management values the investment using net asset value of the investee based on the investee’s financial statements, plus an applicable premium. Management considers the carrying value of the investment to approximate its fair value as a significant portfolio of the underlying investments of the investee company (a major turnkey project) is currently in the construction phase. Therefore, the carrying value is representative of fair value of the investments.

As at 31 December 2019 Investment securitiesUSD’000


derivatives USD’000


derivativesUSD’000

TotalUSD’000

Level 1 16,512 - - 16,512

Level 2 1,113,677 15,866 (1,060) 1,128,483

Level 3 6,494 - - 6,494

1,136,683 15,866 (1,060) 1,151,489

As at 31 December 2018Investment

securitiesUSD’000


derivatives USD’000


derivativesUSD’000

TotalUSD’000

Level 1 19,117 - - 19,117

Level 2 991,579 4,891 (9,616) 986,854

Level 3 6,494 - - 6,494

1,017,190 4,891 (9,616) 1,012,465


Estimation of fair values

The following summarizes the major methods and assumptions used in estimating the fair value of assets and liabilities.

Loans and advances

Fair value is calculated based on discounted expected future principal and interest cash flows. Loan repayments are assumed to occur at contractual repayment dates, where applicable. For loans that do not have fixed repayment dates or that are subject to prepayment risk, repayments are estimated based on experience in previous periods when interest rates were at levels similar to current levels, adjusted for any differences in interest rate outlook. Expected future cash flows are estimated considering credit risk and any indication of impairment. Expected future cash flows for homogeneous categories of loans are estimated on a portfolio basis and discounted at current rates offered for similar loans to new borrowers with similar credit profiles. The estimated fair values of loans reflect changes in credit status since the loans were made and changes in interest rates in the case of fixed rate loans.

Investments carried at amortized cost and derivatives

Fair value is based on quoted market prices at the reporting date without any deduction for transaction costs. If a quoted market price is not available, fair value is estimated based on discounted cash flow and other valuation techniques.

Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate for a similar instrument at the reporting date.

Bank and customer deposits

For demand deposits and deposits with no defined maturities, fair value is taken to be the amount payable on demand at the reporting date. The estimated fair value of fixed-maturity deposits, including certificates of deposit, is based on discounted cash flows using rates currently offered for deposits of similar remaining maturities. The value of long-term relationships with depositors is not taken into account in estimating fair values.

Other on-balance sheet financial instruments

The fair values of all other on-balance sheet financial instruments are considered to approximate their book values.

Off-balance sheet financial instruments

No fair value adjustment is made with respect to credit-related off-balance sheet financial instruments, which include commitments to extend credit, standby letters of credit and guarantees, as the related future income streams materially reflect contractual fees and commissions actually charged at the reporting date for agreements of similar credit standing and maturity.

Foreign exchange contracts are valued based on market prices. The market value adjustments in respect of foreign exchange contracts are included in the book values of other assets and other liabilities.




B22 DERIVATIVES (CONTINUED)

B22.2 Derivatives held or issued for hedging purposes

Notional amounts by term to maturity

At 31 December 2019Positive

fair valueNegative fair value

Notional amount

Within 3 months

3 - 12 months

More than 1 year

RO’000 RO’000 RO’000 RO’000 RO’000 RO’000

Forward foreign exchange purchase contracts 27 380 726,706 339,573 54,163 332,969

Forward foreign exchange sales contracts 6,081 28 686,984 333,797 34,650 318,537


As at 31 December 2018Positive


Notional amount

Within 3 months

3 - 12 months

More than 1 year

RO’000 RO’000 RO’000 RO’000 RO’000 RO’000

Forward foreign exchange purchase contracts 51 3,660 440,506 276,027 164,479 -

Forward foreign exchange sales contracts 1,832 42 439,918 275,701 164,217 -




Notional amount

Within 3 months

3 - 12 months

More than 1 year

USD’000 USD’000 USD’000 USD’000 USD’000 USD’000

Forward foreign exchange purchase contracts 70 987 1,887,548 882,008 140,683 864,855

Forward foreign exchange sales contracts 15,795 73 1,784,374 867,005 90,000 827,369




Notional amount

Within 3 months

3 - 12 months

More than 1 year

USD’000 USD’000 USD’000 USD’000 USD’000 USD’000

Forward foreign exchange purchase contracts 133 9,507 1,144,171 716,953 427,218 -

Forward foreign exchange sales contracts 4,758 109 1,142,644 716,106 426,538 -

B22 DERIVATIVES

In the ordinary course of business, the Bank enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instruments, reference rate or index. These derivatives are stated at fair value. The fair value of a derivative is the equivalent of the unrealized gain or loss from marking to market the derivative using prevailing market rates or internal pricing models. Unrealized gains or losses are included in the statement of comprehensive income. The derivative financial instruments used by the Bank are described below:

B22.1 Derivative product types

Forwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specific price and date in the future.

Swaps are contractual agreements between two parties to exchange interest or foreign currency differentials based on a specific notional amount. For interest rate swaps, counter parties generally exchange fixed and floating rate interest payments based on a notional value in a single currency.

Options are contractual agreements that convey the right, but not the obligation, to either buy or sell a specific amount of a commodity, foreign currency or financial instrument at a fixed price, either at a fixed future date or at any time within a specified period.

B22.2 Derivatives held or issued for hedging purposes

As part of its asset and liability management the Bank uses derivatives for hedging purposes in order to reduce its exposure to currency and interest rate risks. This is achieved by hedging specific financial instruments and forecasted transactions as well as strategic hedging against overall statement of financial position exposures.

The Bank uses forward foreign exchange contracts, to hedge against specifically identified currency risks and to comply with the net open position limit as specified by CBO.

Strategic hedging is carried out for interest rate risk by monitoring the re-pricing of financial assets and liabilities and entering into interest rate swaps to hedge a proportion of the interest rate exposure. As strategic hedging does not qualify for special hedge accounting, the related derivatives are accounted for as trading instruments.

The table below sets out the positive and negative fair values of derivative financial instruments, together with their notional amounts, analyzed by term to maturity. The notional amounts, which provide an indication of the volumes of the transactions outstanding at the end of the period, do not necessarily reflect the amounts of future cash flows involved. These notional amounts, therefore, are neither indicative of the Bank’s exposure to credit risk, which is generally limited to the positive fair value of the derivatives, nor to market risk.




C4 OTHER OPERATING INCOME

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

40,804 50,364 Fees and commission 19,390 15,710

47,961 22,002 Net gains from foreign exchange dealings 8,471 18,465

(18) 5 Profit on sale of fixed assets 2 (7)

431 (436) Bad debt recovery (168) 166

3,075 4,761 Dividend income 1,833 1,184

(6,204) (2,374) Losses from FVTPL investments (914) (2,389)

86,049 74,322 28,614 33,129══════ ══════ ══════ ══════

C5 OTHER OPERATING EXPENSES

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

25,442 28,447 Operating and administration costs 10,952 9,795

2,857 - Capital work in progress written off (B5) - 1,100

6,875 8,286 Occupancy cost 3,190 2,647

338 379 Directors remuneration 146 130

140 114 Directors sitting fees 44 54

130 122 Shari’ah Supervisory Board remuneration and sitting fees 47 50

35,782 37,348 14,379 13,776══════ ══════ ══════ ══════

C6 LOAN IMPAIRMENT CHARGES AND OTHER CREDIT RISK PROVISIONS, NET

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

Impairment charges provided/(released) on:

45,338 50,967 Loans, advance and financing (B3) 19,622 17,455

5,504 (4,392) Loan commitments and financial guarantees (B10) (1,691) 2,119

228 971 Due from banks and other money market placements 374 88

1,725 1,330 Debt securities at amortized cost 512 664

16 13 Debt securities at FVOCI 5 6

- 60 Loans written off 23 -

(543) - Loans written back during the year - (209)

52,268 48,949 Loan impairment charges and other credit risk provisions under IFRS 9, net 18,845 20,123

══════ ══════ ══════ ══════

C1 INTEREST INCOME

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

293,792 329,148 Loans and advances to customers 126,722 113,110

9,454 5,932 Due from banks and other money market placements 2,284 3,640

35,255 45,925 Investments 17,681 13,573

338,501 381,005 146,687 130,323══════ ══════ ══════ ══════

C2 INTEREST EXPENSE

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

109,631 131,475 Customer deposits 50,618 42,208

6,364 6,364 Subordinated loans 2,450 2,450

75,273 60,852 Due to banks and other money market borrowings 23,428 28,980

88 - Compulsorily convertible bonds - 34

191,356 198,691 76,496 73,672══════ ══════ ══════ ══════

C3 NET INCOME EARNED FROM ISLAMIC FINANCING AND INVESTING ACTIVITIES

C3.a Gross income earned from Islamic financing and investing activities

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

21,914 28,086 Financing to customers 10,813 8,437

532 919 Due from banks and other money market placements 354 205

2,416 3,213 Investments 1,237 930

24,862 32,218 12,404 9,572══════ ══════ ══════ ══════

C3.b Profit paid to depositors/money market borrowings

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

11,979 15,701 Profit paid to depositors 6,045 4,612

784 1,312 Profit paid to banks and other money market 505 302

borrowings

12,763 17,013 6,550 4,914

12,099 15,205 Net income from Islamic financing and investing activities 5,854 4,658══════ ══════ ══════ ══════




C7 INCOME TAX

a) Recognized in the statement of comprehensive income

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

Tax expenses

12,878 15,543 - Current tax 5,984 4,958

517 358 - Deferred tax expense 138 199

13,395 15,901 Total income tax expenses 6,122 5,157══════ ══════ ══════ ══════

The Bank is liable for income tax for the year in accordance with the income tax laws of the Sultanate of Oman at the rate of 15% on its taxable profits.

b) Reconciliation

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

89,428 105,266 Profit before tax for the year 40,528 34,430

13,416 15,789 Income tax @ 15% 6,079 5,165

Tax impact of:

1,031 296 - non-deductible expenses/losses 114 397

(1,294) (184) - tax exempt income (71) (498)

13,153 15,901 Income tax expense 6,122 5,064══════ ══════ ══════ ══════

c) Tax assessment

Tax assessments of the Bank for the years 2007 to 2015 have been completed and for the year 2016 to 2018 have not yet been agreed with the Secretariat General for Taxation at the Ministry of Finance. The Bank is of the opinion that additional taxes, if any, related to the open tax years would not be significant to the financial position of the Bank as at 31 December 2019.

C6 LOAN IMPAIRMENT CHARGES AND OTHER CREDIT RISK PROVISIONS, NET (CONTINUED)

The breakup of expected credit loss allowance for all financial assets is as below:

IFRS 9 CBO

Gross loans advances and financing 99,668 93,220

Due from Banks 816 12

Investment securities (amortized cost) 1,508 -

Investment securities (FVOCI) 28 -

Loan commitments and financial guarantees 2,921 -

Total 104,941 93,232

Contractual interest not recognized 15,664 15,664

Total 120,605 108,896

The analysis of changes in the ECL allowance on due from banks and other money market placements, loans, advances and financing (excluding contractual interest not recognized), investments and loan commitments and financial guarantees is as follows:

Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2019 15,923 36,464 33,035 85,422

Expected credit losses recognized 3,880 21,014 11,791 36,685

Recoveries from expected credit losses (10,751) (6,831) (281) (17,863)

Loans brought back from memorandum portfolio - - 697 697


Transfers to Stage 2 (918) 1,680 (762) -


As at 31 December 2019 14,061 43,727 47,153 104,941

The analysis of changes in the ECL allowance on due from banks and other money market placements, loans, advances and financing (excluding contractual interest not recognized), investments and loan commitments and financial guarantees is as follows:

Stage 1USD’000

Stage 2USD’000

Stage 3USD’000

TotalUSD’000

As at 1 January 2019 41,358 94,712 85,805 221,875

Expected credit losses recognized 10,079 54,582 30,626 95,287

Recoveries from expected credit losses (27,925) (17,743) (730) (46,398)

Loans brought back from memorandum portfolio - - 1,810 1,810




As at 31 December 2019 36,522 113,578 122,474 272,574




D FINANCIAL RISK MANAGEMENT

The primary objective of risk management is to safeguard the Bank’s capital and its financial resources from various risks. The Bank has exposure to the following risks from its use of financial instruments:

• Credit risk • Liquidity risk • Market risk • Operational risk

The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework. Such responsibility is discharged by the Board through a Board Risk Committee (BRC), constituted by the Board that is responsible for developing and monitoring the Bank’s risk management policies. BRC submits periodic reports to the Board, appraising it on various aspects of risk and changes in the risk profile of the Bank.

The risk management policies focus on identification, measurement, monitoring and mitigation of risk, irrespective of its manner of manifestation. In this process, the Bank recognizes that the dynamics of markets may necessitate decisions that may deviate on occasions from the principles of Credit Risk Management (CRM). For such requirements, minimal and requisite levels of flexibilities are defined within the Risk Management policies, along with suitable and adequate safeguards/controls.

The Bank’s Audit Committee is responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank. The Audit Committee is assisted in these functions by Internal Audit department. Internal Audit department undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.

There are subcommittees at management level for managing risks. The Asset and Liability Committee (ALCO) manages the risks in the balance sheet arising out of liquidity management, interest rates management as well as tenor of exposures taken by the Bank. ALCO provides management with guidance on managing these risks. Risk appetite is articulated through various limits, ratios and caps. Operational Risk is managed under the guidance of Operational Risk Committee (ORCO) at the management level. A separate ALCO has also been established to monitor the performance of the assets of Sohar Islamic. Expected Credit Loss Provisioning Committee (ECLPC) manages the governance requirements of IFRS-9 standard, to monitor and approve the Bank’s credit risk provisions and the underlying drivers. The Bank’s Management Risk Committee (MRC) oversees the risk management functions across the Bank.

D1 Credit risk

Credit risk is the risk of financial loss to the Bank if counterparty to a financial instrument fails to meet its contractual obligations. Credit risk represents the probability of default by any counterparty in repayment of principal obligations and/or servicing interest obligations in accordance with the set redemption schedule or terms of contract.

D1.1 Management of credit risk

The Board of Directors has delegated responsibility for the monitoring of credit risk to its Board Risk Committee and is responsible for handling all facets of risk for both Islamic and conventional banking division. The Bank has a Chief Risk Officer who heads the management of Risk reporting to the Board Risk Committee. Credit risk management includes:

• Setting up risk limits and boundaries, within the regulatory guidelines, for risk origination to be within the approved risk appetite of the Bank;

• Management and control of credit risk at origination through a time-tested credit appraisal process that includes independent credit risk review of individual corporate credit proposals and through a Board approved retail products policy and template lending. Exceptions are reviewed by Credit Risk function;

• Continuous monitoring of these stand-alone credit risks in the ‘corporate’ and ‘emerging corporate’ portfolio as well as in the retail credit portfolio through an independent loan review group (LRG), reporting to Board Risk Committee of the Board, for risk grading of the portfolios and tracking the movement of the grades;

• Portfolio credit risk measurement through tracking on the set portfolio risk parameters such as concentration risk; Approved credit transactions are periodically reviewed in Loan Review process on sample basis, to check appropriate

compliance to the policy/standard. The process also helps conducting gap analysis in credit assessment process. • The Bank not entertaining credit proposals from entities/individuals whose name appears in the CBO classified list under

Bank Credit and Statistical Bureau (BCSB). However, in exceptional cases in the retail business unit, loans are approved with strong justifications and risk mitigations for considering any such proposals, which in turn have to be referred to delegated authorities as per the retail loan policy;

• Limiting concentrations of exposure to counterparties, geographic locations and industries (for loans and advances), and by issuer, market liquidity and country (for investment securities);

• Developing and maintaining the Bank’s risk grading in order to categorize exposures according to the degree of risk of financial loss faced and to focus management’s attention on the attendant risks;

• Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.

C7 INCOME TAX (CONTINUED)

d) Movement of current tax provision

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

10,771 12,956 Balance as at the beginning of the year 4,988 4,147

12,878 15,543 Charge during the year 5,984 4,958

(10,693) (3,364) Paid during the year (1,295) (4,117)

12,956 25,135 Balance as at the end of the year 9,677 4,988══════ ══════ ══════ ══════

e) Movement of deferred tax asset/(liability)

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

(738) (1,255) Balance as at the beginning of the year (483) (284)

(517) (358) Created during the year (138) (199)

(1,255) (1,613) Balance as at the end of the year (621) (483)══════ ══════ ══════ ══════

C8 BASIC AND DILUTED EARNINGS PER SHARE

Basic earnings per share are calculated by dividing net profit for the year by the weighted average number of shares outstanding during the year.

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

76,275 89,366 Profit for the year 34,406 29,366

(20,130) (29,950) Less: Additional Tier 1 Coupon (11,531) (7,750)

(145) (587) Less: issue expenses – Additional Tier 1 capital (226) (56)

56,000 58,829Profit for the year attributable to equity holders of the Bank after coupon and issuance cost on Additional Tier 1 capital securities 22,649 21,560

1,982,646 2,149,639Weighted average number of shares outstanding during the year (in thousands) 2,149,639 1,982,646

2.83 2.74 Basic earnings per share for the year (cents/baizas) 10.536 10.874══════ ══════ ══════ ══════




D FINANCIAL RISK MANAGEMENT (CONTINUED)

D1 Credit risk (continued)

D1.2 Exposure to credit risk (continued)

As at 31 December 201812 Month ECL

RO’000

Lifetime ECL not credit impaired RO’000

Lifetime ECL credit impaired

RO’000Total

RO’000

Loans and advances to customers - corporate banking

Performing loans (Grades 1-5) 847,899 182,789 671 1,031,359

Performing loans (Grades 6) 256,125 45,012 18 301,155

Performing loans (Grades 7) 16 186,618 12 186,646

Non-performing loans (Grades 8-10) 701 276 58,086 59,063

Gross loans and advances to customers - corporate banking 1,104,741 414,695 58,787 1,578,223

Loans and advances to customers – retail banking

Performing loans (Grades 1-7) 721,007 23,231 - 744,238

Non-performing loans (Grades 8-10) - - 18,199 18,199

Gross loans and advances to customers - retail banking 721,007 23,231 18,199 762,437

Total gross loans and advances to customers 1,825,748 437,926 76,986 2,340,660

Credit related contingent items

Performing loans (Grades 1-5) 250,570 - - 250,570

Performing loans (Grades 6) 375,855 - - 375,855

Performing loans (Grades 7) - 104,844 - 104,844

Non-performing loans (Grades 8-10) - - 1,646 1,646

Total gross contingent items to customers 626,425 104,844 1,646 732,915

Due from banks and money market placements 113,179 8,666 - 121,845

Investment securities 350,388 51,040 - 401,428



D1.1 Management of credit risk (continued)

The Bank employs a range of policies and practices to mitigate credit risk. The Bank follows a risk mitigation practice of identifying business cash flows as the primary driver for the advances extended. These cash flows are then tested for sustainability over the tenor of the credit facility and a suitable mechanism is put in place to capture the same into the client account with the Bank. To cover unforeseen risk, which dries up the cash flows, additional tangible securities are taken such as real estate or equity shares. The Bank implements guidelines on the acceptability of specific classes of collateral credit risk mitigation. The principal types of collaterals for loans and advances are:

• Mortgages over properties; • Charges of assets under Murabaha agreements; • Ownership/title of assets under Ijarah financing; • Charges over business assets such as premises inventory and accounts receivable; and • Charges over financial instruments such as debt securities and equities.

All loans and advances of the Bank are regularly monitored to ensure compliance with the stipulated repayment terms. Those loans and advances are classified into one of the five risk classification categories: Standard, Special Mention, Substandard, Doubtful and Loss – as required by CBO regulations and guidelines. Further, as mandated by IFRS 9, the loans and advances are also classified into Stage 1, Stage 2, Stage 3 and POCI based on the internal credit ratings / significant increase in credit risk criteria / requirements of CBO circular BM 1149. The responsibility for identifying problem accounts and classifying them rests with business line function and a separate unit manages problem accounts.

D1.2 Exposure to credit risk

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.

As at 31 December 2019 12 Month ECLRO’000

Lifetime ECL not credit

impaired RO’000


RO’000Total

RO’000

Loans and advances to customers - corporate banking

Performing loans (Grades 1-5) 1,138,272 98,327 1,035 1,237,634

Performing loans (Grades 6) 106,781 80,315 40 187,136

Performing loans (Grades 7) - 154,772 - 154,772

Non-performing loans (Grades 8-10) - 165 88,772 88,937


Loans and advances to customers – retail banking

Performing loans (Grades 1-7) 850,219 24,132 6,875 881,226

Non-performing loans (Grades 8-10) - 587 19,193 19,780

Gross loans and advances to customers - retail banking 850,219 24,719 26,068 901,006


Credit related contingent items

Performing loans (Grades 1-5) 631,147 5,667 - 636,814

Performing loans (Grades 6) 119,631 20,538 - 140,169

Performing loans (Grades 7) 32 27,409 20 27,461

Non-performing loans (Grades 8-10) - 100 872 972

Total gross contingent items to customers 750,810 53,714 892 805,416

Due from banks and money market placements 198,129 924 - 199,053

Investment securities 503,355 28,031 - 531,386







Maximum exposure to credit risk before collateral held or other credit enhancements for all on-balance sheet assets are based on net carrying amounts as reported in the statement of financial position.

The maximum credit risk exposures relating to off-balance sheet items calculated as per Basel II guidelines are provided in note D5. The amounts represented in note D5 represent a worst case scenario of credit risk exposure as of 31 December 2019 and 2018, without taking into account of any collateral held or other credit enhancements attached.

Impairment assessment

Definition of default and cureThe Bank considers a financial instrument defaulted and therefore Stage 3 (credit-impaired) for ECL calculations in all cases when the borrower becomes 90 days past due on its contractual payments. The Bank considers treasury and interbank balances defaulted and takes immediate action when the required intraday payments are not settled by the close of business as outlined in the individual agreements.

As a part of a qualitative assessment of whether a customer is in default, the Bank also considers a variety of instances that may indicate unlikeliness to pay. When such events occur, the Bank carefully considers whether the event should result in treating the customer as defaulted and therefore assessed as Stage 3 for ECL calculations or whether Stage 2 is appropriate. Such events include:

- Internal rating of the borrower indicating default or near-default and/or substantial downgrade of rating; - Borrower is subject to litigation by third parties that may have a significant impact on his financial position; - A material decrease in the underlying collateral value where the recovery of the loan is expected from the sale of the

collateral; - A material decrease in the borrower’s turnover or the loss of a major customer and material decrease of profit; - A material covenant breach not waived by the Bank; - Unexplained delay in commencement of commercial operation; - Unreliable or delay in submission of financial statements; - The debtor (or any legal entity within the debtor’s group) filing for bankruptcy application/protection; - Debtor’s listed debt or equity suspended at the primary exchange because of rumours or facts about financial difficulties.

It is the Bank’s policy to consider a financial instrument as ‘cured’ and therefore re-classified out of Stage 3 when none of the default criteria have been present for at least twelve consecutive months which is six months for accounts classified as Stage 2. The decision whether to classify an asset as Stage 2 or Stage 1 once cured depends on the updated credit grade, at the time of the cure, and whether this indicates there has been a significant increase in credit risk compared to initial recognition.

Incorporation of forward-looking information The Bank 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. Based on consideration of a variety of external actual and forecast information, the Bank formulates a fundamental view of the future direction of relevant economic variables as well as a reasonable range of possible scenarios.

Given the nature of the Bank’s exposures and availability of historical statistically reliable information, the Bank derives the point-in-time (PIT) probability of default (PD) using the through-the-cycle (TTC) PD data computed from historical bank default data for each rating category. TTC PDs are determined by utilizing macroeconomic variables and non-cyclical risk drivers to predict default rates over an economic cycle. The Bank uses the flow rate analysis model to link the TTC PDs with forward-looking economic factors to drive PIT PD estimates for each Moody’s rating category. The macroeconomic model takes into consideration forward-looking economic forecasts under three scenarios (base case, economic downturn as negative case and economic upturn as positive case), historical economic data, the asset correlation of each rating category, and TTC PDs for deriving PIT PDs. The relationship between the economic factors and default and loss rates have been developed using internal historical data and relevant external market data.

The Bank’s internal rating and PD estimation processThe Bank’s independent Credit Risk Department operates its internal rating models. The Bank runs separate models for its key portfolios in which its customers are rated from 1 to 10 using internal grades. The models incorporate both qualitative and quantitative information and, in addition to information specific to the borrower, utilize supplemental external information that could affect the borrower’s behavior. Where practical, they also build on information from Good Rating Agency. These information sources are first used to determine the PDs within the Bank’s Basel III framework. The internal credit grades are assigned based on these Based III grades.

PDs are then adjusted for IFRS 9 ECL calculations to incorporate forward-looking information and the IFRS 9 Stage classification of the exposure. This is repeated for each economic scenario as appropriate.




As at 31 December 2019 12 Month ECLUSD’000

Lifetime ECL not credit

impaired USD’000


USD’000Total

USD’000Loans and advances to customers - corporate banking Performing loans (Grades 1-5) 2,956,551 255,395 2,688 3,214,634Performing loans (Grades 6) 277,353 208,610 104 486,067Performing loans (Grades 7) - 402,005 - 402,005Non-performing loans (Grades 8-10) - 429 230,577 231,006


Loans and advances to customers – retail bankingPerforming loans (Grades 1-7) 2,208,360 62,681 17,857 2,288,898Non-performing loans (Grades 8-10) - 1,525 49,852 51,377

Gross loans and advances to customers - retail banking 2,208,360 64,206 67,709 2,340,275


Credit related contingent items Performing loans (Grades 1-5) 1,639,344 14,719 - 1,654,063Performing loans (Grades 6) 310,730 53,345 - 364,075Performing loans (Grades 7) 83 71,192 52 71,327Non-performing loans (Grades 8-10) - 260 2,265 2,525

Total gross contingent items to customers 1,950,157 139,516 2,317 2,091,990


Investment securities 1,307,416 72,808 - 1,380,224

As at 31 December 201812 Month ECL

USD’000

Lifetime ECL not credit impaired

USD’000


USD’000Total

USD’000

Loans and advances to customers - corporate banking Performing loans (Grades 1-5) 2,202,335 474,777 1,743 2,678,855Performing loans (Grades 6) 665,260 116,914 47 782,221Performing loans (Grades 7) 42 484,722 31 484,795Non-performing loans (Grades 8-10) 1,821 717 150,873 153,411

Gross loans and advances to customers - corporate banking 2,869,458 1,077,130 152,694 4,099,281

Loans and advances to customers – retail banking Performing loans (Grades 1-7) 1,872,745 60,340 - 1,933,085Non-performing loans (Grades 8-10) - - 47,270 47,270

Gross loans and advances to customers - retail banking 1,872,745 60,340 47,270 1,980,355

Total gross loans and advances to customers 4,742,203 1,137,470 199,964 6,079,636

Credit related contingent items Performing loans (Grades 1-5) 650,831 - - 650,831Performing loans (Grades 6) 976,247 - - 976,247Performing loans (Grades 7) - 272,322 - 272,322Non-performing loans (Grades 8-10) - - 4,275 4,275

Total gross contingent items to customers 1,627,078 272,322 4,275 1,903,675


Investment securities 910,099 132,571 - 1,042,670







Impairment assessment (continued)

Economic variable assumptions (continued)As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. The Bank considers these forecasts to represent its best estimate of the possible outcomes and has analyzed the non-linearities and asymmetries within the Bank’s different portfolios to establish that the chosen scenarios are appropriately representative of the range of possible scenarios.

Other forward-looking considerations not otherwise incorporated within the above scenarios, such as the impact of any regulatory, legislative or political changes, have also been considered, but are not deemed to have a material impact and therefore no adjustment has been made to the ECL for such factors. This is reviewed and monitored for appropriateness on a quarterly basis.

Treasury, trading and interbank relationshipsThe Bank’s treasury, trading and interbank relationships and counterparties comprise financial services institutions, banks, broker-dealers, exchanges and clearing-houses. For these relationships, the Bank’s credit risk department analyzes publicly available information such as financial information and other external data, e.g., the rating of Moody’s or equivalent, and assigns the internal rating.

Corporate and small business lendingFor corporate and investment banking loans, the borrowers are assessed by specialized credit risk employees of the Bank. The credit risk assessment is based on a credit-scoring model that takes into account various historical, current and forward-looking information such as:

- Historical financial information together with forecasts and budgets prepared by the client. This financial information includes realized and expected results, solvency ratios, liquidity ratios and any other relevant ratios to measure the client’s financial performance. Some of these indicators are captured in covenants with the clients and are, therefore, measured with greater attention.

- Any publicly available information on the clients from external parties. This includes external rating grades issued by rating agencies, independent analyst reports, publicly traded bond or CDS prices or press releases and articles.

- Any macro-economic or geopolitical information, e.g., GDP growth relevant for the specific industry and geographical segments where the client operates.

- Any other objectively supportable information on the quality and abilities of the client’s management relevant for the company’s performance.

- The complexity and granularity of the rating techniques varies based on the exposure of the Bank and the complexity and size of the customer. Some of the less complex small business loans are rated within the Bank’s models for retail products.

Consumer lending and retail mortgagesConsumer lending comprises unsecured personal loans, credit cards and overdrafts. These products along with retail mortgages and some of the less complex small business lending are rated by an automated scorecard tool primarily driven by days past due. Other key inputs into the models are:

- Consumer lending products: use of limits and volatility thereof, GDP growth, unemployment rates, changes in personal income/salary levels based on records of current accounts, personal indebtedness and expected interest re-pricing;

- Retail mortgages: GDP growth, unemployment rates, changes in personal income/salary levels based on records of current accounts, personal indebtedness and expected interest re-pricing.

Exposure at defaultThe exposure at default (EAD) represents the gross carrying amount of the financial instruments subject to the impairment calculation, addressing both the client’s ability to increase its exposure while approaching default and potential early repayments too.

To calculate the EAD for a Stage 1 loan, the Bank assesses the possible default events within twelve months for the calculation of the 12mECL. However, if a Stage 1 loan that is expected to default in the twelve months from the balance sheet date and is also expected to cure and subsequently default again, then all linked default events are taken into account. For Stage 2, Stage 3 and POCI financial assets, the exposure at default is considered for events over the lifetime of the instruments.

The Bank determines EADs by modelling the range of possible exposure outcomes at various points in time, corresponding the multiple scenarios. The IFRS 9 PDs are then assigned to each economic scenario based on the outcome of Bank’s models.





Generating the term structure of Probability of Default (PD)The Bank employs statistical models to analyze the data collected and generate estimates of 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 changes in key macro-economic factors, across various geographies in which the Bank has exposures.

The Bank’s internal credit rating grades along with the respective PDs are as below:

Internal rating grades Internal rating grade description PD range (%)

1 Investment grade

0.10% to 2.00%

2 Investment grade

3 Investment grade

4 Investment grade

5 Investment grade

6 Investment grade

7 Sub-investment grade 3.70%

8 - 10 Non-performing 6.60% to 20.00%

Economic variable assumptionsThe Bank obtains the data used from third party sources (World Bank and other public and private sources) to verify the accuracy of inputs to the Bank’s ECL models including determining the weights attributable to the multiple scenarios. For the implemented ECL model for corporate and SME segment, a principal component analysis was done to form composite index (CI) consisting of following three variables namely:

(1) GDP per Capita, Constant Prices (National Currency, change, no lag) (2) Volume of Import of Goods (% Change, lag 1) and (3) General Government Revenue (% of GDP, lag 3).

Projected composite index (CI) for the next four years are as following.

Period CI_Baseline CI_Downturn CI_Upturn

2019 0.93 0.55 1.32

2020 0.43 0.05 0.82

2021 0.10 -0.29 0.49

2022 -0.14 0.53 0.24

These economic variables and their associated impact on the PD, EAD and LGD vary by financial instrument. Expert judgment has also been applied in this process. Forecasts of these economic variables (the “base economic scenario”) are collected from statistical database of World Bank and other public and private sources to provide the best estimate view of the economy over the next five years. After five years, to project the economic variables out for the full remaining lifetime of each instrument, a mean reversion approach has been used, which means that economic variables tend to either incorporate a long run average rate (e.g. for unemployment) or a long run average growth rate (e.g. GDP) over a period of two to five years. The impact of these economic variables on the PD, EAD and LGD has been determined by performing statistical regression analysis to understand the impact changes in these variables and the impact on default rates and on the components of LGD and EAD.






D1.3 Credit rating analysis

The table below presents an analysis of debt securities, treasury bills and other eligible bills by rating agency designation, based on Moody’s ratings or equivalent.

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

- 36,135 Ba1 13,912 -

6,514 - BBB - 2,508

- 21,052 Baa2 8,105 -

41,413 - Baa3 - 15,944

59,002 43,340 Unrated bonds 16,686 22,716

1,258,481 1,539,343 Sovereign securities 592,647 484,515

1,365,410 1,639,870 Total 631,350 525,683══════ ══════ ══════ ══════

The following table shows the gross placements held with counterparties at the reporting date:

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

103,701 22,327 Aaa1 to Aaa3 8,596 39,925

9,927 10,792 A1 to A3 4,155 3,822

180,262 208,875 Baa1 to Baa3 80,417 69,401

509 1,327 Ba1 to Ba3 511 196

22,081 273,699 B1 to Caa 105,374 8,501

316,480 517,020 Total 199,053 121,845══════ ══════ ══════ ══════

The Bank performs an independent assessment based on quantitative and qualitative factors in cases where a Bank is unrated.





Loss given defaultFor corporate and investment banking financial instruments, LGD values are assessed at least every twelve months by account managers and reviewed and approved by the Bank’s specialized credit risk department. The credit risk assessment is based on a standardized LGD assessment framework that results in a certain LGD rate. These LGD rates take into account the expected EAD in comparison to the amount expected to be recovered or realized from any collateral held.

The Bank segments its retail lending products into smaller homogeneous portfolios, based on key characteristics that are relevant to the estimation of future cash flows. The applied data is based on historically collected loss data and involves a wider set of transaction characteristics (e.g., product type, wider range of collateral types) as well as borrower characteristics.

Further recent data and forward-looking economic scenarios are used in order to determine the IFRS 9 LGD rate for each group of financial instruments. When assessing forward-looking information, the expectation is based on multiple scenarios. Examples of key inputs involve changes in, collateral values including property prices for mortgages, commodity prices, payment status or other factors that are indicative of losses in the Bank.

The Bank estimates regulatory and IFRS 9 LGD on a different basis. Under IFRS 9, LGD rates are estimated for the Stage 1, Stage 2, Stage 3 and POCI IFRS 9 segment of each asset class. The inputs for these LGD rates are estimated and, where possible, calibrated through back testing against recent recoveries. These are repeated for each economic scenario as appropriate.

Significant Increase in Credit RiskThe Bank continuously monitors all assets subject to ECL. In order to determine whether an instrument or a portfolio of instruments is subject to 12mECL or LTECL, the Bank assesses whether there has been a significant increase in credit risk since initial recognition.

The Bank also applies a secondary qualitative method for triggering a significant increase in credit risk for an asset, such as moving a customer/facility to the watch list, or the account becoming forborne. In certain cases, the Bank may also consider that events set out below are a significant increase in credit risk as opposed to a default. Regardless of the change in credit grades, if contractual payments are more than 30 days past due, the credit risk is deemed to have increased significantly since initial recognition.

a. Inadequate or unreliable financial or other information such as unavailability of audited financial statements and non-cooperation by borrower in matters pertaining to documentation.

b. Borrower is subject to litigation by third parties that may have a significant impact on his financial position. c. Frequent changes in key senior management personnel without acceptable successors or professional management. d. Intra-group transfer of funds without underlying transactions. e. Deferment/delay in the date for commencement of commercial operations by more than one year except in Government

projects or delays are due to Government approvals. f. Modifications of terms resulting in concessions granted to the borrower (after examining the cash flows of the borrower/

financial position/ability to repay) including extension of moratorium, deferment of payment, waiver of covenants etc. This requirement shall be in conformity to the restructuring guidelines issued by CBO from time to time.

g. A fall of 25% or more in the turnover or in the EBIT as compared to the previous year except in the case of change in business model/one of material events.

h. A fall in Debt Service coverage ratio to below 1 except in cases that have acceptable external credit support. i. 2 notch downgrade in Master Rating Scale (MRS) of the Bank along with associated downgrade in PD except for accounts

rated as 1 at origination for which a 3 notch downgrade in sub-investment grades. j. Erosion in net worth by more than 20% compared to previous year coupled with increase in leverage by 1.5 times.

Model risk managementThe Bank has utilized models in many of its financial and business activities from underwriting a credit facility to reporting expected loss under the IFRS9 accounting standards.

To manage the model risks, the Bank has implemented the IFRS 9 Governance Framework (the Framework). The Framework is a bank-wide policy and is applicable to all models of the Bank. According to the Framework, all internally or externally (vendor-based) developed risk quantification models that directly affect the financial reporting on Expected Loss (EL) and Lifetime Expected Loss (LEL) require independent validation.

The Framework establishes a systematic approach to manage the development, validation, approval, implementation and ongoing use of the models. It sets out an effective management structure with clearly defined roles and responsibilities, policies and controls for managing model risk. The Framework is reviewed on a regular basis to ensure it meets regulatory standards and international practices. Any major changes to the Framework must be approved by the Board of Directors or the BRC.






D1.6 Concentrations (continued)

The Bank manages its credit risk exposure through diversification of lending activities to avoid undue concentrations of risks with individuals or group of customers in specific locations or businesses. It also obtains appropriate security. Concentration of the gross credit exposure is given below:


Loans, advances and

financingRO’000

Due from banks and

other money market

placementsRO’000

Debt securities

RO’000

Loans, advances and

financingRO’000

Due from banks and

other money market

placementsRO’000

Debt securities

RO’000

Concentration by sector

Corporate 1,668,479 - 38,447 1,578,223 - 41,168

Personal 901,006 - - 762,437 - -

Sovereign - - 592,903 - - 484,515

Banks - 199,053 - - 121,845 -

2,569,485 199,053 631,350 2,340,660 121,845 525,683══════ ══════ ══════ ══════ ══════ ══════

Concentration by location

Middle East 2,567,021 86,316 295,549 2,299,850 54,342 245,791

Europe 924 93,351 - 39,270 60,528 5,775

North America - 2,162 330,026 - 5,057 274,117

Asia 1,540 17,224 5,775 1,540 1,918 -

2,569,485 199,053 631,350 2,340,660 121,845 525,683══════ ══════ ══════ ══════ ══════ ══════


Loans, advances and

financingUSD’000

Due from banks and

other money market

placementsUSD’000

Debt securities USD’000

Loans, advances and

financingUSD’000

Due from banks and

other money market

placementsUSD’000

Debt securities USD’000

Concentration by sector

Corporate 4,333,712 - 99,862 4,099,281 - 106,929

Personal 2,340,275 - - 1,980,355 - -

Sovereign - - 1,540,008 - - 1,258,481

Banks - 517,020 - - 316,480 -

6,673,987 517,020 1,639,870 6,079,636 316,480 1,365,410══════ ══════ ══════ ══════ ══════ ══════

Concentration by location

Middle East 6,667,587 224,197 767,660 5,973,636 141,147 638,418

Europe 2,400 242,469 - 102,000 157,216 15,000

North America - 5,616 857,210 - 13,135 711,992

Asia 4,000 44,738 15,000 4,000 4,982 -

6,673,987 517,020 1,639,870 6,079,636 316,480 1,365,410══════ ══════ ══════ ══════ ══════ ══════

Refer to B3 for an analysis by economic sector.



D1.4 Collateral securities

The Bank holds collateral against loans, advances and financing to customers in the form of mortgage interests over property, other registered securities, assets and guarantees. Estimates of fair value are based on the value of the collateral assessed at the time of borrowing and updated once in three years, except when a loan is individually assessed as impaired. In appropriate cases, two valuation reports are also collected for validation. The shares of MSM listed companies, which are taken as securities, are valued on a fortnightly basis, unless it is a highly volatile stock whereby the valuation is done on a daily basis.

An estimate of the fair value of collateral and other security enhancements held against loans, advances and financing is shown below:

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

Against past due but not impaired

686,556 697,488 Property 268,533 264,324

3,740 1,766 Equity 680 1,440

249,325 105,932 Commercial mortgage 40,784 95,990

9,693 7,065 Vehicles 2,720 3,732

24,564 670 Fixed deposits 258 9,457

973,878 812,921 Total 312,975 374,943

Against past due and impaired

59,475 55,699 Property 21,444 22,898


621 2,574 Vehicles 991 239

86,943 160,411 Total 61,758 33,473

Against neither past due nor impaired

1,735,195 2,073,325 Property 798,230 668,050


157,912 197,618 Fixed deposits 76,083 60,796

54,086 81,075 Equity 31,214 20,823

46,618 44,465 Vehicles 17,119 17,948

2,601,279 3,155,441 Total 1,214,845 1,001,492

3,662,100 4,128,773 Total collateral held 1,589,578 1,409,908══════ ══════ ══════ ══════

D1.5 Settlement risk

Settlement risk is the risk of loss due to the failure of a party to honor its obligations to deliver cash, securities or other assets as contractually agreed on the day of settlement.

In foreign exchange trades, though there is fulfillment of both the legs of the transaction on the settlement date as is common practice between trading partners (free settlement), there will be risk on account of different time zones. In these cases, the settlement risk is mitigated through the execution of bilateral payment netting agreements.

D1.6 Concentrations

Concentrations of credit risk arise when a number of counter-parties are engaged in similar business activities or activities in the same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be affected similarly by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographic location.





D2 Liquidity risk (continued)

D2.2 Exposure to liquidity risk (continued)

The Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are calculated in accordance with Basel III framework and guidelines adopted by CBO vide circular BM 1127 and BM 1147. The complete disclosures required under these circulars are available on the Investor Relations page of the Bank’s website.

The table below summarizes the maturity profile of the Bank’s liabilities as on the reporting date based on contractual repayment arrangements. The contractual maturities of liabilities have been determined on the basis of the remaining period at the statement of financial position date to the contractual maturity date and do not take account of the effective maturities as indicated by the Bank’s deposit retention history and the availability of liquid funds.

Carrying amount

RO’000

Gross nominal outflow

RO’000

Within 3 months

RO’000

3 - 12 months

RO’000

Over 1 year

RO’000

As at 31 December 2019

Non-derivative liabilities

Due to banks and other money market borrowings 735,261 756,394 248,583 303,065 204,746

Customer deposits 2,097,310 2,116,992 1,199,732 428,995 488,265

Other liabilities 100,524 100,524 100,524 - -

Subordinated loans 35,392 43,846 350 2,107 41,389

Certificates of deposit 509 542 6 18 518

Total 2,968,996 3,018,298 1,549,195 734,185 734,918

Carrying amount

RO’000


RO’000

Within 3 months

RO’000

3 - 12 months

RO’000

Over 1 year

RO’000



Due to banks and other money market borrowings 722,061 731,335 111,094 218,595 401,646

Customer deposits 1,818,353 1,970,967 1,032,784 494,711 443,472



Certificates of deposit 509 509 - - 509

Total 2,660,979 2,833,793 1,228,908 715,390 889,495




Concentration by location for loans and advances is measured based on the location of the entity holding the asset, which has a high correlation with the location of the borrower. Concentration by location for investment securities is measured based on the location of the issuer of the security. The Bank seeks to manage its credit risk exposure through diversification of lending activities to avoid undue concentrations of risk with banks or customers in a specific currency. It also obtains security when appropriate. An analysis of the Bank’s gross exposure to relevant segments is provided in note E.

D2 Liquidity risk

Liquidity risk is the risk that the Bank will encounter difficulty in meeting its obligations that are settled by delivering cash or another financial asset.

D2.1 Management of liquidity risk

The Bank’s approach to managing liquidity is to ensure that it always has sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking damage to the Bank’s reputation. The Bank has a robust Liquidity Contingency Plan to facilitate management of liquidity under stressed conditions.

Liquidity risk is managed by the Bank through closely monitoring the liquidity gap against fixed limits.

Liquidity is provided by Treasury, which receives information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Treasury maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank. In this process due care is taken to ensure the Bank complies with all the Central Bank regulations.

The Bank conducts stress testing on liquidity based on assumptions approved by ALCO and CBO’s guidelines. All liquidity policies and procedures are subject to review and approval by ALCO.

D2.2 Exposure to liquidity risk

The lending ratio, which is the ratio of total loans and advances to customer deposits and capital, is monitored on a daily basis in line with regulatory guidelines. Internally the lending ratio is set at a more conservative level than required by regulation. The Bank also manages its liquidity risk by monthly monitoring the liquid ratio, i.e. net liquid assets to total assets. For this purpose net liquid assets include cash and cash equivalents and investment grade debt securities for which there is an active and liquid market. Last year, the Bank has taken a number of initiatives to increase customer deposits progressively.

Details of the reported lending and liquid ratio were as follows:


Lending ratio Liquid ratio Lending ratio Liquid ratio

Average for the year 78.7% 14.2% 78.0% 13.2%

Maximum for the year 80.3% 17.3% 79.2% 15.4%

Minimum for the year 77.7% 12.3% 76.2% 10.9%

The Bank also monitors the liquidity through Liquidity Coverage ratio (LCR) and Net Stable Funding Ratio (NSFR). Current levels of these ratios are given below


LCR (as of December) 147.2% 215.4%

LCR (average for the quarter) 155.5% 113.7%

NSFR (as of December)* 107.4% 106.2%

Leverage ratio (as of December)* 14.5% 11.8%

*December 2019 ratios are after deducting proposed cash dividend of RO 7,090,800 as disclosed in B13a.





D3 Market risk

Market risk is the exposure to loss resulting from the changes in the interest rates, foreign currency exchange rates, equity prices and commodity prices. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return to risk.

D3.1 Measurement of market risk

The Bank is mainly engaged in spot transactions, forwards and currency swaps. Positions are mainly customer driven, which further reduces complexity. Accordingly, the Bank measures and controls its risk by using a limit framework. As and when the Bank enters into more complex derivatives, it has sophisticated models and techniques to measure market risk, supported by suitable controls.

D3.2 Management of market risks

The Bank separates its exposure to market risk between trading and non-trading portfolios. Trading portfolios include all positions arising from market making and proprietary position-taking, together with financial assets and liabilities that are managed on a fair value basis.

All foreign exchange risks within the Bank is transferred by Treasury to the trading book. Accordingly, the foreign exchange position is treated as a part of the Bank’s trading portfolio for risk management purposes. Foreign exchange risk is monitored and reported by Middle Office. The risk is managed through the Market Risk Management Policy by implementing a limit framework and reporting tools like Currency Position Report, Risk Analysis of Currency Position, Breach Analysis Report, and Dealer Limit Breach report.

Overall authority for market risk is vested in ALCO. The risk management function is responsible for development of detailed risk management policies (subject to approval by ALCO and BRC). The Market Risk Policy is periodically reviewed to keep it up to date with the market developments.

D3.3 Exposure to interest rate risk – non-trading portfolios

Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair values of financial instruments. The Bank is exposed to interest rate risk as a result of mismatches of interest rate and re-pricing tenure of rate sensitive assets and liabilities.

The effective interest rate (effective yield) of a monetary financial instrument is the rate used in a present value calculation that results in the carrying amount of the instrument. The rate is a historical rate for a fixed rate instrument carried at amortized cost and a current rate for a floating rate instrument or an instrument carried at fair value.

The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps. ALCO monitors compliance with these limits and is assisted by Risk Management in its day-to-day monitoring activities. A summary of the Bank’s interest rate gap position on non-trading portfolios is provided in this note. As per Basel-II guidelines and communicated by CBO the Bank also assesses interest rate risk by assessing the impact on earnings and economic values of an interest rate shock of 200 bps and takes appropriate measures to reduce the impact. Additionally, the Bank also assesses the impact on earnings of an interest rate shock of 50 and 100 bps.




Carrying amount

USD’000


USD’000

Within 3 months

USD’000

3 - 12 months

USD’000

Over 1 year

USD’000



Due to banks and other money market borrowings 1,909,769 1,964,660 645,670 787,182 531,808

Customer deposits 5,447,558 5,498,681 3,116,187 1,114,273 1,268,221



Certificates of deposit 1,322 1,408 16 47 1,345

Total 7,711,677 7,839,736 4,023,883 1,906,975 1,908,878

Carrying amount

USD’000


USD’000

Within 3 months

USD’000

3 - 12 months

USD’000

Over 1 year

USD’000



Due to banks and other money market borrowings 1,875,483 1,899,571 288,556 567,779 1,043,236

Customer deposits 4,722,995 5,119,395 2,682,556 1,284,964 1,151,875



Certificates of deposit 1,322 1,322 - - 1,322

Total 6,911,634 7,360,501 3,191,969 1,858,156 2,310,376

The Bank prepares a liquidity gap report to monitor the Bank’s short-term liquidity position on its Rial denominated assets and liabilities in a time horizon spanning one month. The gap is adjusted for availability of instruments for repo or refinance and also for un-availed committed lines of credit, if any. This statement is reported to the ALCO monthly.





D3 Market risk (continued)

D3.3 Exposure to interest rate risk – non-trading portfolios (continued)

Effective annual

interestrate %

Within three

monthsRO’000

Four months to twelve

months RO’000

Over one year RO’000

Non- sensitive to

interest rateRO’000

TotalRO’000


Assets

Cash and balances with Central Banks 0.01 - - 505 71,951 72,456

Due from banks and other money market placements

2.51 106,352 1,540 - 13,511 121,403

Loans, advances and financing, net 5.17 1,007,253 401,231 825,263 18,183 2,251,930

Investments 2.33 331,233 31,014 135,204 35,318 532,769

Property, equipment and fixtures - - - - 19,676 19,676

Investment properties - - - - 2,900 2,900

Other assets - - - - 45,269 45,269

Total assets 1,444,838 433,785 960,972 206,808 3,046,403

Liabilities and equity

Due to banks and other money market borrowings

2.91 531,454 182,875 - 7,732 722,061

Customer deposits 2.64 271,725 406,962 366,340 773,326 1,818,353

Other liabilities - - - - 84,664 84,664

Subordinated loans 7.00 - - 35,000 392 35,392

Certificates of deposit 4.00 - - 500 9 509

Total equity - - - - 385,424 385,424

Total liabilities and equity 803,179 589,837 401,840 1,251,547 3,046,403

Gap 641,659 (156,052) 559,132 (1,044,739) -

Cumulative gap 641,659 485,607 1,044,739 - -




The Bank’s interest rate sensitivity position based on contractual re-pricing arrangements at 31 December 2019 was as follows:

Effective annual

interestrate %

Within three

monthsRO’000


months RO’000

Over one year RO’000

Non-sesitive to interest

rateRO’000

TotalRO’000


Assets

Cash and balances with Central Banks 0.01 500 - 505 88,567 89,572


3.26 186,005 - 49 12,183 198,237

Loans, advances and financing, net 5.52 933,675 504,602 996,525 19,351 2,454,153

Investment securities 3.48 388,249 64,742 151,834 32,650 637,475



Other assets - - - - 84,379 84,379

Total assets 1,508,429 569,344 1,148,913 278,419 3,505,105



3.23 455,046 274,469 - 5,746 735,261

Customer deposits 2.53 458,000 405,664 327,045 906,601 2,097,310


Subordinated loans 7.00 - - 35,000 392 35,392

Certificates of deposit 4.75 - - 509 - 509

Total equity - - - - 536,109 536,109

Total liabilities and equity 913,046 680,133 362,554 1,549,372 3,505,105

Gap 595,383 (110,789) 786,359 (1,270,953) -

Cumulative gap 595,383 484,594 1,270,953 - -







Effective annual

interestrate %

Within three

monthsUSD’000


months USD’000

Over one year

USD’000

Non- sensitive to interest rate

USD’000Total

USD’000


Assets

Cash and balances with Central Banks 0.01 - - 1,311 186,886 188,197


4.15 276,239 4,000 - 35,093 315,332

Loans, advances and financing, net 5.38 2,616,243 1,042,158 2,143,539 47,229 5,849,169

Investments 2.86 860,345 80,556 351,179 91,736 1,383,816



Other assets - - - - 117,582 117,582

Total assets 3,752,827 1,126,714 2,496,029 537,165 7,912,735



3.73 1,380,400 475,000 - 20,083 1,875,483

Customer deposits 2.68 705,779 1,057,044 951,533 2,008,639 4,722,995


Subordinated loans 7.00 - - 90,909 1,018 91,927

Certificates of deposit 4.75 - - 1,299 23 1,322

Total equity - - - - 1,001,101 1,001,101

Total liabilities and equity 2,086,179 1,532,044 1,043,741 3,250,771 7,912,735

Gap 1,666,648 (405,330) 1,452,288 (2,713,606) -

Cumulative gap 1,666,648 1,261,318 2,713,606 - -




Effective annual

interestrate %

Within three

monthsUSD’000


months USD’000

Over one year

USD’000

Non- sensitive to interest rate

USD’000Total

USD’000


Assets

Cash and balances with Central Banks 0.01 1,299 - 1,312 230,044 232,655


3.26 483,130 - 127 31,644 514,901

Loans, advances and financing, net 5.52 2,425,131 1,310,654 2,588,377 50,261 6,374,423

Investments 3.48 1,008,439 168,161 394,374 84,805 1,655,779



Other assets - - - - 219,166 219,166

Total assets 3,917,999 1,478,815 2,984,190 723,164 9,104,168



3.23 1,181,938 712,906 - 14,925 1,909,769

Customer deposits 2.53 1,189,610 1,053,673 849,468 2,354,807 5,447,558


Subordinated loans 7.00 - - 90,909 1,018 91,927

Certificates of deposit 4.75 - - 1,322 - 1,322

Total equity - - - - 1,392,491 1,392,491

Total liabilities and equity 2,371,548 1,766,579 941,699 4,024,342 9,104,168

Gap 1,546,451 (287,764) 2,042,491 (3,301,178) -

Cumulative gap 1,546,451 1,258,687 3,301,178 - -







The Basel-II Accord recommended that banks should assess the impact of interest rate risk by applying a 200 bps interest rate sensitivity and accordingly the impact of 200 bps interest rate shock on the Bank’s earnings and capital is provided below:

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

159,244 197,519 Net interest income (including Islamic financing) 76,045 61,309

1,108,012 1,493,714 Total Regulatory Capital (note D5.1) 575,080 426,585

Based on 50 bps interest rate shock

6,460 13,391 Impact of 50 bps interest rate shock 5,156 2,487

4.06% 6.78% Impact as % to net interest income 6.78% 4.06%

0.58% 0.90% Impact as % to capital 0.90% 0.58%









D3.4 Exposure to other market risks

Investment value risk is the risk of reduction in the market value of the Bank’s portfolio as a result of diminution in the market value of individual investments. The responsibility for management of investment value risk rests with the Investment division under the supervision and guidance of the Management Investment Committee and Board Executive Committee of the Bank. The Bank’s investments are governed by an investment policy approved by the Board of Directors. The ratings and prices of the instruments are monitored on a regular basis and necessary actions are taken to reduce exposure if needed. The portfolio is revalued at market price to ensure that unrealized losses, if any, on account of reduction in the market value of the investments remains within acceptable parameters.

Security as per country Changes in fair value +/- 5%

31 December2019

RO’000

31 December2018

RO’000

Organization for Economic Co-operation (OECD) Countries 58 56

Oman 469 494

Other Gulf Co-operation Council (GCC) countries 5 5

Security as per country Changes in fair value +/- 5%

31 December2019

USD’000

31 December2018

USD’000

Organization for Economic Co-operation (OECD) Countries 151 145

Oman 1,218 1,283

Other Gulf Co-operation Council (GCC) countries 13 13




Interest rate risk is managed by taking views on interest rate movements for the year and realigning the portfolios and covenants of lending, so as to be proactive and minimize adverse effects. The benchmark presently available in Oman is the 28-day CBO CD rate. The trend of the weighted average interest on loans and cost of deposits for the year is provided below:

2019 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Lending rate 5.36% 5.34% 5.35% 5.37% 5.39% 5.42% 5.43% 5.44% 5.46% 5.36% - -

Deposit rate 1.88% 1.89% 1.89% 1.90% 1.93% 1.94% 1.95% 1.95% 1.99% 1.88% - -

2018 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Lending rate 5.21% 5.19% 5.16% 5.17% 5.23% 5.24% 5.25% 5.28% 5.29% 5.30% 5.31% 5.33%

Deposit rate 1.67% 1.70% 1.64% 1.67% 1.70% 1.72% 1.73% 1.76% 1.79% 1.81% 1.82% 1.90%

The management of interest rate risk is one of the critical components of market risk management in banks. Interest rate risk primarily arises on account of mismatch of the Bank’s re-pricing assets with its re-pricing liabilities that fund the assets. There are basically two approaches to management of interest rate risk in banks, namely “Earnings Approach” and “Economic Value Approach”. The interest rate risk is assessed based on the impact of interest rate shock on the Bank’s earnings and capital.

The focus of earnings approach understands the impact of interest rate changes (shock) of assets and liabilities on the net Interest Income of the Bank. It measures the extent of capability of the Bank to absorb decline in net interest income caused by interest rate changes.

Interest rate risk also influences the present value of the Bank’s asset and liabilities. Economic value perspective considers the present value of the Bank’s assets and liabilities and assesses the potential longer-term impact of interest rates on the Bank. This perspective focuses on how the economic value of the Bank’s assets and liabilities change with movements in interest rates and it reflects the impact of fluctuation in the interest rates on the economic value of the institution.





D4 Operational risk (continued)

Compliance with Bank standards for both conventional and Islamic banking divisions is supported by a program of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and management. The Bank has a comprehensive Operational Risk Management Framework, Operational Risk Management Policy, Risk and Control Self-Assessment (RCSA) procedures, Operational Risk Loss Event Reporting Framework, Maintenance of Operational Risk Loss Data Base and RCSA Framework. The Bank operates an in-house RCSA model and conducts Risk and Control Self-Assessment for all major business activities like Corporate Banking, Retail Banking, Treasury, Card operations, Deposits, HR, E-banking, Administration, Branch operations, Compliance, Legal, IT, Credit Administration, Payment unit etc. The Bank has identified Key Risk Indicators (KRI) of operational risk in major activities of the Bank and set threshold limits that are monitored monthly to assess and manage the level of risk.

The Bank has an effective Fraud Risk Management policy and framework. The Policy sets out the Governance framework for implementing Enterprise-wide Fraud Risk Management environment and culture. It covers the requirements for effective identification, assessment, measurement, monitoring and managing the fraud risk across the Bank with a high level requirement for prevention, detection and reporting of frauds.

The objective of the Policy is to comply with various aspects of Fraud Risk Management stipulated by Central Bank of Oman (CBO) in Circular BM1153 dated 25 December 2017.

In addition, the Bank has developed a robust Business Continuity Management (BCM) policy & governance framework. This will safeguard the interests of the Bank’s customers, employees and stakeholders in the event of a disaster or significant disruption that may impact its operations and premises. The BCM framework along with the Disaster Recovery plan were developed in line with the BCM guidelines mandated by Central Bank of Oman (CBO).

D5 Capital management

D5.1 Regulatory capital

The Bank’s lead regulator, the CBO, sets and monitors the capital requirements for the Bank as a whole. In implementing current capital requirements, CBO requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted assets. The Bank calculates capital requirements for market risk and operational risk based upon the model prescribed by the CBO as follows:

• Claims against sovereign entities in the respective national currencies – Nil • Claims against sovereign entities in other currencies – 100% risk weighting is applied as prescribed by the CBO • Retail and Corporate loans – In the absence of credit rating model 100% risk weighting is applied • Off-balance sheet items – As per credit conversion factors and risk weighting prescribed by the CBO

The Bank’s regulatory capital is analyzed into two tiers:

• Tier 1 capital includes ordinary share capital, share premium, perpetual Tier 1 capital securities classified as innovative Tier 1 securities, retained earnings, translation reserve and minority interests after deductions for goodwill and intangible assets, and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes.

• Tier 2 capital includes qualifying subordinated liabilities, collective impairment allowances and unrealized losses on equity instruments classified as available for sale investments.

Various limits are applied to elements of the capital base. The amount of innovative tier 1 securities cannot exceed 15% of total tier 1 capital; qualifying tier 2 capital cannot exceed tier 1 capital; and qualifying term subordinated loan capital may not exceed 50% of tier 1 capital. There are also restrictions on the amount of collective impairment allowances that may be included as part of tier 2 capital. Other deductions from capital include the carrying amounts of investments in subsidiaries that are not included in the regulatory consolidation, investments in the capital of banks and certain other regulatory items.

Banking operations are categorized as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. The Bank’s policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognized and the Bank recognizes the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.



D3.4 Exposure to other market risks (continued)

Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Board has set limits on the total open position and open position per currency. The open position limits include overnight and intraday open position. Open positions are monitored on a daily basis and hedging strategies used to ensure positions are maintained within established limits. The Bank had the following net open positions denominated in foreign currencies:


AssetsFCY’ 000

LiabilitiesFCY’ 000

Net(liabilities)/

assetsFCY’ 000

AssetsFCY’ 000

LiabilitiesFCY’ 000

Net(liabilities)/

assetsFCY’ 000

US Dollar 2,897,867 3,331,452 (433,585) 2,752,642 3,004,388 (251,745)

Euro 141,728 141,724 4 147,316 147,298 18

UAE Dirhams 44,345 54,213 (9,868) 125,076 48,122 76,954

Japanese Yen 4,867 2,818 2,049 52,426 51,411 1,015

Swiss Franc 4,069 4,051 18 - - -

Pound Sterling 4,202 4,202 - 8,479 8,464 15

Indian Rupee 6,522 86 6,436 12,957 196 12,761

Other currencies (in RO’000) - - - - - 888

The Bank’s open foreign currency positions are a result of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in aggregate for both overnight and intra-day positions, which are monitored daily.

D4 Operational risk

Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, technology, infrastructure or from external events and excludes credit, market and liquidity risks.

The Bank’s objective is to manage operational risk to avoid/reduce financial losses to the Bank by the establishment of the necessary controls, systems and procedures. The Bank recognizes that an over-controlled environment will affect the Bank’s business and earnings, besides adding to costs. Therefore, the Bank aims to effectively manage operational risk through control optimization and well-established systems, methods and governance framework.

The primary responsibility for development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Bank standards in the following areas:

• Clear reporting lines; • Proper delegation of powers; • Appropriate segregation of duties and authorization of transactions through a maker checker system and authorization

matrix; • Ownership reconciliation and monitoring of accounts; • Documentation of controls and processes; • Compliance with regulatory and other legal requirements; • Periodic assessment of the operational risks faced and evaluating the adequacy of controls and procedures to address the

risks identified; • Reporting of operational losses and incidents triggering operational losses and remedial action; • Development of contingency plans; • Training, skill up gradation and professional development; • Ethical and business standards; and • Risk mitigation through insurance, wherever desirable.




E SEGMENTAL INFORMATION

Segmental information is presented for the Bank’s operating segments. For management purposes, the Bank is organized into the following operating segments:

Retail banking: • Including loans to and deposits from retail customers, credit card and fund transfer facilities.

Wholesale banking: • Corporates including loans to and deposits from large and mid-sector corporates, small & medium enterprises and

trade finance customers.

• Government and project finance syndication including loans to and deposits from government and financial institutions, project finance and syndicated loans.

• Investments including proprietary investments, correspondent and investment banking.

• Treasury including money market instruments, derivatives and foreign exchange products.

Head office • Includes balance sheet, income and expense related items that are not directly related to the Bank’s operating segments.

Islamic banking • Including Islamic financing activities, current accounts, unrestricted investment accounts and other products and

services to corporate and individual customers under Shari’ah principles.

The CEO monitors the operating results of business units separately for the purpose of making decisions about resource allocation and performance assessment.

Transfer pricing between operating segments is on an arm’s length basis in a manner similar to transactions with third parties.

No revenue from transactions with a single external counterparty or customer amounted to 10% or more of the Bank’s total revenue in 2019 or 2018.


D5 Capital management (continued)

D5.1 Regulatory capital (continued)

The international standard for measuring capital adequacy is the risk asset ratio, which relates capital to balance sheet assets and off-balance sheet exposures weighted according to broad categories of risk.

The risk asset ratio calculated in accordance with the capital adequacy guidelines of the Bank for International Settlement is as follows:

31 December 2018

USD’000

31 December 2019

USD’000

31 December2019

RO’000

31 December2018

RO’000

CET 1 capital

514,974 613,922 Ordinary share capital 236,360 198,265

46,849 51,797 Share premium 19,942 18,037

63,312 74,075 Legal reserve 28,519 24,375

2,566 2,566 General reserve 988 988

18,182 36,364 Subordinated loan reserve 14,000 7,000

70,096 81,616 Retained earnings* 31,422 26,987

(5,540) (5,748) Fair value losses (2,213) (2,133)

710,439 854,592 Total CET 1 capital 329,018 273,519

Additional Tier 1 capital

259,740 519,481 Perpetual Tier 1 Capital Securities 200,000 100,000

970,179 1,374,073 Total Tier 1 capital 529,018 373,519

Tier 2 capital

65,096 65,096 Impairment allowance on portfolio basis 25,062 25,062

10 - Fair value gains - 4

72,727 54,545 Subordinated loan 21,000 28,000

137,833 119,641 Total Tier 2 capital 46,062 53,066

1,108,012 1,493,714 Total regulatory capital 575,080 426,585══════ ══════ ══════ ══════

Risk weighted assets

6,959,236 7,454,971 Credit and market risks 2,870,164 2,679,306

410,182 466,880 Operational risk 179,749 157,920

7,369,418 7,921,851 Total risk weighted assets 3,049,913 2,837,226══════ ══════ ══════ ══════

Capital adequacy ratio

15.04% 18.86 % Total regulatory capital expressed as a percentage of total risk weighted assets

18.86 % 15.04%

13.16% 17.35 % Total tier I capital expressed as a percentage of total risk weighted assets

17.35 % 13.16%

9.64% 10.79 % Total CET 1 capital expressed as a percentage of total risk weighted assets

10.79 % 9.64%

*Retained earnings for the year 2019 is stated after deducting cash dividend of RO 7,090,800 (2018: RO 11,895,900), as disclosed in B13.a.

The capital adequacy ratio is calculated in accordance with Basel II & Basel III requirements as adopted by CBO. Disclosures required under Basel III and circular BM-1114 dated 17 November 2013 issued by CBO are available on the Investor Relations page of the Bank’s website.




E1 SEGMENTAL INFORMATION (CONTINUED)

As at 31 December 2018Retail

banking RO’000

Wholesale banking RO’000

Head Office RO’000

Islamic banking RO’000

Total RO’000

Income Statement

Interest income 37,280 93,043 - - 130,323

Interest expense (17,543) (56,129) - - (73,672)

Net interest income 19,737 36,914 - - 56,651

Net income from Islamic financing and investing activities

- - - 3,773 3,773

Other operating income 24,646 64,511 - 5,281 94,438

Total Operating income 24,646 64,511 - 5,281 94,438

Total Operating expenses (20,672) (14,487) (1,100) (3,626) (39,885)

Net Operating Income 3,974 50,024 (1,100) 1,655 54,553

Impairment on FVOCI investments - (650) - (31) (681)

Loan impairment charges and other credit risk provisions, net

(2,846) (15,604) - (992) (19,442)

Segment profit/(loss) 1,128 33,770 (1,100) 632 34,430

Income tax expense (169) (4,965) 165 (95) (5,064)

Profit/(loss) for the year 959 28,805 (935) 537 29,366

Balance sheet

Assets

Cash and balances with Central Bank - 63,719 - 8,737 72,456


- 111,573 - 9,830 121,403

Loans, advances and financing, net 674,975 1,396,589 - 180,366 2,251,930

Investments - 511,825 - 20,944 532,769

Property, equipment and fixtures - - 18,550 1,126 19,676

Investment properties - - 2,900 - 2,900

Other assets - 31,764 12,307 1,198 45,269

TOTAL ASSETS 674,975 2,115,470 33,757 222,201 3,046,403

Liabilities

Due to banks and other money market borrowings - 709,358 - 12,703 722,061

Customer deposits 374,609 1,262,919 - 180,825 1,818,353

Other liabilities - 33,912 49,561 1,191 84,664

Subordinated loans - - 35,392 - 35,392

Certificates of deposit - 509 - - 509

TOTAL LIABILITIES 374,609 2,006,698 84,953 194,719 2,660,979

TOTAL EQUITY - - 357,942 27,482 385,424

374,609 2,006,698 442,895 222,201 3,046,403



banking RO’000

Wholesale banking RO’000

Head Office RO’000

Islamic banking RO’000

Total RO’000

Income Statement

Interest income 40,860 105,827 - - 146,687




- - - 5,854 5,854

Other operating income 5,651 21,853 2 1,108 28,614

Total Operating income 25,284 72,411 2 6,962 104,659

Total Operating expenses (22,966) (17,530) - (4,790) (45,286)

Net Operating Income 2,318 54,881 2 2,172 59,373

Impairment on FVOCI investments - (508) - 6 (502)


(847) (17,092) - (404) (18,343)

Segment profit/(loss) 1,471 37,281 2 1,774 40,528

Income tax expense (228) (5,628) - (266) (6,122)

Profit/(loss) for the year 1,243 31,653 2 1,508 34,406

Balance sheet

Assets



- 192,953 - 5,284 198,237

Loans, advances and financing, net 776,669 1,464,088 - 213,396 2,454,153

Investment securities - 614,052 - 23,423 637,475



Other assets - 70,166 12,137 2,076 84,379

TOTAL ASSETS 776,669 2,418,841 52,330 257,265 3,505,105

Liabilities

Due to banks and other money market borrowings - 719,673 - 15,588 735,261




Certificates of deposit - 509 - - 509


TOTAL EQUITY - - 502,119 33,990 536,109

404,795 2,271,968 571,077 257,265 3,505,105





31 December 2018Retail

banking USD’000

Wholesale banking

USD’000Head Office

USD’000Islamic banking

USD’000Total

USD’000

Income Statement

Interest income 96,831 241,670 - - 338,501




- - - 12,099 12,099

Other operating income 12,751 71,680 - 1,618 86,049

Total Operating income 64,016 167,560 - 13,717 245,293

Total Operating expenses (53,694) (37,628) (2,857) (9,418) (103,597)

Net Operating Income 10,322 129,932 (2,857) 4,299 141,696

Impairment on available for sale investments - (1,688) - (81) (1,769)


(7,392) (40,530) - (2,577) (50,499)

Segment profit/(loss) 2,930 87,714 (2,857) 1,641 89,428

Income tax expense (439) (12,896) 429 (247) (13,153)

Profit/(loss) for the year 2,491 74,818 (2,428) 1,394 76,275

Balance sheet

Assets



- 289,800 - 25,532 315,332

Loans, advances and financing, net 1,753,182 3,627,504 - 468,483 5,849,169

Investments - 1,329,416 - 54,400 1,383,816



Other assets - 82,504 31,966 3,112 117,582

TOTAL ASSETS 1,753,182 5,494,728 87,680 577,146 7,912,735

Liabilities

Due to banks and other money market borrowings - 1,842,488 - 32,995 1,875,483




Certificates of deposit - 1,322 - - 1,322

Perpetual Tier 1 capital securities - - 259,740 - 259,740


TOTAL EQUITY - - 929,719 71,382 1,001,101

973,010 5,212,203 1,150,376 577,146 7,912,735

E2 COMPARATIVE FIGURES

Certain comparative figures for 2018 have been reclassified in order to conform to the presentation for the current period. Such reclassifications do not affect previously reported net profit or shareholders’ equity.



banking USD’000

Wholesale banking

USD’000Head Office

USD’000Islamic banking

USD’000Total

USD’000

Income Statement

Interest income 106,130 274,875 - - 381,005




- - - 15,205 15,205

Other operating income 14,678 56,761 5 2,878 74,322

Total Operating income 65,673 188,080 5 18,083 271,841

Total Operating expenses (59,652) (45,532) - (12,441) (117,625)

Net Operating Income 6,021 142,548 5 5,642 154,216

Impairment on available for sale investments - (1,320) - 16 (1,304)


(2,200) (44,395) - (1,050) (47,645)

Segment profit 3,821 96,833 5 4,608 105,267

Income tax expense (592) (14,618) - (691) (15,901)

Profit/(loss) for the year 3,229 82,215 5 3,917 89,366

Balance sheet

Assets



- 501,177 - 13,725 514,902

Loans, advances and financing, net 2,017,322 3,802,826 - 554,275 6,374,423

Investments - 1,594,940 - 60,839 1,655,779



Other assets - 182,249 31,525 5,392 219,166

TOTAL ASSETS 2,017,322 6,282,704 135,922 668,221 9,104,169

Liabilities

Due to banks and other money market borrowings - 1,869,281 - 40,488 1,909,769

Customer deposits 1,051,416 3,862,350 - 533,792 5,447,558



Certificates of deposit - 1,322 - - 1,322

TOTAL LIABILITIES 1,051,416 5,901,215 179,111 579,935 7,711,677

TOTAL EQUITY - - 1,304,205 88,286 1,392,491

1,051,416 5,901,215 1,483,316 668,221 9,104,168


A L L YO U N E E D TO K N OWA B O U T W I N N I N G-

REGULATORY DISCLOSURESSOHAR INTERNATIONAL

-


REGULATORY DISCLOSURES UNDER BASEL II & BASEL III FRAMEWORK AS AT 31 DECEMBER 2019

Sohar International 2019152

1. INTRODUCTION

The following disclosures are being made in accordance with the revised capital adequacy rules under the Basel II & Basel III framework issued by the Central Bank of Oman (CBO) through circular number BM 1009 dated 13 September 2006 and BM 1114 dated 17 November 2013. These disclosures aim to provide market participants material qualitative and quantitative information about Sohar International Bank’s risk exposures, risk management strategies and processes of capital adequacy.

2. SUBSIDIARIES AND SIGNIFICANT INVESTMENTS

Sohar International Bank is not part of any group either as a member or as the top corporate entity in the group.

3. CAPITAL STRUCTURE

The authorized share capital of the Bank is 4,000,000,000 shares of RO 0.100 each. The issued and paid-up share capital of the Bank is 2,363,598,772 shares of RO 0.100 each amounting to RO 236.36 million.

The Bank issued its first Perpetual Tier 1 Capital Securities amounting to RO 100 million on 25 September 2017. These securities bear interest on their nominal amount from the issue date to the first call date at a fixed annual rate of 7.75%. Thereafter the interest rate will reset at five year intervals. Interest will be payable semi-annually in arrears and treated as a deduction from equity.

On 14 March 2019, the Bank issued its second issuance of Perpetual Tier 1 Capital Securities amounting to RO 100 million. These securities bear interest on their nominal amount from the issue date to the first call date at a fixed annual rate of 7.50% with interest rate reset at five year intervals. Interest will be payable semi-annually in arrears and treated as a deduction from equity.

Both the securities constitute direct, unconditional, subordinated and unsecured obligations of the Bank and are classified as equity in accordance with IAS 32: Financial Instruments – Classification. They do not have a fixed or final maturity date. The Bank may at its discretion and after prior consent from the relevant regulatory authority, exercise its option to redeem the securities in full (not in part) on the first Call Date, i.e., the fifth anniversary of the Issue Date, and on every fifth anniversary thereafter, again subject to the prior consent of the regulatory authorities. The Bank, at its sole discretion, may elect not to distribute interest. This is not considered as an event of default. If the Bank does not pay interest, on a scheduled interest payment date (for whatever reason), it cannot make any other distribution or payment on or with respect to its ordinary shares or any of its other Common Equity Tier 1 instruments or securities, ranking junior to or pari-passu with the Perpetual Tier 1 Capital Securities unless and until it has paid one interest payment in full on the securities. The terms of the Perpetual Tier 1 Capital Securities issuance allow the Bank to write-down (in whole or in part) any amounts due to the holders of the securities under certain circumstances.

RO 11.531 million was paid as coupon during 2019 (2018: 7.750 million) and is recognized in the statement of changes in equity.

The Bank has a diverse shareholder profile providing the Bank the necessary opportunity to raise additional capital upon necessity.

The Bank also carries unsecured subordinated loans of RO 35 million raised in 2016 with a maturity of seven years. These instruments are unlisted, non-transferable, non-negotiable and non-convertible with no early call option and with a fixed rate of interest. The principal amount of the subordinated loans is repayable on maturity in 2023 with interest payable semi-annually. The Bank is required to create a subordinated loan reserve equal to 20% of the issue value annually during the last five years of the term of the subordinated loans. According to the Regulations of CBO, the amount of subordinated loans as reduced by subordinated loan reserve is considered as Tier 2 capital for capital adequacy purposes.

Capital structure RO '000

Tier 1 capital

Paid-up share capital 236,360

Share premium 19,942

Legal reserve 28,519

General reserve 988

Subordinated loans reserve 14,000

Retained earnings 31,422

Other capital instruments 200,000

Other amounts deducted from Tier 1 capital including goodwill, deferred tax and investments (2,213)

Total amount of Tier 1 capital 529,018

Total amount of Tier 2 capital 46,062

Total eligible capital 575,080




5. RISK EXPOSURE AND ASSESSMENT

5.1 Management of risk in Sohar International Bank - approach and policy

The Bank’s activities expose it to a variety of financial risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. 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 risks in the Bank are managed through a “Three Lines of Defense model”, with all businesses acting as the front line by owning the respective risks and managing them. The second line of defense is shared by Risk and Compliance functions. While Risk provides “Functional Leadership” to the businesses by educating and training them on the policies, processes and controls set by Risk and also identifying risks, measuring and reporting to the management. Compliance ensures application of all the policies and processes conform to the current regulatory guidelines and applicable laws of Oman. Internal Audit acts as the third line of defense through reviews and exercising oversight of the first two lines of defense. The review findings act as a risk reporting tool for the Board and as inputs for upgrading of processes and plugging gaps in controls by Risk. Thus an “Integrated Risk Management” practice is followed by Sohar International Bank.

The Risk department prepares a comprehensive risk profile of the Bank on a monthly basis covering credit risk, market risk and operational risk. In addition to standalone risk, risk at the portfolio level, risk movement across the portfolio, etc. are tracked. The risk profile indicates the state of various risks and risk recommendations for mitigation and control of risk. The report is placed before the top management every month and quarterly to the Board Risk Committee.

The Bank’s philosophy is to undertake risks which are well understood and within the laid down risk appetite of the Bank.

5.2 Credit risk management

Credit risk is the risk that counterparty will fail to meet their contractual obligations to the Bank as they become due. Credit risk arises primarily from loans and other credit products available to the customers and from the liquid and investment assets held by our treasury division. Credit risk is managed at three stages - at the origination stage, approval stage and at the transaction/portfolio monitoring stage.

The Bank has a credit risk management policy in place, which has laid down policies and framework relating to credit risk management, for all the three stages stated above. The policy is applicable for the Wholesale Banking Credit.

For retail loans products, the Board has approved policies for various retail lending products based on template approval parameters. All the commercial and corporate credit originations have to go through a borrower rating system of Moody’s and only those with acceptable ratings are progressed further for approval of credit. The Bank too has a credit approval delegation matrix in place, which is risk-sensitized and based not merely on the quantum of credit.

In compliance with guidelines issued by the CBO, on the implementation of Basel II recommendations, in the case of credit risk, the Bank follows standardized approach with risk weights as recommended by the CBO.

The core banking software of the Bank has the capability to carry out asset classification on a daily basis. In accordance with this, specific provisioning is made as per the guidelines of the CBO. Non-specific standard asset provisioning is made as per the guidelines of the CBO.

The Bank’s disclosure policy was approved by the Board of Directors on 15 November 2009 and these disclosures have been prepared in accordance with the same.

5.3 Credit risk measurement

The Bank measures credit risk in terms of asset quality using two primary measures - the provisioning ratio and the non-performing loans ratio. The provisioning ratio is the annual charge for provisions as a percentage of total loans. The non-performing loans ratio is the ratio of non-performing loans as a percentage of total loans. Further, the risk movement is tracked through portfolio analysis with focus on concentrations. These are detailed out in the following tables.

The Bank strictly adheres to the extant regulatory guidelines of assigning risk weights to its credit exposures based on counterparties involved and risk weights for non-funded exposures after application of credit conversion factors. It has adopted standardized approach in computing capital adequacy. Lending directly to the Government or investment in sovereign instruments alone will be considered to be sovereign exposures and all others as corporate and risk weights as applicable will be assigned.

Definitions of past due and impaired

The classification of credit exposures is considered by the Bank for identifying impaired credit facilities, as per CBO circular number BM 977 dated 25 September 2004.

4. CAPITAL ADEQUACY

The Bank has adopted the standardized approach for credit risk and basic indicator approach for operational risk and standardized duration approach for market risk under the Basel II regulations, as prescribed by the CBO for all banks operating in Oman with effect from 1 January 2007.

The Bank’s capital adequacy ratio, calculated according to guidelines set by the Bank of International Settlements (BIS) as adopted by CBO was 18.86%. While the international requirement as per BIS is 8%, the CBO’s regulations stipulate that local banks maintain a minimum capital adequacy ratio of 11% and an additional 2.5% towards capital conservation buffer.

The Banks strategy is to maintain adequate capital to allow the Bank to operate under adverse market conditions and which can absorb unforeseen losses.

The Bank has an Internal Capital Adequacy Assessment Process (ICAAP) through which senior management assesses the Bank’s capital against its risk profile. Asset Liability Committee (ALCO) is the forum in which the capital adequacy is assessed, based on the next quarter’s business forecast and the risk profile envisaged. CBO, vide circular BM 1114 dated November 17, 2013, has issued guidelines on Regulatory Capital under Basel III and on composition of capital disclosure requirements.

As per the above guidelines, until 31 March 2018, the minimum Total Capital Adequacy Ratio was 12% of Risk Weighted Assets (RWA). Effective 1 April 2018, as per circular BSO/2018/1, CBO has advised to maintain a total capital adequacy ratio of 11% together with minimum CET 1 and Tier 1 ratios at 7% and 9% respectively. Tier 2 capital will be restricted to 2% as against 3% earlier.

In addition to the minimum Total Capital Adequacy Ratio, a Capital Conservation Buffer (CCB) of 2.5% of RWA is also stipulated by CBO. The CCB of 2.5% of RWA was to be achieved in four equal annual installments of 0.625% each beginning from January 1, 2014. However CBO vide circular BSD/2014/BASELIII/ALL BANKS/1485 deferred the implementation of last three installments till December 31, 2016. Accordingly, the implementation of last three installments commencing January 1, 2017. Thus as of December 31, 2019, regulatory minimum capital buffer to be applied is 2.5% and the total capital requirement is 13.50%.

As per the above guidelines, CBO may require banks to have a Counter Cyclical Buffer (CCyB) up to a maximum of 2.5% of RWA. The timelines for achieving the CCyB of 2.5%, if required, will be the same as that of CCB. Additional Capital buffer such as Capital Conservation Buffer, Counter Cyclical Buffer and enhanced capital surcharge for D-SIB(s) will continue to be comprised of CET 1 and will be held above the regulatory minimum capital requirement.

Total and Tier 1 Capital Ratio, Risk Weighted Assets RO ’000

S. No. Details

Gross Balances

(Book Value)Net Balances

(Book Value)*

Risk Weighted

Assets

1 On-balance sheet items 3,560,761 3,530,661 2,478,821

2 Off-balance sheet items 255,084 249,974 209,578

3 Derivatives 25,653 25,653 25,653

4 Total for Credit Risk 3,841,498 3,806,288 2,714,052

5 Risk Weighted Asset for Market Risk - 156,112

6 Risk Weighted Asset for Operations Risk - 179,749

7 Total Risk Weighted Assets 3,806,288 3,049,913

8 Tier 1 Capital 529,018


10 Tier 3 Capital -

11 Total Regulatory Capital 575,080

11.1 Capital requirement for credit risk 366,397

11.2 Capital requirement for market risk 21,075

11.3 Capital requirement for operational risk 24,266

12 Total required capital 411,738

13 Tier 1 Ratio 17.35%

14 Total Capital Ratio 18.86%

* Net of provisions reserve interest and eligible collaterals

The capital adequacy ratio is calculated in accordance with the Basel II & Basel III norms as adopted by CBO. Disclosures required under Basel III and circular BM-1114 dated 17 November 2013 issued by Central Bank of Oman are available at investor relations section of the Bank’s website.




5. RISK EXPOSURE AND ASSESSMENT (CONTINUED)

5.6 Industry or counterparty type distribution of exposures, broken down by major types of credit exposure

RO ’000

S. No. Economic sector Overdraft Loans

Bills purchased/discounted

Loans against trust receipts Total

Off-balance sheet

exposure

1 Import & export trade 3,156 3,658 203 5,694 12,711 37,084

2 Wholesale & retail trade

30,749 266,499 1,048 36,954 335,250 -

3 Mining & quarrying 3,567 58,378 206 960 63,110 162

4 Construction 29,297 282,965 37,369 32,226 381,858 237,039

5 Manufacturing 19,633 206,855 687 8,352 235,527 20,397

6 Electricity, gas and water

1,699 77,058 2,023 2,155 82,935 7,119

7 Transport and communication

791 59,864 - - 60,655 5,339

8 Financial institutions - 88,669 - - 88,669 53,099

9 Services 13,976 356,587 7,736 7,989 386,288 25,046

10 Personal loans 7,582 893,424 - - 901,006 -

11 Agriculture and allied activities

- - - - - -

12 Government - - - - - 3,866

13 Non-Resident lending - 16,718 2,572 - 19,290 -

14 All others 883 - 1,260 43 2,186 3,559

Total 111,333 2,310,675 53,104 94,373 2,569,485 392,710

5.7 Residual contractual maturity breakdown of the whole portfolio, broken down by major types of credit exposures

RO ’000

S. No. Time band Overdraft Loans

Bills purchased/discounted

Loans against trust receipts Total

Off-balance sheet

exposure

1 Up to 1 month 106,406 190,253 52,881 94,104 443,644 28,560

2 1 - 3 months - 126,827 - - 126,827 71,912

3 3 - 6 months - 65,574 - - 65,574 57,819

4 6 - 9 months - 67,836 - - 67,836 21,957

5 9 - 12 months - 59,154 - - 59,154 53,087

6 1 - 3 years - 399,278 - - 399,278 56,667

7 3 - 5 years - 410,877 - - 410,877 10,330

8 Over 5 years - 996,295 - - 996,295 92,378

Total 106,406 2,316,094 52,881 94,104. 2,569,485 392,710


5.4 Total gross credit risk exposures, plus average gross exposure over the period broken down by major types of credit exposure

RO ’000

S. No. Type of credit exposure Average gross exposure Total gross exposure

2019 2018 2019 2018

1 Overdrafts 117,163 129,841 106,406 127,920

2 Personal loans 831,722 714,812 901,006 762,437

3 Loans against trust receipts 100,916 107,981 94,104 107,727

4 Other loans 1,351,879 1,231,762 1,415,088 1,288,668

5 Bills purchased/discounted 53,395 50,127 52,881 53,908

Total 2,455,075 2,234,523 2,569,485 2,340,660

5.5 Geographic distribution of exposures, broken down in significant areas by major type of credit exposure

RO ’000

S. No. Type of credit exposure OmanOther GCC

countries Others Total

1 Overdrafts 106,406 - - 106,406

2 Personal loans 901,006 - - 901,006

3 Loans against trust receipts 94,104 - - 94,104

4 Other loans 1,395,955 16,669 2,464 1,415,088

5 Bills purchased/discounted 52,881 - - 52,881

6 Any other - - - -

Total 2,550,352 16,669 2,464 2,569,485





5.10 Movements of gross loans

RO ’000

Performing loansNon-

Performing loans

S. No. Details Stage 1 Stage 2 Stage 3 Total

1 Opening balance 1,825,751 437,926 76,983 2,340,660

2 Migration/changes (+/-) (555,749) (254,000) 28,778 (780,971)

3 New loans 822,094 169,490 18,212 1,009,796

4 Recovery of loans - - - -

5 Transfer to memoranda accounts - - - -

6 Loans written off - - - -

7 Closing balance 2,092,096 353,416 123,973 2,569,485

8 Provisions held 10,811 41,745 47,112 99,668

9 Reserve interest - - 15,664 15,664

6. CREDIT RISK: DISCLOSURES FOR PORTFOLIOS SUBJECT TO THE STANDARDIZED APPROACH

6.1 Qualitative disclosures: For portfolios under standardized approach

The Bank is following the standardized approach in assessing regulatory capital for credit risk. For sovereign risk, i.e. claims on the Sultanate of Oman or the Central Bank of Oman in Rial Omani or foreign currency, zero risk weight is applied, whereas for other sovereign risk and central banks’ exposures, the exposure will be risk weighted appropriately within a range of 0% to 100% based on the rating awarded by Eligible Credit Assessment Institution (ECAI) approved by CBO like, Moody’s Standard & Poor, Fitch and Capital Intelligence. For exposures on banks, the risk weight applied depends on the rating of the banks, subject to the respective country rating. In the absence of external ratings for most of the corporate, the Bank treats them as unrated and applies 100% risk weight on their funded exposures. On the off-balance sheet exposures, the relevant credit conversion factors are applied and aggregated to banks or the corporate, as the case may be, and then the risk weight is applied as stated above. Unavailed or yet to be disbursed exposures are taken under commitments and risk weights assigned as permitted by the CBO guidelines.

6.2 Quantitative disclosures

The Bank is following a uniform approach of considering all corporates as unrated and applying 100% risk weights.

7. CREDIT RISK MITIGATION: DISCLOSURE FOR STANDARDIZED APPROACH

The Bank does not make use of netting whether on or off-balance sheet. The Bank’s credit policy specifies the acceptable types of collateral, source of valuation and frequency of revaluation as once in three years for mortgaged properties and shares are valued on daily basis when the share volatility is high or on a weekly basis in normal times. The main types of acceptable collaterals are cash deposits, equity shares listed in the Muscat Securities Market and mortgages. The main types of guarantors are individuals and corporates. The Bank is taking only the cash deposits and equity shares for the purpose of credit risk mitigation under comprehensive approach.

RO ’000

Gross creditExposure before

CCF, CRM and Provisions

Eligible financialCollateral (after

Application of Haircuts) Eligible guarantees

1 Claims on Sovereigns 694,118 - -

2 Claims on Banks 208,300 - -

3 Claims on Corporates 1,574,235 (30,100) -

4 Retail 947,517 - - 5 Other Exposures 136,591 - -

Total 3,560,761 (30,100) -


5.8 By major industry or counterparty type

RO ’000

Provisions held

S. No. Economic sector Gross loans NPLsPerforming

loansStage 1 and

Stage 2 Stage 3 Reserve interest

Provisions made

during the year

1 Import trade 12,711 131 12,204 546 18 273 285

2 Wholesale & retail trade

335,250 35,658 261,916 5,016 13,684 2,975 7,598

3 Mining & quarrying 63,110 7,118 55,992 298 1,027 - (1,610)

4 Construction 381,858 32,834 266,382 13,981 11,462 6,675 7,281

5 Manufacturing 235,527 6,763 184,494 10,190 2,581 401 4,826

6 Electricity, gas and water

82,935 2,777 79,906 156 2,382 76 32

7 Transport and communication

60,655 393 60,262 684 51 31 (469)

8 Financial institutions 88,669 - 88,669 76 - - 22

9 Services 386,288 14,631 307,688 12,218 2,668 1,899 925

10 Personal loans 901,006 21,442 879,564 8,700 11,610 2,974 720

11 Agriculture and allied activities

- 307 (307) - - - 80

12 Non-Resident lending

19,290 1,715 17,575 654 1,587 217 190

13 All others 2,186 204 1,982 37 42 143 (258)

Total 2,569,485 123,973 2,216,327 52,556 47,112 15,664 19,622

5.9 Amount of impaired loans and, if available, past due loans provided separately broken down by significant geographic areas including, if practical, the amounts of specific and general allowances related to each geographical area

RO ’000

Provisions held

S. No. Countries Gross loans NPLsStage 1 and

Stage 2 Stage 3 Reserve interest

Total provisions

1 Oman 2,550,352 122,318 51,884 45,525 15,447 112,856

2 Other GCC countries 16,669 1,655 641 1,587 217 2,445

3 Others 2,464 - 31 - - 31

Total 2,569,485 123,973 52,556 47,112 15,664 115,332




9. LIQUIDITY RISK

The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking damage to the Bank’s reputation.

Central treasury receives information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Central treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank as a whole. The liquidity requirements of business units are met through short-term loans from central treasury to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements. The Bank has also laid down a comprehensive liquidity contingency plan for effective management of liquidity. In this process, due care is taken to ensure that the Bank complies with all the CBO regulations.

All liquidity policies and procedures are subject to review and approved by ALCO. Computation of liquidity gap on maturity of assets and liabilities is provided in Annexure 3. The computation has been prepared in accordance with guidelines provided in Circular BM 955 dated 7 May 2003.

10. OPERATIONAL RISK

Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk arises due to variety of causes associated with the Bank’s processes, personnel, technology and infrastructure and from external events and to include risks other than credit, market and liquidity risks.

Bank’s objective is to manage operational risk to avoid/reduce financial losses to the Bank by establishment of necessary controls, systems and procedures. The Bank recognizes that an over-controlled environment will affect the Bank’s business and earnings, besides adding to costs. Therefore, the Bank aims at effective management of operational risk through control optimization and well-established systems, methods and governance framework. The Bank has laid down the necessary policies, guidelines and framework to manage operational risk incidents and losses.

The primary responsibility for development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Bank’s standards in the following areas for management of operational risk:

═• Clear reporting lines;• ═Proper delegation of powers;• ═ Appropriate segregation of duties and authorization of transactions through a maker checker system and authorization

matrix;• ═Ownership reconciliation and monitoring of accounts;═• Documentation of controls and processes; ═• Compliance with regulatory and other legal requirements;══• Periodic assessment of the operational risks faced and evaluating the adequacy of controls and procedures to address the

risks identified;• ═Reporting of operational losses and incidents triggering operational losses and remedial action;• ═Development of contingency plans;• ═Training, skill up gradation and professional development;• ═Ethical and business standards; and• ═Risk mitigation through insurance, wherever desirable.

Compliance with Bank’s standards is supported by a program of periodic reviews undertaken by Internal Audit department. The findings of internal audit are discussed with the business unit heads and summary observations of audit are placed to Audit Committee and Senior Management of the Bank for corrective action.

8. MARKET RISK

Market risk is inherent in the financial instruments associated in the Bank’s business and/or activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities and derivatives. Market risk is the exposure to loss resulting from the changes in the interest rates, foreign currency exchange rates, equity prices and commodity prices. Market risk management deals with the impact of change in market variables on the earnings and economic value of the Bank.

Market risk is relevant to banking book and trading book but its measurement and management might differ in each book.

8.1 Market risk in trading book

Market risk incorporates a range of risks, but the principal elements are interest rate risk and foreign exchange risk.

Interest rate risk primarily arises on the mismatching of the Bank’s assets with its funding. Mismatches or gaps in the amount of rate sensitive assets, liabilities and off-balance sheet instruments can generate interest rate risk, the impact of which is a function of interest rate changes and the maturity profile of assets and liabilities. This risk is managed by the Bank through the use of appropriate tools (like rate sensitive gap analysis, pricing methods of floating rate or interest re-set at periodical intervals) and financial instruments, including derivatives.

Foreign exchange risk is the risk of financial loss caused due to change in value of assets/liabilities, denominated in foreign currencies, resulting from changes/adverse movement in the financial markets. Foreign currency risk arises as a result of activity undertaken by the Bank when raising and investing funds in currencies other than Omani Rials and in assuming open positions in foreign currencies. Currency risk is managed primarily through net open position limit management and by the use of currency swaps and forward foreign exchange contracts. The risk is also managed, where appropriate, by foreign exchange currency liabilities being matched with assets denominated in the same foreign currency. The Bank, through tools like open position, limits, monitors and controls the foreign exchange risk. The Bank has implemented reporting tools like currency position report, risk analysis of currency position, breach analysis report, dealer limit breach report to monitor and manage foreign exchange currency risk.

In compliance with guidelines issued by the CBO on the implementation of Basel II recommendations, the Bank follows the established approaches and techniques as per the guidelines to manage market risk and standardized duration approach in assessing capital requirements to cover market risk.

The Assets and Liability Committee (ALCO) conducts periodical meetings to discuss the mismatches in assets and liabilities and assesses the interest rate risk, foreign exchange risk and liquidity risk that the Bank is exposed to, so as to take steps to manage such risks. With the guidance of ALCO, the Bank’s treasury manages interest rate and foreign exchange risks, adhering to the policy guidelines, which stipulate appropriate limits.

The capital charge for the applicable market risk is furnished below:

RO ’000

Interest rate position risk -

Equity position risk -

Foreign exchange risk 12,489

Commodity risk -

8.2 Interest rate risk in banking book

The Asset and Liability Committee (ALCO) manages the Bank’s interest rate risk exposure. The Bank is exposed to interest rate risk as a result of mismatches in re-pricing of assets and liabilities. The Bank manages the interest risk by pricing through floating rates of interest, interest re-set clause for fixed interest loans and pricing the assets and liabilities on the same index instrument as far as possible. The statement on interest rate sensitivity of assets and liabilities has been prepared in accordance with guidelines provided in circular BM 955 dated 7 May 2003. The interest rate risk is assessed through interest rate gap analysis as given in Annexure 1. The Bank assesses the interest rate impact (both earnings perspective and economic value perspective) as per Basel-II guidelines communicated by CBO by applying interest rate shock of 200 bps and takes measures to reduce the impact. The impact of 200 bps shock on net interest income and on capital is shown in Annexure 2. The Bank also assesses impact on earnings of interest rate shock of 50 and 100 bps.

Further, the Bank takes care of interest rate risk associated with prepayment of loans and foreclosure of term deposits by incorporating penalty clauses especially for large corporate loans. Liabilities that do not have specific maturity are strictly classified as guided by CBO guidelines in the SAL statement and accordingly the interest change impact is worked out.


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DIS

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4134

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9,88

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4,75

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7,96

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7,84

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1,71

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168

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80

73,

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721

10. OPERATIONAL RISK (CONTINUED)

The Bank has documented processes and controls relating to the material activities of the Bank. The process document included process map with a SOX format, detailing the work flow, controls and the responsibilities of the persons involved in the process.

The Bank has put in place Board of Directors approved Operational Risk Management Policy, Risk Control Self-Assessment (RCSA) and Loss Data Management procedures. The Bank has implemented Operational Risk Loss Event reporting framework to monitor operational risk, developed in-house models for RCSA and has conducted RCSA for significant business lines. The Bank maintains internal loss database duly categorizing them under Basel-II designated business lines and event types to study the loss trends and for preparing towards higher approaches for Operational Risk Management. Thus the Bank manages the operational risks through the process of well laid down policies, models, tools, procedures and governance system, which is periodically reviewed and improved. The Bank has a top level Management Risk Committee that closely monitors and manages operational risk of the Bank.

The Bank has put in place a Board approved Fraud Risk Management Policy and framework. The Policy sets out the Governance framework for implementing Enterprise-wide Fraud Risk Management environment and culture. It covers the requirements for effective identification, assessment, measurement, monitoring and managing the fraud risk across the Bank with high level requirements for prevention, detection and reporting of frauds.

The objective of the Policy is to comply with various aspects of Fraud Risk Management stipulated by Central Bank of Oman (CBO) in Circular BM1153 dated 25 December 2017.

In addition, the Bank has developed a robust BCM policy & governance framework. This will safeguard the interests of the Bank’s customers, employees and stakeholders in the event of a disaster or significant disruption that may affect its operations and premises. The BCM framework along with the disaster recovery plan were developed in line with the BCM guidelines mandated by Central Bank of Oman (CBO).

Exposure to interest rate risk – Annexure 2

2019 RO ’000

Net interest income 76,045

Capital 575,080


Impact of 50 bps interest rate shock 5,156

Impact as % to net interest income 6.78%

Impact as % to capital 0.90%










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UN

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BASEL III COMMON DISCLOSURE TEMPLATE TO BE USED DURING THE TRANSITION OF REGULATORY ADJUSTMENTS

RO ’000

Common Equity Tier 1 capital: instruments and reserves1 Directly issued qualifying common share capital (and equivalent for non-joint stock companies) plus related stock

surplus 256,302

2 Retained earnings 31,422

3 Accumulated other comprehensive income (and other reserves) 43,507

4 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies) -

Public sector capital injections grandfathered until 1 January 2018 -

5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) -

6 Common Equity Tier 1 capital before regulatory adjustments 331,231

Common Equity Tier 1 capital: regulatory adjustments

7 Prudential valuation adjustments 2,213

8 Goodwill (net of related tax liability) -

9 Other intangibles other than mortgage-servicing rights (net of related tax liability) -

10 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)

-

11 Cash-flow hedge reserve -

12 Shortfall of provisions to expected losses -

13 Securitization gain on sale (as set out in paragraph 14.9 of CP-1) -

14 Gains and losses due to changes in own credit risk on fair valued liabilities -

15 Defined-benefit pension fund net assets -

16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) -

17 Reciprocal cross-holdings in common equity -

18 Investments in the capital of banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the Bank does not own more than 10% of the issued share capital (amount above 10% threshold)

-

19 Significant investments in the common stock of banking, financial, insurance and Takaful entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold)

-

20 Mortgage Servicing rights (amount above 10% threshold) -

21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) -

22 Amount exceeding the 15% threshold -

23 Of which: significant investments in the common stock of financials -

24 Of which: mortgage servicing rights -

25 Of which: deferred tax assets arising from temporary differences -

26 National specific regulatory adjustments REGULATORY ADJUSTMENTS APPLIED TO COMMON EQUITY TIER 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT

-

Of which: [INSERT NAME OF ADJUSTMENT] -



27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions

-

28 Total regulatory adjustments to Common equity Tier 1 2,213

29 Common Equity Tier 1 capital (CET1) 329,018

STA

TEM

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T O

N M

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F A

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AN

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(MA

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317

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387

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13,5

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7467

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67,8

7167

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271,

48

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me

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8,22

679

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188,

923

252,

136

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RO ’000Tier 2 capital: regulatory adjustments

52 Investments in own Tier 2 instruments -

53 Reciprocal cross-holdings in Tier 2 instruments -

54 Investments in the capital of banking, financial, insurance and Takaful entities that are outside the scope of reg-ulatory consolidation, net of eligible short positions, where the Bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold)

-

55 Significant investments in the capital banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation (net of eligible short positions)

-

56 National specific regulatory adjustments REGULATORY ADJUSTMENTS APPLIED TO TIER 2 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT

-

Of which: [INSERT NAME OF ADJUSTMENT]



57 Total regulatory adjustments to Tier 2 capital -

58 Tier 2 capital (T2) 46,062

59 Total capital (TC = T1 + T2) 575,080

Risk weighted Assets

RISK WEIGHTED ASSETS IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT -




60 Total risk weighted assets (60a+60b+60c) 3,049,912

60a Of which: Credit risk weighted assets 2,714,051

60b Of which: Market risk weighted assets 156,113

60c Of which: Operational risk weighted assets 179,749

Capital Ratios

61 Common Equity Tier 1 (as a percentage of risk weighted assets) 10.79

62 Tier 1 (as a percentage of risk weighted assets) 17.35

63 Total capital (as a percentage of risk weighted assets) 18.86

64 Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus G-SIB/D-SIB buffer requirement expressed as a percentage of risk weighted assets)

9.50%

65 Of which: capital conservation buffer requirement 2.50%

66 Of which: bank specific countercyclical buffer requirement

67 Of which: D-SIB/G-SIB buffer requirement

68 Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets) 3.77

BASEL III COMMON DISCLOSURE TEMPLATE TO BE USED DURING THE TRANSITION OF REGULATORY ADJUSTMENTS (CONTINUED)

RO ’000Additional Tier 1 capital: instruments

30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus 200,000

31 Of which: classified as equity under applicable accounting standards 5 200,000

32 Of which: classified as liabilities under applicable accounting standards 6 -

33 Directly issued capital instruments subject to phase out from Additional Tier 1 -

34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1)

-

35 of which: instruments issued by subsidiaries subject to phase out -

36 Additional Tier 1 capital before regulatory adjustments 200,000

Additional Tier 1 capital: regulatory adjustments

37 Investments in own Additional Tier 1 instruments -

38 Reciprocal cross-holdings in Additional Tier 1 instruments -

39 Investments in the capital of banking, financial, insurance and Takaful entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the Bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold)

-

40 Significant investments in the capital of banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation (net of eligible short positions)

-

41 National specific regulatory adjustments REGULATORY ADJUSTMENTS APPLIED TO ADDITIONAL TIER 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT

-




42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions -

43 Total regulatory adjustments to Additional Tier 1 capital -

44 Additional Tier 1 capital (AT1) 200,000

45 Tier 1 capital (T1 = CET1 + AT1) 529,018

Tier 2 capital: instruments and provision

46 Directly issued qualifying Tier 2 instruments plus related stock surplus

47 Directly issued capital instruments subject to phase out from Tier 2 21,000

48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2)

-


50 Provisions 25,062

51 Tier 2 capital before regulatory adjustments 46,062





Step 1 : RO ‘000

Balance sheet as in published financial

statementsUnder regulatory

scope of consolidation

As at 31 December 2019 As at 31 December 2019

Assets

Cash and balances with Central Bank of Oman 89,572 112,669

Certificates of deposit - -

Due from banks 198,237 175,135

Loans and advances 2,454,153 2,454,153

Investments in securities 637,475 637,475

Loans and advances to banks - -

Property and equipment 41,289 41,289

Deferred tax assets - -

Other assets 84,379 84,384

Total assets 3,505,105 3,505,105

Liabilities

Due to banks 735,261 735,261

Customer deposits 2,097,310 2,097,310

Certificates of deposit 509 509

Current and deferred tax liabilities - -

Other liabilities** 100,524 107,615

Subordinated debts 35,392 35,392

Compulsory convertible bonds - -

Total liabilities 2,968,996 2,976,087

Shareholders' equity

Paid-up share capital 236,360 236,360

Share premium 19,942 19,942

Legal reserve 28,519 28,519

General reserve 988 988

Retained earnings* 38,513 31,422

Cumulative changes in fair value of investments (2,213) (2,213)

Subordinated debt reserve 14,000 14,000

Impairment reserve - -

Special Reserve - -

Perpetual Tier 1 Capital Securities 200,000 200,000

Total shareholders' equity 536,109 529,018

Total liability and shareholders’ funds 3,505,105 3,505,105

* As per IAS 10, Proposed cash dividend of 3% of RO 7.091 Million is included in retained earnings in the financial statement

** Proposed cash dividend of RO 7.091 Million included in Other liabilities for regulatory scope of consolidation

Proposed cash dividend 7,091

0

RECONCILIATION TEMPLATE AS AT DECEMBER 2019

RO ’000

National minima (if different from Basel III)

69 National Common Equity Tier 1 minimum ratio (if different from Basel III minimum) 7.000

70 National Tier 1 minimum ratio (if different from Basel III minimum) 9.000

71 National total capital minimum ratio (if different from Basel III minimum) 13.500

Amounts below the thresholds for deduction (before risk weighting)

72 Non-significant investments in the capital of other financials -

73 Significant investments in the common stock of financials -

74 Mortgage servicing rights (net of related tax liability) -

75 Deferred tax assets arising from temporary differences (net of related tax liability) -

Applicable caps on the inclusion of provisions in Tier 2

76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardized approach (prior to application of cap)

25,062

77 Cap on inclusion of provisions in Tier 2 under standardized approach 33,926

78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap)

-

79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approach -

Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2018 and 1 Jan 2022)

80 Current cap on CET1 instruments subject to phase out arrangements -

81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) -

82 Current cap on AT1 instruments subject to phase out arrangements -

83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) -

84 Current cap on T2 instruments subject to phase out arrangements -

85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) -





Step 2 (continued): RO ‘000


statementsUnder regulatory scope

of consolidation Reference


Capital & Liabilities

Paid-up Capital 256,302 256,302

Of which:

Amount eligible for CET1 256,302 256,302

Amount eligible for AT1 200,000 200,000

Reserves & Surplus 79,807 72,716

Out of which

Retained earnings* 38,513 31,422 b

Other Reserves 43,507 43,507

Cumulative changes in fair value of investments (2,213) (2,213)

Out of which:

Losses from fair value of investments - a

Gains from fair value of investments -

Haircut of 55% on Gains -

Total Capital 336,109 329,018

Deposits: 2,097,310 2,097,310

Of which:

Deposits from banks - -

Customer deposits 1,891,800 1,891,800

Deposits of Islamic Banking window 205,510 205,510

Other deposits (please specify) - -

Borrowings 735,770 735,770

Of which: From CBO - -

From banks 735,261 735,261

From other institutions & agencies

509 509

Borrowings in the form of bonds, Debentures and Sukuks - -

Others (Subordinated debt) 35,392 35,392

Other liabilities & provisions** Of which:

100,524 107,615

Out of which: DTLs related to Investments -

Out of which: DTAs related to Investments -

Out of which: DTLs related to Fixed Assets -

DTLs related to goodwill - -

DTLs related to intangible assets - -

TOTAL 3,305,105 3,305,105

*As per IAS 10, Proposed cash dividend of 3% of RO 7.091 Million is included in retained earnings in the financial statements **Proposed cash dividend of RO 7.091 Million included in Other liabilities for regulatory scope of consolidation

RECONCILIATION TEMPLATE AS AT DECEMBER 2019 (CONTINUED)RECONCILIATION TEMPLATE AS AT DECEMBER 2019 (CONTINUED)

Step 2 : RO ‘000





Assets

Cash and balances with CBO 89,572 112,669

Balance with banks and money at call and short notice 198,237 175,135

Investments: 637,475 637,475

Of which Held to Maturity 199,852 199,852

Out of investments in Held to Maturity:

Investments in subsidiaries NA NA

Investments in Associates and Joint Ventures

NA NA

Of which Available for Sale 336,355 336,355

Out of investments in Available for Sale: Investments in Subsidiaries

NA NA

Investments in Associates and Joint Ventures

NA NA

Held for Trading 101,268 101,268

Loans and advances 2,454,153 2,454,153

Of which:

Loans and advances to domestic banks

- -

Loans and advances to non-resident banks

- -

Loans and advances to domestic customers

2,188,619 2,188,619

Loans and advances to non-resident customers for domestic operations

-

Loans and advances to non-resident customers for operations abroad

18,381 18,381

Loans and advances to SMEs 30,564 30,564

Financing from Islamic banking window 216,589 216,589

Fixed assets 41,289 41,289

Other assets Of which:

84,379 84,384

Goodwill and intangible assets Out of which:

Goodwill - -

Other intangibles (excluding MSRs) - -


Goodwill on consolidation - -

Debit balance in Profit & Loss account

- -

Total Assets 3,505,105 3,505,105




MAIN FEATURES TEMPLATE OF CAPITAL INSTRUMENTS AS AT DECEMBER 2019

1 IssuerSOHAR INTERNATIONAL

SOHAR INTERNATIONAL

SOHAR INTERNATIONAL

SOHAR INTERNATIONAL

2Unique identifier (e.g., CUSIP, ISIN or Bloomberg identifier for private placement)

ISIN OM0000003398

3 Governing law(s) of the instrument Regulatory treatment

Banking Law of Oman

Banking Law of Oman/Commercial Companies Law



4 Transitional Basel III rules NA NA NA NA

5 Post-transitional Basel III rules Tier 2 Common Equity Tier 1

Additional Tier 1 Additional Tier 1

6 Eligible at solo/group/group & solo Solo Solo Solo Solo

7 Instrument type (types to be specified by each jurisdiction)

Subordinated Debt

Equity Shares Prepetual Capital Securities

Prepetual Capital Securities

8 Amount recognized in regulatory capital (Currency in mil, as of most recent reporting date)

RO 35.0 RO 236.360 Million

RO 100 Million RO 100 Million

9 Par value of instrument RO 35,000,000/= RO 236.360 Million

RO 100 Million RO 100 Million

10 Accounting classification Liability - amortized cost

Shareholder's Equity



11 Original date of issuance Started issuance from 25 May 2016

3-Jan-07 25-Sep-17 14-Mar-19

12 Perpetual or dated Dated Perpetual Perpetual Perpetual

13 Original maturity date 7 years from date of allotment First maturity on 25 Jul 2023

NA NA NA

14 Issuer call subject to prior supervisory approval

NO NA Yes Yes

15 Optional call date, contingent call dates and redemption amount

Not callable NA First call date i.e., the fifth anniversary from the date of issue, at the Bank's sole discretion or if directed to do so by the CBO at an early redemption amount

First call date i.e., fifth anniversary from the date of issue, at the Bank's sole discretion or if directed to do so by the CBO at an early redemption amount

16 Subsequent call dates, if applicable Not callable NA Every fifth anniversary thereafter after the first call date

Every fifth anniversary thereafter after the first call date

Step 3: RO ‘000

Common Equity Tier 1 capital: instruments and reserves

Component of regulatory capital reported by bank

Source based on reference numbers/letters of the

balance sheet under the regulatory scope of

consolidation from step 2

1 Directly issued qualifying common share (and equivalent for non-joint stock companies) capital plus related stock surplus

256,302

2 Retained earnings 31,422 b


4 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies)

-

5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1)

-

6 Common Equity Tier 1 capital before regulatory adjustments

331,231

7 Prudential valuation adjustments -


9 Losses from fair value of investments (2,213) a

10 DTA related to Investments -


RECONCILIATION TEMPLATE AS AT DECEMBER 2019 (CONTINUED)




BASEL III LEVERAGE RATIO FRAMEWORK AND DISCLOSURE REQUIREMENTS AS AT 31 DECEMBER 2019

RO'000

Table 1: Summary comparison of accounting assets vs leverage ratio exposure measure

(Please refer to paragraph 52 of Basel III leverage ratio framework and disclosure requirements of BCBS issued in January 2014)

ItemCurrent Quarter

Previous Quarter

1 Total consolidated assets as per published financial statements 3,505,105 3,338,397

2 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation

- -

3 Adjustment for fiduciary assets recognized on the balance sheet pursuant to the operative accounting framework but excluded from the leverage ratio exposure measure

- -

4 Adjustments for derivative financial instruments (41) 632

5 Adjustment for securities financing transactions (i.e., repos and similar secured lending) - -

6 Adjustment for off-balance sheet items (i.e., conversion to credit equivalent amounts of off-balance sheet exposures)

140,092 145,217

7 Other adjustments (2,935) (4,459)

8 Leverage ratio exposure 3,642,221 3,479,787

Table 2: Leverage ratio common disclosure template

(Please refer to paragraph 53 of Basel III leverage ratio framework and disclosure requirements of BCBS issued in January 2014)

ItemCurrent Quarter

Previous Quarter

1 On-balance sheet items (excluding derivatives and SFTs, but including collateral) 3,175,148 3,063,755

2 (Asset amounts deducted in determining Basel III Tier 1 capital) (2,213) (2,188)

3 Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of lines 1 and 2) 3,172,935 3,061,567

Derivative Exposures

4 Replacement cost associated with all derivatives transactions (i.e., net of eligible cash variation margin)

- -

5 Add-on amounts for PFE associated with all derivatives transactions - -

6 Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the operative accounting framework

- -

7 (Deductions of receivables assets for cash variation margin provided in derivatives transactions) - -

8 (Exempted CCP leg of client-cleared trade exposures) - -

9 Adjusted effective notional amount of written credit derivatives - -

10 (Adjusted effective notional offsets and add-on deductions for written credit derivatives) - -

11 Total derivative exposures (sum of lines 4 to 10) - -

Securities financing transaction exposures

12 Gross SFT assets (with no recognition of netting), after adjusting for sale accounting transactions 329,998 274,010

13 (Netted amounts of cash payables and cash receivables of gross SFT assets) (804) (1,007)

14 CCR exposure for SFT assets

15 Agent transaction exposures

16 Total securities financing transaction exposures (sum of lines 12 to 15) 329,194 273,003

Other Off-balance sheet exposures

17 Off-balance sheet exposure at gross notional amount 1,448,940 1,127,812

18 (Adjustments for conversion to credit equivalent amounts) (1,308,848) (982,595)

19 Off-balance sheet items (sum of lines 17 and 18) 140,092 145,217

Capital and total exposures

20 Tier 1 capital 529,018 526,081

21 Total exposures (sum of lines 3, 11, 16 and 19) 3,642,221 3,479,787

Leverage Ratio

22 Basel III leverage ratio (%) 14.3 15.1

Coupons/dividendsSOHAR INTERNATIONAL

SOHAR INTERNATIONAL

SOHAR INTERNATIONAL

SOHAR INTERNATIONAL

17 Fixed or floating dividend/coupon Fixed NA Floating coupon Floating coupon

18 Coupon rate and any related index 7.00% p.a. NA 7.75% & every 5 year reset

7.50% & every 5 year reset

19 Existence of a dividend stopper NO NO NO NO

20 Fully discretionary, partially discretionary or mandatory

Mandatory Fully discretionary Fully discretionary, payable out of distributable items

Fully discretionary, payable out of distributable items

21 Existence of step up or other incentive to redeem NO NO NO NO

22 Noncumulative or cumulative Noncumulative Noncumulative Noncumulative Noncumulative

23 Convertible or non-convertible Nonconvertible Non-convertible Non-convertible Non-convertible

24 If convertible, conversion trigger(s) NA NA NA NA

25 If convertible, fully or partially NA NA NA NA

26 If convertible, conversion rate NA NA NA NA

27 If convertible, mandatory or optional conversion NA NA NA NA

28 If convertible, specify instrument type convertible into

NA NA NA NA

29 If convertible, specify issuer of instrument it converts into

NA NA NA NA

30 Write-down feature NO NO NO NO

31 If write-down, write-down trigger(s) NA NA NA NA

32 If write-down, full or partial NA NA NA NA

33 If write-down, permanent or temporary NA NA NA NA

34 If temporary write-down, description of write-up mechanism

NA NA NA NA

35 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument)

Subordinated to all Senior liabilities. Currently, subordinated to fixed deposits

Subordinated to the Compulsorily Convertible bonds issued by the Bank

Subordinated to the Compulsorily Convertible bonds issued by the Bank & subordinated loans

Subordinated to the Compulsorily Convertible bonds issued by the Bank & subordinated loans

36 Non-compliant transitioned features NO NO NO NO

37 If yes, specify non-compliant features NA NA NA NA

MAIN FEATURES TEMPLATE OF CAPITAL INSTRUMENTS AS AT DECEMBER 2019 (CONTINUED)




NSFR DISCLOSURES AS AT 31 DECEMBER 2019

RO ’000

Unweighted value by residual maturityASF Item

No < 6 6 months ≥ 1yr Weightedmaturity months to < 1yr value

1 Capital: 575,080 0 0 - 575,080 2 Regulatory capital 529,018 529,018 3 Other capital instruments 46,062 46,062

4Retail deposits and deposits from small business customers

343,322 1,522 25,889 0 335,349

Business customers:5 Stable deposits 29,943 421 3,443 - 32,117 6 Less stable deposits 313,379 1,101 22,445 - 303,233 7 Wholesale funding: 28,751 784,976 411,625 0 612,676 8 Operational deposits9 Other wholesale funding 28,751 784,976 411,625 - 612,676

10 Liabilities with matching interdependent assets11 Other liabilities: 267,575 557,506 688,887

12 NSFR derivative liabilities13 All other liabilities and equity not

included in above categories - - 267,575 557,506 688,887

14 Total ASF 2,211,993

RSF Item 15 Total NSFR high-quality liquid assets (HQLA) 12780.7512516 Deposits held at other financial

institutions for operational purposes 12,181 0 0 0 6,091

17 Performing loans and securities: 34,046 9,529 327,708 446,241 523,390 18 Performing loans to financial institutions secured

by Level 1 HQLA - - - - -

19 Performing loans to financial institutions secured by non- Level 1 HQLA and unsecured performing loans to financial institutions

- - 36,750 - 18,375

20 Performing loans to non-financial corporate clients,loans to retail and small busi-ness customers, and loans to sovereigns, central banks and PSEs, of which

13,556 5,284 286,929 - 152,282

21 -With a risk weight of less than or equal to 35% under the Basel II Standardized approach for credit risk

- - - 633 412

22 Performing residential mortgages, of which: - 4,245 4,029 445,608 334,905 23 With a risk weight of less than or equal to 35%

under the Basel II Standardized Approach for credit risk

- 4,245 4,029 445,608 334,905

24 Securities that are not in default and do not qualify as HQLA, including exchange-traded equities

20,490 - - - 17,416

25 Assets with matching interdependent liabilities 26 Other Assets: 1,860 - 1,704,212 1,474,511 27 Physical traded commodities, including gold 28 Assets posted as initial margin for

derivative contracts and contributions to default funds of CCPs

29 NSFR derivative assets 30 NSFR derivative liabilities before

deduction of variation margin posted 31 All other assets not included in the above cate-

gories 1,860 - 2,815 1,704,212 1,474,511

32 Off-balance sheet items 4,531 762,794 77,015 42,204 33 TOTAL RSF 2,058,976 34 NET STABLE FUNDING RATIO (%) 107.43

LCR COMMON DISCLOSURE TEMPLATE FOR THE QUARTER OCTOBER - DECEMBER 2019

RO ’000

Total Unweighted

Value (average)

Total Weighted

Value (average)

High Quality Liquid Assets

1 Total High Quality Liquid Assets (HQLA) 360,051

Cash Outflows

2 Retail deposits and deposits from small business customers, of which: 319,008 29,680

3 Stable deposits 32,531 1,033

4 Less stable deposits 286,477 28,648

5 Unsecured wholesale funding, of which: 926,585 457,672

6 Operational deposits (all counterparties) and deposits in networks of cooperative banks - -

7 Non-operational deposits (all counterparties) 926,585 457,672

8 Unsecured debt - -

9 Secured wholesale funding -

10 Additional requirements, of which 43,436 3,788

11 Outflows related to derivative exposures and other collateral requirements - -

12 Outflows related to loss of funding on debt products - -

13 Credit and liquidity facilities 43,436 3,788

14 Other contractual funding obligations 15,710 15,710

15 Other contingent funding obligations 861,973 43,099

16 TOTAL CASH OUTFLOWS 549,949

Cash Inflows

17 Secured lending (e.g. reverse repos) - -

18 Inflows from fully performing exposures 456,336 316,994

19 Other cash inflows 109,772 1,367

20 TOTAL CASH INFLOWS 566,107 318,361

Total Adjusted Value

21 TOTAL HQLA 360,051

22 TOTAL NET CASH OUTFLOWS 231,587.82

23 LIQUIDITY COVERAGE RATIO (%) 155.47




SOHARISLAMIC-

U P H O L D I N G I S L A M I C VA LU E S-




Sh. Azzan Nasser Al AmriMember

Dr. Mudassir SiddiquiDeputy Chairman

Sh. Fahad Mohammed Al KhaliliMember

Left to Right

Dr.Hussain HamedChairman

SOHAR ISLAMIC SHARI’AHSUPERVISORY BOARD

-


THE SHARI’AH SUPERVISORY BOARD BELIEVES THAT:

1. Contracts, operations and transactions conducted by the Bank throughout the year ending 31 December 2019 were in accordance with the standard contracts pre-approved by the Shari’ah Supervisory Board.

2. The distribution of profit on investment accounts was in compliance with the basis and principles approved by the Shari’ah Supervisory Board.

3. The audit did not show any gains resulting from sources or means prohibited by the provisions and principles of Islamic Shari’ah. As such there was no need to direct any amount to the Charity and Donations Account according to SSB’s resolution.

4. The Shari’ah Supervisory Board created, developed, reviewed and approved all products, financing structures and contracts of transactions that were presented to them.

Dr. Hussein Hamid HassanChairman

Dr. Muddassir Hussain SiddiquiDeputy Chairman

Sheikh Azzan Bin Nasir Bin Furfur Al AamriMember

Sheikh Fahad Mohammed Hilal Al KhaliliMember

Muscat, Sultanate of Oman

SHARI'AH SUPERVISORY BOARD 2019

بسم اهلل الَرحمن الَرحيم

الحمدهلل رب العالمين

والَصالة والَسالم على رسوله الكريم،،، أما بعد

In The Name of Allah, most Gracious, most Merciful.

Peace and Blessings Be Upon His Messenger.

To the shareholders of Sohar Islamic,

Sohar International S.A.O.G (“The Bank”)

السالم عليكم ورحمة اهلل وبركاته

Pursuant to the powers entrusted by the Charter of the Bank and the terms of the appointment of the Shari’ah Supervisory Board, we hereby submit the following Annual Shari’ah report:

The Shari’ah Supervisory Board monitored the operations of the Bank between the period of 1 January 2019 and 31 December 2019, to ascertain the Bank’s adherence to the provisions and principles of Islamic Shari’ah as expounded by the Shari’ah Supervisory Board. The Shari’ah Supervisory Board’s monitoring function included the checking of documents and procedures to scrutinize operations carried out by the Bank, either directly or through the Shari’ah Audit Unit. We planned with the Shari’ah Audit Unit to carry out monitoring functions by obtaining all the information and clarifications that were deemed necessary to confirm that the Bank did not violate the principles and provisions of Islamic Shari’ah as elaborated by the Shari’ah Supervisory Board. The Shari’ah Audit Unit audited the Bank’s transactions and submitted a report to the Shari’ah Supervisory Board. The report confirmed the Bank’s commitment and conformity to the Shari’ah Supervisory Board’s opinions. It held several meetings throughout the year ended 31 December 2019 and replied to the inquiries, in addition to approving investment opportunities presented by the Management.

SHARI'AH SUPERVISORY BOARD 2019


LIST OF FATWAS 2019

Period Fatwa Reference No. Fatwa Details

Q1 3/1/2019

Wakala Working Capital Product

Problem Statement:

The SSB members were sent the documentation for the Wakala Working Capital product which included:

1. Product documentation 2. Product Program 3. Master Wakala Agreement 4. Product Program

Resolution:

The SSB having reviewed the structure, mechanism and documentation ruled that the proposed Wakala Working Capital Product was in compliance with the principles of Shari’ah.

Q1 4/1/2019

Charging Advance Rentals Under Istisna Financing

Problem Statement:

Could advance rental be charged under Istisna financing and can this payment be treated as the Bank’s income?

Resolution:

There is consensus amongst the Shari’ah scholars that rent can be charged in advance before the delivery of an asset and its usufruct. Similarly, if an agreement is reached between the lessor and lessee on advance payment of Ijarah in whole or part, or after the Ijarah period or during the Ijarah period, then this permissible.

If the asset is not delivered to the lessee, then the lessor would have to give back any advance rent that was taken, because under Ijarah principles, the lessor has to deliver usufruct to the lessee.

The timing of the payment of rent in a lease contract may be left to the mutual agreement of the lessor and lessee. This opinion is based on the well-established principles of the Shari’ah.

المسلمون على شروطهم إال شرطا أحل حراما أو حرم حالال - األصل في المعامالت اإلباحة

The lessor, under the contract, has received funds from the customer as advance rent on the condition that he will deliver the property at an agreed time. As such, the advance payment is similar to ‘Arbun, a conditional payment. It’s not an absolute income to the lessor, until the delivery of the counter-value is made - which is the usufruct of the asset.

To analogize, this is similar to a Waqf endowment on many levels - for example, a Waqif (a person who gives Waqf) gives an asset as Waqf on the condition that the trustee rents out the asset for a long period and the rental proceeds go to the children and grandchildren of the Waqif. In some cases, the grandchildren may not even be born but they will receive a share of the Ijarah proceeds.

In some cases, the Ijarah contract is executed and the Ijarah payment is made in advance. However, later the Ijarah contract is terminated. In this scenario, the lessor will give back the rental payment for the period that the usufruct was not consumed.

If the lessor fails to deliver the asset at the agreed time, he must return the advance payment to the customer as the advance payment only belongs to the lessor on condition of delivery of the asset’s usufruct.

LIST OF FATWAS 2019


Q1 1/1/2019

Profit distribution for December 2018, January, February and March 2019

Problem Statement:

Profit distribution for December 2018, January, February and March 2019 was sent to the SSB members.

Resolution:

The profit distribution for December 2018, January, February and March 2019 were reviewed and approved by the SSB who confirmed that it was in line with the approved SSB guidance.

Q1 2/1/2019

Mudaraba Financing

Problem Statement:

The SSB members were sent the documentation for the Mudaraba product which included:

1. Master Mudaraba Agreement 2. Product Policy Document 3. Procedures Document 4. Business monitoring sheet

Resolution:

The Mudaraba product documentations were approved based on the following confirmation:

The Mudaraba financing will be a standalone facility and not linked to another facility.

The Mudaraba agreement that Sohar Islamic enters into with the client will be accorded within the AAOIFI guidelines.

In this Mudaraba financing, the client (Mudarib) will be given a limit from which he can withdraw any amount whenever he requires and he can return any amount whenever it’s not required.

The Bank will calculate the Customer’s utility of funds in light of the overall business’ profitability. The Mudarib is permitted to mix his own current asset to the Mudaraba capital. The total capital used for the Mudaraba should be known from the outset.

Cost of sales will be deducted from the business turnover, giving a gross profit amount. The gross profit of the business will be distributed at two levels:

1- The capital participation level: based on the amount of capital provided by both parties.

2- The Mudaraba level: based on the expected profit rate.

The SSB reviewed the product structure, mechanism and documentation, and opined that it was in compliance with the principles of Shari’ah.


LIST OF FATWAS 2019


Q2 7/2/2019

Calculation of Profit Under The Wakala Financing Product

Problem Statement:

Is profit under the Wakala mode of financing calculated on gross or net basis? What are the challenges faced by Islamic financial institutions in calculating the profit on net basis?

Sohar Islamic management conveyed to the SSB the practical challenges in implementing calculation of Wakala profits on net basis namely:

1. Calculating profit on net basis makes the contract one-sided, in which the Wakil (customer) can potentially make substantial profits, whilst all the credit risks are borne by the Bank.

2. Net profit calculation means the Wakil can potentially deduct any costs, including inter alia; costs attributable to: financing, fixed assets, payroll, administration, marketing, asset depreciation and taxes etc., leaving very little to share with the Muwakkil. Gross profit calculation will minimize potential misconduct, fraud and “the agency problem”.

Resolution:

The views of the SSB members received were as follows:

Chairman: As for Mudaraba, the calculation of profits should be on net profit and not gross profit, because gross basis profit calculation may lead to all the profit going to the Rabulmaal that is prohibited in Shari’ah.

As for Wakala, the Muwakkil is entitled to calculate on gross profit if the Wakeel agrees.

Deputy Chairman: The basic Shari’ah rule is what has been laid down by the HSSA of the Central Bank of Oman (CBO) that profit should be calculated on net basis in Wakala financing. However, the Bank’s management has practical issues in implementing profit calculation on net basis as stated above and those should be conveyed to the CBO to gauge whether there would be any flexibility on the matter.

In view of the difficulties faced by the Bank’s management in calculating Wakala profit on net basis, the parties should agree on a gross basis profit calculation. As long as expenses are fair, reasonable and specific and pre-agreed by the Muwakkil, operating expenses are allowed to be deducted from the gross profits.

An SSB member was of the opinion that Wakala profit should be calculated on net basis and not gross profit basis, as net profit calculation is more just and fair for both parties and God knows best.

The SSB members were unanimous that the fatwa issued from the HSSA on the subject was obligatory to implement (calculating Wakala profit on net profit basis).

It was not the place for the SSB of any bank to overrule the fatwa of the HSSA. In light of this, the Deputy Chairman suggested in addition to his opinion on the subject, to have our financing contracts tightly worded to specifically include all the types of operating expenses the Wakil may deduct from his gross profit and to share any details of expenses he would incur with the Muwakkil prior to making them. In this way, the Bank’s interest could be safeguarded and implementation of the fatwa could be maintained.

LIST OF FATWAS 2019


Q1 5/1/2019

Prize Draw Scheme Product Manual & Fatwa

Problem Statement:

The SSB members were requested to opine on the documentation for the Prize Draw Scheme Product which included the following:

1- Special Conditions 2- Product Manual

Resolution:

The SSB having reviewed the structure, mechanism and documentation as set out above, ruled that the proposed Mudaraba financing product is in compliance with principles of Shari’ah.

More specifically, the prize will be available only for customers that open this type of Mudaraba savings account. Furthermore, this product will have its own product code and the Customer will have to actively “opt in” to the features of this product by signing the special terms and conditions.

The Customer would be entitled to participate and receive the cash prize if his/her name is picked through a draw. The SSB opinion included that the Rabulmaal cannot stipulate capital guarantee (capital is guaranteed only in case of Mudarib’s fraud, negligence, misconduct or breach of contractual terms). Similarly, the prohibition of capital guarantee in Mudaraba prohibits a Mudarib to guarantee a gift to the Rabulmaal and a capital guarantee or a gift would nullify the Mudaraba contract.

The gift expenses would come from the funds of the shareholders and would not be expensed to other depositors.

The prize draw scheme and the profit entitlement in the Mudaraba are two separate and independent contracts. One is an opportunity (not guarantee) entitling the customer a cash reward as a result of his name appearing on the draw and the other is based on his agreed share in actual profit generated by an Islamic Mudaraba between him and the Bank.

Q2 6/2/2019

Profit distribution for April, May and June 2019

Problem Statement:

Profit distribution details for April, May and June 2019 were shared with the SSB for review.

Resolution:

The profit distribution for April, May and June 2019 was reviewed and approved by the SSB, who confirmed that it was made in line with the approved SSB guidance.

Sohar International 2019 191Sohar International 2019190

LIST OF FATWAS 2019


Q3 8/3/2019

Profit distribution for July, August and September 2019.

Problem Statement:

Profit distribution for July, August and September 2019 was sent to the SSB members.

Resolution:

The profit distribution for July, August, September 2019 were reviewed and approved by SSB. Furthermore, the SSB confirmed that profit distribution was in line with SSB opinion.

Q3 9/3/2019

Profit distribution for July, August and September 2019.

Making Hiba Payments to select depositors under Mudaraba and Wakala saving schemes.

Problem Statement:

Can Hiba be paid to certain depositors on a continuous basis under Mudaraba and Wakala saving schemes?

Resolution:

The SSB responded as follows:

Hiba is given on a continuous basis by the Bank from its own wealth and not from the share of other depositors. The Bank is well within its rights to distribute its wealth as it wishes.

If the Hiba is contractual then this is not permissible, similarly, the continuous practice of giving Hiba makes it common knowledge and like contractual and hence Hiba should not be given on a continuous basis to the point that it is understood that the expected rate becomes the guaranteed actual profit rate given to the customer from the Bank.

The CBO would have final say in the matter, however, the management should convey to the CBO that such practices are necessary to attract deposits of large size and long tenors otherwise these deposits would go elsewhere.

Q3 10/3/2019

Sohar Islamic Customers Using Parent Banks’ cash deposit machines (CDMs) and vice versa.

Problem Statement:

Is it permissible from a Shari’ah perspective for Sohar Islamic customers to use the parent Bank’s (Sohar International) CDM and Sohar International customers use Sohar Islamic’s CDM?

Resolution:

The SSB members had the following opinion:

The Chairman opined that there was no Shari’ah issue in Sohar Islamic customers using the Sohar International’s CDMs and vice versa.

The Deputy Chairman held the same opinion as the Chairman of the SSB. One SSB Member approved of Sohar Islamic customers using Sohar International’s CDMs, but had reservations on Sohar International customers using Sohar Islamic CDMs and recused himself from approving Sohar International customers using Islamic CDMs.

The majority view of the SSB was to approve Sohar Islamic customers to use Sohar International CDMs and vice versa, subject to the necessary regulatory approval.



FINANCIAL STATEMENTSSOHAR ISLAMIC

- CO N T I N U I N G T H E W I N N I N G J O U R N E Y TO G E T H E R-


The accompanying notes A1 to D8 form part of these financial statements.

STATEMENT OF FINANCIAL POSITIONAS AT 31 DECEMBER 2019

31 December2019

RO’000

31 December2018

RO’000

Note

ASSETS

Cash and balances with Central Bank B 1 11,990 8,737

Due from banks and financial institutions B 2 5,284 9,830

Murabaha receivables B 3A 13,366 13,360

Ijarah muntahia bittamleek B 3B 71,097 57,049

Istisna followed by Ijarah muntahia bittamleek B 3C 85,253 73,904

Diminishing Musharka B 3D 42,269 35,311

Investment securities B 4 23,423 20,944Property, equipment and fixture B 5 1,095 1,126Other assets B 6 3,534 2,404

TOTAL ASSETS 257,311 222,665 ══════ ══════

LIABILITIES

Wakala deposits B 7 174,426 133,376

Customer deposit and other accounts B 8 17,485 19,168

Other liabilities B 9 2,223 1,655

TOTAL LIABILITIES 194,134 154,199

EQUITY OF INVESTMENT ACCOUNT HOLDERS B 10 29,187 40,984

EQUITY

Assigned capital B 11 (a) 30,000 25,000

Legal reserve B 11 (b) 134 134

General reserve B 11 (c) 988 988

Impairment reserve B 11 (d) 602 -

Retained earnings 2,266 1,360

TOTAL OWNERS’ EQUITY 33,990 27,482

TOTAL LIABILITIES, EQUITY OF INVESTMENT ACCOUNT HOLDERS AND OWNERS’ EQUITY 257,311 222,665 ══════ ══════

CONTINGENT LIABILITIES B12.1 34,542 32,301

COMMITMENTS B12.2 4,093 1,045

These financial statements were approved and authorized for issue by the Board of Directors on 27 January 2020 and signed on their behalf by:

____________________________ ____________________________

Chairman Board member


STATEMENT OF OWNERS’ EQUITYFOR THE YEAR ENDED 31 DECEMBER 2019

NoteAllocated

capitalRO’000

Legal reserve

RO’000

General reserve

RO’000

Impairment reserve

RO’000

Retained earningsRO’000

TotalRO’000

As at 1 January 2019 25,000 134 988 - 1,360 27,482

Capital allocated during the year B 11 (a) 5,000 - - - - 5,000

Transfer to Impairment reserve during the year - - - 602 (602) -

Profit for the year - - - - 1,508 1,508

As at 31 December 2019 30,000 134 988 602 2,266 33,990 ══════ ══════ ══════ ══════ ══════ ══════

NoteAllocated

capitalRO’000

Legal reserve

RO’000

General reserve

RO’000

Impairment reserve

RO’000

Retained earningsRO’000

TotalRO’000

As at 1 January 2018 21,000 134 988 - 897 23,019

Impact of adopting IFRS 9 - - - - (74) (74)

Restated opening balance under IFRS 9 21,000 134 988 - 823 22,945

Capital allocated during the year B 11 (a) 4,000 - - - 4,000

Profit for the year - - - - 537 537

As at 31 December 2018 25,000 134 988 - 1,360 27,482 ══════ ══════ ══════ ══════ ══════ ══════


STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2019

31 December2019

RO’000

31 December2018

RO’000

Note

Income from jointly financed financing activities and receivables C 1 3,125 2,252

Return on unrestricted investment account holders C3 (771) (744)

Share of income (as Mudarib and Rabulmaal) 2,354 1,508

Income from self-financed financing activities C 1 7,688 6,184

Income from self-financed investing activities C 2 1,591 1,135

INCOME FROM FINANCING, INVESTMENTS AND RECEIVABLES 11,633 8,827

Return on due to under Wakala contracts C3 (5,779) (4,170)

NET REVENUE FROM FINANCING AND INVESTING ACTIVITIES 5,854 4,657

Foreign exchange gain – net 236 360

Other income C4 872 263

TOTAL REVENUES 6,962 5,280

Staff costs (2,256) (1,891)

Other operating expenses C 5 (2,237) (1,441)

Depreciation B 5 (297) (293)

TOTAL EXPENSES (4,790) (3,625)

OPERATING PROFIT BEFORE IMPAIRMENT AND INCOME TAX ALLOCATION 2,172 1,655

Expected credit loss on investment securities B 4 (9) (21)

Expected credit loss on due from banks and financial institutions B 2 15 (10)

Expected credit loss on financing advances and other receivables B 3 (336) (986)

Expected credit loss on financing advance commitments and financial guarantees B 9 (68) (6)

PROFIT FOR THE YEAR BEFORE TAX 1,774 632

TAX ALLOCATED FROM HEAD OFFICE (266) (95)

PROFIT AND TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,508 537 ══════ ══════



A1 INCORPORATION, LEGAL STATUS AND PRINCIPAL ACTIVITIES

Sohar International Bank SAOG (the Head office) (previously Bank Sohar SAOG) under an Islamic Banking License issued by the Central Bank of Oman (CBO) on 30 April 2013, carries out Islamic banking operations and other financial trading activities in accordance with Islamic Shari’ah rules and regulations under the name of “Sohar Islamic” (the Window). The Bank’s Shari’ah Supervisory Board is entrusted to ensure the Window’s adherence to Shari’ah rules and principles in its transactions and activities. As required under clauses 3.5.1.2 and 3.5.1.3 of Title 1, ’Licensing Requirements’ of Islamic Banking Regulatory Framework (IBRF) issued by CBO, the head office assigned RO 30 million (refer note B11a) to the Window as assigned capital.

The Window has not operated as a separate legal entity. The separate financial statements of the Window have been prepared to comply with the requirement of Articles 1.5.1.2 to 1.5.1.4 of Title 2 ‘General Obligations and Governance’ of IBRF issued by CBO.

The Window offers a full range of Islamic banking services and products. The principal activities of the Window include accepting Shari’ah-compliant customer deposits, providing Shari’ah-compliant financing and undertaking investment activities and providing commercial banking services and other investment activities permitted under IBRF.

A2 BASIS OF PREPARATION

A2.1 Statement of compliance

The financial statements for the Window are prepared in accordance with the Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Islamic Shari’ah rules and principles as determined by the Shari’ah Supervisory Board of the Window and Islamic Banking Regulatory Framework issued by CBO. In accordance with the requirement of AAOIFI, for matters not covered by FAS, the Window uses standards issued by the International Accounting Standards Board (IASB) and the interpretations released by the International Financial Reporting Interpretations Committee and will be replaced later by FAS when an applicable FAS is issued.

Statement of sources and uses of charity fund are not presented as these are not applicable.

A2.2 Basis of measurement

The financial statements have been prepared under the historical cost basis except for derivative financial instruments and investments which have been measured at fair value. These financial statements are presented in Rial Omani, which is the Window’s functional currency. All financial information presented in Rial Omani has been rounded off to the nearest thousands.

A2.3 Use of Judgments and estimates

In preparation of the Bank’s financial statements, management is required to make certain estimates and assumptions that affect the reported amount of financial assets and liabilities and the resultant allowances for impairment and fair values. In particular, considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowances required for impaired financing and receivables as well as allowances for impairment provision for unquoted investment securities. Estimates and judgments are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on a regular basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Estimates considered by the Bank to have a significant risk of material adjustment in subsequent periods are discussed in notes .

Impairment provisions against financing contracts with customers

The Window reviews its financing contracts at each reporting date to assess whether an impairment provision should be recorded in the financial statements. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provision required. Such estimates are based on assumptions about factors involving varying degrees of judgment and uncertainty and actual results may differ resulting in future changes to the provisions.

In addition to specific provisions against individually significant financing contracts, the Window also makes collective impairment provision against exposures which, although not specifically identified as requiring a specific provision, have a greater risk of default than when originally granted. This takes into consideration, factors such as any deterioration in country risk, industry, and technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows.

Classification of investments

Management decides upon acquisition of an investment whether it should be classified as fair value through statement of income, fair value through equity or at amortized cost.

NOTES TO FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2019


STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2019

31 December2019

RO’000

31 December2018

RO’000

CASH FLOWS FROM OPERATING ACTIVITIES

Profit before taxation 1,774 632

Adjustments for:

Depreciation 297 293

Net impairment loss on financing assets 398 1,023

Loss on disposal of fixed assets - 7

Income on investments (1,237) (930)

Operating profit before changes in operating assets and liabilities 1,232 1,025

Changes in operating assets and liabilities

Due from banks and Wakala placement (28) -

Murabaha receivables (40) (996)

Ijarah muntahia bittamleek (13,919) (2,788)

Istisna followed by Ijarah muntahia bittamleek (11,412) (33,075)

Diminishing Musharka (7,145) 984

Wakala deposits 42,978 12,212

Customer deposit and other accounts (1,683) (668)

Other assets (1,577) (537)

Other liabilities 499 698

Income tax paid - (112)

Net cash from / (used in) operating activities 8,905 (23,257)

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition of fixed assets (266) (380)

Disposal of fixed assets - 50

Income received on Investments 1,469 644

Disposal of Investments - 8,000

Acquisition of Investments (2,691) (12,899)

Net cash from / (used) in investing activities (1,488) (4,585)

CASH FLOWS FROM FINANCING ACTIVITIES

Changes in Unrestricted Investment Account Holders (URIA) (11,797) 6,517

Capital allocated during the year 5,000 4,000

Net cash (used in) / from financing activities (6,797) 10,517

NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS 620 (17,325)

CASH AND CASH EQUIVALENT AT BEGINNING OF THE YEAR 5,879 23,204

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 6,499 5,879 ══════ ══════

REPRESENTING:

Cash and balances with Central Bank 11,990 8,737

Due from banks and financial institutions 5,285 9,845

Wakala deposits from banks (10,776) (12,703)

6,499 5,879 ══════ ══════





A2.4 New standards, interpretations and amendments (continued)

A2.4.d FAS 35 Risk Reserves

AAOIFI has issued FAS 35 “Risk Reserves” in 2018. This standard along with FAS 30 ‘Impairment, Credit losses and onerous commitments’ supersede the earlier FAS 11 “Provisions and reserves”.

The objective of this standard is to establish the principles of accounting and financial reporting for risk reserves established to mitigate various risks faced by stakeholders, mainly the profit and loss taking investors, of Islamic financial institutions (IFIs/ the institutions). This standard shall be effective for the financial periods beginning on or after 1 January 2021 with early adoption permitted only if the bank early adopts FAS 30 “Impairment, Credit losses and onerous commitments”.

The Window is currently evaluating the impact of this standard but does not foresee any material impact.

A2.4.e FAS 30 Impairment, Credit losses and onerous commitments

In November 2017, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) issued Financial Accounting Standard (FAS) 30 - Impairment, credit losses and onerous commitments, the standard supersedes the earlier FAS 11 “Provisions and Reserves” effective from the financial periods beginning on or after 1 January 2020, with early adoption permitted.

However, during the year 2017, the CBO had issued a circular BM 1149 dated 13 April 2017 governing implementation of IFRS 9 Financial Instruments (IFRS 9) for all the banks, which also apply to Islamic banks/windows subject to any specific instructions by the Central Bank for Islamic Banking entities on IFRS 9 if, as and when instructions are issued.

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


A2.4.f FAS 32 “Ijarah”

FAS 32 (which supersedes earlier FAS 8) on Ijarah improves the existing treatments in line with the global best practices. It set out principles for the classification, recognition, measurement, presentation and disclosures of Ijarah transactions including their different forms entered into by the Islamic financial institutions in the capacity of both the lessor and lessee. This standard brings a fundamental shift in the accounting approach for Ijarah transactions, particularly, in the hand of the lessee in contrast to the earlier approach of the off-balance sheet accounting for Ijarah. It is effective for period starting 1 January 2021 with early adoption permitted.


A2.4.g FAS 33 “Investments in Sukuk, Shares and Similar Instruments”

FAS 33 (which supersedes earlier FAS 25) sets out the improved principles for classification, recognition, measurement, presentation and disclosure of investment in Sukuk, shares and other similar instruments of investments made by Islamic financial institutions (IFIs/the institutions), in line with Shari’ah principles. It defines the key types of instruments of Shari’ah-compliant investments and defines the primary accounting treatments commensurate to the characteristics and business model of the institution under which the investments are made, managed and held. This standard shall be effective from the financial periods beginning on 1 January 2020.



A2.3 Use of Judgments and estimates (continued)

Liquidity

The Window manages its liquidity through consideration of the maturity profile of its assets and liabilities which is set out in the liquidity risk disclosures in note D2.2. This requires judgment when determining the maturity of assets and liabilities with no specific maturities.

A2.4 New standards, interpretations and amendments

These financial statements have been prepared using accounting policies, which are consistent with those used in the preparation of the annual financial statements for the year ended 31 December 2019.

Standards issued and effective

A2.4.a FAS 28 Murabaha and Other Deferred Payment Sales

AAOIFI has issued FAS 28 Murabaha and Other Deferred Payment Sales in 2017. FAS 28 supersedes the earlier FAS No. 2 “Murabaha and Murabaha to the Purchase Orderer” and FAS No. 20 “Deferred Payment Sale”. The objective of this standard is to prescribe the appropriate accounting and reporting principles for recognition, measurement and disclosures in relation to Murabaha and other deferred payment sales transactions for the sellers and buyers, for such transactions. This standard is effective for the current financial periods beginning 1 January 2019.

The Window has adopted the standard and there is no material impact of this standard.

A2.4.b Adoption of IFRS 16 Leases

The Bank for the first time has applied IFRS 16 Leases (as issued by the IASB in January 2016) as of 1 January 2019, the same date as the effective date of the standard. IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to the lease accounting by removing the distinction between operating and finance leases. It requires the recognition of a right-to-use asset and a lease liability at the commencement date for all leases, except for short-term leases (i.e., leases with a lease term of 12 months or less) and leases of ’low-value’ assets (e.g., personal computers). In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged.

Impact on Lessee Accounting:

The management has opt to use a “Cumulative catch-up approach” which requires calculating outstanding lease liabilities for existing operating leases using incremental borrowing rate at date of transition and carry forward existing finance lease liabilities and measure asset at an amount equal to liability adjusted for any accruals or prepayments with no effect on the opening retained earnings on transition. Adopting IFRS 16 as of 1 January 2019, the Bank has:

Recognized right-to-use assets and lease liabilities in the statement of financial position, initially measured at the present value of future lease payments measured at the incremental borrowing rate for all existing operating leases as per residual contractual period. Recognized depreciation of right-to-use assets and profit on lease liabilities in the statement of comprehensive income. Both these expenses are included within other operating expenses in the statement of comprehensive income. The Bank excluded all existing operating leases which will be vacated and not renewable under twelve months. For leases which will not be renewed, the Bank has opted to recognize a lease expense on a straight-line-basis as permitted by IFRS 16. This expense is presented within other operating expenses in the statement of comprehensive income.

The adoption of the above did not result in any changes to previously reported net profit or equity of the Bank.

The Bank has recognized RO 1.1 million under right-to-use assets and additional lease liabilities as at 1 January 2019 in the financial statements. The right-to-use assets are reported under Other Assets and Lease Liability is reported as part of Other Liabilities in the statement of financial position.

Standard issued but not yet effective

A2.4.c FAS 31 Investment Agency (Al-Wakala Bi Al-lstithmar)

AAOIFI has issued FAS 31 Investment Agency (Al-Wakala Bi Al-lstithmar) in 2018. The objective of this standard is to establish the principles of accounting and financial reporting for the investment agency (Al-Wakala Bi Al-Istithmar) instruments and the related assets and obligations from both the principal (investor) and the agent perspectives. This standard shall be effective for the financial periods beginning on or after 1 January 2020 with early adoption permitted.

The Window has adopted the standard and there is no material impact of this standard.






A3.3 Financing assets (continued)

Istisna followed by Ijarah muntahia bittamleek

Istisna followed by Ijarah muntahia bittamleek is construction finance product in which property is developed under the Istisna` contract between the customer and the Bank. Banks develops the property and then after completion of construction, the property is leased to customer under the Ijarah muntahia bittamleek contract. During construction, the customer pays the advance rentals.

Salam

In a Salam contract a buyer pays in advance for a specified quantity and quality of a commodity, deliverable on a specific date, at an agreed spot price. Salam is particularly applicable to seasonal agricultural purchases and can be used as a means of financing production. The price is paid at the time of the contract but the delivery would take place at a future date which enables an entrepreneur to sell his output to the Window at a price determined in advance. However, at the time of sale all specifications, quality and quantity of the commodity must be determined to avoid any ambiguity which could become a cause of dispute. Furthermore, date and time of delivery must also be agreed upon but can be changed with mutual consent of the parties. Salam contracts are recognized on the date at which they are originated and are carried at their cost less expected credit loss allowance, if any.

Diminishing Musharakah

In Diminishing Musharakah financing, the Bank enters into Musharakah based on Shirkat-ul-milk for financing an agreed share of fixed asset (e.g. house, land, plant or machinery) with its customers and enters into period profit payment agreement for the utilization of the Bank’s Musharakah share by the customer.

A3.4 Financial instruments – initial recognition

A3.4.a Date of recognition

Financial assets and liabilities, with the exception of financing assets to customers and balances due to customers, are initially recognized on the trade date, i.e., the date that the Bank becomes a party to the contractual provisions of the instrument. This includes regular way trades: purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Financings and advances to customers are recognized when funds are transferred to the customers’ accounts. The Bank recognizes balances due to customers when funds are transferred to the Bank.

A3.4.b Initial measurement of financial instruments

The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments. Financial instruments are initially measured at their fair value (except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from, this amount. Trade receivables are measured at the transaction price. When the fair value of financial instruments at initial recognition differs from the transaction price, the Bank accounts for the Day 1 profit or loss, as described below.

A3.4.c Day 1 profit or loss

When the transaction price of the instrument differs from the fair value at origination and the fair value is based on a valuation technique using only inputs observable in market transactions, the Bank recognizes the difference between the transaction price and fair value in net trading income. In those cases where fair value is based on models for which some of the inputs are not observable, the difference between the transaction price and the fair value is deferred and is only recognized in profit or loss when the inputs become observable, or when the instrument is derecognized.

A3.4.d Measurement categories of financial assets and liabilities

The Bank classifies all of its financial assets based on the business model for managing the assets and the asset’s contractual terms, measured at either:

Amortized cost; FVOCI, fair value through other comprehensive income; or FVTPL, fair value through profit and loss

A3 SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies adopted in the preparation of the financial statements are set out below:

A3.1 Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and balances with Central Bank and placements with banks and financial institutions that mature within three months, less borrowings with banks and financial institutions accounts that mature within three months and restricted balances.

A3.2 Foreign currency transactions

Transactions in foreign currencies are translated into functional currency at the spot exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into the functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for the effective profit and payments during the period, and the amortized cost in the foreign currency translated at the spot exchange rate at the end of the period. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

A3.3 Financing assets

Financing assets comprise Shari’ah-compliant financing provided by the Window with fixed or determinable payments. These include financing provided through Murabaha, Mudaraba, Musharaka, Musawama, Ijarah, Istisna and other modes of Islamic financing. Financing assets are stated at their amortized cost less expected credit loss allowance (if any).

Murabaha

Murabaha receivables are sales on deferred terms. The Window arranges a Murabaha transaction by buying a commodity (which represents the object of the Murabaha) and selling it to the Murabeh (a beneficiary) at a margin of profit over cost. The sales price (cost plus the profit margin) is repaid in instalments by the Murabeh over the agreed period. Murabaha receivables are stated net of deferred profits and expected credit loss allowance (if any). Any promise made by potential Murabeh is considered obligatory.

Mudaraba

Mudaraba is stated at the fair value of consideration given less any expected credit loss allowance.

Mudaraba is a form of partnership between work and capital in which the Window contributes capital. Mudaraba capital provided by the Window at inception in kind (if other than cash) is measured at the fair value of the assets. If the valuation of assets results in difference between fair value and book value, such difference is recognized as profit or loss to the Window.

In case Mudaraba capital is lost or damaged prior to the inception of work without misconduct or negligence on the part of Mudarib, then such losses are deducted from Mudaraba capital and are treated as loss to the Window. In case of termination or liquidation, unpaid portion by Mudarib is recognized as receivable due from Mudarib.

Musharaka

Musharaka contracts represents a partnership between the Window and a customer whereby each party contributes to the capital in equal or varying proportions to establish a new project or share in an existing one, and whereby each of the parties becomes an owner of the capital on a permanent or declining basis and shall share profits or losses. These are stated at the fair value of consideration given less any amounts written off and provision for expected credit loss allowance, if any. In diminishing Musharaka based transactions, the Window enters into a Musharaka based on Shirkat-ul-milk for financing an agreed share of fixed asset (e.g. house, land, plant or machinery) with its customers and enters into period profit payment agreement for the utilization of the Window’s Musharaka share by the customer.

Ijarah muntahia bittamleek

These are initially recorded at cost including initial direct costs. Ijarah muntahia bittamleek is a lease whereby the legal title of the leased asset passes to the lessee at the end of the Ijarah (lease term), provided that all Ijarah installments are settled.

Depreciation is charged on Ijarah muntahia bittamleek assets at rates calculated to write off the cost of each asset over its lease term.

Ijarah income receivables represent outstanding rentals at the end of the year less any expected credit loss allowance. The Ijarah income receivable is classified under other asset.





A3.4 Financial instruments – initial recognition (continued)

A3.4.d Measurement categories of financial assets and liabilities (continued)

(ii) Derivatives recorded at fair value through profit or loss

A derivative is a financial instrument or other contract with all three of the following characteristics:

Its value changes in response to the change in a specified profit rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract (i.e., the ‘underlying’). It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts expected to have a similar response to changes in market factors. It is settled at a future date.

The Bank enters into derivative transactions with various counterparties. These include profit rate swaps, futures, cross-currency swaps, forward foreign exchange contracts and options on profit rates, foreign currencies. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. The notional amount and fair value of such derivatives are disclosed separately in notes. Changes in the fair value of derivatives are included in net trading income unless hedge accounting is applied. Hedge accounting disclosures are provided in notes.

(iii) Embedded derivatives

An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified profit rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract.

With the introduction of IFRS 9, the Bank continues to accounts in this way for derivatives embedded in financial liabilities and non-financial host contracts. Financial assets are, however, classified based on the business model and SPPI assessments as outlined in notes.

(iv) Financial assets or financial liabilities held for trading

The Bank classifies financial assets or financial liabilities as held for trading when they have been purchased or issued primarily for short-term profit making through trading activities or form part of a portfolio of financial instruments that are managed together, for which there is evidence of a recent pattern of short-term profit taking. Held-for-trading assets and liabilities are recorded and measured in the statement of financial position at fair value. Changes in fair value are recognized in net trading income. Profit and dividend income or expense is recorded in net trading income according to the terms of the contract, or when the right to payment has been established.

Included in this classification are debt securities, equities, short positions and customer Financings that have been acquired principally for the purpose of selling or repurchasing in the near term.

(v) Debt instruments at FVOCI

The Bank applies the new category under IFRS 9 of debt instruments measured at FVOCI when both of the following conditions are met:

The instrument is held within a business model, the objective of which is achieved by both collecting contractual cash flows and selling financial assets; and The contractual terms of the financial asset meet the SPPI test.

These instruments largely comprise assets that had previously been classified as financial investments available for sale under IAS 39. FVOCI debt instruments are subsequently measured at fair value with gains and losses arising due to changes in fair value recognized in OCI. Profit income and foreign exchange gains and losses are recognized in profit or loss in the same manner as for financial assets measured at amortized cost as explained in notes. The ECL calculation for Debt instruments at FVOCI is explained in notes where the Bank holds more than one investment in the same security, they are deemed to be disposed of on a first–in first–out basis. On derecognition, cumulative gains or losses previously recognized in OCI are reclassified from OCI to profit or loss.




The Bank classifies and measures its derivative and trading portfolio at FVTPL The Bank may designate financial instruments at FVTPL, if so doing eliminates or significantly reduces measurement or recognition inconsistencies.

(i) Due from banks, financings and advances to customers, financial investments at amortized cost

Due from bank and financings and advances to customers, included non–derivative financial assets with fixed or determinable payments that were not quoted in an active market, other than those:

That the Bank intended to sell immediately or in the near term; That the Bank, upon initial recognition, designated as at FVTPL or as available-for-sale; or For which the Bank may not recover substantially all of its initial investment, other than because of credit deterioration, which were designated as available-for-sale.

The Bank only measures due from banks, financings and advances to customers and other financial investments at amortized cost if both of the following conditions are met:

The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and profit (SPPI) on the principal amount outstanding.

The details of these conditions are outlined below.

Business model assessment

The Bank determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. The Bank’s business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as:

═• How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity’s key management personnel;═• The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed;═• How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected); and═• The expected frequency, value and timing of sales are also important aspects of the Bank’s assessment.

The business model assessment is based on reasonably expected scenarios without taking ‘worst case’ or ‘stress case’ scenarios into account. If cash flows after initial recognition are realized in a way that is different from the Bank’s original expectations, the Bank does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

The SPPI test

As a second step of its classification process the Bank assesses the contractual terms of financial assets to identify whether they meet the SPPI test. ‘Principal’ for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortization of the premium/discount).

The most significant elements of profit within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the Bank applies judgment and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the profit rate is set.

In contrast, contractual terms that introduce a more than the minimum exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and profit on the amount outstanding. In such cases, the financial asset is required to be measured at FVTPL.






A3.4.e Derecognition

(i) Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when:

• The rights to receive cash flows from the asset have expired; or• The Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass–through’ arrangement; and either:

═ • The Bank has transferred substantially all the risks and rewards of the asset; or═ • The Bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass–through arrangement, and has neither transferred nor retained substantially all of the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank’s continuing involvement in the asset. In that case, the Bank also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

(ii) Financial liabilities

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognized in profit or loss.

A3.4.f Offsetting of financial assets and financial liabilities

Financial assets and financial liabilities are only offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and the Bank intends to either settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards or for gains and losses arising from a group of similar transactions.

A3.4.g Impairment of financial assets

(i) Overview of the ECL principles

The Bank has been recording the allowance for expected credit losses for all Financings and other debt financial assets not held at FVPL, together with Financing commitments and financial guarantee contracts, in this section all referred to as ‘financial instruments’. Equity instruments are not subject to impairment under IFRS 9.

The ECL allowance is based on the credit losses expected to arise over the life of the asset (the lifetime expected credit loss or LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 months’ expected credit loss (12mECL). The Bank’s policies for determining if there has been a significant increase in credit risk.

The 12mECL is the portion of LTECLs that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Both LTECLs and 12mECLs are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments.




(vi) Equity instruments at FVOCI

Upon initial recognition, the Bank occasionally elects to irrevocably classify some of its equity investments as equity instruments at FVOCI when they meet the definition of Equity under IAS 32 Financial Instruments: Presentation and are not held for trading. Such classification is determined on an instrument-by-instrument basis.

Gains and losses on these equity instruments are never recycled to profit. Dividends are recognized in profit or loss as other operating income when the right of the payment has been established, except when the Bank benefits from such proceeds as a recovery of part of the cost of the instrument, in which case, such gains are recorded in OCI. Equity instruments at FVOCI are not subject to an impairment assessment.

(vii) Financial assets and financial liabilities at fair value through profit or loss

Financial assets and financial liabilities in this category are those that are not held for trading and have been either designated by management upon initial recognition or are mandatorily required to be measured at fair value under IFRS 9. Management only designates an instrument at FVPL upon initial recognition when one of the following criteria is met. Such designation is determined on an instrument by instrument basis:

The designation eliminates, or significantly reduces, the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis;

The liabilities are part of a group of financial liabilities, which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

The liabilities containing one or more embedded derivatives, unless they do not significantly modify the cash flows that would otherwise be required by the contract, or it is clear with little or no analysis when a similar instrument is first considered that separation of the embedded derivative(s) is prohibited.

Financial assets and financial liabilities at FVTPL are recorded in the statement of financial position at fair value. Changes in fair value are recorded in profit and loss with the exception of movements in fair value of liabilities designated at FVTPL due to changes in the Bank’s own credit risk. Such changes in fair value are recorded in the own credit reserve through OCI and do not get recycled to the profit or loss. Profit earned or incurred on instruments designated at FVTPL is accrued in profit income or profit expense, respectively, using effective rate of return method, taking into account any discount/premium and qualifying transaction costs being an integral part of instrument. Profit earned on assets mandatorily required to be measured at FVTPL is recorded using contractual profit rate. Dividend income from equity instruments measured at FVTPL is recorded in profit or loss as other operating income when the right to the payment has been established.

(viii) Financial guarantees, letters of credit and undrawn Financing commitments

The Bank issues financial guarantees, letters of credit and Financing commitments.

Financial guarantees are initially recognized in the financial statements (within Provisions) at fair value, being the premium received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amount initially recognized less cumulative amortization recognized in the income statement, and under IFRS 9 – an ECL provision as set out in notes. The premium received is recognized in the income statement in net fees and commission income on a straight line basis over the life of the guarantee.

Undrawn Financing commitments and letters of credits are commitments under which, over the duration of the commitment, the Bank is required to provide a Financing with pre-specified terms to the customer.

The nominal contractual value of financial guarantees, letters of credit and undrawn Financing commitments, where the Financing agreed to be provided is on market terms, are not recorded on in the statement of financial position.

The nominal values of these instruments together with the corresponding ECLs are disclosed in notes. The Bank occasionally issues Financing commitments at below market profit rates drawdown. Such commitments are subsequently measured at the higher of the amount of the ECL allowance and the amount initially recognized less, when appropriate, the cumulative amount of income recognized.






A3.4.g Impairment of financial assets (continued)

(ii) The calculation of ECLs (continued)

Impairment losses and releases are accounted for and disclosed separately from modification losses or gains that are accounted for as an adjustment of the financial asset’s gross carrying value.

The mechanics of the ECL method are summarized below:

Stage 1: The 12mECL is calculated as the portion of LTECLs that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date. The Bank calculates the 12mECL allowance based on the expectation of a default occurring in the 12 months following the reporting date. These expected 12-month default probabilities are applied to a forecast EAD and multiplied by the expected LGD and discounted by an approximation to the original effective rate of return method. This calculation is made for each of the four scenarios, as explained above.

Stage 2: When a Financing has shown a significant increase in credit risk since origination, the Bank records an allowance for the LTECLs. The mechanics are similar to those explained above, including the use of multiple scenarios, but PDs and LGDs are estimated over the lifetime of the instrument. The expected cash shortfalls are discounted by an approximation to the original effective rate of return method.

Stage 3: For Financings considered credit-impaired, the Bank recognizes the lifetime expected credit losses for these Financings. The method is similar to that for Stage 2 assets, with the PD set at 100%.

POCI: POCI assets are financial assets that are credit impaired on initial recognition. The Bank only recognizes the cumulative changes in lifetime ECLs since initial recognition, based on a probability-weighting of the four scenarios, discounted by the credit adjusted effective rate of return method.

Financing commitments and letters of credit:

When estimating LTECLs for undrawn Financing commitments, the Bank estimates the expected portion of the Financing commitment that will be drawn down over its expected life. The ECL is then based on the present value of the expected shortfalls in cash flows if the Financing is drawn down, based on a probability weighting of the four scenarios. The expected cash shortfalls are discounted at an approximation to the expected effective rate of return method on the Financing.

Credit cards and revolving facilities: Credit cards and revolving facilities that include both a Financing and an undrawn commitment, ECLs are calculated and presented together with the Financing. For Financing commitments and letters of credit, the ECL is recognized within Provisions.

Financial guarantee contracts: The Bank’s liability under each guarantee is measured at the higher of the amount initially recognized less cumulative amortization recognized in the income statement, and the ECL provision. For this purpose, the Bank estimates ECLs based on the present value of the expected payments to reimburse the holder for a credit loss that it incurs. The shortfalls are discounted by the risk-adjusted profit rate relevant to the exposure. The calculation is made using a probability-weighting of the four scenarios. The ECLs related to financial guarantee contracts are recognized within Provisions.

(iii) Debt instruments measured at fair value through OCI

The ECLs for debt instruments measured at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortized cost is recognized in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. The accumulated loss recognized in OCI is recycled to the profit and loss upon derecognition of the assets.

(iv) Purchased or originated credit impaired financial assets (POCI)

For POCI financial assets, the Bank only recognizes the cumulative changes in LTECL since initial recognition in the loss allowance.




The Bank has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument.

Based on the above process, the Bank groups its Financings into Stage 1, Stage 2, Stage 3 and POCI, as described below:

• Stage 1: When Financings are first recognized, the Bank recognizes an allowance based on 12 month ECLs. Stage 1 Financings also include facilities where the credit risk has improved and the Financing has been reclassified from Stage 2.• Stage 2: When a Financing has shown a significant increase in credit risk since origination, the Bank records an allowance for the LTECLs. Stage 2 Financings also include facilities, where the credit risk has improved and the Financing has been reclassified from Stage 3.• Stage 3: Financings considered credit-impaired. The Bank records an allowance for the LTECLs.

For financial assets for which the Bank has no reasonable expectations of recovering either the entire outstanding amount, or a proportion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) derecognition of the financial asset.

(ii) The calculation of ECLs

The Bank calculates ECLs based on a three probability-weighted scenarios to measure the expected cash shortfalls, discounted at an approximation to the effective rate of return method. A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive.

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

• PD - The Probability of Default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognized and is still in the portfolio. • EAD - The Exposure at Default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and profit, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued profit from missed payments. • LGD - The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the Bank would expect to receive, including from the realization of any collateral. It is usually expressed as a percentage of the EAD.

When estimating the ECLs, the Bank considers four scenarios (a base case, an upside, a mild downside (‘downside 1’) and a more extreme downside (‘downside 2’)). Each of these is associated with different PDs, EADs and LGDs. When relevant, the assessment of multiple scenarios also incorporates how defaulted Financings are expected to be recovered, including the probability that the Financings will cure and the value of collateral or the amount that might be received for selling the asset.

With the exception of credit cards and other revolving facilities, the maximum period for which the credit losses are determined is the contractual life of a financial instrument unless the Bank has the legal right to call it earlier.







(ix) Forborne and modified Financings (continued)

Derecognition decisions and classification between Stage 2 and Stage 3 are determined on a case-by-case basis. If these procedures identify a loss in relation to a Financing, it is disclosed and managed as an impaired Stage 3 forborne asset until it is collected or written off. From 1 January 2018, when the Financing has been renegotiated or modified but not derecognized, the Bank also reassesses whether there has been a significant increase in credit risk. The Bank also considers whether the assets should be classified as Stage 3. Once an asset has been classified as forborne, it will remain forborne for a minimum 12-month probation period. In order for the Financing to be reclassified out of the forborne category, the customer has to meet all of the following criteria:

• All of its facilities has to be considered performing;• Regular payments of more than an insignificant amount of principal or profit have been made during at least half of the probation period;• The customer does not have any contract that is more than 30 days past due.The Bank assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and an impairment loss is incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Bank about the following loss events as well as considering the guidelines issued by the Central Bank of Oman:

• Significant financial difficulty of the issuer or obligor;• A breach of contract, such as a default or delinquency in profit or principal payments;• The Bank granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty, a concession that the lender would not otherwise consider;• It becoming probable that the borrower will enter bankruptcy or other financial reorganization;• The disappearance of an active market for that financial asset because of financial difficulties; or• Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including adverse changes in the payment status of borrowers in the group, or national or local economic conditions that correlate with defaults on the assets in the group.(x) Assets carried at amortized cost

The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on Financings and receivables or held to maturity investments carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective profit rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the statement of comprehensive income. If a Financing or held to maturity investment has a variable profit rate, the discount rate for measuring any impairment loss is the current effective profit rate determined under the contract.

The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.




(v) Credit cards and other revolving facilities (continued)

The ongoing assessment of whether a significant increase in credit risk has occurred for revolving facilities is similar to other lending products. This is based on shifts in the customer’s internal credit grade, but greater emphasis is also given to qualitative factors such as changes in usage.

The profit rate used to discount the ECLs for credit cards is based on the average effective profit rate that is expected to be charged over the expected period of exposure to the facilities. This estimation takes into account that many facilities are repaid in full each month and are consequently charged no profit.

(vi) Forward-looking information

In its ECL models, the Bank relies on a broad range of forward-looking information as economic inputs, such as:

• Gross domestic product• Savings and investment• Inflation• Trade statistics• Demographics• Revenue and expenditure• Public debt• Real estate• Composite indicators• Oil prices and production

The inputs and models used for calculating ECLs may not always capture all characteristics of the market at the date of the financial statements. To reflect this, qualitative adjustments or overlays are occasionally made as temporary adjustments when such differences are significantly material.

(vii) Collateral valuation

To mitigate its credit risks on financial assets, the Bank seeks to use collateral, where possible. The collateral comes in various forms, such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. Collateral, unless repossessed, is not recorded on the Bank’s statement of financial position. However, the fair value of collateral affects the calculation of ECLs. It is generally assessed, at a minimum, at inception and re-assessed periodically based on the type of asset, for example, cash or securities relating to margining requirements, is valued daily.

To the extent possible, the Bank uses active market data for valuing financial assets held as collateral. Other financial assets which do not have readily determinable market values are valued using models. Non-financial collateral, such as real estate, is valued by certified third-party valuers.

(viii) Write-offs

Financial assets are written off either partially or in their entirety only when the Bank 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.

(ix) Forborne and modified Financings

The Bank sometimes makes concessions or modifications to the original terms of Financings as a response to the borrower’s financial difficulties, rather than taking possession or to otherwise enforce collection of collateral. The Bank considers a Financing forborne when such concessions or modifications are provided as a result of the borrower’s present or expected financial difficulties and the Bank would not have agreed to them if the borrower had been financially healthy. Indicators of financial difficulties include defaults on covenants or significant concerns raised by the Credit Risk Department. Forbearance may involve extending the payment arrangements and the agreement of new Financing conditions. Once the terms have been renegotiated, any impairment is measured using the original effective rate of return method as calculated before the modification of terms. It is the Bank’s policy to monitor forborne Financings to help ensure that future payments continue to be likely to occur.






A3.4.i Fair value measurement (continued)

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or

indirectly observable Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Bank determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

At each reporting date, the Bank analyzes the movements in the values of assets and liabilities which are required to be re-measured or re-assessed as per the Bank’s accounting policies. For this analysis, the Bank verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents.

The Bank also compares the changes in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable.

For the purpose of fair value disclosures, the Bank has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

A3.4.j Cash and cash equivalents

Cash and cash equivalents consist of cash in hand, unrestricted balances held with central banks and highly liquid financial assets with original maturities of up to three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in management of its short-term commitments. Cash and cash equivalents are carried at amortized cost in the statement of financial position.

A3.4.k Acceptances

Acceptances are disclosed on the statement of financial position under other assets with corresponding liability disclosed under other liabilities. Therefore, there is no off-balance sheet commitment for acceptances.

A3.4.l Derivatives held for risk management purposes

Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or trading liabilities. Derivatives held for risk management purposes are measured at fair value in the statement of financial position. The treatment of changes in their fair value depends on their classification into the following categories:

(i) Fair value hedge

When a derivative is designated as a hedge of the change in fair value of a recognized asset or liability or a firm commitment, changes in the fair value of the derivative are recognized immediately in statement of comprehensive income together with changes in the fair value of the hedged item that are attributable to the hedged risk.

If the derivative expires or is sold, terminated, or exercised, no longer meets the criteria for fair value hedge accounting, or the designation is revoked, hedge accounting is discontinued. Any adjustment up to that point, to a hedged item for which the effective profit method is used, is amortized to profit or loss as part of the recalculated effective profit rate of the item over its remaining life.




(x) Assets carried at amortized cost (continued)

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group.

The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience.

When a Financing is uncollectible, it is written off against the related allowance for Financing impairment. Such Financings are written off after all the necessary procedures have been completed and the amount of the loss has been determined.

If in a subsequent period, the amount of impairment loss decreases and decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the statement of comprehensive income. Also refer to note B3 for Financings, advances and financing.

(xi) Assets classified as available for sale

The Bank assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. For debt securities, the Bank uses the criteria referred to at (x) above. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is evidence that the assets are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss - is removed from equity and recognized in the profit or loss. Impairment losses on equity instruments recognized in the profit or loss are not reversed through statement of profit or loss.

A3.4.h Amortized cost measurement

The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective profit rate of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment.

A3.4.i Fair value measurement

A number of the Bank’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on a number of accounting policies and methods. Where applicable, information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• In the principal market for the asset or liability, or• In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible to the Bank. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best profit.

A fair value measurement of a non-financial asset takes into account a market participant›s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.





A3.7 Employee benefits

End of service benefits

End of service indemnity for Omani employees are contributed in accordance with the terms of the Social Securities Law of 1991.

Provision for end of service indemnity for non-Omani employees has been made in accordance with the terms of the Oman Labor Law 2003 and its amendments and is based on current remuneration rates and cumulative years of service at the statement of financial position date. Employees’ entitlements to annual leave and leave passage are recognized when they accrue to the employees up to the reporting date. These accruals are included in current liabilities, while that relating to end of service benefits is disclosed as a non-current liability.

Contributions to a defined contribution retirement plan for Omani employees in accordance with the Omani Social Insurance Law of 1991 are recognized as an expense in the statement of comprehensive income as incurred.

Short-term benefits

Short-term benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A provision is recognized for the amount expected to be paid if the Window has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

A3.8 Customer deposits and other accounts

Balances in current deposits and other accounts are recognized when received by the Window. The transactions are measured as the amount received by the Window at the time of contracting. At the end of the reporting period, these accounts are measured at amortized cost.

A3.9 Equity of unrestricted investment account holders

The Window charges a management fee (Mudarib fee) to the unrestricted investment account holders. Of the total income from investments of funds, the income attributable to the unrestricted investment account holders is allocated to them after setting aside provisions, reserves (profit equalization reserve and investment risk reserve), if any, and deducting the Window’s share of income as a Mudarib. The allocation of income is determined by the management of the Window within the allowed profit sharing limits as per the terms and conditions of the unrestricted investment accounts.

A3.10 Due to and due from banks and Wakala Deposits

Due to and due from banks and financial institutions and customers comprise of Wakala payables and receivables. Wakala payables and receivables are initially recognized at cost, being the fair value of consideration exchanged. Subsequently, they are carried at amortized cost less amounts repaid.

A3.11 Revenue recognition

Murabaha

Profit on Murabaha is recognized on an accrual basis. Profit on Murabaha transactions for the period from the date of disbursement to the date of culmination of Murabaha.

Mudaraba

Income on Mudaraba financing is recognized when the right to receive payment is established or on distribution by the Mudarib. Losses on the other hand are charged to the income statement on declaration by the Mudarib.

Musharaka

Income on Musharaka is recognized when the right to receive payment is established or on distribution. In case of losses in Musharaka, the Window's share of loss is recognized to the extent that such losses are being deducted from its share of the Musharaka capital.

Diminishing Musharakah

Profit on Diminishing Musharakah financings is recognized on an accrual basis.

Profit on Sukuks

Profit on Sukuks is recognized on an accrual basis. Where Sukuks are purchased at a premium or discount and are classified at amortized cost, those premiums/discounts are amortized over the remaining maturity, using the effective profit rate method.



A3.4.l Derivatives held for risk management purposes (continued)

(ii) Cash flow hedge

When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or a 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 recognized in other comprehensive income in hedging reserve. The amount recognized in other comprehensive income is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the statement of comprehensive income. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss.

If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then the hedge accounting is discontinued prospectively. In a discontinued hedge of a forecast transaction the cumulative amount recognized in other comprehensive income from the period when the hedge was effective is reclassified from the equity to statement of comprehensive income as a reclassification adjustment when the forecast transaction occurs and affects profit or loss. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is reclassified immediately to profit or loss as a reclassification adjustment.

(iii) Other non-trading derivative

When a derivative is not held for trading, and is not designated in a qualifying hedge relationship, all changes in its fair value are recognized immediately in statement of comprehensive income.

A3.5 Property, equipment and fixtures

Items of property, equipment and fixtures are measured at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the asset. Depreciation is provided on a straight-line basis over the estimated useful lives of property, equipment and fixtures, except freehold land. The estimated useful lives for the current period are as follows:

Asset Years

Motor vehicles 5

Furniture and fixtures 6-7

Office equipment 6-7

Computer software 10

The assets’ residual values, useful lives and depreciation methods are reviewed and adjusted if appropriate at each reporting date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within ‘other operating income’ in the income statement.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Window and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

A3.6 Taxation

The tax return of the Bank is filed at head office level and the Window is not required to file a separate return on the activities of the Islamic Banking operations. During the year head office has started to allocate tax at flat rate of 15% of the Window’s profit. Deferred tax assets and liabilities are recognized only at head office level.





A3.17 Zakah

In accordance with the article of association Zakah is payable by individual shareholders of the Window and Zakah on unrestricted investment and other accounts is the responsibility of investment account holders.

A3.18 Provisions

A provision is recognized if, as a result of a past event, the Window has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are equivalent to the amortized value of the future liabilities which is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the liability.

A3.19 Joint and self-financed

Assets that are jointly financed by the Window and the equity of investment accountholders are disclosed as “jointly financed” in the financial statements and assets that are financed solely by the Window are classified under “self-financed”.

A3.20 Profit equalization reserve

Profit equalization reserve, this is the amount appropriated out of Mudaraba income before allocating the Window’s share as investment manager (Mudarib), in order to maintain a certain level of return on investment for unrestricted investment accountholders and increase owners’ equity.

A3.21 Investment risk reserve

Investment risk reserve is the amount appropriated out of profit share of the unrestricted investment accountholders after allocating the Mudarib share, in order to cushion the effects of the risk of future investment losses. The terms and conditions whereby investment risk reserve can be set aside and utilized are determined and approved by the Shari’ah Supervisory Board of the Window.

A3.22 Impairment reserve

The CBO has issued guidelines relating to the creation of impairment reserve, which is as set out below:

- Should the existing Financing loss impairment computed in accordance with the requirements of IAS 39 and CBO guidelines be higher than the impairment allowance computed under IFRS 9, the related difference (net of tax) be transferred to a Financing loss impairment reserve from retained earnings as of 1 January 2018. - In the subsequent years, where the allowance for Financing loss impairment computed in accordance with CBO requirements is higher than the allowance for Financing loss impairment loss computed under IFRS 9, the difference (net of tax) should be transferred to the aforementioned Financing loss impairment reserve from retained earnings.

The Window, as a policy decision, decided to review this position on an annual basis.

The related impairment reserve will not be available for dividend distribution or for inclusion in the regulatory capital. Any subsequent utiliszation of the impairment reserve would require prior approval of the CBO.


A3.11 Revenue recognition (continued)

Ijarah

Ijarah rental income is recognized over the term of the lease on accrual basis and is stated net of depreciation and impairment. Income related to non-performing Ijarah muntahia bittamleek accounts and Ijarah installments that are above 90 days is excluded from the statement of income.

Istisna followed by Ijarah muntahia bittamleek

Income for Istisna followed by Ijarah muntahia bittamleek is booked on receipt of the rentals.

Fees and commission income

Fees and commission income that are integral to the effective profit rate of a financial asset carried at amortized cost are included in the measurement of the effective profit rate of the financial asset. Other fees and commission income, including account servicing fees, sales commission, management, arrangement and syndication fees, are recognized as the related services are performed.

The Window’s share of income from equity of investment account holders (as Rabulmaal and Mudarib)

Income is allocated proportionately between equity of investment account holders and shareholders on the basis of their respective investment in the pool before allocation of the Mudarib fees. The Window’s share as a Mudarib for managing the equity of investment account holders is accrued based on the terms and conditions of the related Mudaraba agreements.

Salam

Income from Salam is determined by using the percentage of completion method.

Dividend income

Dividend income is recognized when the right to receive the dividend is established.

Profit on amounts due from banks and financial institutions

Profit on amounts due from banks and financial institutions is recognized on a time apportioned basis over the period of the contract based on the principal amounts outstanding and the profit agreed with clients.

A3.12 Expense recognition

Return on equity of investment account holders is calculated based on the income generated from joint investment accounts after deducting the expenses related to investment pool, i.e. “Mudarib expenses”. Mudarib expenses include all expenses incurred by the Window, but excluding staff costs and other administrative expenses. The Window’s “Mudarib profit” is deducted from the investors’ share of income before distributing such income.

A3.13 Earnings or expenditures prohibited by Shari’ah

The Window records these amounts in a separate account in the other payables and is not included in the Window’s revenues; these amounts are distributed to charities according to the Shari’ah Supervisory Board directions.

A3.14 Contingent liabilities

Contingent liabilities include guarantees, letter of credit, the Window’s obligations with respect to unilateral promise to buy/sell currencies and others. Contingent liabilities are not recognized in the statement of financial position but are disclosed in the notes to the financial statements, unless they are remote.

A3.15 Shari’ah supervisory board

The Window's business activities are subject to the supervision of a Shari’ah supervisory board consisting of members appointed by the general assembly of shareholders.

A3.16 Offsetting

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The legally enforceable rights must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Window and the counterparty.




B1 CASH AND BALANCES WITH CENTRAL BANK

31 December 2019

RO’000

31 December 2018

RO’000

Balances with CBO:

- current account 4,760 2,155

- cash reserve 5,306 5,306

Cash 1,924 1,276

11,990 8,737 ══════ ══════

The cash reserve with the Central Bank of Oman cannot be withdrawn without its approval.

B2 DUE FROM BANKS AND FINANCIAL INSTITUTIONS

31 December 2019

RO’000

31 December 2018

RO’000

Local currency (A)

Wakala placements with banks 5,000 5,000

Foreign currency abroad (B)

Wakala placements with banks - 3,884

Demand accounts 285 961

Total (A+B) 5,285 9,845

Expected credit loss allowance (1) (15)

5,284 9,830 ══════ ══════

The analysis of changes in the gross carrying amount and corresponding ECL allowance on due from banks and financial institutions is as follows:

Gross carrying amountStage 1

RO’000Stage 2

RO’000Stage 3

RO’000Total

RO’000

As at 1 January 2019 9,845 - - 9,845

Net change in assets (4,561) - - (4,561)

As at 31 December 2019 5,285 - - 5,285

ECLStage 1

RO’000Stage 2

RO’000Stage 3

RO’000Total

RO’000

As at 1 January 2019 15 - - 15

Net charge for the year (14) - - (14)

As at 31 December 2019 1 - - 1

There have been no significant changes in due from banks and financial institutions gross balances, which have contributed to significant changes to the ECL over the year.

A4 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The resulting accounting estimates will, by definition, seldom equal the related actual results.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The Bank’s significant accounting estimates are on:

A4.1 Impairment losses on Financings and advances

The measurement of impairment losses under IFRS 9 across all categories of financial assets requires judgment, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgments and estimates include:

The Bank’s internal credit grading model, which assigns PDs to the individual grades; The Bank’s criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should be measured on a LTECL basis and the qualitative assessment; The segmentation of financial assets when their ECL is assessed on a collective basis; Development of ECL models, including the various formulas and the choice of inputs; Determination of associations between macroeconomic scenarios and economic inputs, such as unemployment levels and collateral values, and the effect on PDs, EADs and LGDs; and Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models.

A4.2 Fair value estimation of unquoted securities

In cases where the underlying assets are fair valued such as private equity funds, management uses net assets value. Management believes that net assets values of these investments are representative of their fair values as the majority of the underlying assets are fair valued and the reported net assets of those entities takes into account the updated fair values changes.

A4.3 Fee and commission income

The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income, which is not an integral part of the effective interest rate of a financial instrument, is accounted for in accordance with IFRS 15 ‘Revenue from Contracts with Customers’. Under the IFRS 15, fee income is measured by the Bank based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Bank recognizes revenue when it transfers control over a product or service to a customer.

Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective profit rate.

Other fees and commission income – including account or financing and advances servicing fees, advisory fee, investment management fees and sales commission – are recognized as the related services are performed. Financing commitment fees for financing and advances that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognized as an adjustment to the effective rate of return on the financing and advances. When it is unlikely that a financing will be drawn down, the financing and advance commitment fees are recognized over the commitment period on a straight-line basis.




B3 FINANCING ADVANCES AND OTHER RECEIVABLES (CONTINUED)

Additional disclosures on Non-performing loans (NPL) coverage as per CBO circular BM 1149 is given below:

As at 31 December 2019 As per CBO RO’000

As per IFRS 9RO’000

DifferenceRO’000

Impairment loss charged to statement of comprehensive income 1,000 398 602

Provisions 3,572 3,245 327

Gross NPL ratio (percentage)* 0.79 0.56 0.23

*NPL ratios are calculated on the basis of funded non-performing loans and advances.

The below table provides a comparison of provision held as per IFRS 9 and required as per CBO norms

31 December 2019

Classification:

CBO

IFRS 9 classification

RO’000


RO’000


IFRS9 Provisions

RO’000

Difference between CBO and

IFRS 9 RO’000

Net carrying amount

RO’000

CBO Reserve

profit RO’000

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

Stage 1 189,807 2,128 489 1,639 189,318 -

Standard Stage 2 4,962 52 80 (28) 4,882 -

Stage 3 104 0 26 (26) 78 -

Subtotal 194,873 2,180 595 1,585 194,278 -

Special Stage 1 16,966 170 1,334 (1,164) 15,632 -

mention Stage 2 1,635 17 29 (11) 1,607 -

Stage 3 6 - 1 (1) 5 -

Subtotal 18,607 187 1,363 (1,176) 17,244 -

Stage 1 - - - - - -

Substandard Stage 2 - - - - - -

Stage 3 518 134 113 21 405 8

Subtotal 518 134 113 21 405 8

Stage 1 - - - - - -

Doubtful Stage 2 - - - - - -

Stage 3 160 41 27 14 133 5

Subtotal 160 41 27 14 133 5

Stage 1 - - - - - -

Loss Stage 2 - - - - - -

Stage 3 1,020 1,030 1,095 (65) (75) 72

Subtotal 1,020 1,030 1,095 (65) (75) 72

Gross Financing,

Advance

Stage 1 206,773 2,298 1,823 475 204,950 -

Stage 2 6,597 69 108 (39) 6,489 -

Stage 3 1,808 1,205 1,262 (57) 547 85

Subtotal 215,178 3,572 3,193 379 211,986 85

Due from banks, Stage 1 67,391 - 136 (136) 67,255 -

Investment securities, Stage 2 - - - - - -

& Financial guarantees Stage 3 6 - 1 (1) 5 -

Total 67,397 - 137 (137) 67,260 -

Total Stage 1 274,164 2,298 1,959 337 272,205 -

Stage 2 6,597 69 108 (39) 6,489 -

Stage 3 1,814 1,205 1,263 (58) 552 85

Total 282,575 3,572 3,330 242 279,246 85

B2 DUE FROM BANKS AND FINANCIAL INSTITUTIONS (CONTINUED)

The analysis of changes in the gross carrying amount and corresponding ECL allowance on due from banks and financial institutions is as follows:


RO’000Stage 2

RO’000Stage 3

RO’000Total

RO’000

As at 1 January 2018 7,982 - - 7,982


Assets derecognized or repaid (7,705) - - (7,705)

As at 31 December 2018 9,845 - - 9,845

ECLStage 1

RO’000Stage 2

RO’000Stage 3

RO’000Total

RO’000

As at 1 January 2018 - - - -



Net charge for the year 10 - - 10

As at 31 December 2018 15 - - 15

There have been no significant changes in due from banks and financial institutions gross balances, which have contributed to significant changes to the ECL over the year.

B3 FINANCING ADVANCES AND OTHER RECEIVABLES

31 December 2019

Self-financedRO’000

Jointly financedRO’000

TotalRO’000

Book value

Murabaha receivables 13,607 - 13,607

Ijarah muntahia bittamleek 15,617 56,773 72,390

Istisna followed by Ijarah muntahia bittamleek 66,066 19,474 85,540

Diminishing Musharka 42,211 1,430 43,641

137,501 77,677 215,178

Expected credit loss allowance (2,006) (1,102) (3,108)

Contractual profit not recognized (23) (62) (85)

135,472 76,513 211,985

31 December 2018



TotalRO’000

Book value

Murabaha receivables 13,557 - 13,557


Istisna followed by Ijarah muntahia bittamleek 61,085 13,041 74,126

Diminishing Musharka 34,545 1,957 36,502

128,345 54,123 182,468

Expected credit loss allowance (1,712) (1,063) (2,775)


126,624 53,000 179,624




B 3 FINANCING ADVANCES AND OTHER RECEIVABLES (CONTINUED)

The analysis of changes in the gross carrying amount and corresponding ECL allowance on financing advances and other receivables is as follows:


RO’000Stage 2

RO’000Stage 3

RO’000Total

RO’000

As at 1 January 2019 159,436 21,440 1,592 182,468


Assets derecognized or repaid-net (11,884) (819) (78) (12,781)




As at 31 December 2019 206,773 6,597 1,808 215,178


RO’000Stage 2

RO’000Stage 3

RO’000Total

RO’000

As at 1 January 2018 137,355 7,918 1,424 146,667


Assets derecognized or repaid (19,963) (1,662) 168 (21,457)

Transfers to Stage 1 2,698 (2,698) - -


As at 31 December 2018 159,456 21,440 1,592 182,468

ECLStage 1

RO’000Stage 2

RO’000Stage 3

RO’000Total

RO’000

ECL allowance as at 1 January 2019 460 1,240 1,075 2,775

New assets originated or purchased 68 11 7 86

Assets derecognized or repaid-net 128 170 (51) 247

Transfers to Stage 1 1,337 (1,337) - -



As at 31 December 2019 1,823 108 1,177 3,108

ECLStage 1

RO’000Stage 2

RO’000Stage 3

RO’000Total

RO’000

As at 1 January 2018 - - - 1,751

Impact of adopting IFRS 9 - - - 38

Restated ECL allowance as at 1 January 2018 304 127 1,358 1,789



Net charge for the year 164 1,105 (283) 986

At 31 December 2018 460 1,240 1,075 2,775

Classification:

CBO

IFRS 9 classification

RO’000


RO’000


IFRS9 Provisions

RO’000

Difference between

CBO and IFRS 9

RO’000

Net carrying amount

RO’000

CBO Reserve

profit RO’000

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

Standard Stage 1 159,436 1,728 460 1,268 158,976 -

Stage 2 21,279 216 1,231 (1,015) 20,048 -

Stage 3 109 1 45 (44) 64 1

Subtotal 180,824 1,945 1,736 209 179,088 1

Special mention Stage 1 - - - - - -

Stage 2 161 2 9 (7) 152 -

Stage 3 11 - 3 (3) 8 -

Subtotal 172 2 12 (10) 160 -

Substandard Stage 1 - - - - - -

Stage 2 - - - - - -

Stage 3 447 114 18 96 429 7

Subtotal 447 114 18 96 429 7

Doubtful Stage 1 - - - - - -

Stage 2 - - - - - -

Stage 3 987 473 1,036 (563) (49) 61

Subtotal 987 473 1,036 (563) (49) 61

Loss Stage 1 - - - - - -

Stage 2 - - - - - -

Stage 3 38 38 42 (4) (4) -

Subtotal 38 38 42 (4) (4) -

Gross Financing,

Advance

Stage 1 159,436 1,728 460 1,268 158,976 -

Stage 2 21,440 218 1,240 (1,022) 20,200 -

Stage 3 1,592 626 1,144 (518) 448 69

Subtotal 182,468 2,572 2,844 (272) 179,624 69

Due from banks, Stage 1 64,180 - 73 (73) 64,107 -

Investment Securities Stage 2 - - - - - -

& Financial Guarantees Stage 3 - - - - -

Total 64,180 - 73 (73) 64,107 -

Total Stage 1 223,616 1,728 533 1,195 223,083 -

Stage 2 21,440 218 1,240 (1,022) 20,200 -

Stage 3 1,592 626 1,144 (518) 448 69

Total 246,648 2,572 2,917 (345) 243,731 69


The below table provides a comparison of provision held as per IFRS 9 and required as per CBO norms

31 December 2018





B3.b Ijarah muntahia bittamleek (continued)

31 December 2018



TotalRO’000

Cost 26,075 50,434 76,509

Accumulated Depreciation/Amortization (6,917) (11,309) (18,226)

Net book value 19,158 39,125 58,283

Expected credit loss allowance (152) (1,021) (1,173)


19,005 38,044 57,049

B3.c Istisna followed by Ijarah muntahia bittamleek

31 December 2019



TotalRO’000

Book value 66,066 19,474 85,540

Expected credit loss allowance (261) (24) (285)

Contractual profit not recognized (2) - (2)

65,803 19,450 85,253

Istisna followed by Ijarah muntahia bittamleek, which are Stage 3 as of 31 December 2019, amounted to RO 94 K (2018: RO 43 K)

31 December 2018



TotalRO’000

Book value 61,085 13,041 74,126

Expected credit loss allowance (197) (25) (222)

Contractual profit not recognized - - -

60,888 13,016 73,904

B3.d Diminishing Musharka

31 December 2019



TotalRO’000

Book value 42,211 1,430 43,641

Expected credit loss allowance (1,360) (12) (1,372)

Contractual profit not recognized - - -

40,851 1,418 42,269

B 3 FINANCING ADVANCES AND OTHER RECEIVABLES (CONTINUED)

B3.a Murabaha receivables

31 December 2019



TotalRO’000

Book value 15,630 - 15,630

Deferred profit (2,023) - (2,023)

Net book value 13,607 - 13,607

Expected credit loss allowance (226) - (226)


13,366 - 13,366

Murabaha receivables which are Stage 3 as of 31 December 2019 amounted to RO 292 K (2018: 154 K)

31 December 2018



TotalRO’000

Book value 15,481 - 15,481

Deferred profit (1,924) - (1,924)

Net book value 13,557 - 13,557

Expected credit loss allowance (195) - (195)


13,360 - 13,360

Unamortized Deferred profit

31 December 2019

RO’000

31 December 2018

RO’000

Deferred profit at the beginning of the year 1,924 1,705

Profit deferred during the year on sales 1,358 1,070

Murabaha sales revenue during the year (C-1) (1,259) (851)

Deferred profit at the end of the year 2,023 1,924

B3.b Ijarah muntahia bittamleek

31 December 2019



TotalRO’000

Cost 24,755 66,652 91,407

Accumulated Depreciation/Amortization (9,138) (9,879) (19,017)

Net book value 15,617 56,773 72,390

Expected credit loss allowance (159) (1,066) (1,225)


15,452 55,645 71,097

Ijarah muntahia bittamleek, which are Stage 3 as of 31 December 2019, amounted to RO 1,423 (2018: RO 999).




B5 PROPERTY, PLANT AND EQUIPMENT



RO’000

Office equipment

RO’000

Motor vehicle

RO’000

Capital work in-progress

RO’000Total

RO’000

Cost: As at 1 January 2019 1,117 686 536 124 101 2,564

Additions 134 167 49 16 (101) 265Disposals/transfers - 4 29 - - 33

As at 31 December 2019 1,251 857 614 140 - 2,862 ══════ ══════ ══════ ══════ ══════ ══════

Accumulated depreciation:As at 1 January 2019 (583) (396) (361) (98) - (1,438)

Charge for the year (121) (94) (73) (9) - (297)Disposals/transfers - (4) (28) - - (32)

As at 31 December 2019 (704) (494) (462) (107) - (1,767) ══════ ══════ ══════ ══════ ══════ ══════

Net book value atAs at 31 December 2019 547 363 152 33 - 1,095

══════ ══════ ══════ ══════ ══════ ══════



RO’000

Office equipment

RO’000

Motor vehicle

RO’000

Capital work in-progress

RO’000Total

RO’000

Cost:As at 1 January 2018 1,100 600 454 99 62 2,315

Additions 17 158 92 12 101 380Disposals/transfers - (72) (10) 13 (62) (131)

As at 31 December 2018 1,117 686 536 124 101 2,564 ══════ ══════ ══════ ══════ ══════ ══════

Accumulated depreciation:As at 1 January 2018 (468) (371) (297) (82) - (1,218)

Charge for the year (115) (91) (74) (13) - (293)Disposals/transfers - 66 10 (3) - 73

As at 31 December 2018 (583) (396) (361) (98) - (1,438) ══════ ══════ ══════ ══════ ══════ ══════

Net book value atAs at 31 December 2018 534 290 175 26 101 1,126

══════ ══════ ══════ ══════ ══════ ══════

B6 OTHER ASSETS

31 December 2019

RO’000

31 December 2018

RO’000

Profit/rental receivable 1,411 739Recoverable from head office - 371Advance against financing - 187Right to use assets 849 -Others 1,274 1,107

3,534 2,404 ══════ ══════


B3.d Diminishing Musharka (continued)

31 December 2018



TotalRO’000

Book value 34,545 1,957 36,502

Expected credit loss allowance (1,168) (17) (1,185)


33,371 1,940 35,311

B4 INVESTMENT SECURITIES

31 December 2019

RO’000

31 December 2018

RO’000

Held at FVTPL 8,105 8,099

Held at amortized cost 15,372 12,890

23,477 20,989

Expected credit loss allowance (54) (45)

23,423 20,944

The Sukuk certificates are for a period of 5 years and carry a profit rate of 3.5% - 8.5% per annum.

All investment securities are classified under Stage 1 as of 1 January 2019 and 31 December 2019.

Movement in expected credit loss allowance is as given below:

Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2019 45 _ _ 45

Net change for the period 9 _ _ 9

As at 31 December 2019 54 _ _ 54

Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2018 - - - -



Net charge for the period 21 - - 21

As at 31 December 2018 45 - - 45





The analysis of changes in the gross carrying amount and corresponding ECL allowance on financing advance commitments and financial guarantees is as follows:


Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2019 33,346 - - 33,346New assets originated or purchased 22,414 - - 22,414Assets derecognized or repaid (17,125) - - (17,125)Transfers to Stage 1 - - - -Transfers to Stage 2 - - - -Transfers to Stage 3 (6) - 6 -Amounts written off - - - -

As at 31 December 2019 38,629 - 6 38,635 ══════ ══════ ══════ ══════


RO’000Stage 2

RO’000Stage 3

RO’000Total

RO’000

As at 1 January 2018 32,570 - - 32,570New assets originated or purchased 2,131 - - 2,131Assets derecognized or repaid (1,355) - - (1,355)Transfers to Stage 1 - - - -Transfers to Stage 2 - - - -Transfers to Stage 3 - - - -Amounts written off - - - -

As at 31 December 2018 33,346 - - 33,346 ══════ ══════ ══════ ══════

ECL amount Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2019 13 - - 13New assets originated or purchased 7 - - 7Assets derecognized or repaid 62 - - 62Transfers to Stage 1 - - - -Transfers to Stage 2 - - - -Transfers to Stage 3 (1) - 1 -Amounts written off - - - -

Ast 31 December 2019 81 - 1 82 ══════ ══════ ══════ ══════

ECL amount Stage 1RO’000

Stage 2RO’000

Stage 3RO’000

TotalRO’000

As at 1 January 2018 - - - -Impact of adopting IFRS 9 7 - - 7

Restated ECL allowance as at 1 January 2018 7 - - 7Net charge for the period 6 - - 6

As at 31 December 2018 13 - - 13 ══════ ══════ ══════ ══════

B7 WAKALA DEPOSITS

31 December 2019

RO’000

31 December 2018

RO’000

Local currency:-banks 5,000 5,000-corporates & retail 148,299 96,525Foreign Currency:-banks 10,588 7,703-corporates & retail 10,539 24,148

174,426 133,376 ══════ ══════

Wakala deposits include various facilities with a fixed profit rate ranging from 1.2% – 4.75%. The maturity of the Wakala payables ranges from 1 week to 85 months.

B8 CUSTOMER ACCOUNTS AND OTHER ACCOUNTS

31 December 2019

RO’000

31 December 2018

RO’000

Accounts by nature:- current 12,359 11,257- margin 5,126 7,911

17,485 19,168 ══════ ══════

B9 OTHER LIABILITIES

31 December 2019

RO’000

31 December 2018

RO’000

Profit/fee payable 55 82Staff entitlements 438 257Payable to Takaful company 186 106Expected credit loss allowance on financing advance commitments and financial guarantees 82 13Other accruals and provisions & payable 1,300 1,197Instrument payables 162 -

2,223 1,655 ══════ ══════




B12 CONTINGENT LIABILITIES AND COMMITMENTS

B12.1 Contingent liabilities

Standby letters of credit and guarantees commit the Bank to make payments on behalf of customers’ contingent upon the failure of the customer to perform under the terms of the contract.

31 December 2019

RO’000

31 December 2018

RO’000

Guarantees 5,478 29,073 Letter of credit 29,064 3,228

34,542 32,301 ══════ ══════

B12.2 Commitments

Credit-related commitments include commitments to extend credit, standby letters of credit and guarantees, which are designed to meet the requirements of the Bank’s customers. Commitments to extend credit represent contractual commitments to make financing and advances. Commitments generally have fixed expiry dates or other termination clauses and require the payment of a fee. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash obligations.

31 December 2019

RO’000

31 December 2018

RO’000

Credit-related commitments 4,093 1,045

B13 RELATED PARTIES

In the ordinary course of business, the Window conducts transactions with certain of its Directors, shareholders, senior management, head office, Shari’ah Supervisory Board (SSB), Shari’ah reviewer and companies in which they have a significant profit. These transactions are conducted on an arm’s length basis and are approved by the Window’s management and Board of Directors.

The aggregate amount of balances and the income and expenses generated with such related parties are as follows:

31 December 2019

RO’000

31 December 2018

RO’000

Financing and advances (balance at end of year) 10 -

Financing and advances disbursed during the year - -

Financing and advances repaid during the year - (32)

Deposits (balance at end of year) 281 -

Deposits received during the year 58 -

Deposits matured/paid during the year (36) -

Profit on financing and advances (during the year) - -

Profit expense (during the year) (7) -

Senior management compensation

Salaries and other short-term benefits 118 210

Directors’ sitting fees and remuneration

Shari’ah Supervisory Board’s sitting fees and remuneration 47 47

Transaction with head office

Profit paid on Wakala borrowings 325 5

Fee on committed line 162 162

B10 EQUITY OF INVESTMENT ACCOUNT HOLDERS

31 December 2019

RO’000

31 December 2018

RO’000

Saving accounts 29,182 40,736Term accounts 5 248

29,187 40,984 ══════ ══════

Unrestricted investment account holder accounts are monies invested by customers under Mudaraba to form a pool of funds. Investment account holders’ funds are commingled with the Banks’s funds for investment, no priority is granted to any party for the purpose of investments and distribution of profits.

Term deposits are deposits which can be withdrawn with no loss of capital subject to certain conditions.

The share, as Mudarib, in the profits of equity of investment account holders is up to a maximum of 70% (2018: 70%) as per the terms of investment account holder agreements.

During the year, the Window has not charged any administrative expense to the pool

Equity of investment account holders

Product Participation factor Average rate earned

Saving-RO 17 0.68%Saving-AED 7 0.22%Saving-USD 7 0.30%Term 6 Months 10 0.00%Term 12 Months 18 0.74%

B11 OWNERS’ EQUITY

(a) Assigned Capital

As required under clauses 3.5.1.2 and 3.5.1.3 of Title 1, ‘Licensing Requirements’ of IBRF, the head office assigned capital of RO 10 million to the Window at inception. The head office raised this through a rights issue of shares. The head office has progressively assigned further capital into the Window and during 2019, assigned capital of RO 5 million (2018: RO 4 million) to the Window. As a result, the assigned capital of the Window as of 31 December 2019 amounted to RO 30 million (2018: RO 25 million).

(b) Legal reserve

As per Article 78 of Commercial Companies Law of Oman of 1974, ‘an additional amount within 2% of the nominal value of share may be collected for each share as issue fees. If the shares are issued at a value higher than the nominal value, the excess amount, after deducting issue expenses, shall be added either to the legal reserve or a special reserve to be established as provided under Article 106 of the Law’. Accordingly, the Window has transferred the net excess amount of the issue proceeds collected by the Bank during Window’s inception to the legal reserve.

(c) General reserve

This represents retained earnings allocated by head office.

(d) Impairment reserve

CBO circular BM 1149 requires the Window to create a reserve for the difference between provisions under CBO norms and IFRS 9 provisions, if CBO provisions are higher than IFRS 9 provisions. The provisions required under IFRS 9 are higher than the provisions computed under CBO norms as of 31 December 2019, accordingly impairment reserve has been created.




C 2 INCOME FROM INVESTING ACTIVITIES

31 December 2019

RO’000

31 December 2018

RO’000

Income from inter-bank placements with Islamic banks 354 205Income from investment in debt-type instruments 1,237 930

1,591 1,135 ══════ ══════

C 3 PROFIT PAID

31 December 2019

RO’000

31 December 2018

RO’000

On Mudaraba deposit 771 744On Wakala deposit- -Customers 5,274 3,868 -Banks 505 302

5,779 4,170

6,550 4,914 ══════ ══════

C 4 OTHER INCOME (NET)

31 December 2019

RO’000

31 December 2018

RO’000

Fee and commission – net 805 555

Loss on sale of fixed assets 7 -

Loss on held for trading investment securities - realized 60 (285)

Others - (7)

872 263 ══════ ══════

C 5 OTHER OPERATING EXPENSES

31 December 2019

RO’000

31 December 2018

RO’000

Operating and administration costs 1,833 1,114

Establishment costs 357 277

SSB remuneration and sitting fees 47 50

2,237 1,441 ══════ ══════

B14 DERIVATIVES

In the ordinary course of business, the Window enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instrument, reference rate or index. These derivatives are stated at fair value. The fair value of a derivative is the equivalent of the unrealized gain or loss from marking to market the derivative using prevailing market rates or internal pricing models. Unrealized gains or losses are included in the statement of comprehensive income. The derivative financial instruments used by the Window are described below:

B14.1 Derivative product types

Currency forward (Wa’ad), is a unilateral agreement between parties to buy one currency against selling another currency at an agreed price for settlement at forward/future value date. The exchange rate used for the transaction is called the forward exchange rate.

It is done to hedge from exchange rate volatility risk and to manage liquidity efficiently by allowing the Window to place/invest excess liquidity with offshore banks or to take funds from offshore banks in case of liquidity shortage.

As part of its asset and liability management, the Window uses derivatives for hedging purposes in order to reduce its exposure to currency and profit rate risks. This is achieved by hedging specific financial instruments and forecasted transactions as well as strategic hedging against overall statement of financial position exposures.

B14.1 Derivative product types (continued)

Notional Notional amounts by term to maturity

As at 31 December 2019 amount Within 3 months 3 - 12 months 1 - 5 years

RO’000 RO’000 RO’000 RO’000

Forward foreign exchange purchase contracts 103,183 73,985 19,395 9,803 ══════ ══════ ══════ ══════

Forward foreign exchange sales contracts 103,183 73,985 19,395 9,803 ══════ ══════ ══════ ══════

Notional Notional amounts by term to maturity

As at 31 December 2018 amount Within 3 months 3 - 12 months 1 - 5 years

RO’000 RO’000 RO’000 RO’000

Forward foreign exchange purchase contracts 142,863 90,528 52,335 - ══════ ══════ ══════ ══════

Forward foreign exchange sales contracts 142,863 90,528 52,335 - ══════ ══════ ══════ ══════

Main counterparty to forward contracts is the head office.

C 1 INCOME FROM FINANCING ACTIVITIES

31 December 2019

RO’000

31 December 2018

RO’000

Murabaha 1,259 851Ijarah muntahia bittamleek 3,946 3,433Istisna followed by Ijarah muntahia bittamleek 4,495 3,146Diminishing Musharaka 1,113 1,006

10,813 8,436 ══════ ══════

Income from jointly financed assets 3,125 2,252 Income from self-financed assets 7,688 6,184

10,813 8,436 ══════ ══════






D1.3 Credit rating analysis

The table below presents an analysis of debt securities, treasury bills, gross placements and other eligible bills by rating agency designation at 31 December 2019, based on Moody’s ratings or equivalent.

31 December 2019

RO’000

31 December 2018

RO’000

A1 to A3 284 4,845Baa1 to Baa3 5,000 5,000 Ba+ to B- 8,105 8,099Sovereign 15,318 12,845

28,707 30,789 ══════ ══════

The Window performs an independent assessment based on quantitative and qualitative factors in cases where a counterparty is unrated.

The Bank's internal credit rating grades along with the respective PDs are as below:

Internal rating grades Internal rating grade description PD range (%)

1 – 6 Investment grade 0.10% to 2.00%

7 Sub-investment grade 3.70%

8 - 10 Non-performing 6.60% to 20.00%

The table below shows the credit quality by class of financial asset, based on internal credit ratings:


Murabaha receivables

RO'000

Ijarah muntahia

bittamleek RO'000

Istisna followed by

Ijarah muntahia

bittamleek RO'000

Diminishing Musharka

RO'000

Wakala placements

& balance with banks

RO'000

Debt type securities

RO'000Total

RO'000Stage 1 (12 month ECL)Investment grade 12,987 67,473 83,630 42,863 5,284 23,423 235,480Sub-investment grade - - - - - - -

Carrying amount 12,987 67,473 83,630 42,863 5,284 23,423 235,480

Stage 2 (Lifetime ECL but not credit-impaired)Investment grade - - - - - - -Sub-investment grade 328 3,495 1,816 958 - - 6,597

Carrying amount 328 3,495 1,816 958 - - 6,597

Stage 3 (Lifetime ECL and credit-impaired)Impaired 292 1,422 94 - - - 1,808

13,607 72,390 85,540 43,821 5,284 23,423 243,885 ══════ ══════ ══════ ══════ ══════ ══════ ══════

D FINANCIAL RISK MANAGEMENT

D1 Credit risk

D1.1 Credit risk in financing products

Credit risk originates from the financing of receivables and leases (including but not limited to Murabaha, Diminishing Musharaka, Istisna and Ijarah) and financing of working capital (including but not limited to Salam). The Window acts as financier, supplier, Rabulmaal and contributor of capital in Musharaka agreement. The Window exposes itself with the risk of counterparty’s failure to meet their obligations in terms of receiving deferred payment and making or taking delivery of an asset.

The Window manages and controls credit risk by setting limits on the extent of risk it is willing to accept in terms of amounts, counterparties, product types, geographical area and industry sector. It has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision by the Credit Review and Analysis Department (CR&AD). Any changes to the Credit Risk Policy will be approved by the Board.

Exposure limits are based on the aggregate exposure to counterparty and any connected entities. Corporate contracts/facilities are reviewed on an annual basis by CR&AD.

To cover unforeseen risk, which dries up the cash flows, additional tangible investments are taken as collateral such as real estate or equity shares. The Window implements guidelines on the acceptability of specific classes of collateral credit risk mitigation. The principal types of collaterals for financings and advances are:

• Charges of assets under Murabaha agreements• Ownership/title of assets under Ijarah & Istisna financing• Ownership/title under Istisna arrangement

D1.2 Management of credit risk

All financings and advances of the Window are regularly monitored to ensure compliance with the stipulated repayment terms. Those financings and advances are classified into one of the 5 risk classification categories: Standard, Special Mention, Substandard, Doubtful and Loss – as stipulated by Central Bank of Oman regulations and guidelines. The responsibility for identifying problem accounts and classifying them rests with the business line functions.

The credit exposure of the Window as on the reporting date is as follows:



RO'000

Ijarah muntahia

bittamleek RO'000

Istisna followed by

Ijarah muntahia

bittamleek RO'000


RO'000

Wakala placements


RO'000


RO'000Total

RO'000

Stage 1 12,987 67,473 83,630 42,683 5,284 23,423 235,480Stage 2 328 3,495 1,816 958 - - 6,597Stage 3 292 1,422 94 - - - 1,808

Total 13,607 72,390 85,540 43,641 5,284 23,423 243,885 ══════ ══════ ══════ ══════ ══════ ══════ ══════



RO'000

Ijarah muntahia

bittamleek RO'000

Istisna followed by

Ijarah muntahia

bittamleek RO'000


RO'000

Wakala placements


RO'000


RO'000Total

RO'000

Stage 1 12,966 54,328 73,285 18,858 9,845 20,989 190,271Stage 2 437 2,956 798 17,249 - - 21,440Stage 3 154 999 43 396 - - 1,592

Total 13,557 58,283 74,126 36,503 9,845 20,989 213,303 ══════ ══════ ══════ ══════ ══════ ══════ ══════

Maximum exposure to credit risk before collateral held or other credit enhancements for all on-balance sheet assets are based on net carrying amounts as reported in the statement of financial position.

The maximum credit risk exposures relating to off-balance sheet items calculated as per Basel II guidelines are provided in note D6. The amounts represented in the note D6 represent a worst case scenario of credit risk exposure as of 31 December 2018, without taking into account any collateral held or other credit enhancements attached.






D1.5 Write-off policy (continued)

An estimate of the fair value of collateral and other security enhancements held against financings and advances is shown below:

31 December 2019

RO’000

31 December 2018

RO’000

Property 399,538 355,505Equity - -

399,538 355,505 ══════ ══════

D1.6 Concentrations

Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities or activities in the same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be affected similarly by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Window’s performance to developments affecting a particular industry or geographic location.

In order to avoid excessive concentrations of risk, the Window’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.

• Regulatory Caps – exposure limits to a person (including juristic person) and his connected parties has been set at 15% of the Bank’s net worth.

• Net worth is the aggregate amount of assets less liabilities, which shall include assets and liabilities both within and outside the Sultanate.

• Exposure to senior member in the management of the Window and any related parties shall not exceed 10% of the amount of the net worth of the Bank and aggregate of all such exposures shall not exceed 35% of the amount of the net worth.

Limits are not applicable to exposures fully secured by cash or cash equivalent (not subject to withdrawal from the Window) or are secured by guarantee of the financial institutions within or outside Sultanate of Oman or the Government of the Sultanate of Oman.



RO'000

Ijarah muntahia

bittamleek RO'000

Istisna followed by

Ijarah muntahia

bittamleek RO'000


RO'000

Wakala placements


RO'000


RO'000Concentration by sectorCorporate 819 14,438 65,484 30,308 - 8,105Personal 12,547 56,659 19,769 11,961 - -Sovereign - - - - - 15,318Banks - - - - 5,284 -

13,366 71,097 85,253 42,269 5,284 23,423 ══════ ══════ ══════ ══════ ══════ ══════

Concentration by locationMiddle East 13,366 71,097 85,253 42,269 5,103 23,423Europe - - - - 181 -North America - - - - - -Asia - - - - - -

Total 13,366 71,097 85,253 42,269 5,284 23,423 ══════ ══════ ══════ ══════ ══════ ══════



D1.3 Credit rating analysis (continued)



RO'000

Ijarah muntahia

bittamleek RO'000

Istisna followed by

Ijarah muntahia

bittamleek RO'000


RO'000

Wakala placements


RO'000


RO'000Total

RO'000

Stage 1 (12 month ECL)Investment grade 12,966 54,328 73,285 18,858 9,845 20,989 190,271Sub-investment grade - - - - - - -

Carrying amount 12,966 54,328 73,285 18,858 9,845 20,989 190,271

Stage 2 (Lifetime ECL but not credit-impaired)Investment grade - - - - - - -Sub-investment grade 437 2,956 798 17,249 - - 21,440

Carrying amount 437 2,956 798 17,249 - - 21,440

Stage 3 (Lifetime ECL and credit-impaired)Impaired 154 999 43 396 - - 1,592

13,557 58,283 74,126 36,503 9,845 20,989 213,303 ══════ ══════ ══════ ══════ ══════ ══════ ══════

D1.4 Allowances for impairment

The Window establishes an allowance for impairment losses account that represents its estimate of incurred losses in its financing and advances portfolio. The components of this allowance are specific loss components that relate to individually significant exposures and a collective financing and advances loss allowance established for group of homogenous assets in respect of losses that have been incurred but have not been identified on financings subject to individual assessment for impairment.

D1.5 Write-off policy

The Window writes off a financing and advances/security balance (and any related allowances for impairment losses when the Window determines that the financing and advances/security is uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower/issuer’s financial position such that the borrower/issuer can no longer repay the obligation, or that proceeds from the collateral will not be sufficient to pay back the entire exposure. For smaller balance standardized financings, charge off decisions generally are based on a product specific past due status.

The assets, or title to the asset, will be maintained in the Window’s custody or with a custodian approved by the Window. Necessary measures are taken to ensure that the assets are maintained in usable condition.

The release of collateral without full repayment of all related financial obligations requires authorization of the same level that originally approved and sanctioned the facility. Substitution of collateral is permitted if the new collateral would further minimize the Window’s risk exposure keeping in mind the regulatory requirements.

When collateral is released to the customer, the Credit Administration Department obtains and maintains in its records acknowledgement of receipt from the customer or its authorized representative.






D2.1 Management of liquidity risk (continued)

Details of the reported lending and liquid ratio as at 31 December 2019 were as follows:

31 December 2019Lending ratio Liquid ratio

Average for the year 85.52% 28%Maximum for the year 86.08% 36%Minimum for the year 84.13% 21%

31 December 2018

Lending ratio Liquid ratio Average for the year 84.27% 8.32%Maximum for the year 85.84% 11.14%Minimum for the year 78.31% 3.30%

Bank also monitors the liquidity through Liquidity Coverage ratio (LCR) and Net Stable Funding Ratio (NSFR). Current levels of these ratios are given below:

31 December 2019 31 December 2018LCR NSFR LCR NSFR

151.29% 102.86% 114.39% 113.09%

The table below summarizes the maturity profile of the Window’s liabilities as on the reporting date based on contractual repayment arrangements. The contractual maturities of assets and liabilities have been determined on the basis of the remaining period at the statement of financial position date to the contractual maturity date and do not take account of the effective maturities as indicated by the Window’s deposit retention history and the availability of liquid funds.

D2.2 Exposure to liquidity risk

Carrying amount

RO’000

Within three

months RO’000

Four months to 12 months

RO’000

One to three years

RO’000

More than three

years RO’000

Total RO’000

As at 31 December 2019Wakala deposits 174,426 22,290 70,673 31,831 54,674 179,468Customer deposit and other accounts 17,485 - - - 17,485 17,485Other liabilities 2,223 - - - 2,223 2,223

194,134 22,290 70,673 31,831 74,382 199,176

Equity of Investment account holders 29,187 - - - 29,187 29,187

223,321 22,290 70,673 31,831 103,569 228,363 ══════ ══════ ══════ ══════ ══════ ══════






RO'000

Ijarah muntahia

bittamleek RO'000

Istisna followed by

Ijarah muntahia

bittamleek RO'000


RO'000

Wakala placements &

balance with banks

RO'000


RO'000

Concentration by sectorCorporate 1,460 18,818 60,630 32,323 - 8,099Personal 11,900 38,231 13,274 2,988 - -Sovereign - - - - - 12,845Banks - - - - 9,830 -

13,360 57,049 73,904 35,311 9,830 20,944 ══════ ══════ ══════ ══════ ══════ ══════

Concentration by locationMiddle East 13,360 57,049 73,904 35,311 5,140 20,944Europe - - - - 4,690 -North America - - - - - -Asia - - - - - -

Total 13,360 57,049 73,904 35,311 9,830 20,944 ══════ ══════ ══════ ══════ ══════ ══════

D2 Liquidity risk

Liquidity risk is the risk that the Window will encounter difficulty in meeting its obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

D2.1 Management of liquidity risk

The Window’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking damage to the Window’s reputation.

The Window’s central treasury receives information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Central treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, financing and advances and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank as a whole. The liquidity requirements of business units are met through short-term financing and advances from central treasury to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements. The Window has also laid down a comprehensive liquidity contingency plan for effective management of liquidity. In this process due care is taken to ensure that the Window complies with all the CBO regulations.

All liquidity policies and procedures are subject to review and approved by Asset Liabilities Committee (ALCO). Computation of liquidity gap on maturity of assets and liabilities is provided. The computation has been prepared in accordance with guidelines provided by the regulator.

The lending ratio, which is the ratio of the total financings and advances to customer deposits and capital, is monitored on a daily basis in line with the regulatory guidelines. Internally the lending ratio is set at a more conservative basis than required by regulation. The Window also manages its liquidity risk on regular basis and by monitoring the liquid ratio which is a ratio of net liquid assets to total assets on a monthly basis. For this purpose net liquid assets are considered as including cash and cash equivalents and investment grade debt investments for which there is an active and liquid market.






D3.3 Management of market risks

The Window separates its exposure to market risk between trading and non-trading portfolios. Trading portfolios include all positions arising from market making and proprietary position taking, together with financial assets and liabilities that are managed on a fair value basis.

All foreign exchange risk within the Window is transferred by Central Treasury to the trading book. Accordingly, the foreign exchange position is treated as a part of the Window’s trading portfolio for risk management purposes. Foreign currency risk is monitored and managed by the Window by establishment of Middle Office to monitor the market risk, and the risk is managed by putting in place Policy, and implementing limit framework, reporting tools like Currency Position Report, Risk Analysis of Currency Position, Breach Analysis Report, and Dealer Limit Breach report.

Overall authority for market risk is vested in ALCO. The risk management function is responsible for development of detailed risk management policies (subject to approval by ALCO and Risk Management Committee of the Board). The Policy is periodically reviewed to keep it up to date with the market developments.

D3.4 Exposure to profit rate risk

Profit rate risk is the potential impact of the mismatch between the rate of return on assets and the expected rate of funding due to the sources of finance. Senior management identifies the sources of profit rate risk exposures based upon the current as well as forecasted balance sheet structure of Window. The profit rate risk in the Window may arise due to the following transactions:

• Murabaha transactions;• Wakala transactions;• Isitisna followed by Ijara Muntahia Bittamleek • Ijarah Muntahia Bittamleek;• Istisna;• Sukuk; and• Musharaka investments.

The Window’s management believes that the Window is not exposed to material profit rate risk as the re-pricing of assets, liabilities and equity of investment account holders occur at similar intervals. The profit distribution to equity of investment account holders is based on profit-sharing agreements. Therefore, the Window is not subject to any significant profit rate risk.

Sources of Profit Rate Risk

The different profit rate risks faced by the Window can be classified broadly into the following categories:

• Re-pricing risk that arises from timing differences in the maturity (for fixed rate) and re-pricing (for floating rate) of assets, liabilities and off-balance sheet positions. As profit rates vary, these re-pricing mismatches expose Window’s income and underlying economic value to unanticipated fluctuations;

• Yield curve risk which arises when unanticipated shifts of the yield curve have adverse effects on Window’s income and/or underlying economic value;

• Basis risk which arises from imperfect correlation in the adjustment in the rate earned on products priced and the rate paid on different instruments with otherwise similar re-pricing characteristics. When profit rates change, these differences can give rise to unexpected changes in the cash flows and earnings spread between assets, liabilities, and off-balance sheet instruments of similar maturities or re-pricing frequencies; and

• Displaced Commercial Risk refers to the market pressure to pay returns that exceeds the rate that has been earned on the assets financed by the liabilities, when the return on assets is underperforming as compared to competitor’s rates.

Profit rate risk strategy

Profit rate risk arises from the possibility that changes in profit rates will affect future profitability or the fair values of financial instruments. The Window is exposed to profit rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off-balance sheet instruments that mature or re-price in a given period. The Window manages this risk through risk management strategies.

The effective profit rate (effective yield) of a monetary financial instrument is the rate that, when used in a present value calculation, results in the carrying amount of the instrument. The rate is a historical rate for a fixed rate instrument carried at amortized cost and a current rate for a floating rate instrument or an instrument carried at fair value.




Carrying amount

RO’000

Within three months

RO’000


RO’000

One to three years

RO’000

More than three

years RO’000

Total RO’000

As at 31 December 2018Wakala deposits 133,376 31,263 74,564 27,613 4,207 137,647Customer deposit and other accounts 19,168 - - - 19,168 19,168Other liabilities 1,655 - - - 1,655 1,655

154,199 31,263 74,564 27,613 25,030 158,470

Equity of Investment account holders 40,984 213 36 - 40,736 40,985

195,183 31,476 74,600 27,613 65,766 199,455 ══════ ══════ ══════ ══════ ══════ ══════

The Window prepares a liquidity gap report to monitor the Window’s short-term liquidity position on the Rial denominated assets and liabilities in a time horizon spanning one month. The gap is adjusted for availability of instruments for repo or refinance and also for unavailed committed lines of credit, if any. This statement of short-term liquidity is to be reported to the ALCO every month.

In addition to the above measures of liquidity, the window also monitors the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio as per the regulator in line with Basel-III standards.

D3 Market risk

Market risk is the exposure to loss resulting from the changes in the profit rates, foreign currency exchange rates, equity prices and commodity prices. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return to risk.

D3.1 Market risk in financing products

Financing contracts mainly comprise ‘Murabaha receivables’ and ‘Ijarah Muntahia Bittamleek’. Following are the financing related market risk:


In the case of an asset in possession for a Murabaha transaction and an asset acquired specifically for resale to a customer in a non-binding Murabaha to the purchase ordered (MPO) transaction, the asset would be treated as inventory of the Window and is subject to price risk.

Ijarah Muntahia Bittamleek (IMB)

In the case of non-binding Promise to lease an asset acquired and held for the purpose of either operating Ijarah or IMB. The asset would be treated as asset owned by the Window and is subject to price risk from its acquisition date until its disposal.

D3.2 Measurement of market risk

The Window is mainly engaged in Spots and Currency swaps. Since the positions are taken mainly for customer transactions, the complexity is further reduced. In view of above, the Window measures and controls the risk by using a limit framework. As and when the Window enters into more complex derivatives, it will have more sophisticated models and techniques to measure market risk, supported by a suitable mechanism.






D3.5 Exposure to profit rate risk – non-trading portfolios (continued)

Effective annual

Profit Rate %

Within three months

RO’000


RO’000Over one year

RO’000

Non- sensitive to

profit rate RO’000

Total RO’000


Assets

Cash and balances with Central Bank - - - 8,737 8,737

Due from banks and financial institutions 2.53 8,871 - - 959 9,830

Murabaha receivables 5.77 - - - 13,363 13,363

Ijarah muntahia bittamleek 5.20 22,443 - 34,606 - 57,049

Istisna followed by Ijarah muntahia bittamleek 5.41 13,985 - 59,919 - 73,904

Diminishing Musharka 4.94 4,515 - 30,796 - 35,311

Investment securities 4.78 - - 20,944 - 20,944

Fixed assets - - - 1,126 1,126

Other assets - - - 2,401 2,401

Total assets 49,814 - 146,265 26,586 222,665 ══════ ══════ ══════ ══════ ══════

Liabilities and equity Wakala deposits 3.67 33,719 96,197 3,460 - 133,376

Customer current accounts - - - 19,168 19,168

Other liabilities - - - 1,655 1,655

Total liabilities 33,719 96,197 3,460 20,823 154,199 ══════ ══════ ══════ ══════ ══════

Equity of Investment account holders 1.75 40,984 - - - 40,984

Total liabilities and equity of Unrestricted Investment Account (URIA) 74,703 96,197 3,460 20,823 195,183

Total profit rate sensitivity gap (24,889) (96,197) 142,805 5,763 -

Cumulative profit rate sensitivity gap (24,889) (121,086) 21,719 27,482 - ══════ ══════ ══════ ══════ ══════



D3.4 Exposure to profit rate risk (continued)

Profit rate risk measurement tools

The Window monitors re-pricing gap analysis that measures the arithmetic difference between the profit-sensitive assets and liabilities of book in absolute terms.

Profit rate risk monitoring and reporting

The Window has implemented information systems for monitoring, controlling and reporting profit rate risk. Reports are provided on a timely basis to Executive Committee and the Board of Directors of the head office.

The Risk and Compliance Unit monitors these limits regularly. They reviews the results of gap limits and exceptions, if any, and recommends corrective action to be taken which is approved by ALCO or Executive Committee, according to authority parameters approved by the Board.

D3.5 Exposure to profit rate risk – non-trading portfolios

The Window’s profit sensitivity position based on contractual re-pricing arrangements at 31 December 2019 was as follows:

Effective annual

Profit Rate %

Within three months

RO’000


RO’000

Over one year

RO’000

Non- sensitive to

profit rate RO’000

Total RO’000


Assets

Cash and balances with Central Bank - - - 11,990 11,990

Due from banks and financial institutions 3.1 5,284 - - - 5,284

Murabaha receivables 5.73 - - - 13,366 13,366

Ijarah muntahia bittamleek 5.25 70,134 963 - - 71,097

Istisna followed by Ijarah muntahia bittamleek 5.71 73,525 11,728 - - 85,253

Diminishing Musharka 5.46 40,731 1,538 - - 42,269

Investment securities 5.6 - - - 23,423 23,423

Fixed assets - - - 1,095 1,095

Other assets - - - 3,534 3,534

Total assets 189,674 14,229 - 53,408 257,311 ══════ ══════ ══════ ══════ ══════


Wakala deposits 3.8 12,694 72,319 33,522 55,891 174,426

Customer current accounts - - - 17,485 17,485

Other liabilities - - - 2,223 2,223

Total liabilities 12,694 72,319 33,522 75,599 194,134 ══════ ══════ ══════ ══════ ══════

Equity of Investment account holders 1.99 29,187 - - - 29,187

Total liabilities and equity of Unrestricted Investment Account (URIA) 41,881 72,319 33,522 75,599 223,321

Total profit rate sensitivity gap 147,793 (58,090) (33,522) (22,191) -

Cumulative profit rate sensitivity gap 147,793 89,703 56,181 33,990 - ══════ ══════ ══════ ══════ ══════





D5 Displaced commercial risk

Displaced commercial risk (DCR) refers to the magnitude of risks that are transferred to shareholders in order to cushion the Investment Account Holder (IAH) from bearing some or all of the risks to which they are contractually exposed in Mudaraba contracts.

Under a Mudaraba (profit-sharing and loss-bearing) contract, unrestricted IAH are exposed to aggregate impact of risks arising from the assets in which their funds are invested, but this is managed by Sohar Islamic Window through DCR.

This risk-sharing is achieved by constituting and using various reserves such as PER, and by adjusting the Sohar Islamic Window's profit share in order to smooth the returns payable to the IAH from exposure to the volatility of aggregate returns arising from banking risks, and thereby to enable payment of returns that are competitive in the marketplace.

Sohar Islamic Window manages its displaced commercial risk as outlined in its Profit Distribution Policy. The Window foregoes its fee in case displaced commercial risk arises. The Window manages profit rates with other Islamic Windows and full-fledged Islamic/conventional banks operating in Oman.

D6 Capital management

D6.1 Regulatory capital

The Window’s lead regulator, Central Bank of Oman, sets and monitors capital requirements for the Window as a whole. In implementing current capital requirements Central Bank of Oman requires the Window to maintain a prescribed ratio of total capital to total risk-weighted assets. The Window calculates capital requirements for market risk and operational risk based upon the model prescribed by Central Bank of Oman as follows:

• Sovereign entities – Nil for Oman • Window’s – Risk-weighting based upon ratings by external credit assessment institutions as approved by CBO.• Retail and Corporate financings - As per credit conversion factors and risk weightage prescribed by CBO.• Off-balance sheet items – As per credit conversion factors and risk weightage prescribed by CBO.

The Window’s regulatory capital is analyzed into two tiers: • Tier 1 capital, which includes allocated capital and reserves, retained earnings and intangible assets, and other regulatory

adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes.• Tier 2 capital, which includes qualifying collective impairment allowances.

Various limits are applied to elements of the capital base. The amount of innovative tier 1 investments cannot exceed 15% of total tier 1 capital; qualifying tier 2 capital cannot exceed tier 1 capital; and qualifying term subordinated financing and advances capital may not exceed 50% of tier 1 capital. There are also restrictions on the amount of collective impairment allowances, PER and IRR that may be included as part of tier 2 capital. Other deductions from capital include the carrying amounts of investments in subsidiaries that are not included in the regulatory consolidation, investments in the capital of windows and certain other regulatory items.

The Window’s operations are categorized as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. There is no availability of data for previous three years as required under basic indicator approach for computation of capital charge for operational risk. The Window’s policy is to maintain a strong capital base.



D 3.6 Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Board has set limits on the overall open position and for open position for each currency. The open position limits include overnight open position and intraday open position. Open positions are monitored on a daily basis and hedging strategies used to ensure positions are maintained within established limits. The Window had the following net exposures denominated in foreign currencies:

31 December 2019

Assets Liabilities & URIA Net assets

Riyal Omani 183,046 138,027 45,019

United States Dollar 73,844 55,936 17,908

Euro 30 166 136

UAE Dirhams 390 4 386

Pound Sterling - - -

31 December2018

Assets Liabilities & URIA Net assets

Riyal Omani 148,579 68,724 79,855

United States Dollar 72,991 83,757 (10,766)

Euro 1,720 1,716 4

UAE Dirhams 714 1 713

Pound Sterling 14 - 14

The Window takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in aggregate for both overnight and intraday positions, which are monitored daily.

Changes in the non-parity foreign currency prices as at 31 December 2019 and 2018 on net assets are considered negligible.

D4 Operational risk

Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk arises due to variety of causes associated with the Window’s processes, personnel, technology and infrastructure and from external events and to include risks other than credit, market and liquidity risks.

The Window has adopted same policies and procedures to mitigate operational risk as those of the head office. Advantages of head office processes and infrastructure are obtained in compliance with IBRF. Policies on following processes are also similar to that of the head office:

• Track loss events and potential exposures;• Reporting of losses, indicators and scenarios on a regular basis; and• Review the reports jointly by risk and line managers.

In addition to the above, the Window has a dedicated Shari’ah compliance officer responsible to ensure compliance with IBRF, Shari’ah guidelines and other applicable laws and regulations.




D6 Capital management (continued)

D6.1 Regulatory capital (continued)

The international standard for measuring capital adequacy is the risk asset ratio, which relates capital to balance sheet assets and off-balance sheet exposures weighted according to broad categories of risk.

The risk asset ratio calculated in accordance with the capital adequacy guidelines of the Window for International Settlement is as follows:

31 December 2019

RO’000

31 December 2018

RO’000

Tier 1 capitalAssigned capital 30,000 25,000Legal reserve 134 134General reserve 988 988Retained earnings 2,266 1,360

Total 33,388 27,482 ══════ ══════

Tier 2 capitalImpairment allowance on portfolio basis 1,510 1,510

Total regulatory capital 34,898 28,992 ══════ ══════

Risk weighted assetsWindow credit and market risk 211,118 197,310Operational risk 10,684 7,779

Total risk weighted assets 221,802 205,090 ══════ ══════

Capital adequacy ratioTotal regulatory capital expressed as a percentage of total risk weighted assets 15.73% 14.14%

Total tier 1 capital expressed as a percentage of total risk weighted assets 15.05% 13.40% ══════ ══════

The capital adequacy ratio given above is calculated in accordance with the Basel II norms as adopted by Central Bank of Oman and IBRF.

D7 Segmental information

The activities of the Window are performed as one unit. Reporting to management is made by business unit. The Window operates solely in the Sultanate of Oman and as such no geographical segment information is presented.

D8 Other disclosures

Following are the disclosures required under Islamic Banking Regulatory Framework:

• There has been no comingling of the funds. • As of 31 December 2019, an amount of RO NIL thousands is payable to head office.• During the year, head office has allocated RO 1,395 thousands (2018: RO 641 thousands) cost for shared services. • There has been no amount transferred to Charity fund during the year. • Proposed remuneration and sitting fee of SSB board is as follows:

RO

Name Remuneration Sitting Fee Total

Dr. Hussain Hamed Hassan 15,400 1,155 16,555Dr. Mudassir Siddiqui 11,550 1,155 12,705Sheikh Azzan bin Nasir Farfoor Al Amri 7,700 1,155 8,855Sheikh Fahad Mohamed Hilal Al Khalili 7,700 1,155 8,855

42,350 4,620 46,970 ══════ ══════ ══════



I N FO R M AT I O N TO M A K E W I N N I N G D E C I S I O N S-

REGULATORY DISCLOSURESSOHAR ISLAMIC

-


REGULATORY DISCLOSURES UNDER BASEL II & BASEL III FRAMEWORK & IBRF AS AT 31 DECEMBER 2019


1. INTRODUCTION

Sohar International Bank SAOG (the head office), under an Islamic Banking License issued by the Central Bank of Oman (CBO) on 30 April 2013, carries out Islamic banking operations and other financial trading activities in accordance with Islamic Shari’ah rules and regulations under the name of “Sohar Islamic” (the Window). A separate set of financial statements is included in the consolidated financial statements of the Bank.

The following disclosures are being made in accordance with the Islamic Banking Regulatory Framework (IBRF) issued by Central Bank of Oman (CBO). These disclosures aim to provide market participants material qualitative and quantitative information about Sohar Islamic Window risk exposures, risk management strategies and processes of capital adequacy. The Window has not operated as a separate legal entity.

There is no restriction on transfer of funds between the Window and the Bank. However, as per the guidelines contained in Islamic Banking Regulatory Framework (IBRF), the Window is not permitted to place funds with the Bank.

2. SUBSIDIARIES AND SIGNIFICANT INVESTMENTS

Sohar Islamic is wholly owned window of Sohar International Bank SAOG.

3. CAPITAL STRUCTURE & UNRESTRICTED INVESTMENT ACCOUNT HOLDER

As required under clauses 3.5.1.2 and 3.5.1.3 of Title 1, ’Licensing Requirements’ of Islamic Banking Regulatory Framework (IBRF) issued by CBO, the head office assigned RO 30 million to the Window as assigned capital.As per IBRF, windows have to keep a minimum of RO 10 million as assigned capital.

31 December 2019

RO’000

Tier 1 capital

Assigned capital 30,000

Legal reserve 134

General reserve 988

Retained earnings 2,266

Total 33,388

Tier 2 capital

Impairment allowance on portfolio basis 1,510

Total 1,510

Total regulatory capital 34,898

Equity of Investment account holder 29,187

The Window has not maintained any Profit Equalization and Investment risk reserve.




4. CAPITAL ADEQUACY (CONTINUED)

The net exposure after risk mitigation subject to standardized approach is as follows:

RO’ 000

Exposure

RWAs - Standardized

Approach

Sovereign - carrying 0% 27,249 -

Banks - -

carrying 20% 4,999 1,000

carrying 50% 285 143

Corporate - -

Carrying 75% - -

Carrying 100% 8,572 8,572

Retail - carrying 100% 30,169 30,169

Claims secured by residential property - carrying 35% 76,276 26,697

Claims secured by commercial property - carrying 100% 106,361 106,361

Non-Performing Loans carrying 100% 546 546

Other Assets - carrying 100% 4,785 4,785

Total On Balance Sheet 259,242 178,273

Off-balance Sheet Items

carrying 50% 8,356 4,115

carrying 100% 31,702 26,719

40,058 30,834

Total Banking Book 299,301 209,107

5. DISCLOSURE FOR INVESTMENT ACCOUNT HOLDERS (IAH)

Investment account holders (depositors) engaged in funding of the Window’s activities on a profit and loss-bearing basis as Rabulmaal (investor) under a Mudaraba contract. The underlying Mudaraba contract governs the relationship between the account holders and the Licensee.

The Window has only Unrestricted Investment account holders.

5.1 Unrestricted Investment Account holder

Equity of Investment account holder under Mudaraba, Mudaraba is a form of partnership in which two or more persons establish a business (Shirkat ul Aqd) for sharing in the profits, in an agreed proportion and one or more of the partner(s) contribute with their efforts while the other partner(s) provide the financial resources. The former is/are called “Mudarib” and the latter “Rabulmaal”.

5.2 Rules and Structure of Mudaraba and Shari’ah essentials

1. Mudaraba means an arrangement in which a person participates with his money (called Rabulmaal) and another with his efforts (called Mudarib) for sharing in profit from investment of these funds in an agreed manner.

2. A Mudarib may be a natural person, a group of persons, or a legal entity and a corporate body. 3. Rabulmaal shall provide his investment in money or species, other than receivables, at a mutually agreed valuation. Such

investment shall be placed under the absolute disposal of the Mudarib. 4. The conduct of business of Mudaraba shall be carried out exclusively by the Mudarib within the framework of mandate

given in the Mudaraba agreement. 5. The profit shall be divided in strict proportion agreed at the time of contract and no party shall be entitled to a predetermined

amount of return or remuneration. 6. Financial losses of the Mudaraba shall be borne solely by the Rabulmaal, unless it is proved that the Mudarib has been guilty

of fraud, negligence or willful misconduct or has acted in contravention of the mandate.

4. CAPITAL ADEQUACY

The Window’s capital adequacy ratio is calculated according to guidelines set by the CBO guidelines. It stipulates that the license should maintain a minimum capital adequacy ratio of 11%.

The Window’s lead regulator, Central Bank of Oman, sets and monitors capital requirements for the Window as a whole.

As required under clauses 3.5.1.2 and 3.5.1.3 of Title 1, ’Licensing Requirements’ of Islamic Banking Regulatory Framework (IBRF) issued by CBO, the head office has allocated RO 30 million to the Window as assigned capital.

The Bank has an Internal Capital Adequacy Assessment Process (ICAAP) through which senior management assesses the Bank’s capital against its risk profile. Asset Liability Committee (ALCO) is the forum in which the capital adequacy is assessed, based on the business forecast and the risk profile envisaged.

Total and Tier 1 Capital Ratio, Risk Weighted Assets RO ’000

S. No. Details

Gross Balances

(Book Value)

Net Balances

(Book Value)*

Risk Weighted

Assets

1 On-balance sheet items 259,242 257,311 178,272

2 Off-balance sheet items 40,059 40,059 30,834

3 Derivatives - - -

4 Total for Credit Risk - 297,370 209,106

5 Risk Weighted Asset for Market Risk - - 2,013

6 Risk Weighted Asset for Operations Risk 10,684

7 Total Risk Weighted Assets 297,370 221,803



10 Tier 3 Capital -

11 Total Regulatory Capital 34,898

11.1 Capital requirement for credit risk 25,093

11.2 Capital requirement for market risk 242

11.3 Capital requirement for operational risk 1,282

12 Total required capital 26,617

13 Tier 1 Ratio 15.05%

14 Total Capital Ratio 15.73%

* Net of provisions

Disclosure of Capital Requirements according to different risk categories for each Shari’ah-compliant financing contract.

RO’ 000


Capital Requirements

Murabaha receivables 13,480 1,483

Ijarah muntahia bittamleek 34,531 3,798

Istisna followed by Ijarah muntahia bittamleek 72,685 7,995

Diminishing Musharaka 43,641 4,800

Placements with banks 1,142 126

Investments 8,008 881

Others 4,785 526

Off-Balance sheet 30,834 3,392

209,106 23,001

Of above Risk weighted assets funded by the URIA 29,107 3,202

Assets funded by the URIA are treated at par for all other assets for calculation of capital adequacy.




5. DISCLOSURE FOR INVESTMENT ACCOUNT HOLDERS (IAH) (CONTINUED)

5.3 Profit Distribution Mechanism between Shareholders & Depositors of Sohar Islamic under the Common Pool (continued)

5.3.4 Transfer to or from Profit Equalization Reserve (PER)

The percentage to be approved by Bank’s management, subject to internal Shari’ah approval, that should be appropriated by the Bank out of the total common pool profit as per the policy of the Bank before any distribution takes place, in order to ensure certain level of cushion for the Investment portfolio.

Any provisions that are required against the Islamic financing assets or investments will be provided in the books as per the Bank’s policy which will be in adherence to the Central Bank’s revised provisioning policy.

The balance of the PER shall also be maintained as a current account.

5.3.5 Transfer to or from (IRR)

In case the rate of return to the depositors in a certain profit distribution period is substantially higher than the market rates, the Bank’s management may decide to deduct, after taking permission from the SSB, a portion of depositors’ share of profit and transfer the same to the IRR.

In case the rate of return to the depositors in a certain profit distribution period is lower than the market, the Banks’s management may decide to compensate the depositors by transferring the required amount from the said reserve account to increase depositors’ return.

5.3.6 Assignment of a portion of shareholders’ profit to depositors

If required, the Bank may decide to allocate some portion from their own profit to a specific deposit category(s). This could be either due to increase in the rate of profit announced by other Islamic financial institutions/competitors or to encourage a specific category of depositors.

No Profit Equalization Reserve and Investment Risk Reserve was created during the year and no allocation has been made by the shareholders.

The Window has not charged any administrative expense to the pool.

5.4 Quantitative Disclosures

During the year, profit calculated is distributed among the participation factor declared before each profit calculation period. During the year, the participation factor range applied and the range of rate earned is as below:

Product Participation factor Average rate earned

Saving-RO 17 0.68%

Saving-AED 7 0.22%

Saving-USD 7 0.30%

Term 6 Month 10 0.00%

Term 12 Months 18 0.74%

At the close of the year, the amount of unrestricted investment account holder with respective category was:

ProductAmount RO‘000

% of total URIA

Saving-RO 28,839 98.81%

Saving-AED 343 1.18%

Saving-USD - 0.00%

Term 6 Month 5 0.02%

TOTAL 29,187 100%

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


5.3 Profit Distribution Mechanism between Shareholders & Depositors of Sohar Islamic under the Common Pool

This profit distribution mechanism sets out the Shari’ah-compliant mechanism for distribution of the Net Profit Shareholders Funds and Depositors Funds, combined together in the Common Pool will be called Joint Mudaraba capital (“Joint Mudaraba Capital”). Net profit will be calculated in accordance with the following formula: N = G - (E + D + P) Where:‘N’ means Net Profit‘G’ means Gross Profit‘E’ means direct expenses in relation to the Activities (“Direct Expenses”)‘D’ means depreciation of the investment assets (“Investment Assets”) in the Common Pool ‘P’ means provisions for bad and doubtful accounts

During the year, no expense and provision has been allocated to the pool.

Unrestricted investment account holder accounts are monies invested by customers under Mudaraba to form a pool of funds. Investment account holders’ funds are commingled with the Banks’s funds for investment, no priority is granted to any party for the purpose of investments and distribution of profits.

Net Profit will be allocated to the pool participants based on the weighted average balances.

Participation factor, weights or profit-sharing ratios are pre-decided by the management of the Bank and are intimated to the investors before start of the month. Weighted average balance is calculated at the end of the period by multiplying the participation factor with average balance for the period.

5.3.1 Modarba fee

The Modarba fee will be deducted from allocated profit as per the pre-agreed ratio as approved by SSB which will be advised to customers through the website or by posting in branches. Initially, at the start-up stage, it is fixed as:

Bank – Up to 70% Depositors - 30%

During the year, there was no change in ratios from SSB of the Window. The Bank can create reserves as allowed by Shari’ah and CBO for smoothing of returns to investors and risk management purposes. Two types of reserves allowed are Profit Equalization Reserve (PER) and Investment Risk Reserve (IRR). The Window does not maintain any reserves.

5.3.2 Profit Equalization Reserve (PER)

PER comprises amounts appropriated out of the gross income from the Mudaraba to be available for smoothing returns paid to the IAH and the shareholders, and consists of IAH portion and a shareholders portion. The basis for computing the amounts to be appropriated are applied in accordance with SSB directions.

5.3.3 Investment Risk Reserve (IRR)

This reserve is created out of the depositors’ share of profit out of the Net Profit from the Common Pool. The purpose of the reserve is to offset the effect of future losses. The available balance in the reserve account shall be invested in the Common Pool and the profit earned by investing such balance will be added to the reserve account.

The basis for computing the amounts to be appropriated are applied in accordance with SSB directions.

This is to secure suitable and competitive return to the depositors in case there are certain extraordinary circumstances, depressing the return, which were anticipated by the depositors. The disposition of the reserve amount will take place with the prior approval of the SSB.

In case the balance in the reserve account is not sufficient to face the competition, the shareholders may grant part of their share of profit to the depositors with the approval of SSB.




6. RISK EXPOSURE AND ASSESSMENT

6.1 Management of risk in Bank Sohar - approach and policy

The risk management philosophy of the Window is to identify, capture, monitor and manage the various dimensions of risk with the objective of protecting asset values and income streams such that the interest of head office (and others to whom Sohar Islamic owes a liability) are safeguarded, while maximizing the returns intended to optimize head office return and maintaining its risk exposure within self-imposed parameters.

Sohar Islamic offers to Corporate and SME customers in Phase One of its operations, products like Term Financing, Working Capital Financing, Short-term Financing, Corporate Deposits, Trade Finance, Cash Management Services and Treasury products. Based on the assessment of respective credit risk, security of short-term assets, plant, machinery and real estate is taken to strengthen the quality of its exposure. Sohar Islamic is guided by CBO’s regulatory requirements to single maximum exposure and has further controls over exposure to senior management staff members or related parties.

Sohar Islamic approves credit through an Executive Credit Committee (ECC) appointed by the Board of Directors of Bank Sohar with specific delegated limits for exceptions’ approvals by Head of Islamic Window.

In Consumer Finance, the policy is guided by the objectives of granting finance on sound and collectible basis, investing funds for the benefit of shareholders and protection of depositors and to serve the legitimate needs of communities in line with Shari’ah guidelines as approved by the Shari’ah Supervisory Board.

The Risk Management process is guided by risk diversification and avoidance of concentration of risk. Further, Business Risk Review is the mainstay of internal control of financing portfolio. Periodic Asset Quality Reviews, Shari’ah Reviews, Process Reviews, Administrative and Documentation Reviews and Compliance Reviews are performed for both business and senior management.

Currently, Consumer Finance products are limited to Vehicle and House Financing only. Financing and advances are approved through Approval Matrix defining specific limits for designated officials and the Executive Credit Committee.

The Board of Directors of the parent bank has the power to approve all policy issues relating to credit and risk. It has constituted the Credit Approval Committee (CAC) and granted the highest credit approving authority in the Bank up to the maximum regulatory limits.

6.2 Strategies, Processes and Internal Controls

Comprehensive Risk Management Policy Framework is approved by the Board of the parent bank. These are also supported by appropriate limit structures. These policies provide an enterprise-wide integrated risk management framework in the Bank, which are also applicable to Sohar Islamic. The limit imposed on the type of assets are as per CBO requirements and bank policies.

Sohar Islamic is exposed to various types of risks, such as market, credit, profit rate, liquidity and operational, all of which require comprehensive controls and ongoing oversight. The risk management framework summarizes the spirit behind Basel II, which includes management oversight and control, risk culture and ownership, risk recognition and assessment, control activities and segregation of duties, adequate information and communication channels, monitoring risk management activities and correcting deficiencies.

6.3 Credit risk

Sohar Islamic manages its credit risk exposure by evaluating each new product/activity with respect to the credit risk introduced by it. It has established a limit structure to avoid concentration of risks for counterparty, sector and geography.



RO'000

Ijarah muntahia

bittamleekRO'000

Istisna followed by Ijarah

muntahia bittamleek

RO'000


RO'000

Wakala placements


RO'000


RO'000Total

RO'000

Neither past due not impaired

12,633 65,794 80,918 42,269 5,284 23,423 230,321

Past due but not impaired 441 3,880 4,241 - - - 8,562

Past due and impaired 292 1,423 94 - - - 1,809

Total 13,366 71,097 85,253 42,269 5,284 23,423 240,692

Definitions of past due and impaired

The classification of credit exposures is considered by the Bank for identifying impaired credit facilities, as per CBO circular number BM 977 dated 25 September 2004.


5.4 Quantitative Disclosures (continued)

Return on Assets & URIA:

RO’ 000

2019 2018 2017 2016 2015

Income on Mudaraba Assets 3,125 2,252 1,992 1,630 1,130

Income distributed to URIA 771 744 392 400 175

Return on Average Modarba Assets 4.02% 4.16% 4.40% 4.49% 4.72%

Return on Average URIA 2.64% 1.82% 1.14% 1.31% 1.00%

Assets allocated to common pool are:

RO’ 000

Gross exposure Provision

Net Exposure


Istisna followed by Ijarah muntahia bittamleek 1,430 12 1,418

Diminishing Musharka 19,474 24 19,450

77,677 1,164 76,513

Ratio of Equity of Unrestricted Investment Account holder to jointly finance assets:

As of reporting date, the assets allocated to the pool has been financed 37.57% by the Equity of Unrestricted Investment Accounts holder.

The Window has earned gross return of 4.68% on average equity in pool assets during the year.

The Bank does not have restriction on Investment in URIA pool except if any imposed by the CBO and limits set in Banks’s policy.

The Window does not have any Restricted Investment Accounts.





6.3 Credit risk (continued)

6.3.3 Industry or counterparty type distribution of exposures, broken down by major types of credit exposure

S. No. Economic sector


RO ’000

Ijarah muntahia

bittamleek RO ’000


muntahia bittamleek

RO ’000

Diminishing MusharkaRO ’000

Debt-type investments

RO ’000Total

RO ’000

Off-balance sheet

exposureRO ’000

1 Import trade 8 - - 472 - 480 -

2 Construction - 9,559 56,875 28,366 8,105 102,904 30,599

3 Manufacturing - - 8,008 - - 8,008 3,812

4 Service 861 5,109 863 2,843 - 9,676 131

5 Personal financing 12,738 56,759 19,794 11,960 - 101,252 -

6 Government - - - - 15,318 15,318 -

7 Non-resident - 963 - - - 963 -

Total 13,607 72,390 85,540 43,641 23,423 238,601 34,542

6.3.4 Residual contractual maturity breakdown of the whole portfolio, broken down by major types of credit exposures

S. No. Time band


RO ’000

Ijarah muntahia

bittamleek RO ’000


muntahia bittamleek

RO ’000

Diminishing MusharkaRO ’000

Debt-type investments

RO ’000Total

RO ’000

Off-balance sheet

exposureRO ’000

1 Up to 1 month 334 533 176 739 - 1,782 161

2 1 - 3 months 606 655 557 612 - 2,430 1,296

3 3 - 6 months 656 1,319 656 689 - 3,320 3,759

4 6 - 9 months 851 1,096 720 941 - 3,608 2,549

5 9 - 12 months 764 1,185 870 916 - 3,735 552

6 1 - 3 years 5,493 8,870 8,873 6,321 - 29,557 22,702

7 3 - 5 years 2,797 8,577 12,113 5,728 23,423 52,638 3,512

8 Over 5 years 2,106 50,155 61,575 27,695 - 141,531 11

Total 13,607 72,390 85,540 43,641 23,423 238,601 34,542

6.3.5 Amount of impaired financing and advances and, if available, past due financing and advances provided separately broken down by significant geographic areas including, if practical, the amounts of specific and general allowances related to each geographical area

RO ’000

Provisions held

S. No. CountriesGross

financing NPLs Stage 1 & 2 Stage 3Reserve

Profit

Provision made during

the year

Advances written off during the

year

1 Oman 214,156 846 968 214 25 336 -

2 Other GCC 1,022 962 963 963 60 - -

Total 215,178 1,808 1,931 1,177 85 336 -



6.3.1 Total gross credit risk exposures, plus average gross exposure over the period broken down by major types of credit exposure

31 December 2019

Average gross exposure

Total gross exposure

S. No. Type of credit exposure RO’000 %

1 Murabaha receivables 12,768 13,607 5.70%

2 Ijarah muntahia bittamleek 63,289 72,390 30.34%

3 Istisna followed by Ijarah muntahia bittamleek 69,038 85,540 35.85%

4 Diminishing Musharka 38,519 43,641 18.29%

5 Debt-type investments 20,176 23,423 9.82%

Total 203,790 238,601 100%

Percentage of financing for each category of counterparty to gross financing.

31 December 2019

RO’000 %

Corporate 113,926 52.94%

Retail 101,252 47.06%

Total 215,178 100%

6.3.2 Geographic distribution of exposures, broken down in significant areas by major type of credit exposure

S. No. Type of credit exposureOman

RO ’000

Other GCC countries RO ’000

Total RO ’000

1 Murabaha receivables 13,607 - 13,607

2 Ijarah muntahia bittamleek 71,368 1,022 72,390

3 Istisna followed by Ijarah muntahia bittamleek 85,540 - 85,540

4 Diminishing Musharka 43,641 - 43,641

5 Debt-type investments 23,423 - 23,423

Total 237,579 1,022 238,601





6.4 Profit rate risk in banking book

Profit rate risk is the potential impact of the mismatch between the rate of return on assets and the expected rate of funding due to the sources of finance. Senior management identifies the sources of profit rate risk exposures based upon the current as well as forecasted balance sheet structure of the Window. The profit rate risk in the Window may arise due to the following transactions:

• Murabaha transactions • Wakala transactions • Ijara Muntahia Bittamleek • Diminishing Musharka • Sukuk; and • Investments

Window management believes that the Window is not exposed to material profit rate risk as a result of mismatches of profit rate re-pricing of assets, liabilities and equity of investment account holders as the re-pricing of assets, liabilities and equity of investment account holders occur at similar intervals. The profit distribution to equity of investment account holders is based on profit sharing agreements. Therefore, the Window is not subject to any significant profit rate risk.

6.4.1 Sources of Profit Rate Risk

The different profit rate risks faced by the Window can be classified broadly into the following categories:

• Re-pricing risk that arises from timing differences in the maturity (for fixed rate) and re-pricing (for floating rate) of assets, liabilities and off balance sheet positions. As profit rates vary, these re-pricing mismatches expose the Window’s income and underlying economic value to unanticipated fluctuations;

• Yield curve risk which arises when unanticipated shifts of the yield curve have adverse effects on the Window’s income and/or underlying economic value;

• Basis risk which arises from imperfect correlation in the adjustment in the rate earned on products priced and the rate paid on different instruments with otherwise similar re-pricing characteristics. When profit rates change, these differences can give rise to unexpected changes in the cash flows and earnings spread between assets, liabilities, and off-balance sheet instruments of similar maturities or re-pricing frequencies; and

• Displaced Commercial Risk refers to the market pressure to pay returns that exceeds the rate that has been earned on the assets financed by the liabilities, when the return on assets is under performing as compared to competitor’s rates.

6.4.2 Profit rate risk strategy

Profit rate risk arises from the possibility that changes in profit rates will affect future profitability or the fair values of financial instruments. The Window is exposed to profit rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off-balance sheet instruments that mature or re-price in a given period. The Window manages this risk through risk management strategies.

The effective profit rate (effective yield) of a monetary financial instrument is the rate that, when used in a present value calculation, results in the carrying amount of the instrument. The rate is a historical rate for a fixed rate instrument carried at amortized cost and a current rate for a floating rate instrument or an instrument carried at fair value.

6.4.3 Profit rate risk measurement tools

The Window uses the following tools for profit rate risk measurement in its book:

• Re-pricing gap analysis which measures the arithmetic difference between the profit-sensitive assets and liabilities of Window book in absolute terms; and

• Basis Point Value (BPV) analysis which is the sensitivity measure for all profit rate priced products and positions. The BPV is the change in net present value of a position arising from a 1 basis point shift in the yield curve. This quantifies the sensitivity of the position or portfolio to changes in profit rates.

6.4.4 Profit rate risk monitoring and reporting

The Window has implemented information systems for monitoring, controlling and reporting profit rate risk. Reports are provided on a timely basis to Executive Committee and the Board of Directors of the head office.



6.3.6 Movements of gross financing and advances

RO ’000

Details Stage 1 Stage 2 Stage 3 Total

Opening Balance 159,436 21,440 1,592 182,468

Migration/changes (+ / -) 12,059 (12,453) 394 -

New Financing 43,996 500 - 44,496

Recovery of Financing 8,718 2,890 178 11,786

Financing written off - - - -

Closing Balance 206,773 6,597 1,808 215,178

Total ECL 1,823 108 1,177 3,108

Reserve Interest - - 85 85

6.3.7 Credit risk: Disclosures for portfolios subject to the standardized approach

6.3.7.1 Qualitative disclosures: For portfolios under standardized approach

The Window follows the standardized approach in assessing regulatory capital for credit risk. For sovereign risk, zero risk weight is applied, as permitted under this approach, whereas for exposures on banks, the risk weight applied depends on the rating of the banks by Eligible Credit Assessment Institution (ECAI) approved by CBO like Moody’s Standard & Poor, Fitch and Capital Intelligence, subject to the respective country rating. In the absence of external ratings for most of the corporate, the Bank treats them as unrated and applies 100% risk weight on their funded exposures. On the off-balance sheet exposures, the relevant credit conversion factors are applied and aggregated to banks or the corporate, as the case may be, and then the risk weight is applied as stated above. Unavailed or yet to be disbursed exposures are taken under commitments and risk weights assigned as permitted by the IBRF.

6.3.7.2 Quantitative disclosures

Credit rating analysis

The table below presents an analysis of debt securities, treasury bills, gross placements and other eligible bills by rating agency designation at 31 December 2019, based on Moody’s ratings or equivalent.

31 December 2019

RO ’000

A1 to A3 284

Baa1 to Baa3 5,000

Ba+ to B- 8,105

Sovereign 15,318

Total 28,707

The Window performs an independent assessment based on quantitative and qualitative factors in cases where a counterparty is unrated.

The Window follows a uniform approach of considering all corporates as unrated and applying 100% risk weights.

6.3.7.3 Credit risk mitigation: Disclosure for standardized approach

The Window does not make use of netting whether on or off-balance sheet.





6.5 Liquidity risk

The Window’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking damage to the Bank Sohar SAOG’s reputation.

Central treasury receives information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Central treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, financing and advances and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank as a whole. The liquidity requirements of business units are met through short-term financing and advances from central treasury to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements. The Bank has also laid down a comprehensive liquidity contingency plan for effective management of liquidity. In this process, due care is taken to ensure that the Window complies with all the CBO regulations.

All liquidity policies and procedures are subject to review and approved by Asset Liabilities Committee (ALCO). Computation of liquidity gap on maturity of assets and liabilities is provided. The computation has been prepared in accordance with guidelines provided in Circular BM 955 dated 7 May 2003.

6.5.1 Exposure to liquidity risk

The lending ratio, which is the ratio of the total financings and advances to customer deposits and capital, is monitored on a daily basis in line with the regulatory guidelines. Internally, the lending ratio is set at a more conservative basis than required by regulation. The Window also manages its liquidity risk on regular basis and by monitoring the liquid ratio which is a ratio of net liquid assets to total assets on a monthly basis. For this purpose net liquid assets are considered as including cash and cash equivalents and investment grade debt securities for which there is an active and liquid market.

Details of the reported lending and liquid ratio as at 31 December 2019 were as follows:

31 December 2019

Lending ratio Liquid ratio

Average for the year 85.52% 16.79%

Maximum for the year 86.08% 20.96%

Minimum for the year 84.13% 11.64%

The table below summarizes the maturity profile of the Window’s liabilities as on the reporting date based on contractual repayment arrangements. The contractual maturities of assets and liabilities have been determined on the basis of the remaining period at the statement of financial position date to the contractual maturity date and do not take account of the effective maturities as indicated by the Window’s deposit retention history and the availability of liquid funds.

Carrying amount

RO’000

Within three

months RO’000


RO’000

One to three years

RO’000

More than three years

RO’000Total

RO’000


Wakala deposits 174,426 22,290 70,673 31,831 54,674 179,468

Customer deposit and other accounts 17,485 - - - 17,485 17,485

Other liabilities 2,223 - - - 2,223 2,223

Total liabilities 194,134 22,290 70,673 31,831 74,382 199,176

Equity of Investment account holders 29,187 - - - 29,187 29,187

223,321 22,290 70,673 31,831 103,569 228,363

The Window prepares a liquidity gap report to monitor the Window’s short-term liquidity position on the Rial denominated assets and liabilities in a time horizon spanning one month. The gap is adjusted for availability of instruments for repo or refinance and also for unavailed committed lines of credit, if any. This statement of short-term liquidity is to be reported to the ALCO every month.

The Window’s exposure to profit rate risk has been further elaborated in Annexure 1 and 2.


6.4 Profit rate risk in banking book (continued)

6.4.5 Exposure to profit rate risk – non-trading portfolios

The Window’s profit sensitivity position based on contractual re-pricing arrangements at 31 December 2019 was as follows:

Effective annual

Profit Rate %

Within three months

RO’000


RO’000Over one year

RO’000

Non-sensitive to profit rate

RO’000


Assets

Cash and balances with central banks - - - 11,990

Due from banks and financial institutions 3.1 5,284 - - -

Murabaha receivables 5.73 - - - 13,366

Ijarah muntahia bittamleek 5.25 70,134 963 - -

Istisna followed by Ijarah muntahia bittamleek 5.71 73,525 11,728 - -

Diminishing Musharka 5.46 40,731 1,538 - -

Investment securities 5.6 - - - 23,423

Fixed assets - - - 1,095

Other assets - - - 3,534

Total assets 189,674 14,229 - 53,408


Wakala deposits 3.8 12,694 72,319 33,522 55,891

Customer current accounts - - - 17,485

Other liabilities - - - 2,223

Total liabilities 12,694 72,319 33,522 75,599

Equity of Investment Account Holders 1.99 29,187 - - -

Total liabilities and equity of Unrestricted Investment Account (URIA) 41,881 72,319 33,522 75,599

Total profit rate sensitivity gap 147,793 (58,090) (33,522) (22,191)

Cumulative profit rate sensitivity gap 147,793 89,703 56,181 33,990





6.5 Liquidity risk (continued)

6.5.2 Liquidity Coverage Ratio and Net Stable Funding Ratio

Net Stable Funding ratio:

RO ’000

Unweighted value by residual maturity

No < 6 6 months ≥ 1yr Weightedmaturity months to < 1yr value

1 Capital: 34,898 - - - 34,8982 Regulatory capital 33,388 33,3883 Other capital instruments 1,510 1,510

4Retail deposits and deposits from small business customers

65,835 - 6,407 - 65,018

5 Stable deposits 6 Less stable deposits 65,835 6,407 65,0187 Wholesale funding: 28,751 - 67,747 - 48,2498 Operational deposits 9 Other wholesale funding 28,751 67,747 48,249

10 Liabilities with matching interdependent assets11 Other liabilities: 38,894 36,488

12 NSFR derivative liabilities13 All other liabilities and equity not

included in above categories 36,055 36,488

14 Total ASF (Available stable funding) 184,652

RSF Item 15 Total NSFR high-quality liquid assets (HQLA)16 Deposits held at other financial

institutions for operational purposes17 Performing loans and securities: 0 5,284 7,650 198,799 174,84418 Performing loans to financial institutions secured

by Level 1 HQLA -

19 Performing loans to financial institutions secured by non- Level 1 HQLA and unsecured performing loans to financial institutions

-

20 Performing loans to non-financial corporate clients,loans to retail and small business customers, and loans to sovereigns, central banks and PSEs, of which

5,284 7,650 5,865

21 -With a risk weight of less than or equal to 35% under the Basel II Standardized approach for credit risk

-

22 Performing residential mortgages, of which: - - - 198,799 168,97923 With a risk weight of less than or equal to 35%

under the Basel II Standardized Approach for credit risk

198,799 168,979

24 Securities that are not in default and do not quali-fy as HQLA, including exchange-traded equities

0 -

25 Assets with matching interdependent liabilities - 26 Other Assets: 0 - 2,815 1,504 2,91127 Physical traded commodities,

including gold

28 Assets posted as initial margin for derivative contracts and contributions to default funds of CCPs

29 NSFR derivative assets 30 NSFR derivative liabilities before

deduction of variation margin posted

31 All other assets not included in the above cate-gories

2,815 1,504 2,911

32 Off-balance sheet items 765 34,542 1,76533 TOTAL RSF 179,52134 NET STABLE FUNDING RATIO (%) 102.86


6.5 Liquidity risk (continued)

6.5.2 Liquidity Coverage Ratio and Net Stable Funding Ratio

The Bank also monitors the liquidity through Liquidity Coverage ratio (LCR) and Net Stable Funding Ratio (NSFR). Current levels of these ratios are given below:

Liquidity Coverage ratio:

RO ’000

Total Unweighted

Value (average)

Total Weighted

Value (average)

High Quality Liquid Assets

1 Total High Quality Liquid Assets (HQLA) 27,249

Cash Outflows

2 Retail deposits and deposits from small business customers, of which: 40,131 3,883

3 Stable deposits 2,594 130

4 Less stable deposits 37,537 3,754

5 Unsecured wholesale funding, of which: 46,622 21,649

6 Operational deposits (all counterparties) and deposits in networks of cooperative banks - -

7 Non-operational deposits (all counterparties) 46,622 21,649

8 Unsecured debt

9 Secured wholesale funding -

10 Additional requirements, of which 765 54

11 Outflows related to derivative exposures and other collateral requirements - -

12 Outflows related to loss of funding on debt products - -

13 Credit and liquidity facilities 765 54

14 Other contractual funding obligations 2,745 2,745

15 Other contingent funding obligations 34,542 1,727

16 TOTAL CASH OUTFLOWS 30,059

Cash Inflows

17 Secured lending (e.g. reverse repos) - -

18 Inflows from fully performing exposures 11,974 10,333

19 Other cash inflows 62,000 1,715

20 TOTAL CASH INFLOWS 73,974 12,048

Total Adjusted Value

21 TOTAL HQLA 27,249

22 TOTAL NET CASH OUTFLOWS 18,011

23 LIQUIDITY COVERAGE RATIO (%) 151.29





6.8 Displaced Commercial Risk

Displaced commercial risk (DCR) refers to the magnitude of risks that are transferred to shareholders in order to cushion the Investment Account Holder (IAH) from bearing some or all of the risks to which they are contractually exposed in Mudaraba contracts.

Under a Mudaraba (profit sharing and loss-bearing) contract, unrestricted IAH are exposed to aggregate impact of risks arising from the assets in which their funds are invested, but this is managed by Sohar Islamic Window through DCR.

This risk-sharing is achieved by constituting and using various reserves such as PER, and by adjusting the Sohar Islamic Window’s profit share in order to smooth the returns payable to the IAH from exposure to the volatility of aggregate returns arising from banking risks, and thereby to enable payment of returns that are competitive in the marketplace. PER has been discussed above in detail.

Sohar Islamic Window manages its displaced commercial risk as outlined in its Profit Distribution Policy. The Window foregoes its fee in case displaced commercial risk arises. The Window manages profit rates with other Islamic Windows and full-fledged Islamic/conventional banks operating in Oman.

During the year, the Bank has on average charged a fee of 16% of income generated by the assets allocated to the pool.

The Window has not created any reserves so no analysis is presented for the same.

6.9 Contract Specific Risk

In each type of Islamic financing asset is exposed to a varying mix of credit and market risk, and accordingly capital is required to be allocated for such risk exposures.

As of reporting date, financing assets only carries credit risk and accordingly capital is allocated as per the required regulations by CBO. The current product mix does not change the nature of risk according to the stage of contract.

Disclosure of Capital Requirements according to different risk categories for each Shari’ah-compliant financing contract.

RO’ 000


Capital Requirements

Murabaha receivables 13,480 1,483

Ijarah muntahia bittamleek 34,531 3,798

Istisna followed by Ijarah muntahia bittamleek 72,685 7,995

Diminishing Musharaka 43,641 4,800

Placements with banks 1,142 126

Investments 8,008 881

Others 4,785 526

Off Balance sheet 30,834 3,392

209,106 23,001

7. SHARI’AH GOVERNANCE

A Shari’ah governance framework has been implemented in the Window whose main objective of is to ensure Shari’ah compliance at all the times. The key elements of Shari’ah governance framework of the Window are as follows: i. Shari’ah Supervisory Board (SSB) ii. Internal Reviewer who has the overall responsibility to undertake and monitor Shari’ah Compliance, Shari’ah Audit and

training functions in accordance with IBRF.

Compliance with Shari’ah (as manifested by the guidelines and Fatwa issued by the SSB) and as stipulated in IBRF is mandatory and is being done through review and approval of the contracts, agreements, policies, procedures, products, reports (profit distribution calculations), etc.


6.6 Market risk

Market risk is the exposure to loss resulting from the changes in the profit rates, foreign currency exchange rates and commodity prices. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return to risk.

Market risk is relevant to banking book and trading book but its measurement and management might differ in each book.

Sohar Islamic proactively measures and monitors the market risk in its portfolio using appropriate measurement techniques such as limits on its foreign exchange open positions although they are insignificant.

6.6.1 Market risk in trading book

Market risk incorporates a range of risks, but the principal elements are profit rate risk and foreign exchange risk.

Treasury business is conducted within approved market risk limits. It is the Treasurer’s responsibility to ensure that an appropriate market risk limits structure is available at all times to govern the business.

Limits are set for:

• Foreign exchange risk• Rate of return risk• Approved dealing products• Approved dealing currencies• Maximum tenor

The Assets and Liability Committee (ALCO) conducts periodical meetings to discuss the mismatches in assets and liabilities and assesses the profit rate risk, foreign exchange risk and liquidity risk that Sohar Islamic is exposed to, so as to take steps to manage such risks. With the guidance of ALCO, the Bank’s treasury manages profit rate and foreign exchange risks, adhering to the policy guidelines, which stipulate appropriate limits.

The capital charge for the applicable market risk is furnished below:

RO ’000

Profit rate position risk -

Equity position risk -

Foreign exchange risk 5,924

Commodity risk -

6.6.2 Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Board has set limits on the overall open position and for open position for each currency. The open position limits include overnight open position and intraday open position. Open positions are monitored on a daily basis and hedging strategies used to ensure positions are maintained within established limits.

6.7 Operational risk

Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk arises due to variety of causes associated with the Window’s processes, personnel, technology and infrastructure and from external events and to include risks other than credit, market and liquidity risks.

The Window has adopted same policies and procedures to mitigate operational risk as those of the head office. Advantages of head office processes and infrastructure are obtained in compliance with IBRF. Policies on following processes are also similar to that of the head office:

• Track loss events and potential exposures;• Reporting of losses, indicators and scenarios on a regular basis; and• Review the reports jointly by risk and line managers.

In addition to the above, the Window has a dedicated Shari’ah compliance officer responsible to ensure compliance with IBRF, Shari’ah guidelines, and other applicable laws and regulations.




7. SHARI’AH GOVERNANCE (CONTINUED)

Remuneration to SSB

RO

As at 31 December 2019 Remuneration Sitting Fee Total

Dr. Hussain Hamed Hassan 15,400 1,155 16,555

Dr. Mudassir Siddiqui 11,550 1,155 12,705

Sheikh Azzan bin Nasir Farfoor Al Amri 7,700 1,155 8,855

Sheikh Fahad Mohamed Hilal Al Khalili 7,700 1,155 8,855

42,350 4,620 46,970

Shari’ah Supervisory Board’s meetings and attendance

Name of Shari’ah Board Members 21 April-19 11 July-19 13 Oct-19 26 Jan-20

No. ofMeetings Attended

Dr. Hussain Hamed Hassan 3

Dr. Mudassir Siddiqui 4

Sheikh Azzan Al Amri 4

Sheikh Fahad Mohamed Hilal Al Khalili 4

Corporate Social Responsibility

Sohar Islamic conducts a customer awareness program on Islamic banking and also supports social Shari’ah-compliant activities.

Other disclosures

Following are the disclosures required under Islamic Banking Regulatory Framework:

• There has been no comingling of the funds. • As of 31 December 2019, an amount of RO NIL is payable to head office. • There has been no amount transferred to Charity fund during the year.

7. SHARI’AH GOVERNANCE (CONTINUED)

The Window ensures that the operations of the Islamic Banking Window are conducted in Shari’ah compliance and controlled manner by following policies and procedures:

a) An appropriate Shari’ah governance framework in compliance with IBRF, AAOIFI governance standards and guidelines and directives issued by SSB is maintained;

b) Key duties and functions are segregated. An independent executive is designated with the responsibility for Shari’ah compliance and audit;

c) Policies and procedures manuals and documentation in relation to our products, operations, compliance, trainings, and internal controls are maintained and available to relevant staff;

d) Shari’ah audit reports are submitted to the SSB in line with the agreed annual plan; e) Islamic Banking Window assets are kept separate and distinct from conventional assets; f) The Window cannot place funds with the conventional banks including Bank Sohar; g) The Window management ensures that staff for certain key functions reporting to their respective department heads with

dotted line reporting to the Head of the Window; h) The Window has dedicated staff for business functions, such as consumer, corporate, treasury, etc. and the staff reports to

the Head of Islamic Banking; and i) The core banking system adopted by Tte Window is capable of recognizing the unique nature of Islamic Banking contracts,

transactions and processes.

Shari’ah audits are conducted on quarterly basis in accordance with IBRF and submitted to SSB for its review and guidance. SSB has issued its annual report for 2019 on Shari’ah compliance of the Window and did not report any violations and did not direct any amount to Charity Account.

Internal Shari’ah Reviewer oversees the Shari’ah training plans and schedule for the Licensee. During the year 2019, training programs were conducted for the staff.

SSB maintains no business relationship with the Bank.

Profile of the Shari’ah Supervisory Board

Dr. Hussain Hamed Hassan

Honorable Dr. Hussain is a Professor of Shari’ah and Comparative Law at Cairo University, he did his PhD in the Faculty of Shari’ah from Al Azhar University, Egypt and Master of Comparative Jurisprudence from University of New York, USA and graduated in Law and Economics from University of Cairo, Egypt, and he has an honorable PhD in Civil Law from Durham University in United Kingdom. He has over 50 years of experience in Islamic Banking and is the Chairman of Shari’ah Supervisory Boards of more than 30 banks and financial institutions. He is also the author of more than 50 books and research papers, has written over 400 extensive articles and has also supervised the grand plan of translating 200 Islamic books into different languages. Additionally, he has successfully converted many conventional banks and financial institutions into Islamic ones.

Dr. Mudassar Siddiqui

Dr. Mudassar Siddiqui is an internationally renowned expert of Islamic Studies and Western laws. He did his PhD in Law from Chicago Kent College of Law, USA; Master of Law from Harvard Law School, USA; and Islamic Studies from, Islamic University of al-Madina al-Munawwarah, Kingdom of Saudi Arabia. He is a member of the AAOIFI Shari’ah Standards Committee; the Fiqh Council of North America; and a Research Fellow at the International Shari’ah Research Academy for Islamic Finance in Malaysia. He has more than 30 years of experience in providing Shari’ah and Law consultancy, Islamic banking documentation, research, lectures and arbitration for more than 40 worldwide organizations, universities and research centers.

Sheikh Azzan bin Nasir Farfoor Al Amri

Holding a bachelor’s degree in Islamic Studies and with a specialisation in Judiciary, Sheikh Azzan bin Nasir Farfoor Al Amri has been working as the secretary to the Grand Mufti of the Sultanate of Oman in the Fatwa Section since 2001. He is also well versed in Shari’ah Law, having done numerous courses in relevant fields and participated in many related workshops and conferences.

Sheikh Fahad Mohamed Hilal Al Khalili

Sheikh Fahad graduated from the Florida Atlantic University USA after which he joined the Central Bank of Oman (CBO), where he was part of the Treasury and Investment Division. Thereafter, Sheikh Fahad joined Al Madina Investment where he became the Deputy General Manager of Investment Banking. His key responsibilities included portfolio management, promotion of Greenfield Ventures and handling high net worth individuals. Recently, Sheikh Fahad founded Bayan Investment House, which is focused on building long-term relationships by provided investment banking and advisory services.


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-

-

-

-

-

Tota

l 1

32,5

67

28

,177

2

8,3

76

5,8

54

9

,68

0

40

,734

4

0,4

48

1

42,

674

4

28,5

11

Exposure to interest rate risk – Annexure 2

31 December2019

RO ’000

Net Profit Income 5,854

Capital 34,898

Based on 50 bps Profit rate shock

Impact of 50 bps profit rate shock 316.13

Impact as % to Net profit 5.40

Impact as % to CAPITAL 0.91


Impact of 100 bps profit rate shock 632.26

Impact as % to Net profit 10.80



Impact of 200 bps profit rate shock 1,265

Impact as % to Net loss 21.60





RE

GU

LATO

RY

DIS

CLO

SUR

ES

UN

DE

R B

ASE

L II

& B

ASE

L II

I FR

AM

EW

OR

K &

IBR

F

AS

AT

31 D

EC

EM

BE

R 2

019

RECONCILIATION TEMPLATE AS AT DECEMBER 2019

Step 1 : RO ‘000


statementsUnder regulatory

scope of consolidation


Assets

Cash and balances with Central Bank of Oman 11,990 11,990

Certificates of deposit - -

Due from banks 5,284 5,284

Financing and advances 211,985 211,985

Investments in securities 23,423 23,423

Loans and advances to banks - -

Property and equipment 1,095 1,095


Other assets 3,534 3,534

Total assets 257,311 257,311

Liabilities

Due to banks 15,588 15,588

Customer deposits 205,510 205,510

Current and deferred tax liabilities - -

Other liabilities 2,223 2,223

Subordinated debts -

Compulsory convertible bonds -

Total liabilities 223,321 223,321

Shareholders' equity -

Paid-up share capital 30,000 30,000

Share premium -

Legal reserve 134 134

General reserve 988 988

Retained earnings* 2,868 2,868

Cumulative changes in fair value of investments - -

Subordinated debt reserve - -

Total shareholders' equity 33,990 33,990

Total liability and shareholders’ funds 257,311 257,311

STA

TEM

EN

T O

N M

ATU

RIT

Y O

F A

SSE

TS

AN

D L

IAB

ILIT

IES

(MA

L)

Ann

exur

e 3

(con

tinu

e)

RO

’00

0

No.

Out

flow

s (L

iab

iliti

es a

nd O

BS)

Up

to 1

mon

th1-

3 m

onth

s3

-6m

onth

s6

-9

mon

ths

9-1

2 m

onth

s1-

3 ye

ars

3-5

ye

ars

Ove

r20

yea

rsTo

tal

1C

urre

nt D

epos

its 14

,740

14

,740

11

,05

5

7,3

70

7,3

70

-

-

18,4

25

73,

700

2Sa

ving

Dep

osits

876

8

74

874

8

74

874

4

,369

4

,369

4

,369

1

7,4

80

3Ti

me

Dep

osits

7,2

16

70

5

20

,50

8 14

,963

3

1,761

2

5,7

05

2

,961

5

,385

1

09

,20

4

4O

ther

Dep

osits

4,9

39

5

88

7

57

28

2

-

5,1

26

5B

alan

ces

due

to H

O/A

ffilia

tes/

Bra

nche

s 5

,00

0

-

-

3,8

50

-

-

-

-

8

,85

0

6B

alan

ces

due

to O

ther

Ban

ks -

5

,775

-

9

63

-

-

-

-

6,7

38

7C

ertifi

cate

of D

epos

its -

-

-

-

-

-

-

-

-

8O

ther

Bor

row

ings

-

-

-

-

-

-

-

-

-

9N

et In

ter-

bra

nch

Tran

sact

ions

-

-

-

-

-

-

-

-

-

10B

ills

Pay

able

-

-

-

-

-

-

-

-

-

11In

tere

st P

ayab

le -

-

-

-

-

-

-

-

12P

rov.

oth

er th

an fo

r Loa

n Lo

sses

and

Dep

. in

Invt

s. -

-

-

-

-

-

-

-

-

13O

ther

Lia

bili

ties

2,2

23

-

-

-

-

-

-

-

2,2

23

14Sp

ot a

nd F

orw

ard

Sal

es 5

2,0

40

21,9

45

19,3

95

-

-

9,8

03

-

-

10

3,18

3

15Sw

aps

-

-

-

-

-

-

-

-

-

16O

ptio

ns -

-

-

-

-

-

-

-

-

17R

epos

-

-

-

-

-

-

-

-

-

18Le

tter

s of

Cre

dit/

Gua

rant

ees/

Acc

epta

nces

247

9

91

643

8

7 11

14

-

-

1

,993

19C

omm

itted

Lin

es o

f Cre

dit

-

-

-

-

-

60

,00

0

-

-

60

,00

0

20U

nutil

ized

por

tion

of O

verd

raft

and

Loa

ns a

nd A

dva

nces

1,64

7 8

75

70

0

20

8 2

56

338

2

9 4

0

4,0

93

21O

ther

s (S

pec

ify)

-

-

-

-

-

-

-

-

-

22C

apita

l -

-

-

-

-

-

-

3

0,0

00

3

0,0

00

23R

eser

ves

-

-

-

-

-

-

-

3,6

55

3

,65

5

24R

etai

ned

Ear

ning

s -

-

-

-

-

-

-

2

,266

2

,26

6

25Su

bor

din

ated

Deb

ts -

-

-

-

-

-

-

-

-

26O

ther

s (C

urre

nt Y

ear's

Pro

fit/L

oss)

-

-

-

-

-

-

-

-

-

27U

ndra

wn

Exp

osur

e (S

yn L

oans

) -

-

-

-

-

-

-

-

-

28C

onve

rtib

le B

ond

s -

-

-

-

-

-

-

-

-

Tota

l 8

8,9

28

45

,910

5

3,26

3 2

8,3

22

40

,329

1

00

,257

7

,361

6

4,1

40

4

28,5

11

Cum

ulat

ive

Liab

iliti

es 8

8,9

28

134

,838

1

88

,10

1 2

16,4

23

25

6,7

51

357

,00

9

36

4,3

70

428

,511

Gap

43,

639

(1

7,73

3) (2

4,8

87)

(22,

46

8)

(30

,64

9)

(59

,523

) 3

3,0

87

78

,534

Cum

ulat

ive

Gap

43,

639

2

5,9

07

1,0

20

(21,

44

8)

(52,

097

) (1

11,6

20)

(78

,534

) 0

Cum

ulat

ive

Gap

as

a %

of C

umul

ativ

e Li

abili

ties

49

.07

19

.21

0.5

4

(9.9

1) (2

0.2

9)

(31.

27)

(21.

55

) 0

.00





Step 2 (continued): RO ‘000





Capital & Liabilities

Paid-up capital 30,000 30,000

Of which:

Amount eligible for CET1 30,000 30,000

Amount eligible for AT1 - -

Reserves & surplus 1,122 1,122

Out of which:

Retained earnings 2,868 2,868

Other reserves - -

Cumulative changes in fair value of investments - -

Out of which:

Losses from fair value of investments NA NA a

Gains from fair value of investments NA NA

Haircut of 55% on gains NA NA

Total Capital 33,990 33,990

Deposits: 205,510 205,510

Of which:

Deposits from banks - -

Customer deposits 46,672 46,672

Deposits of Islamic banking window

Other deposits (please specify) Wakala deposits 158,838 158,838

Borrowings 15,588 15,588

Of which: from CBO - -

From banks 15,588 15,588

From other institutions & agencies

- -

Borrowings in the form of bonds, debentures and Sukuks - -

Others (subordinated debt) - -

Other liabilities & provisions Of which:

2,223 2,223

Out of which: DTAs related to investments

Out of which: DTLs related to investments b

Out of which: DTLs related to fixed assets - -

DTLs related to goodwill - -

DTLs related to intangible assets - -

TOTAL 257,311 257,311


Step 2 : RO ‘000





Assets

Cash and balances with CBO 11,990 11,990

Balance with banks and money at call and short notice 5,284 5,284

Investments : 23,423 23,423

Of which held to maturity 15,318 15,318

Out of investments in held to maturity:

Investments in subsidiaries NA NA

Investments in associates and joint ventures NA NA

Of which available for sale NA NA

Out of investments in available for sale: investments in subsidiaries

NA NA

Investments in associates and joint ventures NA NA

Held for trading 8,105 8,105

Loans and advances 211,985 211,985

Of which:

Loans and advances to domestic banks - -

Loans and advances to non-resident banks - -

Loans and advances to domestic customers 207,726 207,726

Loans and advances to non-resident customers for domestic operations

- -

Loans and advances to non-resident customers for operations abroad

1,022 1,022

Loans and advances to SMEs 3,237 3,237

Financing from Islamic banking window - -

Fixed assets 1,095 1,095

Other assets of which:

3,534 3,534

Goodwill and intangible assets Out of which:

Goodwill - -

Other intangibles (excluding MSRs) - -


Goodwill on consolidation - -

Debit balance in Profit & Loss account - -

Total Assets 257,311 257,311




RO ’000

Common Equity Tier 1 capital: instruments and reserves1 Directly issued qualifying common share capital (and equivalent for non-joint stock companies) plus related stock

surplus 30,000



4 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies) -

Public sector capital injections grandfathered until 1 January 2018 -

5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) -

6 Common Equity Tier 1 capital before regulatory adjustments 33,388

Common Equity Tier 1 capital: regulatory adjustments

7 Prudential valuation adjustments -


9 Other intangibles other than mortgage-servicing rights (net of related tax liability) -

10 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)

-

11 Cash-flow hedge reserve -

12 Shortfall of provisions to expected losses -

13 Securitization gain on sale (as set out in paragraph 14.9 of CP-1) -

14 Gains and losses due to changes in own credit risk on fair valued liabilities -

15 Defined-benefit pension fund net assets -

16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) -

17 Reciprocal cross-holdings in common equity -

18 Investments in the capital of banking, financial, insurance and Takaful entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the Bank does not own more than 10% of the issued share capital (amount above 10% threshold)

-

19 Significant investments in the common stock of banking, financial, insurance and Takaful entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold)

-

20 Mortgage Servicing rights (amount above 10% threshold) -

21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) -

22 Amount exceeding the 15% threshold -

23 Of which: significant investments in the common stock of financials -

24 Of which: mortgage servicing rights -

25 Of which: deferred tax assets arising from temporary differences -

26 National specific regulatory adjustments REGULATORY ADJUSTMENTS APPLIED TO COMMON EQUITY TIER 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT

-




27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions

-

28 Total regulatory adjustments to Common equity Tier 1 -


BASEL III COMMON DISCLOSURE TEMPLATE TO BE USED DURING THE TRANSITION OF REGULATORY ADJUSTMENTS


Step 3: RO ‘000

Common Equity Tier 1 capital: instruments and reserves

Component of regulatory capital reported by Bank

Source based on reference numbers/letters of the

balance sheet under the regulatory scope of

consolidation from step 2

1 Directly issued qualifying common share (and equivalent for non-joint stock companies) capital plus related stock surplus

30,000



4 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies)

-

5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1)

-

6 Common Equity Tier 1 capital before regulatory adjustments

33,990

7 Prudential valuation adjustments

-


9 Losses from fair value of investments NA a

10 DTL related to investments - b

11 Common Equity Tier 1 capital (CET1)

33,990




RO ’000Tier 2 capital: regulatory adjustments

52 Investments in own Tier 2 instruments -

53 Reciprocal cross-holdings in Tier 2 instruments -

54 Investments in the capital of banking, financial, insurance and Takaful entities that are outside the scope of reg-ulatory consolidation, net of eligible short positions, where the Bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold)

-

55 Significant investments in the capital banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation (net of eligible short positions)

-

56 National specific regulatory adjustments REGULATORY ADJUSTMENTS APPLIED TO TIER 2 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT

-




57 Total regulatory adjustments to Tier 2 capital -

58 Tier 2 capital (T2) 1,510

59 Total capital (TC = T1 + T2) 34,898

Risk Weighted Assets

RISK WEIGHTED ASSETS IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT -




60 Total risk weighted assets (60a+60b+60c) 221,802

60a Of which: Credit risk weighted assets 209,106

60b Of which: Market risk weighted assets 2,012

60c Of which: Operational risk weighted assets 10,684

Capital Ratios

61 Common Equity Tier 1 (as a percentage of risk weighted assets) 15.05

62 Tier 1 (as a percentage of risk weighted assets) 15.05

63 Total capital (as a percentage of risk weighted assets) 15.73

64 Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus coun-tercyclical buffer requirements plus G-SIB/D-SIB buffer requirement expressed as a percentage of risk weighted assets)

9.50%

65 Of which: capital conservation buffer requirement 2.50%

66 Of which: bank specific countercyclical buffer requirement

67 Of which: D-SIB/G-SIB buffer requirement

68 Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets)


RO ’000Additional Tier 1 capital: instruments

30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus -

31 Of which: classified as equity under applicable accounting standards 5 -

32 Of which: classified as liabilities under applicable accounting standards 6 -

33 Directly issued capital instruments subject to phase out from Additional Tier 1 -

34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1)

-


36 Additional Tier 1 capital before regulatory adjustments -

Additional Tier 1 capital: regulatory adjustments

37 Investments in own Additional Tier 1 instruments -

38 Reciprocal cross-holdings in Additional Tier 1 instruments -

39 Investments in the capital of banking, financial, insurance and Takaful entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the Bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold)

-

40 Significant investments in the capital of banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation (net of eligible short positions)

-

41 National specific regulatory adjustments REGULATORY ADJUSTMENTS APPLIED TO ADDITIONAL TIER 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-BASEL III TREATMENT

-




42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions -

43 Total regulatory adjustments to Additional Tier 1 capital -

44 Additional Tier 1 capital (AT1) -

45 Tier 1 capital (T1 = CET1 + AT1) 33,388

Tier 2 capital: instruments and provisions

46 Directly issued qualifying Tier 2 instruments plus related stock surplus -

47 Directly issued capital instruments subject to phase out from Tier 2 -

48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2)

-

49 Of which: instruments issued by subsidiaries subject to phase out -

50 Provisions 1,510

51 Tier 2 capital before regulatory adjustments 1,510






RO ’000National minima (if different from Basel III)

69 National Common Equity Tier 1 minimum ratio (if different from Basel III minimum) 7.00%

70 National Tier 1 minimum ratio (if different from Basel III minimum) 9.00%

71 National total capital minimum ratio (if different from Basel III minimum) 11.00%

Amounts below the thresholds for deduction (before risk weighting)

72 Non-significant investments in the capital of other financials -

73 Significant investments in the common stock of financials -

74 Mortgage servicing rights (net of related tax liability) -

75 Deferred tax assets arising from temporary differences (net of related tax liability) -

Applicable caps on the inclusion of provisions in Tier 2

76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardized approach (prior to application of cap)

-

77 Cap on inclusion of provisions in Tier 2 under standardized approach -

78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap)

-

79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approach -

Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2018 and 1 Jan 2022)

80 Current cap on CET1 instruments subject to phase out arrangements -

81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) -

82 Current cap on AT1 instruments subject to phase out arrangements -

83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) -

84 Current cap on T2 instruments subject to phase out arrangements -

85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) -


CONTACTS-

TO G E T H E R L E T ’ S S C A L E N E W H E I G H T S O F W I N N I N G-


B R A N C H N E T W O R K

Al Amerat Branch

P.O. Box 243

PC 119 Amerat

Tel: +968 24878565

Fax: +968 24878535

Al Khoud Branch

P.O. Box 463

PC 132 Al Khoud

Tel: +968 24541025

Fax: +968 24189940

Al Khuwair Branch

P.O. Box 122

PC 103 Khuwair

Tel: +968 24480216

Fax: +968 24480354

Al Qurum Branch

P.O. Box 44

PC 114 Al Qurum

Tel: +968 24565727

Fax: +968 24563292

Avenues Mall Branch

P.O. Box 2360

PC 113 Al Azaiba

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Fax: +968 25647903

Azaiba Branch

P.O. Box 4019

PC 112 Azaiba

Tel: +968 24491226

Fax: +968 24494649

Bahla Branch

P.O. Box 8

PC 612 Bahla

Tel: +968 25419466

Fax: +968 25419410

Barka Branch

P.O. Box528

PC 320 Barka

Tel: +968 26883583

Fax: +968 26883592

Buraimi Branch

P.O. Box 70

PC 512 Buraimi

Tel: +968 25650502

Fax: +968 25650542

Ibra Branch

P.O. Box 505

PC 400 Ibra

Tel: +968 25571414

Fax: +968 25572234

Ibri Branch

P.O. Box 487

PC 511 Ibri

Tel: +968 25688642

Fax: +968 25688681

Jalan Bani Bu Ali Branch

P.O. Box 90

PC 416 Jalan

Tel: +968 25554488

Fax: +968 25553742

Khaboura Branch

P.O. Box 580,

PC 326 Khaboura

Tel: +968 26802242

Fax: +968 26802448

Khasab Branch

P.O. Box 229

PC 811 Khasab

Tel: +968 26732565

Fax: +968 26732569

Mabellah Branch

P.O. Box 2104

PC 132 Mabellah

Tel: +968 24463118

Fax: +968 24463121

MBD Branch

P.O. Box 44

PC 114- Hai Al Mina

Tel: +968 24730077

Fax: +968 24730240

Musannah Branch

P.O. Box 371

PC 312 Al Musannah

Tel: +968 26971192

Fax: +968 26971194

Nizwa Branch

P.O. Box 227

PC 611 Nizwa

Tel: +968 25412675

Fax: +968 25412677

Quriyat Branch

P.O. Box 229

PC 120 Quriyat

Tel: +968 24845090

Fax: +968 24845093

Rustaq Branch

P.O. Box 220

PC 329 Rustaq

Tel: +968 26875031

Fax: +968 26875028

Ruwi Branch

P.O. Box 104

PC 131 Ruwi

Tel: +968 24833887

Fax: +968 24834348

Saham Branch

P.O. Box 212

PC 319 Saham

Tel: +968 26854972

Fax: +968 26854874

Salalah Branch

P.O. Box 1577

PC 211 Salalah

Tel: +968 23295239

Fax: +968 23297932

Seeb Branch

P.O. Box 869

PC 111 Seeb Airport

Tel: +968 24422771

Fax: +968 24422050

Shinas Branch

P.O. Box 458

PC 324 Shinas

Tel: +968 26748282

Fax: +968 26748520

Sinaw Branch

P.O. Box 72

PC 418 Sinaw

Tel: +968 25525277

Fax: +968 25524030

Sohar Branch

P.O. Box 831

PC 311 Sohar

Tel: +968 26846957

Fax: +968 26843952

Sur Branch

P.O. Box 269

PC 411 Sur

Tel: +968 25545199

Fax: +968 25545084

Suwaiq Branch

P.O. Box 13

PC 315 Al Suwaiq

Tel: +968 26860019

Fax: +968 26860012

Wattaya Branch

P.O. Box 4148

PC 112 Ruwi

Tel: +968 24572284

Fax: +968 24571125

S O H A R I S L A M I C

Al Khoudh Branch

P.O. Box 3209

PC 111 Al Khoudh

Tel: +968 24189949

Fax: +968 24189940

Barka Branch

P.O. Box 295

PC 320 Barka

Tel: +968 26883188

Fax: +968 26883203

Firq Branch

P.O. Box 1579

PC 611 Nizwa

Tel: +968 25447789

Fax: +968 25441186

Ghala Branch

P.O. Box, 205

PC 114 – Hai Al Mina

Tel: +968 24617063

Fax: +968 24507279

Ghubrah Branch

P.O. Box 186

PC 130 Ghubrah

Tel: +968 24614417

Fax: +968 24614233

Mabellah Branch

P.O. Box 1325

PC 122 Mabellah

Tel: +968 24463771

Fax: +968 24267216

Saada Branch

P.O. Box 140

PC 215 Salalah

Tel: +968 23227399

Fax: +968 23227378

Sohar Branch

P.O. Box 1264

PC 311 Sohar

Tel: +968 26642203

Fax: +968 26640110

S O H A R I N T E R N AT I O N A L

C O N T A C T D E T A I L S

Business Location: Water front, Shatti Al-Qurum AreaPO Box: 44 Hai Al Mina, PC:114Sultanate of Oman

Tel: +968 2473 0000Fax: +968 2473 0010E – Mail: [email protected]: soharinternational.com

H E A D O F F I C E

Vinod Kumar DurbhaActing Head-Large Corporate BankingTel: +968 24662126Fax:+968 24662110E – Mail: [email protected]

Jeanan S. SultanSr. AGM – Government Institutions & Public Sector Units, Project Finance & SyndicationsTel: +968 2466 2140Fax: +968 2473 0010E – Mail: [email protected]

Waleed Marzooq Al MusheifriAGM & Head Mid CorporateTel: +968 2466 2030Fax: +968 2456 0045E – Mail: [email protected]

Abdul Hafeedh Othman Al BalushiAGM & Head SMETel: +968 2452 7101Fax: +968 2452 7116E – Mail: [email protected]

Sriram SubramanianHead -Trade FinanceTel: +968 2473 0205Fax: +968 2473 0361E – Mail: [email protected]

Marc ZogheibHead-Financial InstitutionsTel: +968 24 761970Fax: +968 2476 1741E – Mail: [email protected]

Gigi Tharian VargheseHead – Investment BankingTel: +968 2473 0366Fax: +968 2476 1741E – Mail: [email protected]

Srinivasa Rao EdupalliHead Project Finance & SyndicationTel: +968 24662115Fax: +968 24662125E – Mail: [email protected]

Aziz Mohamed Nasser Al JahdhamiAGM & Head- Wealth ManagementTel: +968 2473 0003E – Mail: [email protected]

Ahmed Rashid Ahmed Al SalmiAGM & Head Retail SupportTel: +968 2473 0373Fax: +968 2473 0259E – Mail: [email protected]

Saeed Ali Hamdan Al HinaiSenior AGM & Head TreasuryTel: +968 2473 0239Fax: +968 2473 0280E – Mail: [email protected]

Salim Khamis Al MaskryDGM & Head Islamic BankingTel: +968 24037303E – Mail: [email protected]

Fahad Akbar Al ZadjaliHead Retail Islamic BankingTel: +968 2473 0352Fax: +968 2473 0276E – Mail: [email protected]

Ataurrahim HanafiHead-Corporate Islamic BankingTel: +968 2476 1877Fax: +968 2473 0276E – Mail: [email protected]

B U S I N E S S B A N K I N G

P E R S O N A L B A N K I N G


T R E A S U R Y

W E A LT H M A N A G E M E N T


A T M L O C A T I O N


REGION BRANCH NAME REGION ATM's

North Batinah Sohar North Batinah Sohar (Falaj Qabail)

South Batinah Barka Dhofar Salalah

Dakheliya Firq Muscat Hail (Shell Petrol Station)

Azaiba (Shell Petrol Station)

Dhofar Saada

Muscat Al Khoudh

Al Mabellah

Ghala

Al Ghubra

O N S I T E O F F S I T E

A T M L O C A T I O N

S O H A R I N T E R N A T I O N A L

REGION BRANCH NAME REGION ATM'S

North Batinah Khaboura North Batinah Saham (Dara)

Suwaiq Sohar-Waqibah (Al-Maha Petrol Station)

Saham Sohar (Safeer Mall)

Shinas Sohar (Lulu Hypermarket)

Sohar Sohar (Orpic)

Sohar (Aluminium)

South Batinah Mussanah Rustaq (Lulu Hypermarket)

Barka Barka (Dragon Mart)

Rustaq Souq Nakhal

Buraimi Buraimi Buraimi Hafeet (Oman Borders)

Buraimi (Lulu Hypermarket)

Dakheliya Bahla

Nizwa Dakheliya Nizwa (Industrial Area)

Dhahira Ibri Dhahira Ibri (Shell Petrol Station)

Dhofar Salalah Dhofar Salalah (Al Maha Petrol Station)

Salalah (Lulu Hypermarket)

Musandam Khasab Salalah (Al Baleed Resort)

Salalah (Al Maha Petrol Station Drive Thru)

Muscat Al-Khoudh Muscat Atheba (Al Meera Hypermarket)

Al-Mabellah Al-Hail-North (Shell Petrol Station)

A’Seeb China Market-North

Al Amirat Mabellah Souq

Avenues Mall Mabellah Industry (Shell Petrol Station)

Aziaba Mabellah (Al Maha Petrol Station)

Al Khuwair Knowledge Oasis Muscat

MBD Mawalih (Mazoon Mosque–Shell Petrol Station)

Ruwi Ministry of Defense (Moaskar Mortafa’a)

Wattaya Muscat International Airport

Al Qurum Oman Exhibition & Convention Center

Quryat South Hail (Mars Hypermarket)

A'Seeb (China Mall)

South Sharqiya Jalan Bani Bu Ali Al Mouj

Sur Atheba (Mars Hypermarket)

Al Khuwair (Marmul Travels)

North Sharqiya Ibra Darsait (Shell Petrol Station)

Sinaw Souq Ruwi (Majan Exchange)

Wadi Kabeer (Mars Hypermarket)

Qurum (Mars Hypermarket)

North Sharqiyah Ibra (Asifala)

O N S I T E O F F S I T E


With your trust, support and patronage,

Sohar International soars to greater

h e i g h t s t o w a r d s g r e a t e r w i n s .

We take great pride as you continue

to be a part of this joruney that echoes...

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