together we grow · 2020. 8. 16. · mr. ali bin mohamed bin juma al lawati independent member eng....

Annual Report 2019

Together We Grow

His Majesty Sultan Qaboos Bin Said (May God Rest His Soul)

His Majesty Sultan Haitham Bin Tarik

CONTENTS

Board of Directors 4

A Word from the Chairman 6

Economy of Oman 10

Technical Report on the Bank’s Performance 16

Strategy and Development Programs 20

Events 22

Empowerment and Development 30

ODB Corporate Governance Report 32

Report and Financial Statements 40

Basel II – Pillar III & Basel III Related Disclosures for the Full Year 2019 94

Annual Report 2019

3

BOARD OF DIRECTORS

Interior of Kashab fort, Musandam.4

Annual Report 2019

5

H.E. Sayyid Salim bin Musallam Al Busaidi

Chairman

Mr. Abdul Salam bin Nasir Al Kharusi

Vice Chairman

Mrs. Ziyana bint MohamedAl Rashidya

Representative of the Ministry of Finance

Mr. Ali bin Mohamed binJuma Al Lawati

Independent Member

Eng. Hilal Bin Hamed Bin

Seif Al BusaidiIndependent Member

Eng. Nahla bint Abdul Wahab Al Hamdiya

Representative of the Ministry of Commerce and Industry

Eng. Saleh bin Mohammedbin Saleh Al Abri

Representative of the Ministry of Agriculture and Fisheries

Narrow archway with old, heavy wooden doors opened to show the famous frankincense monument of Muscat.6

A WORD FROM THE CHAIRMAN

On behalf of my fellow board members, I am pleased to submit to you a summary of the Oman Development Bank (ODB)’s achievements and performance during 2019, as well as its future programs and strategic initiatives.

I begin this speech by reviewing the main themes of the Bank’s performance during 2019.

First: Credit Performance

Loans approved

6,467 13%increase in loansapproved in 2019

million total loanapproved

61RO

Despite the challenging economic conditions that the Sultanate and the world are going through, ODB has achieved acceptable results. The Bank continues its efforts to achieve better results in future, in line with the ambitious plans and goals approved by the Board of Directors.

You will find below a summary of ODB’s lending activity, the main contributor of the Bank’s revenues. The Bank’s lending performance is summarized as follows:

1- Approved loans

During 2019, there has been an increase in the number loans provided by the Bank. ODB has approved 6,467 loans, an increase of 13% compared to the number of loans approved during 2018. The total value of these loans amounted to RO 61 million, a decrease in value by 6% compared to 2018.

2- Loan disbursement

The total value of loan disbursement during the year 2019 amounted to about RO 60 million, of which RO 35 million were disbursed by the branches. The value of the loans disbursed by the corporate branch amounted to RO 25 million (including working capital loans).

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H.E. Sayyid Salim bin Musallam Al BusaidiChairman

3- Loan Repayment Performance

Loan repayment indicators showed that the collection rate reached 102% as RO 51 million were collected from the Bank’s loans, including working capital loans.

4- Provision

There has been a decrease in Provision during the past five years to reach RO 14 million in 2019, a decrease of RO279,000 , or a difference of -0.02% compared to 2018.

Second: The financial situation

As per the profit and loss account, the financial statements for the year ended December 31, 2019 showed a net profit of RO 2,359,350, compared to RO 2,457,182 in 2018.

Third: Business Continuity Plan

In order to ensure that the bank is ready for any obstacles that may prevent the continuation of the work properly, in the year 2019 through a specialized consultant in this field ODB had updated its Business Continuity Plan, the same was approved by the Board of the Directors.

Also, and for several times, necessary tests were taken regarding the effectiveness of the Evacuation Plans, readiness, and preparedness of the alternative site to accommodate work in the event of disasters.

Fourth: strategy and development programs

The Bank is moving forward with the implementation of the five-year institutional strategy. 2019 was the first year of implementing the development initiatives package included in the strategy. The strategy focused on increasing lending activity and directing it towards promising development sectors such as fisheries, tourism, mining and manufacturing industries.

Within the framework of its institutional strategy, ODB seeks to finance large loans and infrastructure loans. This goal is in line with the Royal Decree expected to be issued in 2020, which will increase to increase the lending ceiling and add new development activities.

It should be noted that many planned strategic projects have been implemented, the most prominent of which are: developing a number of new products that target the micro-enterprise segment based on self-employment. OBD has obtained the necessary approvals to introduce current and savings accounts. This move will allow ODB to provide additional facilities that serve projects in all its sectors.

On the other hand, according to the directions of the strategy by adopting the best practices in risk management, the Bank has implemented the International Financial Reporting Standard IFRS9 in addition to a number of development projects such as the completion of updating the procedures manual, a project to assess the performance of the business continuity plan and a project to streamline the work processes.

Fifth: Information Technology

It is true that information technology plays a key and pivotal role in developing the services provided by the Bank. The Bank continued its efforts during 2019 to implement database projects, information management systems, the smart management reports, an electronic performance monitoring platform for the various key performance indicators in the Bank and the expansion of the automation system. The projects also include expanding the linking with the Central Bank of Oman systems to implement the scanner system, cheque automation associated with facilitating the payment of post-dated cheque and improving Banking services at the branches.

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Sixth: Human Resources

The Bank pays great attention to the development and modernization of its human resources management system. The Bank has introduced the new technical system for human resources that is compatible with the modern requirements for managing the Bank’s human resources.

Seventh: The role of marketing

In its strategic plans and programs, the Bank has also attached great importance to the marketing activities. Emphasis was also placed on participating in many seminars, workshops, specialized exhibitions and economic conferences in industrial areas and Oman Chamber Of Commerce and Industry branches throughout the Sultanate. The participation aims at spreading awareness of the facilities and services that the bank provides for medium and small projects. The Bank participated in the programs and workshops held by the Public Establishment for Industrial Estates and the Chambers of Commerce and Industry in various regions of the Sultanate.

In conclusion, I would like to express my highest gratitude and appreciation to His Majesty the Sultan and to the esteemed Omani government for the great support and care extended to the Bank. I also thank the Central Bank of Oman for its continuous cooperation with ODB.

I would like also to thank the executive management for its efforts to translate the Board of Directors policies and program into action and wish them all the best in their endeavors to achieve further growth and development for our Bank.

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ECONOMY OF OMAN

Entrance of the gate door of the town of Nizwa in Oman10

Oman | Credit Rating

The credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of Oman therefore having a big impact on the country’s borrowing costs. The government debt credit rating for Oman has been reported by major credit rating agencies. Standard & Poor’s credit rating for Oman stands at BB with negative outlook. Moody’s credit rating for Oman was last set at Ba1 with negative outlook. Fitch’s credit rating for Oman was last reported at BB+ with stable outlook.

Oman Credit Rating ( S&P, Moody’s, Fitch)

Agency Rating Outlook Date

S&P BB Negative Apr 19 2019

Moody’s Ba1 Negative Mar 05 2019

Fitch BB+ Stable Dec 18 2018

Moody’s Baa3 Negative Mar 16 2018

Fitch BBB- Negative Dec 11 2017

S&P BB Stable Nov 10 2017

Moody’s Baa2 Negative Jul 28 2017

Fitch BBB Negative Jun 19 2017

S&P BB+ Negative May 12 2017

https://tradingeconomics.com/oman/rating

Ninth Five Year Plan (2016- 2020)

Early in the year 2016, His Majesty Sultan Qaboos bin Said issued a Royal Decree No. 1/ 2016 approving the Ninth Five-Year Plan (2016 to 2020) with a focus on diversifying the economy of Oman and partnering with the private sector in the development process. The Ninth Five-Year Plan was prepared due to a number of challenges, most notable of which are the fluctuating global oil prices, the geopolitical situation in the region and the young population structure that will pressurize the employment market in the coming years. Tanfeedh Plan is adopting to implement the Ninth Five Year Plan.

‘Tanfeedh’ Plan which is an initiative that will play an essential role in linking the different strategies of the targeted five sectors of Manufacturing, Transportation and Logistics, Tourism, Fisheries and Mining, and in providing a platform for an active participation and sustainable partnership between the stakeholders of the public and private sectors. The private sector will now get a chance to invest, either independently or in partnership with the government, in mega projects that the government earlier has planned to manage alone. The focus is therefore on achieving real Gross Domestic Product (GDP) growth to maintain a good standard of living for the people, offer increased opportunities in training and employment, increase production efficiency and stimulate scientific and cultural innovation.

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Oman | GDP

RO 10.7 billionTotal projected revenuein 2020

The International Monetary Fund expects Oman to become the fastest growing economy in the GCC region in year 2020. The IMF revised up its Oman GDP growth forecast to 3.7 per cent for 2020 from its previous estimate per according to the fund’s official website. However, the IMF sharply lowered its growth forecast for 2019, expecting Oman’s economy to grow by just 1.1 per cent this year, against its earlier forecast of 5 per cent growth. The Fund slashed its 2019 growth forecasts across the board for all GCC countries. With an estimated growth rate of 2.0 per cent this year, the Qatar and Bahrain will be the fastest growing economy in the GCC in 2019, according to the IMF as following:

GCC - Real GDP Growth Forecast (%)

2019 2020

Oman 1.1% 3.7%

Kuwait 0.6% 3.1%

UAE 1.6% 2.5%

Qatar 2.0% 2.8%

Bahrain 2.0% 2.1%

Saudi Arabia 0.2% 1.9%

According to reports from World Bank report from October 2019, following a recovery of 2.2% in 2018, Oman’s real GDP growth is estimated to decelerate to 0.3% in 2019 as oil production remains capped by the OPEC+ production cut agreement. Growth is expected to increase over 2020-21, driven in part by a large increase in gas production from new Khazzan gas project, and infrastructure spending plans in both oil and non-oil sectors. Elevated spending, however, will keep the fiscal deficit high, averaging over 8% pf GDP over the forecast period, and raise public debt to 66% of GDP. High fiscal and current account deficits and raising public debt indicate that Oman’s financing needs will be high in the coming years. Plans to boost non-oil revenues and additional financial consolidation measures are needed to reduce macroeconomic risks in the medium term. GDP growth is projected to rebound to 3.7% in year 2020 driven largely by the rise in natural gas output as production from new fields comes on stream. The potential boost of the government’s diversification efforts would continue to facilitate an increase in non-hydrocarbon growth to about 4 percent annually in the medium term. Inflation is expected to increase to almost 2% in 2020, and further accelerate to nearly 4 percent in 2021 reflecting introduction of VAT.

The current account deficit is estimated to increase to 7.7 percent of GDP in 2019 driven by the drop-in oil prices. The extensive investment program in the public and private sectors is contributing to the current account deficit. Reflecting the current account deficit, foreign reserves are estimated to drop to an estimated US$16 billion (or 5 months of imports), from US$17.4 billion in 2018 (or 5.8 months of imports), despite the recent bond issuance; the standard three-month threshold for emerging markets is some-what alleviated by liquid assets in other funds and SOEs. Persistent large fiscal and external deficits have contributed to sharply rising debt levels. Public debt-to- GDP is estimated to increase to 60 percent in 2019 from 53 percent in 2018. External debt is estimated to remain high at 106 percent of GDP in 2019, a 12.8 percent increase

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compared to 2018. These high vulnerabilities have led to a series of sovereign credit rating downgrades and an increase in funding costs.

A lack of jobs remains a key concern amongst young Omanis. Latest data from Oman’s statistical center reveals that the unemployment rate for Omani youth aged (15-24) stood at 8.5 percent as of June 2019 (versus a 2.3 percent national unemployment rate) but is more than twice higher (19 percent) among females in the same ages group. Oman has long used selective expat visa bans across various private sector industries to reduce the number of unemployed locals. The ban has been extended many times with the latest extension came into force in July 2019 to include four more professions in the private sector. According to official figures, the number of legally employed expats fell by over 5 percent between January 2018 and July 2019, and currently stands at 1.75 million, down from 1.85 million in January 2018 (100,000 expats less). The government’s long-term strategic Vision 2040 and the 2021–25 development plan, which are currently being formulated, give more prominence to spur economic diversification and job creation.

According to Oman Budget 2020, total revenue should reach 10.7 billion OMR out of which 7.7 billion OMR is coming from oil and gas source reaching 72%. The budget is running deficit 2.5 billion OMR which represents 23% of total revenue. The budget assumption is 58 USD per barrel. The 2020 budget represents the final year of the ninth five year development plan and also of Oman Vision 2020, paving the way for the tenth five year development plan and Oman Vision 2040. The 2020 budget demonstrates the government’s continued focus on controlling deficit which is expected to reduce by 11% from OMR 2.8 billion budgeted in 2019 to OMR 2.5 billion in 2020. The deficit, as a percentage of GDP, is expected to decline from 9% in 2019 to 8% in 2020. The government is seeking to achieve this in an era of declining oil revenues by enhancing revenues from gas, taxes and other non-oil revenues. Government spending aims to be kept under control with a budgeted increase of only 2% compared to the 2019 budget, which is also attributable to an increase in interest cost on borrowings.

The successful implementation of excise tax on alcohol, carbonated drinks, energy drinks, pork and pork products and tobacco and tobacco products in June 2019 is expected to continue generating revenues for the government. Similar to the United Arab Emirates (UAE) and Kingdom of Saudi Arabia (KSA), Oman is now expected to expand the scope of excise tax to sweetened drinks during 2020. The UAE and KSA introduced VAT on 1 January 2018 and Bahrain on 1 January 2019. Each of these countries have since recognized the significant contribution VAT has made to their non-oil revenues and GDP. The 2020 budget does not reflect any revenues from the introduction of VAT in Oman. The Tax Authority and the Ministry of Finance in Oman, however, remain committed to the introduction of VAT and preparations continue to get the VAT Law approved and published during 2020 with a formal announcement regarding the effective date of implementation to be made during 2020.

Banking Sector in Oman

Financial Status of Banking Sector

Outstanding credit extended by Other Depository Corporations (ODCs) increased by 4.2% to

RO 25.9 billion

Credit to private sector grew by 3.4% to

RO 22.7 billion

The banking sector continued to perform well in terms of meeting credit requirements and providing other banking services. According to Central Bank of Oman’s September monthly statistical bulletin, total outstanding credit extended by other depository corporations (ODCs), consisting of conventional banks

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and Islamic banking entities, increased year-on-year (YoY) by 4.2 percent to RO 25.9 billion at the end of September 2019. The credit to private sector grew YoY by 3.4 percent to RO 22.7 billion during this period. The sectoral composition indicates that the non-financial corporate sector received the largest share in private sector credit at 46.2 percent, followed by household sector (mainly under personal loans) with 45.2 percent, financial corporations with 5.2 percent and other sectors with 3.4 percent.

Total deposits held with ODCs increased YoY by 3.3 percent to RO 23.2 billion, with private sector deposits witnessing a growth of 6.3 percent to RO 15 billion at the end of September 2019. The households accounted for 49.5 percent of total private sector deposits, while non-financial corporations, financial corporations, and other sectors accounted for 30.3 percent, 17.9 percent and 2.3 percent, respectively.

Outstanding credit extended by conventional banks increased by

2.7%The outstanding credit extended by conventional banks increased YoY by 2.7 percent as of end September 2019, with credit to the private sector growing by 1.3 percent to RO 19 billion. Conventional banks’ total investments in securities increased YoY considerably by 11.3 percent to RO 3.6 billion at the end of September 2019 – out of which, the investment in Government Treasury Bills stood at RO 293.2 million. Aggregate deposits of conventional banks increased by 2.1 percent to RO 19.7 billion at the end of September 2019 from RO 19.3 billion a year ago. Private sector deposits increased YoY by 3.4 percent to RO 12.8 billion and constituted 65.1 percent of total deposits with conventional banks. The core capital and reserves of conventional banks stood at RO 4.9 billion as of end-September 2019.

The financing by Islamic banking entities continued to expand and stood at RO 3.9 billion at the end of September 2019, higher than RO 3.5 billion a year ago. Total deposits held with Islamic banks and windows also increased to RO 3.5 billion from RO 3.1 billion a year ago. The total assets of Islamic banks and Windows combined amounted to RO 4.8 billion, constituting 13.8 percent of the banking system assets at the end of September 2019.

With regard to monetary aggregates, the narrow money (M1) decreased YoY marginally by 0.8 to RO 5 billion at the end of September 2019, while quasi-money (Rial Omani saving and time deposits, certificates of deposit issued by banks, margin deposits and foreign currency denominated deposits) increased YoY by 7.9 percent to RO 12.4 billion during this period. Broad money supply M2 (M1 plus quasi-money) grew YoY by 5.2 percent to RO 17.4 billion during the period under review over the level a year ago.

Weighted averageinterest rate increased to

1.987%The domestic interest rates continued to follow the trends in USA reflecting the currency peg arrangement and open capital account. Nevertheless, the Central Bank of Oman ensured appropriate liquidity in the banking system to support economic activities in the Sultanate. The weighted average interest rate on RO deposits increased to 1.987 percent in September 2019 from 1.786 percent a year ago, while the weighted average RO lending rate increased to 5.463 percent from 5.294 percent during the same period. The overnight Rial Omani domestic interbank lending rate also hardened to 2.675 percent in September 2019

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as compared to 2.230 percent a year ago. The average Repo rate for liquidity injection by the CBO stood at 2.554 percent per annum during the month of September 2019. Since the Federal Reserve started cutting interest rates since the end of July 2019, the upward pressure on interest rates in Oman also eased.

There are 17 licensed foreign and local commercial banks and two specialized banks in Oman. The Central Bank of Oman licenses and regulates the local banking sector, monitors interest rates, and issues development bonds and notes.

Oman’s banking system is stable According to Moody’s

According to Moody’s, the outlook for Oman’s banking system is stable, as government borrowing, along with higher hydrocarbon output, are expected to support a healthy level of public spending and help stabilize the domestic economy.

https://corporatefinanceinstitute.com/resources/careers/companies/top-banks-in-oman/

Foreign Banks Local Banks Specialiazed banks

Commercial Banks (Conventional)

Commercial Banks(Islamic)

Standard Chartered Bank HSBC Oman Al Izz Bank Oman Housing Bank

Habib Bank Sohar International Sohar Islamic Oman Development Bank

Bank Melli Iran AL Ahli Bank AlHilal Islamic Bank

National Bank of Abu Dhabi Oman Arab Bank Al Yusr Islamic

Bank Saderat Iran Bank Muscat Bank Muscat Meethaq

Bank of Baroda National Bank of Oman Muzn Islamic Banking

State Bank of India Bank Dhofar Maisarah Islamic Banking

Bank of Beirut Bank Nizwa

Qatar National Bank

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TECHNICAL REPORT ON THE BANK’S PERFORMANCE

Abandon village on the Jebel Akhdar.16

Approvals Governorate wise

AL WUSTA GOVERNORATE

AD DAKHLIYYAHGOVERNORATE

ADH DHAHIRAHGOVERNORATE

MUSCATGOVERNORATE

AL BURAYMIGOVERNORATE

1,76116 million

9217 million

55912 million

1,94015 million

1962 million

2563 million

2022 million

2342 million

3982 million

DHOFAR GOVERNORATE

Loan Amount Number of Loans

AL BATIN

AH

NO

RTH

GO

VERNO

RATE

AL BATINAH SOUTHGOVERNORATE

ASH SHARQIYYAH SOUTHGOVERNORATE

ASH SHARQIYYAH NORTH GOVERNORATE

MUSANDAMGOVERNORATE

Madha(Sultanate of Oman)

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Industry 2702 loans worthof RO 25.4 million

Fisheries 1738 loans worth of RO10.8 million

ApprovalsSector wise

Tourism Services172 loans worthof RO 6.8 million

Health Services41 loans worth of

RO 3 million

Professional and GeneralServices 745 loans worth

of RO 6.5 million

Education Services196 loans worth of

RO 2.5 million

Mining 2 loansworth of

RO 0.5 million

Agriculture and AnimalsProducts 871 loans worth

of RO 5.5 million

19 loans RO10 million



5,483 loansRO 22 million

Micro Loans36%*

ApprovalsProduct

Wise

Working Capitaland SeasonalLoans 25%*

CorporateLoans16%*

SME Loans23%*

*Based on total approval amount.

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Collection

RO 51 millionRO 60 millionRO 61 million

DisbursementApprovals

Working Capitaland Seasonal 5%

SME30%

Corporate32%

Micro33%

Outstanding: 53.17 mPast Due: 7%

Outstanding: 49.80 mPast Due: 7% Outstanding: 56.33 m

Past Due: 5%

Outstanding: 8.06 mPast Due: 18%

The total outstanding at the end of 2019 is RO 167.36 million and the Past Dues percentage 6.79%.

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STRATEGY AND DEVELOPMENT PROGRAMS

View to Ash Sharqiyah, Jebel Akhdar, part of the Al Hajar Mountains range in Oman.20

Oman Development Bank is moving ahead with the implementation of the five-year corporate strategy. Year 2019 has been the first year of implementing the development initiatives package included in the strategy.

The bank’s strategic plan aims to make a radical change in ODB’s business model. The strategic plan seeks to enhance ODB’s ability to reach its goal related to adopting a business models consistent with those adopted by international development institutions while maintaining ODB’s sustainability. The main general objectives of the strategy are summarized as follows: -

1) To support the growth of small and medium-sized enterprises (SMEs) in various stages by offering a wide range of services and products.

2) Enhancing and promoting partnership with ODB’s clients by increasing support for large projects and end-to-end project lifecycle partnership.

3) Achieving double-digit growth in the lending portfolio while increasing the financially independence through the diversification of financing and income sources.

4) Ensuring financial sustainability and reducing dependence on government subsidy.

5) Providing technical and knowledge support to the beneficiaries of the bank by “establishing the data bank”

ODB’s strategic goals are focused on increasing lending activity and directing it towards promising development sectors such as fisheries, tourism, mining, manufacturing and logistics the prioritized sectors in the ninth five-year plan.

Within the framework of the corporate strategy, ODB aspires to enhance the growth of the economic sectors by financing large institutions and infrastructure projects. This goal is in line with awaited issuance of ODB Royal Decree, which will increase the ceiling of lending and add new development activities

It should be noted that ODB has implemented several strategic projects, the most notable of which are developing several new products to regulate the lending activity of the micro-segment loans and SME enterprises. ODB has also obtained the necessary approvals to provide current and savings accounts, a move that will allow ODB to provide additional facilities that serve projects in all its sectors.

On the other hand, and according to the directions of the strategy which encourages adopting the best practices in risk management, ODB has applied IFRS9 and implemented several development projects such as completing the updating of its procedures manual. ODB has also implemented a project to evaluate the performance of the business continuity plan (BCP) and the workflow-structuring project.

ODB realizes the importance of information technology in the development of the services offered by it, therefore during 2019 ODB has continued the implementation of data base upgrading and Management Information Systems (MIS) and the smart e-platform for monitoring the key performance indicators. It also expanded the system for automating the conduct of banking business. ODB has also expanded the project to link with the systems of the Central Bank of Oman to implement the scanner system and Electronic Cheque Clearing (ECC) to facilitate the settlement of the post-dated checks and improve the banking services in branches.

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EVENTS

2322

Annual Report 2019

2524

Annual symposium of the Association of Development Finance

Institutions in Asia and the Pacific (ADFIAP)

The Third Global Entrepreneur Forum

Panel Discussion on means of attracting investment

and financing

Membership Agreement with the Oman Center for Credit and Financial

Information (Mala’a)

ODB Staff Open day Entrepreneurship Award

The “Start Your Business” Forum

The Annual Excellence Competition Ceremony for

Branches 2018 - Fifth Edition

March 2019

November 2019

November 2019

October 2019

November 2019

December 2019

February 2019

October 2019

November 2019

June 2019

November 2019

Events

Events

Exhibition “Omani Creations”, the seventh edition

Marking the Omani Women Day

in Rustaq

Riyada Talk

Seminar on agricultural insurance, livestock and fisheries

December 2019

26

Hosting and organizing the annual seminar for Association of Development Financing Institutions in Asia and the Pacific (ADFIAB) (February 2019)

The Symposium reviewed the role of development financial institutions in

developing the national economy and supporting entrepreneurship.

Membership agreement with Oman Center for Credit and Financial Information (November 2019)

Oman Development Bank signed a membership agreement with the Oman Center for Credit and Financial Information

(Mala’a) in November, with the aim of providing ODB with credit statements and exchanging financial information to

help make credit decisions.

2019 EVENTFUL YEAR2019 EVENTFUL YEAR

27

1st version of “ Start Your Business Forum’ October 2019.

Oman Development Bank sponsored the first edition of the “Start your Business” Forum organized by the Public Authority for Small and Medium Enterprises Development (Riyada) in October 2019.

“Omani Creations’ Expo, 7th edition (November 2019)

ODB has sponsored “Omani Creations” exhibition and “Riyada Hadith’ program to market and promote financed projects in November 2019.

Taking part at the 4th Entrepreneurship Award for the best financing agency award promoted by the Public Authority for SMEs Development, Riyada, December 2019

ODB has been shortlisted alongside with to other organizations to the final stage of the fourth edition of the Entrepreneurial Award t, which is given to the best finance institution (December 2019).


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Taking part at the ‘Agriculture, animal and fish insurance ‘seminar organized by OCCI in cooperation with the Ministry of Agriculture and Fisheries (December 2019).

ODB participated in the “Symposium on Agricultural Insurance, Livestock and Fisheries” organized by Oman

Chamber of Commerce and Industry (OCCI) in cooperation with the Ministry of Agriculture and Fisheries in

December 2019.


Employee Open Day, November 2019

ODB has organized ODB Staff Open day under the title “A Good Gathering” in November 2011. The event program included a number of activities and programs to meet the taste of different ages and groups.

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Branch Excellence Award for 2018 ( March 2019)

ODB honored the winning branches and recognized employees in various professional fields in the fifth edition of the competition in March 2019.

Sponsoring the Ministry of Social Development celebration of the Omani Woman’s Day in Rustaq (October 2017)

ODB has sponsored the event organized to mark the Omani Women’s Day on October 17. The event was held this year in the Al Batinah South Governorate under the patronage of HH Hajija Bint Jaffer Al Saeed.


2nd ‘ Riyada’ event, November 2019

ODB has sponsored a Riyada Talk program to support and enhance the participating projects. (November 2019)

EMPOWERMENT AND DEVELOPMENT

Beautiful dome of Mutrah Souq.30

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31

Within the efforts made to develop and empower national capabilities and competencies and in line with the Oman Vision 2040, Oman Development Bank (ODB) has provided more than 148 training programs and courses. The growth rate of the number of training programs stood at 147% in 2019.

Annual Excellence Competition among departments at ODB’s headquarters

Competition goals:

• Integrating the culture of excellence and quality at work

• Achieving quality and perfection in performance, practice and implementation.

• Improving the performance of ODB employees

• Creating a business-friendly environment to achieve ODB’s strategic goals

The total number of employees

257

The total number of training courses

148The number of training courses in the Sultanate

130The number of training courses outside the Sultanate

18The total number of trainees

659Growth rate in the number of training programs

147%

The employees appointed

24

The targeted departments and units

14

The competition targeted

131

ODBCorporate Governance ReportFor the Financial Year Ended on 31/12/2019

Lighthouse and traditional boat in the bay of Sur.32

Introduction:

7Board meetingsin 2019

Oman Development Bank was established as a public joint stock company (SAOC) under the Royal Decree No. (18/97) and the attached annex thereto. The Government owns its total capital in the bank. On 11/3/2006, the Royal Decree No. 18/2006 was issued, which has stated the amendments of some of the provisions of the Royal Decree referred to above, whereby the Bank was transferred from a public shareholding company to a closed shareholding company (SAOC). The amendments resulted in accepting the Bank from being subject to CMA’s Circular No. (16/2003) issued on 30/7/2003, and the guiding statute of public shareholding companies. However, the provisions of the Bank’s Articles of Association are matching with the provisions of the guiding statue referred to above.

The Bank is also subject to the Commercial Companies’ Law No. 4/74 and its amendments, which gave the Ministry of Commerce and Industry the control and supervision of organizing the work of closed joint stock companies, accept some provisions governing the activities of those companies.

All procedures related to the application of the principles of corporate governance were also taken into consideration in the preparation of this report, along with its consistency with the Corporate Governance Charter of the Public Shareholding Companies, issued in July 2015.

The Bank’s organization and management report reflects the Bank’s implementation of the provisions of the above-mentioned Charter, and the procedures described in the report are not considered as an audit or review in accordance with international auditing standards.

This report has been prepared pursuant to Articles 27 & 26 of the above-mentioned Charter, which requires that the Board of Directors shall add a separate chapter in its annual report of organizing and managing the joint stock company.

In light of the above- mentioned, the report of organizing and managing Oman Development Bank (SAOC) for the fiscal year ended on 31/12/2019 has been prepared.

First: The foundations and rules of the organization and management in the bank:

The Bank is committed to implement the rules and regulations of organizing and managing the companies (corporate governance), issued by the Central Bank of Oman under Circular No. 932, on February 4, 2002, concerning the governance of banking and financial institutions and the circular issued by the Capital Market Authority No. (7 / 2015) in this regard, in a manner consistent with the Royal Decree No. (18/97) concerning the establishment of the bank and amended by the Royal Decree No. (18/2006) and the accompanying annex thereto.

The Bank is adopting good practices in organization and management, and it is working on preparing and developing the regulations for the next phase. The following are the outstanding features of the Bank’s governance and management rules:

1. The role and responsibilities of the Board of Directors:

Setting the rules and regulations governing the work of the bank, directing, and accounting the management on the bank’s performance, the role of the Board in details is as follows:

• Adopting the financial and banking policies.

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33

• Adopting the estimated budget of the Bank.

• Supervising the Bank’s main activities.

• Monitoring the performance of the executive management, to ensure that the bank’s work is functioning properly, in order to achieve the objectives of the bank.

• Adopting the principles of the charter of Good Professional behavior at the Bank.

• Adopting and implementing the disclosure policy and monitoring its compliance with the regulatory requirements.

• Reviewing the significant transactions with the related parties, that are not normal transactions.

• Nominate the members of the subsidiary board committees and define their roles, responsibilities and powers.

• Appointing the Chief Executive / General Manager and the senior executive and technical officers, and defining their roles, responsibilities, competencies and rewards.

• Evaluate the functions and responsibilities of the subcommittees, the CEO and the senior officers in the Bank.

• Approving of annual and interim financial statements.

• Informing the Government of the Bank’s status through the annual report and providing advice on any matter that might raise the level of the bank’s work.

• Approving internal regulations and systems that are governing the bank’s activities and the affairs of its employees.

2. The role and responsibilities of the executive management of the Bank:

• Managing the Bank’s affairs according to the policies and strategy approved by the Board of Directors.

• Assisting the Board in designing and formulating the policies.

• Applying the laws, regulations and circulars that govern the Bank’s work.

• Applying the policies and regulations approved by the Board of Directors.

• Preparing detailed and procedural programs to implement the approved policies.

• Preparing the contracts of the projects according to the work’s requirements.

• Preparing of the draft balance sheet.

• Preparing a report on the Bank’s activity during the previous financial year.

• Complying with the principles of the charter and the system of the professional behavior.

• Responsible for reporting full and true data on the Bank’s activities to the Board of Directors.

3. Procedures and systems of internal control:

The Board of Directors formed an Audit Committee consisting of three members of the Board of Directors. This committee oversees the functions of the Internal Audit Department and verifies the compatibility of these functions with the rules and regulations of the regulatory bodies such as the Financial and Administrative Control Authority of the State, the Central Bank of Oman and the Capital Market Authority, as well as being compatible with internationally approved auditing systems, policies and standards.

The Bank follows the utmost diligence and applies the principle of security in its financial transactions where no transaction of the bank transactions is signed by one person alone but must be signed by at least two persons. Moreover, there are safe procedures acceptable to the computer’s operations and programs. In general, the administrative controls in the bank are good and practical.

• The compliance officer regulation has been approved and it is currently in force.

34

Second: The Board of Directors

The Bank is managed by a Board of Directors consisting of a Chairman and four members representing the Ministry of Finance, the Ministry of Commerce and Industry, the Ministry Agriculture and Fisheries, as well as two independent members of the competent and experienced candidates, nominated by the General Assembly of the Bank, in accordance with the provisions of the Royal Decree No. (18/97) of establishing Oman Development Bank, and its amendments.

Third: The Audit Committee

• The committee includes three members of the Board of Directors

• The Charter of the Committee was adopted by the Board of Directors on 16/6/2003 under the Board of Directors Resolution No. (17/2003) which has been amended by the Board of Directors Resolution No. (22/2010), issued on 10/1/2010.

The main objective of the Audit Committee is to assist the Bank’s Board of Directors in the performance of its supervisory duties and to discharge its responsibilities according to the following:

1. Ensuring the Bank’s commitment to the applicable laws and regulations and that it is applying the principles of professional ethics, set by the Bank.

2. The role of the Audit Committee is a regulatory and supervisory role. The Committee is responsible for maintaining an effective professional relationship between the Board of Directors, the Executive Management, internal and external auditors.

3. Enhancing the communication with the external auditors by working effectively with them and ensuring that they carry out their duties professionally and independently without any influences from any entity in the bank.

Details of the Audit Committee’s members’ attendance in the meetings during 2019:

Meeting No. Date Mr. Abdul Al Salam bin Nassir Al Kharousi

Eng. Nahla bint Abdul Al Wahab Al Hamdiya

Mr. Ali bin Mohammed bin Jumaa‘ Al Lawati

First 24/1/2019 Attended Attended Attended

Second 19/3/2019 Attended Did not attend Attended

Third 19/3/2019 Attended Attended Didn’t attend

Fourth 7/5/2019 Attended Attended Attended

Fifth 22/7/2019 Attended Attended Attended

Sixth 23/10/2019 Attended Attended Attended

Seventh 25/12/2019 Attended Attended Attended

Fourth: Risks Committee:

The main objective of the Risk Committee is to implement the circulars and guidelines of the Central Bank of Oman, which requires the appointment an authority derived from the board of directors, to ensure that all internal regulations, adopted by the Board of Directors, are applied, in terms of identifying, measuring and monitoring the various types of risks, that may have an impact on the Bank.

Annual Report 2019

35

The main tasks and responsibilities assigned to this Committee are as follows:

• Understanding the extent and magnitude of the risks facing the Bank and ensure that it is properly managed.

• Developing risk management policies, in the light of the Bank’s ability to withstand these risks.

• Reviewing the types of potential risks, in the light of the evolution of the banking system and identifying the risks and reviewing the policies and the procedures’ feasibility, to protect the interests of the bank.

• Ensuring that risk management policies include all quantitative elements in the Bank’s various operations, and in accordance with the relevant laws and regulations.

• Studying and evaluating the market changes that may have an impact on the Bank’s position.

• Monitoring the adherence to the risk measures across the bank’s operations.

• Assigning the executive management in the bank to follow the risks that fall within the scope of its responsibilities and providing studies and proposals on this.

• Overseeing the implementation of the policies and the Central Bank of Oman’s recommendations, within the same framework.

• Adopting the loans’ allocations raised from the risk management.

• Supervising the bank’s compliance function.

• Supervising of loan review function (LRM)

• Overseeing the Bank’s full implementation of the anti-money laundering and anti-terrorism related issues.

The committee includes three members of the board of directors.

Details of the attendance of the members of the Risk Committee for the Meetings during 2019:

Meeting No.

Date Mr. Ali bin Mohammed bin

Jumaa‘ Al Lawati

Mr. Saleh bin Mohammed bin

Saleh Al Abri

Miss. Zayana bint Mohammed bin

Khamis Al Rashdi

First 19/3/2019 Attended Attended Attended

Second 13/5/2019 Attended Attended Attended

Third 22/7/2019 Attended Attended Attended

Fourth 23/10/2019 Attended Attended Attended

Fifth 25/12/2019 Attended Attended Attended

Fifth: The restructuring committee:

A committee derived from the Board of Directors has been formed by virtue of Resolution No. (A: 65/2018) entitled “Restructuring Committee”, which includes four members of the Board of Directors.

The Committee shall undertake the following tasks:

1. Supervising the completion of the housing process.

2. Studying the necessary budget to complete the housing process according to the current grades and seminars and submit the recommending to the Board of Directors for approval.

36

3. Studying the new grade scale and submitting the recommending to the Board of Directors, with a statement of the total financial impact on the financial position of the Bank when settling the new scale.

4. Approving the review of the final draft of the new Human Resources Regulations and submitting the recommendations, thereon, to the Board of Directors as a final draft for approval.

5. Supervising the selection of qualified persons applying for leadership positions that have not yet taken place in the organizational structure and selecting the competencies both inside and outside the bank.

6. Considering the employees’ grievances resulting from the structuring process.

7. Any other subjects assigned by the Board.

Details of the attendance of the members of the Re-structuring Committee for the Meetings during 2019:

Meeting No. Date Eng. Nahla bint Abdul

Al Wahab Al Hamdiya

Eng. Hilal bin Hamad Al

Busaidi

Mr. Ali bin Mohammed

bin Jumaa’ Al Lawati

Eng. Saleh bin

Mohammed Al Abri

First 13/1/2019 Attended Didn’t attend Attended Attended

Sixth: Financial allocations:

The following amounts were disbursed during the year 2019 to the members of the Board of Directors:

1- Remuneration paid to BoD members for attending the meeting

Meeting Amount paid

BoD meeting RO21,900

Audit committee RO4750

Risk committee meeting RO3750

Restructuring committee RO750

Total amount RO31,150

2- The allowances and bonuses paid and proposed to the Board of Directors within the limits of the Commercial Companies Law No. (4/74) and its amendments, specifically the amendments issued by the Royal Decree No. (99/2005) dated 28/11/2005.

3- The total salaries, allowances and remunerations paid for the top five senior employees of the Bank during the year 2019 amounted to RO487434.000

Seventh: The Board of Directors:

The Board of Directors consists of a Chairman and four members representing the governmental entities, as defined by the Royal Decree, establishing the Bank. Those members shall have two independent members with expertise (all members of the Board are highly qualified and experienced).

Annual Report 2019

37

This is a list of the boards’ members is as follows:

Independent members Members representing the governmental entities

Sayyid Salem bin Musalam Al BusaidiChairman

Eng. Hilal bin Hamad bin Saif Al BusaidiBoard Member

Mr. Ali bin Mohammed bin Jumaa’ Al LawatiBoard Member

Mr. Abdul Al Salam bin Nassir bin Abdullah Al KharousiDeputy Chairman of the BoardRepresentative of the Ministry of Finance

Eng. Nahla bint Abdul Al Wahab bin Ahmed Al HamdiBoard MemberRepresentative of the Ministry of Commerce and Industry

Eng. Saleh bin Mohammed bin Saleh Al AbriBoard MemberRepresentative of the Ministry of Agriculture and Fisheries

Mrs. Zayana bint Mohammed Al RashdiBoard MemberRepresentative of the Ministry of Finance

Sayyid Salem bin Musalam Al Busaidi has been appointed as Chairman of the board of directors as per the Council of Ministers’ decision No Finance/T/99030/MSB/5/61/2019/2433 dated 25/3/2019.

Details for BoD meetings attendance during 2019

Meeting

No. and

Date

Sayyid

Salem bin

Musalam

Al Busaidi

Mr. Abdul

Al Salam

bin Nassir

Al Kharousi

Eng. Nahla

bint Abdul

Al Wahab

bin Ahmed

Al Hamdi

Eng.

Saleh bin

Mohammed

bin Saleh

Al Abri

Mrs.

Zayana bint

Mohammed

Al Rashdi

Mr. Hilal

bin Hamad

bin Saif Al

Busaidi

Mr. Ali bin

Mohammed

bin Jumaa’

Al Lawati

1st

13/9/2019

Did not

attend

Attended Attended Attended Attended Attended Did not

attend

2nd

24/2/2019

Did not

attend

Attended Did not

attend

Attended Attended Attended Attended

3rd

25/3/2019

Did not

attend

Attended Attended Attended Attended Attended Attended

4th

19/5/2019

Attended Attended Attended Attended Attended Attended Attended

5th

5/8/2019

Attended Attended Attended Attended Attended Did not

attend

Did not

attend

6th

28/10/2019

Attended Attended Attended Attended Attended Attended Did not

attend

7th

29/12/2019

Attended Did not

attend

Attended Attended Attended Attended Attended

38

Eighth: Regulations and sanctions imposed:

During the past year (2019), the Bank has complied with all organizational and regulatory requirements (the State Financial and Administrative Control Agency, the Central Bank of Oman and the Capital Market Authority). The Board of Directors is keen to direct the Bank’s board, to address the comments received from the aforementioned regulatory authorities continuously. These directives are continuously updated by the Board of Directors and the Internal Audit and Risk Committees through regular follow-up reports prepared for this purpose. The Board is kept informed of the steps taken to ensure that the observations and irregularities reported in these reports are solved.

Ninth: Means of communication with shareholders (government) and other concerned authorities:

The Bank maintains direct communication and the results and financial statements of the Bank are also published in two main newspapers in Arabic and English. Moreover, Periodic results are also sent via electronic means to the Capital Market Authority.

Tenth: The bank’s auditors during the year 2019:

About Deloitte:

The name “Deloitte” is used to denote one or more companies licensed by Deloitte Touche Tohmatsu Limited, a global group of licensed member companies and associated entities, the latter and each of the licensed companies having their own independent legal personality.

Deloitte is a global leader in auditing, reviewing, management and financial consulting, risks consulting, taxations and related services. It provides services to four out of five companies on Fortune global magazine of top-500 companies, thanks to an interconnected global network from the authorized member companies from more than 150 countries.

About Deloitte & Touche (Middle East):

Deloitte & Touche (Middle East) is a member company licensed by Deloitte Touche Tohmatsu Ltd., one of the leading professional consultancy services provider that has been established in the Middle East and has been active in the region since 1926. The presence of Deloitte & Touche (Middle East) in the Middle East is established through companies licensed by it to provide services, in accordance with the laws and decrees of the country of which it has an independent legal personality. Companies and entities licensed by Deloitte cannot oblige each other and / or oblige Deloitte & Touche (Middle East). When providing services, each licensed company or entity licensed by Deloitte & Touche (the Middle East) contracts independently with its own customers (without reference to Deloitte & Touche (Middle East) and these companies and entities are solely responsible for their actions or shortcomings.

Prepared by

The Legal Advisor to the Board of Directors

Annual Report 2019

39

OMAN DEVELOPMENT BANK SAOCReport and financial statements

for the year ended 31 December 2019

Nakhal Fort 40

Independent auditor’s report to the shareholders ofOman Development Bank SAOC

Report on the audit of the financial statements

Opinion

We have audited the financial statements of Oman Development Bank SAOC (“the Bank”), which comprise the statement of financial position as at 31 December 2019, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies set out on pages 4 to 55.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2019, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the other ethical requirements that are relevant to our audit of the Bank’s financial statements in Sultanate of Oman, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Responsibilities of the Board of Directors for the financial statements

The Board of Directors (“the Board”) is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, commercial companies law of 2019 and for such internal control as the Board is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Board is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Annual Report 2019

41

Independent auditor’s report to the shareholders of Oman Development Bank SAOC (continued)

Auditor’s responsibilities for the audit of the financial statements (continued)

As part of an audit in accordance with ISA’s, we exercise professional judgement and maintain professional skepticism throughout the audit. We also :

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risk, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than the one resulting from error, as fraud may involve collusion, forgery, intentional omission, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board.

• Conclude on the appropriateness of the Board’s use of the going concern basis of accounting and based on the audit evidenced obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosure are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Bank to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represents the underlying transactions and events in a manner that achieves fair presentation.

We communicate with the Board regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Report on other legal and regulatory requirements

Further, we report that the financial statements comply, in all material respects, with the relevant disclosure requirements of the Commercial Companies Law of 2019, as amended.

Deloitte & Touche (M.E.) & Co. LLC

Muscat, Sultanate of Oman

15 March 2020

42

Statement of financial positionat 31 December 2019

2019 2018

Note RO RO

Assets

Cash and balances with Central Bank of Oman 889,170 1,912,730

Balances with banks 5 28,211,920 42,794,113

Loans and advances to customers - net 6 150,683,345 139,147,811

Investments 7 19,472,846 16,572,480

Staff housing loans 8 1,158,667 1,309,691

Receivable from Government 9 6,161,671 3,811,347

Property and equipment 10 963,714 1,122,776

Prepayments and other receivables 11 1,730,368 1,803,036

Total assets 209,271,701 208,473,984

Liabilities and shareholders’ equity

Liabilities

Customer deposits (Izdihar) 12 435,106 500,993

Payable to Government 13 254,101 182,278

Payables and accruals 14 6,047,154 7,542,843

Borrowings 15 38,693,990 38,654,216

Total liabilities 45,430,351 46,880,330

Shareholders’ equity

Share capital 17 100,000,000 100,000,000

Legal reserve 18 7,471,080 7,235,145

Investment revaluation reserve 560,879 672,533

Special reserve 19 5,541,048 5,541,048

Impairment reserve 20 776,057 776,057

Retained earnings 49,492,286 47,368,871

Total shareholders’ equity 163,841,350 161,593,654

Total liabilities and shareholders’ equity 209,271,701 208,473,984

Net assets value per share 29 1.638 1.616

Commitments and contingencies 28 19,529,932 22,408,914

H.E. Sayyid Salim bin Musallam Al BusaidiChairman

Dr. Abdulaziz Bin Mohammed Al Hinai Chief Executive Officer

The accompanying notes form an integral part of these financial statements.

Annual Report 2019

43

Statement of profit or loss and other comprehensive incomefor the year ended 31 December 2019

2019 2018

Note RO RO

Interest income 21 11,042,262 9,904,764

Interest expense (827,876) (455,253)

Net interest income 10,214,386 9,449,511

Fees, commission and other income 22 3,514,796 2,812,024

Net operating income 13,729,182 12,261,535

General and administrative expenses 23 (8,818,439) (8,585,269)

Operating profit before loan impairment charges and allowance for customer relationship account 4,910,743 3,676,266

Investments loss – net 25 (95,313) (349,997)

Impairment for credit losses 6 (2,323,965) (828,583)

Impairment charge for customer relationship accounts 11 (132,115) (40,504)

Profit for the year 2,359,350 2,457,182

Other comprehensive income

Items that may not be reclassified subsequently to profit or loss:

Change in fair value of investments at fair value through other comprehensive income 7 (111,654) (282,069)

Total comprehensive income for the year 2,247,696 2,175,113

Basic and diluted earnings per share 32 0.024 0.025


44

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ts.

Annual Report 2019

45

Statement of cash flowsfor the year ended 31 December 2019

2019 2018RO RO

Operating activitiesProfit for the year 2,359,350 2,457,182Adjustments:Depreciation of property and equipment 322,648 379,339Exchange loss - 149,000Interest expense 827,876 455,253Employees terminal benefits 108,750 19,266Impairment for credit losses 2,323,965 828,583 Direct write-off of loans and advances 8,159 486,673Gain on disposal of property and equipment - (17,630)Realised investment income - net (450,396) (729,855)Premium amortised - Bonds & Sukuk 106,359 114,435Impairment provision for bonds and fixed deposits 13,397 42,920Change in fair value of investments at fair value through profit or loss 439,350 965,417Net movement in allowance for customer relationship accounts 132,115 40,504Operating profit before changes in operating assets and liabilities 6,191,573 5,191,087Changes in operating assets and liabilities:Loans and advances to customers (13,867,658) (14,741,492)Staff housing loans 151,024 (15,576)Prepayments and other receivables (59,448) (214,955)Customer deposit (Izdihar) (65,887) (38,199)Receivable from Government - net (2,278,501) (1,847,358)Payables and accruals (1,604,438) 1,651,795Net cash used in operating activities (11,533,335) (10,014,698)Investing activitiesPurchase of property and equipment (163,586) (307,902)Proceeds from disposal of property and equipment - 19,300Placement of deposits - net 12,000,000 (13,000,000)Realised investments income – net 450,396 729,855Net disposals / (purchases) of investments at fair value through profit or loss 584,687 (353,885)Bonds matured 5,000,000 2,000,000Bonds and Sukuk purchased (9,151,000) (500,000)Net cash generated from / (used in) investing activities 8,720,497 (11,412,632)Financing activitiesBorrowings - 19,101,000 Interest paid (788,102) (397,021)Net cash (used in) / generated from financing activities (788,102) 18,703,979Net decrease in cash and cash equivalents (3,600,940) (2,723,351)Cash and cash equivalents at the beginning of the year 9,693,843 12,417,194Cash and cash equivalents at the end of the year 6,092,903 9,693,843Cash and cash equivalents comprise:Cash and balances with Central Bank of Oman 889,170 1,912,730Capital deposit with Central Bank of Oman (50,000) (50,000)Balances with banks (note 5) 5,253,733 7,831,113Cash and cash equivalents at end of the year 6,092,903 9,693,843


46

1. Legal status and principal activities

Oman Development Bank SAOC (the Bank) was established under the Royal Decree Number 18/97, as a joint stock company on 9 April 1997. The Bank operates in Oman under a banking license issued by the Central Bank of Oman (CBO). The Bank has 18 (2017 - 18) branches within the Sultanate of Oman. The registered address of the Bank is P.O. Box 3077, Ruwi, Postal Code 112, Sultanate of Oman. The Bank is 100% owned by the Government of the Sultanate of Oman.

The Bank is principally engaged in providing loans to development projects, primarily involved in the activities of agriculture, fisheries, livestock, industrial resources, information technology, educational colleges, health, tourism, professional activities, workshops and traditional industrial craftsmanship in the Sultanate of Oman. The Banks achieves its objective by granting loans, administering grants and subsidies, participating in share capital to companies registered under the Commercial Companies Law of Oman and other enterprises, and carrying out other banking activities. In accordance with its objectives, interest on loans and advances is charged to the customers at a rate which is subsidized by the Government of the Sultanate of Oman. In addition the Bank also acts as agent on behalf of the Government of Sultanate of Oman in respect of:

• the distribution and collection of Government soft loans;

• the disbursement of amounts from the Agriculture and Fisheries Development Fund; and

• the disbursement and collection of Al RAFAD Fund (SANAD Fund) Loans.

Under the Royal Decree establishing the Bank, the Government of the Sultanate of Oman guarantees its borrowings of up to four times the capital and general reserves of the Bank.

Royal Decree No. 18/2006 was issued in the year 2006 by which new avenues were opened for the Bank in terms of financial lending limits, allowing the bank to sanction soft loans up to One million Rials Omani for a single project at a stipulated interest rate of 3% per year. The maximum limit of soft loans can be Three million Rials Omani to Joint Stock Companies that have offered 40% of their shares for public subscription.

The new Royal Decree also allows the bank to provide non-subsidised working capital loans to new and existing projects.

Further, all the soft loans which were earlier handled by the Financial Support Committee of the Ministry of Commerce and Industry have been delegated to Oman Development Bank SAOC.

2. Adoption of new and revised international financial reporting standards (IFRS)

2.1 New and revised IFRSs that are effective for the current year

The following new and revised IFRSs, which became effective for annual periods beginning on or after January 2019, have been adopted in these financial statements.

The Bank applies, for the first time, IFRS 16 Leases. The impact of the initial application of these standards is disclosed in Note 2.3 to these financial statements.

The following new and revised IFRSs, which became effective for annual periods beginning on or after 1 January 2019, have been adopted in these financial statements. The application of these revised IFRSs has not had any material impact on the disclosures or on the amounts reported in these financial statements.

Notes to the financial statements for the year ended 31 December 2019

Annual Report 2019

47

2. Adoption of new and revised international financial reporting standards (IFRS)

2.1 New and revised IFRSs that are effective for the current year (continued)

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

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

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 1 January 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.

1 January 2019

Amendments to IAS 28 Investment in Associates and Joint Ventures: Relating to long-term interests in associates and joint ventures. 1 January 2019

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

1 January 2019

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

The Annual Improvements include amendments to four Standards.

1 January 2019

IAS 12 Income Taxes

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

1 January 2019

48

Notes to the financial statements for the year ended 31 December 2019 (continued)

2. Adoption of new and revised international financial reporting standards (IFRS) (continued)



IAS 23 Borrowing costs

The 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 capitalisation rate on general borrowings.

1 January 2019

IFRS 3 Business Combinations

The 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 unrecognised assets, liabilities and goodwill relating to the joint operation.

1 January 2019

IFRS 11 Joint Arrangements

The 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.

1 January 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.

1 January 2019

IFRIC 23 Uncertainty over Income Tax Treatments

The 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

1 January 2019

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Annual Report 2019

2. Adoption of new and revised international financial reporting standards (IFRS) (continued)



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

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.’

1 January 2019

Definition of a Business – Amendments to IFRS 3 Business Combinations

The 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’.

1 January 2020

Amendments to References to the Conceptual Framework in IFRS Standards

Amendments 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.

1 January 2020

IFRS 7 Financial Instruments: Disclosures and IFRS 9 - Financial Instruments

Amendments regarding pre-replacement issues in the context of the IBOR reform

1 January 2020

50


2. Adoption of new and revised International Financial Reporting Standards (IFRS) (continued)

2.2 New and revised IFRS in issue but not yet effective

The Bank has not yet applied the following new and revised IFRSs that have been issued but are not yet effective:


IFRS 17 Insurance Contracts

IFRS 17 requires insurance liabilities to be measured at a current fulfilment 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 1 January 2022.

1 January 2020

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

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Annual Report 2019

2. Adoption of new and revised International Financial Reporting Standards (IFRS) (continued)

2.3 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, 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. There is no material impact on the initial application of this standard on the amounts reported in these financial statements.

3 Summary of significant accounting policies

Statement of compliance

The financial statements of the Bank at 31 December 2019 have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB), the disclosure requirements and the applicable regulations of the Commercial Companies Law of 2019.

The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and 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. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised 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 areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4.

The financial statements have been prepared on the historical cost basis except for investments at fair value through profit or loss and investment at fair value through other comprehensive income which are measured at fair value.

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

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3 Summary of significant accounting policies (continued)

Functional and presentation currency

The financial statements are presented in Rials Omani (RO), which is the functional currency of the primary economic environment in which the Bank operates.

Transactions in foreign currencies are translated into Rials Omani at the rates prevailing on the date of the transactions. Assets and liabilities denominated in foreign currencies are translated to Rials Omani at year end rates. Any gain or loss arising from changes in exchange rates subsequent to the date of the transaction is recognised in the statement of comprehensive income.

Financial assets and financial liabilities

(i) Recognition

The Bank initially recognises loans and advances to customers, due from / to banks, customer deposits, debt securities and other borrowings on the date at which they are originated. All other financial assets and liabilities are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument.

(ii) Classification and initial measurement

Financial assets

On initial recognition, a financial asset is classified as measured at: amortised cost, Fair value through other comprehensive income (FVOCI) or Fair value through profit or loss FVPL.

A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVPL:

- The asset is held within a business model whose objective is to hold assets 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 interest on the principal amount outstanding.

A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVPL:

- The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and

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

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 as measured at FVPL.

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Annual Report 2019


Financial assets and financial liabilities (continued)

(ii) Classification and initial measurement (continued)

Financial assets (continued)

In addition, on initial recognition, the Bank may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVPL 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 a financial 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;

- 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; and

- The frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity.

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

Assessment of whether contractual cash flows are solely payments of principal and interest

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 contingent events that would change the amount and timing of cash flows, prepayment and extension terms, terms that limit the Bank’s claim to cash flows from specified assets and features that modify consideration of the time value of money.

54




(ii) Classification and initial measurement (continued)

Reclassifications

Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Bank changes its business model for managing financial assets.

Financial liabilities

The Bank has classified and measured its financial liabilities at amortised cost.

(iii) Derecognition

Financial assets

The Bank derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred, or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset.

On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and consideration received (including any new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognised in OCI is recognised in the income statement.

Cumulative gain / loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in the income statement on derecognition of such securities.

The Bank enters into transactions whereby it transfers assets recognised on its statement of financial position but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised.

In transactions in which the Bank neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Bank continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset.

In certain transactions the Bank retains the obligation to service the transferred financial asset for a fee. The transferred asset is derecognised if it meets the derecognition criteria. An asset or liability is recognised for the servicing contract, depending on whether the servicing fee is more than adequate (asset) or is less than adequate (liability) for performing the servicing.

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Annual Report 2019



(iii) Derecognition (continued)

Financial liabilities (continued)

The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

(iv) Modification 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, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value.

If the cash flows of the modified asset carried at amortised cost 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 recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in the income statement. 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.


The Bank derecognises 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 recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognized in profit or loss.

(v) Impairment

The Bank recognises loss allowances for expected credit losses (ECL) on the following financial instruments that are not measured at FVPL:

- Financial assets that are debt instruments; and

- Loan commitments and financial guarantee contracts.

No impairment loss is recognised on equity instruments. Impairment and ECL are used interchangeably throughout these financial statements.

The Bank measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL:

- Debt investment securities that are determined to have low credit risk at the reporting date; and

- Other financial instruments on which credit risk has not increased significantly since their initial recognition.

12-month ECL are the portion of ECL that result from default events on financial instruments that are possible with the 12 months after the reporting date.

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(v) Impairment (continued)

Measurement of ECL

ECL are 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; and

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

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 derecognised and ECL are measured as follows:

- If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset; or

- If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset.

Credit-impaired financial assets

At each reporting date, the Bank assesses whether financial assets carried at amortised 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 reorganisation; or

- The disappearance of an active market for a security because of financial difficulties.

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Annual Report 2019


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 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, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

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

58



Fair value measurement (continued)

At each reporting date, the Bank analyses 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.

Cash and cash equivalents

For the purpose of preparing the statement of cash flows, cash equivalents comprises of highly liquid assets which are readily convertible into known amount of cash and which are subject to an insignificant risk of change in value. Cash and cash equivalents comprise all balances with Central Bank of Oman and deposits with banks and other financial institutions, except for balances held by investment funds managers and short term deposits, with a maturity of three months or less from the date of placement.

Property and equipment

Property and equipment held for use in the production or supply of goods or services, or for administrative purposes, are initially recognised at their cost being their purchase price plus any other costs directly attributable to bringing the assets to the location and condition necessary for them to be capable of operating in the manner intended by management.

After initial recognition, the property and equipment are carried, in the statement of financial position, at their cost less any accumulated depreciation and any accumulated impairment. The depreciation charge for each period is recognised in the statement of profit or loss. Depreciation is calculated on a straight line basis, which reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the Bank over the estimated useful life of the assets as follows:

Years

Buildings 25

Vehicles 5

Furniture and fixtures and office equipment 4 - 5

Land is not depreciated as it is deemed to have an indefinite life.

The depreciation charge for each period is recognised in the statement of profit or loss. The estimated useful lives, residual values and depreciation method are reviewed at each year-end, with the effect of any changes in estimate accounted for on a prospective basis.

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Annual Report 2019


Property and equipment (continued)

The carrying values of property and equipment are reviewed for impairment when events or changes in the circumstances indicate the carrying value may not be recoverable. If any such indication of impairment exists, impairments losses are recorded in the statement of comprehensive income.

On the subsequent derecognition (sale or retirement) of the property and equipment, the resultant gain or loss, being the difference between the net disposal proceeds, if any, and the carrying amount, is included in the statement of comprehensive income.

Repairs and renewals are charged to the statement of comprehensive income when the expense is incurred. Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property and equipment. All other expenditure is recognised in the statement of comprehensive income as an expense as incurred.

Provisions

Provisions are present obligations (legal or constructive) resulted from past events, the settlement of the obligations is probable and the amount of those obligations can be estimated reliably. The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation at the statement of financial position date, that is, the amount that the Bank would rationally pay to settle the obligation at the statement of financial position date or to transfer it to a third party.

Provisions reviewed and adjusted at each statement of financial position date. If outflows, to settle the provisions, are no longer probable, reverse of the provision is recorded as income. Provisions are only used for the purpose for which they were originally recognised.

Employees’ terminal benefit

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 Labour Law 2003 and its amendments. Employee entitlements to annual leave and leave passage are recognised when they accrue to employees and an accrual is made for the estimated liability arising as a result of services rendered by 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 Omani Government Social Security Scheme under Royal Decree No. 72/91 for Omani employees in accordance with the Omani Social Insurance Law 1991 are recognised as an expense in the statement of comprehensive income as incurred.

In accordance with the provisions of IAS 19, Employee benefits, management carries an exercise to assess the present value of the Bank’s obligations as of reporting date, using the actuarial techniques, in respect of employees’ end of service benefits payable under the Oman aforesaid Labour Law. Under this method, an assessment is made of an employee’s expected service life with the Bank and the expected basic salary at the date of leaving the service.

60



Equity instruments

Equity instruments are recorded at the proceeds received, net of direct issue costs.

Interest income and expense

Interest income and expense are recognised in the statement of comprehensive income on accrual basis, taking account of the principal outstanding and the effective intertes rate applicable. If the recovery of the interest income is doubtful, its recognition in the statement of comprehensive income is deferred until it is received.

Commission and fees

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 recognises 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.

Dividend income

Dividend income is recognised when the right to receive income is established.

Contingent liabilities

Contingent liabilities are possible obligations depending on whether some uncertain future events occur, or they are present obligations but payments are not probable or the amounts cannot be measured reliably. Contingent liabilities are not recognised in the financial statements.

Fiduciary assets

Assets held by the Bank in its own name, but on the account of third parties and held on trust on behalf of third parties, are not reported in the statement of financial position. Commissions received from fiduciary activities are shown in fee and commission income.

Directors’ remuneration

Directors’ remuneration is calculated in accordance with the Commercial Companies Law of the Sultanate of Oman.

Dividend

Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’s members.

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Annual Report 2019

4 Use of estimates

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amount of financial assets and liabilities at the date of the financial statements and the resultant provisions and changes in fair value for the year. Such estimates are necessarily based on assumptions about factors involving varying, and possibly significant, degrees of judgment and uncertainty and actual results may differ from management’s estimates resulting in future changes in estimated assets and liabilities.

Significant areas where the management has used estimates, assumption or exercised judgements are as follows:

Measurement of the expected credit losses allowance

The measurement of the expected credit loss allowance for financial assets measured at amortised cost and debt investment measured at FVOCI is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour (e.g. the likelihood of customers defaulting and the resulting losses).

A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as:

• Determining criteria for significant increase in credit risk;

• Choosing appropriate models and assumptions for the measurement of ECL;

• Establishing the number and relative weightings of forward-looking scenarios for each type of product / market and the associated ECL; and

• Establishing groups of similar financial assets for the purposes of measuring ECL.

Management uses estimates based on historical loss experience for financing and other credits with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when estimating cash flows. The methodology and assumptions used for estimating both the amount and the timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

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5 Balances with banks

2019 2018

RO RO

Current accounts 5,253,733 7,831,113

Long term deposits - 10,000,000

Short term deposit 23,000,000 25,000,000

Provision for expected credit loss (41,813) (37,000)

28,211,920 42,794,113

Current accounts include an amount of RO 431,562 held by investment managers as of 31 December 2019 (2018 – RO 208,236).

Long term deposit was placed for a period of two year and carry interest rate of 3%. The deposit was matred during the current year.

Short term deposits have been placed for a period of one year and carry interest rate of 3.65% to 4.50% (2018 - 3.6% to 4.25%).

All term deposits and current accounts are with local commercial banks located in the Sultanate of Oman.

6 Loans and advances to customers - net

2019 2018

RO RO

Loans and advances to customers 155,782,863 142,801,948

Loan against trust receipts and working capital loans 7,882,455 7,406,571

Interest receivable 3,699,327 3,302,718

Gross loans and advances 167,364,645 153,511,237

Provision for expected credit losses (16,681,300) (14,363,426)

150,683,345 139,147,811

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Annual Report 2019

6 Loans and advances to customers (continued)

Loans and advances were granted to projects within the Sultanate of Oman. The concentration of gross loans and advances by sector is as follows:

2019 2018

RO RO

Economic sector

Manufacturing 58,294,865 54,324,119

Agriculture and fisheries 41,784,020 41,622,809

Services 56,335,822 49,413,738

Mining and quarrying 2,610,640 1,405,816

Others 8,339,298 6,744,755

167,364,645 153,511,237

Movement in provision for impairment is analysed below:

2019 2018

Stage 1 Stage 2 Stage 3 Total ECL Total ECL

RO RO RO RO RO

Balance at 1 January 2,153,715 1,975,835 10,233,876 14,363,426 14,641,934

Impact of Initial application - - - - (363,920)

Transfers betwwen stages (105,153) (136,525) 241,678 - -

Net charge for the year 156,345 256,138 1,911,482 2,323,965 828,583

Amounts written off (68) - (6,023) (6,091) (743,171)

Balance at 31 December 2,204,839 2,095,448 12,381,013 16,681,300 14,363,426

Impairment provisions held 2019

CBO norms IFRS9 Difference

RO / % RO / % RO / %

Provision required as per CBO norms/held as per IFRS9 16,723,284 16,681,300 (41,984)

Gross non-performing loan ratio (%) 15.46 13.41 (2.05)

Net non-performing loan ratio (%) 7.40 3.83 (3.57)

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(‘00

0)RO

(‘00

0)RO

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0)(1

)(2

)(3

)(4

)(5

)(6

)(7

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)+(5

)-(6

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)=(3

)-(4

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) = (3

)-(6

)

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dard

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e 1

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814

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65

Annual Report 2019N

ote

s to

th

e fi

nan

cial

sta

tem

ents

fo

r th

e ye

ar e

nd

ed 3

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0)(1

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l Men

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e 1

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tes

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al s

tate

men

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year

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ded

31

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er 2

019

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nu

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ans

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to c

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tru

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000)

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1,37

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9

67

Annual Report 2019N

ote

s to

th

e fi

nan

cial

sta

tem

ents

fo

r th

e ye

ar e

nd

ed 3

1 D

ecem

ber

201

9 (c

on

tin

ued

)

6 Lo

ans

and

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van

ces

to c

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nu

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tru

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s -

2018

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et c

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er C

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(5)

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(3)-

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RO (‘

000)

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000)

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000)

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000)

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000)

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000)

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e 1

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e 1

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e 2

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e 3

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1,77

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l

Stag

e 1

--

--

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-

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e 2

4,42

9 93

5 6

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e 3

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No

tes

to t

he

fin

anci

al s

tate

men

ts

for

the

year

en

ded

31

Dec

emb

er 2

019

(co

nti

nu

ed)

6 Loans and advances to customers (continued)

As of reporting date, the Bank has a portfolio of written off loans (“Technical write off portfolio”) where the Bank continues to follow up with its customer in order to collect outstanding balances.

2019 2018

RO RO

Opening 6,771,855 5,766,598

Additions 2,236 1,178,471

Accrued interest 29,142 45,051

Repayments (164,994) (84,315)

Reversal (2,505) (133,950)

Closing 6,635,734 6,771,855

Fair value of qualified collaterals RO 169,061,334 against loan outstanding of RO 167,364,274 (2018: RO 132,878,333 against loan outstanding of RO 153,511,237). Qualified collaterals includes government guarantees, banks guarantees, deposits, listed shares/bonds and real estate mortgages on freehold properties.

7 Investments

Investment at fair value through other comprehensive income 1,308,995 1,420,649

Investment at fair value through profit or loss 3,492,858 4,516,895

Investment measured at amortized cost 14,670,993 10,634,936

19,472,846 16,572,480

Investments at fair value through other comprehensive income

Movement of investments at fair value through other comprehensive income is given below:

2019 2018

RO RO

At beginning of the year 1,420,649 1,702,718

Change in fair value (111,654) (282,069)

At end of the year 1,308,995 1,420,649

The analysis of market value based on the most recent market price and cost of quoted investment at fair value through other comprehensive income by economic sector is as follows:

Cost Market value

2019 2018 2019 2018

RO RO RO RO

Banking and investment 351,634 351,634 838,917 880,808

Industrial 382,400 382,400 425,205 491,268

Services 13,082 13,082 43,873 47,573

747,116 747,116 1,307,995 1,419,649

69


Annual Report 2019

7 Investments (continued)

Investments at fair value through other comprehensive income (continued)

Included in investments at fair value through other comprehensive income an amount of RO 1,000 (2018 - RO 1,000) being the value of unquoted Omani shares.

Details of the Bank’s investments where the Bank’s holding exceeds 10% of the market value of the Bank’s investments at fair value through other comprehensive income, are as follows:

Investmentportfolio

Number ofshares Market value Cost

% 2019 2018 2019 2018

RO RO RO RO

Quoted equity and fund investments

Oman National Development and Investment Co. SAOG 61.77 2,376,424 807,985 823,827 262,832 262,832

Oman Cement Company SAOG 17.97 1,000,000 235,000 300,000 200,000 200,000

Majan Glass Company SAOG 14.54 1,062,600 190,205 191,268 182,400 182,400

Investment at fair value through profit or loss

Movement of the investments is given below:

2019 2018

RO RO


Net (disposals) / purchases (584,687) 353,885

Change in fair value (note 25) (439,350) (965,418)

At end of the year 3,492,858 4,516,895

Investment measured at amortized cost

Government development bonds, Sukuk and commercial bonds 14,670,993 10,634,936

Government development and commercial bonds carry interest rates ranging from 4.25% to 7.75% (2018 - 2.75% to 5.5%).

70


7 Investments (continued)

Investment measured at amortized cost (continued)

The movement of investments measured at amortized cost is given below:

2019 2018

RO RO


Matured during the year (5,000,000) (2,000,000)

Non-government bonds and Sukauk purchased during the year 9,151,000 500,000

Provision for expected credit loss (8,584) (5,920)

Premium amortised during the year (106,359) (114,435)

At end of the year 14,670,993 10,634,936

8 Staff housing loans

Staff housing loans are recoverable over periods of up to twenty years and are interest free till the employees’ end of service with the Bank and after that there is an interest charge ranging from 1% to 6%, depending on the salary of the employee at the time of leaving. The fair value of staff housing loans at initital recognition is determined by using discounted cash flow technique using market rates currently offered for such facilities. The Bank applied 5% to discount the cash flows (2018: 5%). The difference between the amount of staff house loans disbursed and the fair value of the housing loan is recognised as deferred employee benefit (note 11).

9 Receivable from Government

2019 2018

RO RO

Ministry of Finance - subsidy receivable 915,795 404,440

Ministry of Finance - accrued subsidy 436,368 491,883

Ministry of Finance – accrued management fees - Al Rafad 5,471,754 3,506,000

6,823,917 4,402,323

Ministry of Finance - Government soft loans (662,246) (590,976)

6,161,671 3,811,347

• Subsidy receivable represents the amount billed to the Ministry of Finance for the interest subsidy on the loans and advances.

• Accrued subsidy represents the interest subsidy due on loans and advances but not billed to the Ministry of Finance as at the reporting date.

• Government soft loans represents the net balance of the funds received from Ministry of Finance for various type of schemes handled by the Bank on behalf of the Ministry of Finance, as a custodian.

71


Annual Report 2019

10

Pro

per

ty a

nd

eq

uip

men

t

Lan

dB

uild

ing

sV

ehic

les

Furn

itu

re a

nd

fi

xtu

res

Offi

ceeq

uip

men

t C

apit

al w

ork

-in

-pro

gre

ssTo

tal

RO

RO

RO

RO

RO

RO

RO

Co

st

At

1 Ja

nuar

y 20

1834

,943

1,21

9,37

270

4,79

090

4,92

21,

555,

792

26,9

394,

446,

758

Add

ition

s-

-75

,900

5,63

111

2,47

311

3,89

830

7,90

2

Dis

posa

ls /

writ

e-of

fs-

-(8

0,49

0)-

--

(80,

490)

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sfer

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--

77,6

0013

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(90,

845)

-

At

1 Ja

nuar

y 20

1934

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170

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--

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586

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sfer

s-

--

23,7

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217

(30,

977)

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At

31 D

ecem

ber

2019

34,9

431,

219,

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200

1,02

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756

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um

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atio

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1 Ja

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787

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fs-

(78,

820)

--

-(7

8,82

0)

At

1 Ja

nuar

y 20

1988

7,98

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361,

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rge

for

the

year

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322,

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ecem

ber

201

9-

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Net

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ecem

ber

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ecem

ber

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6

72

No

tes

to t

he

fin

anci

al s

tate

men

ts

for

the

year

en

ded

31

Dec

emb

er 2

019

(co

nti

nu

ed)

11 Prepayments and other receivables

2019 2018

RO RO

Deferred employee benefit 509,828 561,137

Accrued interest income 629,058 403,120

Guarantee recoverable from Ministry of Finance - 228,500

Customer relationship account receivables - net (note 11.1) 149,328 159,553

Prepaid expenses 51,849 50,974

Short term staff loans - net 175,563 77,481

Other receivables 214,742 322,271

1,730,368 1,803,036

11.1 Customer relationship account receivables

Customer relationship account receivables 589,011 467,121

Provision for impairment (439,683) (307,568)

Customer relationship account receivables - net 149,328 159,553

Movement in provision for impairment is as follows:

Provision at 1 January 307,568 267,064

Impairment charge for the year 132,115 40,504

Balance at 31 December 439,683 307,568

12 Customer deposits (Izdihar)

Term deposits 435,106 500,993

The term deposits mature within one year and carries interest rates ranging from 0.25% - 1.25% per annum (2018 - 0.10% - 1%) per annum.

13 Payable to Government

2019 2018

RO RO

Al Rafad Fund - balances under reconciliation 254,101 182,278

73


Annual Report 2019

14 Payables and accruals

2019 2018

RO RO

Customers relationship accounts* 3,517,747 3,405,831

Payable to Al Rafad Fund 245,535 1,356,073

Provision for leave salary, gratuity and air ticket 637,267 632,733

Accrued expenses 411,038 384,527

Provision for bonus 318,753 288,301

Other payables 916,814 1,475,378

6,047,154 7,542,843

* Customer relationship accounts mainly include the balances received in advance from the borrowers for settlement of loan installments.

15 Borrowings

During 2018, the Arab Fund for Economic and Social Development approved a loan of USD 50,000,000 (RO 19,250,000) to the Bank which has been disbursed to the Bank on 6 November 2018. The loan carries an interest rate of 2% per annum payable semi-annually in the months of March and September. The loan has a tenure of ten years with grace period of two years. The instalments are payable on semi-annual basis of USD 3.5 million from years 3 to 9 and USD 1 million in the last year with first payment due on 1 October 2021. In 2016, the Arab Fund for Economic and Social Development approved a loan of USD 50,000,000 (RO 19,345,986) to the Bank which has been disbursed to the Bank on 12 August 2017. The loan carries an interest rate of 2% per annum payable semi-annually in the months of March and September. The loan has a tenure of ten years with grace period of two years. The instalments are payable on semi-annual basis of USD 3.5 million from years 3 to 9 and USD 1 million in the last year with first payment due on 1 October 2020.

Reconciliations of liabilities arising from financing activity:

1 January New net borrowing in local currency

Non cash changes

(exchange loss and interest)

Cash flows (interest

paid)

31 December

RO RO RO RO RO

31 December 2019

Borrowings 38,654,216 - 778,014 (738,240) 38,693,990

31 December 2018

Borrowings 19,345,986 19,101,000 595,210 (387,980) 38,654,216

74


16 Trust activities

The Bank acts as a trustee for the following banks balances under trust are:

2019 2018

RO RO

Agriculture and Fisheries Development Fund - 4,264,829

AL Rafad Fund (Sanad Fund) 239,091 5,669,465

Grants for universities 3,000,000 3,000,000

17 Share capital

Authorized share capital (100 million ordinary shares of RO 1 each) 100,000,000 100,000,000

Issued and fully paid (100 million ordinary shares of RO 1 each) 100,000,000 100,000,000

18 Legal reserve

The Legal reserve, which is not available for distribution, is being accumulated in accordance with the Commercial Companies Law of 2019. The annual appropriation shall be 10% of the profit of the Bank until such time when the Legal Reserve amounts to at least one-third of the capital.

19 Special reserve

In accordance with the Article of Association of the Bank, an amount could be transferred to a special reserve at the discretion of Board of Directors.

20 Impairment reserve

In accordance with Central Bank of Oman requirements (CBO), if the provision charged for the loan impairment as per CBO norms is higher than the provision as per IFRS 9, the difference to be transferred to the impairment reserve as an appropriation of profit. This reserve is not available for distribution of dividend or for inclusion in regulatory capital. Any subsequent utilization of the impairment reserve would require a prior approval of the CBO.

75


Annual Report 2019

21 Interest income

2019 2018

RO RO

Interest income from:


Cash and term deposits 1,283,466 799,925

Other 70,673 151,148

11,042,262 9,904,764

Interest income from loans and advances includes around RO 5.4 million (2018 - RO 5.1 million), represents Government subsidy provided by Ministry of Finance (MOF) for customers projects against which loans have been obtained by the customers from the Bank. The subsidy is only applicable to customers who fulfil their obligations in repaying their instalments. In an event of default by the customer the interest is fully charged to the customer and no claim is made for the MOF.

22 Fees, commission and other income

Management fee - Al Rafad Fund 1,975,180 1,804,003

Commitment, legal, loan study and other fees and commissions 831,359 593,425

Reversal of provisions 263,385 84,315

Other income 444,872 330,281

3,514,796 2,812,024

23 General and administrative expenses

Employees’ costs (note 24) 6,023,188 5,843,773

Professional fees 103,034 178,060

Depreciation (note 10) 322,648 379,336

Office expenses 303,289 302,404

Rent 233,756 235,056

Communication costs 153,816 175,203

Training expenses 335,492 200,007

Exchange loss - 149,000

Travelling and vehicle expenses 91,215 125,101

Board meeting expenses and sitting fees 35,902 27,927

Director’s remuneration 25,848 41,350

Fees and contribution to local institutes 23,724 28,397

Direct write-off of loans and advances 8,159 486,673

Marketing expenses 245,473 122,316

Incentive expenese 237,754 19,644

Miscellaneous expenses 675,141 271,022

8,818,439 8,585,269

76


24 Employees costs

2019 2018

RO RO

Salaries and allowances 4,504,283 4,359,499

Bonus 779,559 752,818

Social security costs 468,977 388,439

Other benefits 270,369 343,017

6,023,188 5,843,773

25 Investments loss - net

Realised income:

Income from investments at fair value through other comprehensive income:

• Dividend income 80,111 68,778

Income from investments at amortized cost:

• Interest income from Government Development and other Bonds 361,818 327,086

Income from investments at fair value through profit or loss:

• Dividend income 264,600 257,716

• Loss on sale of investments (362,492) (38,159)

Total realised income 344,037 615,421

Unrealised loss:

Change in fair value of investment at fair value through profit or loss (note 7) (439,350) (965,418)

(95,313) (349,997)

26 Taxation

The Bank is exempted from tax, in accordance with the Royal Decree 18/2006.

77


Annual Report 2019

27 Related party transactions

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly, including any Director (whether executive or otherwise).

2019 2018

RO RO

Directors remuneration

Board meeting expenses and sitting fees 61,750 69,277

Key management compensation

Salary and benefits to key management personnel 576,960 482,999

Receivables from and payables to related parties are disclosed in notes 9 and 13 respectively.

28 Commitments and contingencies

2019 2018

RO RO

Loans and advances approved but not draw down 18,345,646 20,154,534

Commitments for acquisition of property and equipment 2,406 58,294

Letter of guarantees 1,181,880 2,196,086

29 Net assets value per share

Net assets value per share is calculated by dividing the net assets at the year-end by the number of shares outstanding as follows:

2019 2018

RO RO

Net assets (RO) 163,841,350 161,593,654

Number of shares outstanding at 31 December 100,000,000 100,000,000

Net assets value per share (RO) 1.638 1.616

78


30

Ass

ets

and

liab

iliti

es m

atu

rity

pro

file

The

tabl

e be

low

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lyse

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e Ba

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79

Annual Report 2019N

ote

s to

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Ass

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81

Annual Report 2019N

ote

s to

th

e fi

nan

cial

sta

tem

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fo

r th

e ye

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No

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the

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ded

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er 2

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32 Basic and diluted earnings per share

2019 2018

RO RO

Profit for the year (RO) 2,359,350 2,457,182

Weighted average number of shares on issue 100,000,000 100,000,000

Basic and diluted earnings per share (RO) 0.024 0.025

The basic earnings per share is calculated by dividing the net profit for the year by the weighted average number of shares outstanding during the year.

33 Capital adequacy

2019 2018

RO’000 RO’000

Capital base (Tier 1 & 2) 164,501 162,206

Risk weighted assets

Credit risk 191,653 182,867

Market risk 9,602 11,875

Operational risk 24,296 23,081

Total risk weighted assets 225,551 217,823

Capital adequacy ratio 72.93% 74.47%

34 Employees terminal benefits

The Bank contributes to the Government of Oman Social Insurance Scheme, which is a defined contribution retirement plan. During the year ended 31 December 2019, the Bank’s contribution amounted to RO 468,977 (2018 - RO 388,439).

The provision for employee’s terminal benefits for non-Omani employees is made in accordance with the requirements of Omani Labour Law. This is an un-funded defined benefits retirement plan and the movements during the year is as follows:

2019 2018

RO RO

At 1 January 130,092 110,826

Charge for the year 108,750 19,266

Paid during the year (22,072) -

At 31 December 216,770 130,092

83


Annual Report 2019

35 Fair value information

Classification for financial assets and liabilities

the below table explains the accounting classifications if the financial assets and liabilities :

31 December 2019

Investments at fair value

through other comprehensive

income


through profit or loss

Financial assets and

liabilities at amortised cost Total

Financial assets RO RO RO RO

Cash and balances with Central Bank of Oman - - 889,170 889,170

Balances with banks - - 28,211,920 28,211,920

Loans and advances to customers - - 150,683,345 150,683,345

Investments 1,308,995 3,492,858 14,670,993 19,472,846

Staff housing loans - - 1,158,667 1,158,667

Receivable from Government - - 6,161,671 6,161,671

Other receivables - - 1,168,692 1,168,692

Total financial assets 1,308,995 3,492,858 202,944,458 207,746,311

Total non-financial assets 1,525,390

Total assets 209,271,701


Customer deposits (Izdihar) - - 435,106 435,106

Payable to Government - - 254,101 254,101

Payables - - 6,047,154 6,047,154

Borrowings - - 38,693,990 38,693,990

Total financial liabilities - - 45,430,351 45,430,351

Total non-financial liabilities -

Total liabilities 45,430,351

84


35 Fair value information (continued)

Classification for financial assets and liabilities (continued)

31 December 2018


through other comprehensive

income


through profit or loss

Financial assets and liabilities at amortised cost Total

Financial assets RO RO RO RO

Cash and balances with Central Bank of Oman - - 1,912,730 1,912,730

Balances with banks - - 42,794,113 42,794,113

Loans and advances to customers - - 139,147,810 139,147,810

Investments 1,420,649 4,516,895 10,634,936 16,572,480

Staff housing loans - - 1,309,692 1,309,692

Receivable from Government - - 3,811,347 3,811,347

Other receivables - - 1,190,925 1,190,925

Total financial assets 1,420,649 4,516,895 200,801,553 206,739,097

Total non-financial assets 1,734,887

Total assets 208,473,984


Customer deposits (Izdihar) - - 500,993 500,993

Payable to Government - - 182,278 182,278

Payables - - 7,542,843 7,542,843

Borrowings - - 38,654,216 38,654,216

Total financial liabilities - - 46,880,330 46,880,330

Total non-financial liabilities -

Total liabilities 46,880,330

The table below analyses financial instruments and its fair values:

Carrying amount Fair value2019 2018 2019 2018

RO RO RO RO

Assets

Cash and balances with Central Bank of Oman 889,170 1,912,730 889,170 1,912,730

Balances with banks 28,211,920 42,794,113 28,211,920 42,794,113

Loans and advances to customers 150,683,345 139,147,811 150,683,345 139,147,810

Investments 19,472,846 16,572,480 19,472,846 16,572,480

Staff housing loans 1,158,667 1,309,692 1,158,667 1,309,692

Receivable from Government 6,161,671 3,811,347 6,161,671 3,811,347

Prepayments and other receivables 1,168,691 1,190,925 1,168,691 1,190,925

85


Annual Report 2019

35 Fair value information (continued)

Carrying amount Fair value

2019 2018 2019 2018

RO RO RO RO

Liabilities

Customer deposits 435,106 500,993 435,106 500,993

Payable to Government 254,101 182,278 254,101 182,281

Payables and accruals 6,047,154 7,542,843 6,047,154 7,542,846

Borrowings 38,693,990 38,654,216 38,693,990 38,654,215

Fair value hierarchy

The table analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

Level 1

Level 1 assets and liabilities are typically exchange -traded positions traded in active markets. These positions are valued using unadjusted quoted prices in active markets.

Level 2

Fair value is determined using valuation techniques based on valuation models with directly or indirectly market observable inputs. These valuation techniques include discounted cash flow analysis models, option pricing models, simulation models and other standard models commonly used by market participants. Valuation techniques incorporate assumptions that other market participants would use in their valuations, such as discount rates, default rates, credit spreads and option volatilities. These inputs need to be directly or indirectly observable in order to be classified as level 2.

Level 3

Level 3 assets are valued using techniques similar to those outlined for level 2, except that if the instrument has one or more inputs that are unobservable and significant to the fair value measurement of the instrument in its entirety, it will be classified as level 3.

2019 2018

RO RO

Level 1

Investments at fair value through other comprehensive income 1,308,995 1,420,649

Investments at fair value through profit or loss 3,492,858 4,516,895

4,801,853 5,937,544

Level 3

Investments at fair value through other comprehensive income 1,000 1,000

There were no transfers between level 1 and level 3 of the fair value hierarchy of the investment securities.

86


36 Risk management

Oman Development Bank is owned by the Government of the Sultanate of Oman. It provides assistance to development projects in the Sultanate of Oman by granting loans, administering grants and subsidies, participating in share capital and providing technical assistance to companies. In accordance with its objectives, interest on loans and advances is charged to customers at rates which are subsidised by the Government.

All of the Bank’s activities involve, to varying degrees, the analysis, evaluation, acceptance and management of risks or combinations of risks. The most important categories of risk that the Bank is exposed to are credit risk, market risk, operational risks in various forms, liquidity risk, reputational risk, legal risk and sustainability (environmental and social) risks. Market risk includes foreign exchange, interest rate and equity price risks. The management of these various risk categories is discussed below.

The risk profiles of the Bank change constantly under the influence of a wide range of factors. The risk management framework established by the Bank fosters the continuous monitoring of the risk environment and an integrated evaluation of risks and their interdependencies.

Credit risk

Credit risk is the risk that the borrower of a loan fails to adhere to the terms of borrowing, causing the Bank to suffer a loss in terms of cash flow or market value.

The Bank deals with creditworthy parties to lessen its risk on each individual credit exposure. The credit worthiness of a party and the business viability of a project are assessed by the appropriate committee before an exposure is undertaken. The Managers evaluate and monitor their respective portfolios and are held responsible for follow up of credit / follow up and recovery of defaulting clients.

Concentration of loans by economic sectors as shown in note 6 to the financial statements, shows the diversification of the loans, thereby reducing the possibilities of losses in the event of a reduction in activity in one sector.

The below table details the bank’s maximum exposure to credit risk without taking account the value of any collateral obtained, which represents the carrying amount of financial assets recorded in the financial statements, net of impairment losses.

2019 2018

RO RO

Balances with banks 29,091,821 44,699,562


Staff housing loans 1,158,667 1,309,692

Receivable from Government 6,161,671 3,811,346

Other receivables 1,168,692 1,190,925

188,264,196 190,159,336

87


Annual Report 2019

36 Risk management (continued)

Credit risk (continued)

The table below presents an analysis of balances with commercial banks and investment managers as at 31 December:

2019 2018

RO RO

Ba1 2,105,406 4,028

Baa2 - 7,127,766

Baa3 2,716,765 491,083

Not rated (investment managers) 431,562 208,236

5,253,733 7,831,113

The following table shows the placements of fixed deposits held with counterparties at the reporting date:

2019 2018

RO RO

Aa3 4,000,000 9,000,000

A2 5,000,000 -

Baa2 - 4,000,000

Baa3 - 6,000,000

Ba1 4,000,000 16,000,000

Ba2 10,000,000 -

23,000,000 35,000,000

The following table shows the rating of Government Development bonds, Sukuk and commercial bonds at the reporting date:

2019 2018

RO RO

Baa3 4,035,600 10,134,936

Ba1 10,135,686 -

Not rated 499,707 500,000

14,670,993 10,634,936

The following table sets out information about the credit quality of financial assets measured at amortized cost, commitments and financial guarantees.

Cash and Balances with Central Banks and Banks

2019 2018

Stage 1 Stage 2 Stage 3 Total Total

RO RO RO RO RO

Standard 29,142,904 - - 29,142,904 44,743,842

Loss allowance (41,813) - - (41,813) (37,000)

Carrying amount 29,101,091 - - 29,101,091 44,706,842

88




Loans and advances to customers

2019 2018

Stage 1 Stage 2 Stage 3 Total

RO RO RO RO RO

Standard 127,814,484 4,331,004 341,526 132,487,014 120,592,050

Special mention 220,143 8,781,297 5,106 9,006,546 11,183,810

Substandard 87,042 2,350,346 5,106,777 7,544,165 4,692,517

Doubtful 415,166 33,605 4,190,530 4,639,301 4,071,715

Loss 32,093 848,227 12,807,299 13,687,619 12,971,145

128,568,928 16,344,479 22,451,238 167,365,645 153,511,237

Loss allowance (16,681,300) (14,363,426)

Carrying amount 150,683,345 139,147,811

Investment securities (debt)

2019 2018

Stage 1 Stage 2 Stage 3 Total

RO RO RO RO

Standard 14,679,577 - - 14,679,577 10,640,856

Loss allowance (8,584) - - (8,584) (5,920)

Carrying amount 14,670,993 - - 14,670,993 10,634,936

Movement in provision for impairment for all types of financial assets is analysed below:

2019 2018


RO RO RO RO RO



Transfers betwwen stages (105,153) (136,525) 241,678 - -




The diffrence between impairment provision as per Central Bank of Oman requirements and IFRS 9 expected credit losses provision for all financial assets, as at 31 Decmebre 2019 is explained below:

ROExpected credit loss provision as per IFRS 9 17,230,316Provision as per extant CBO norms 16,723,284

507,032

89


Annual Report 2019



Inputs, assumptions and techniques used for estimating impairment

Significant increase in credit risk

When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis including internal credit risk grading system, external risk ratings, where available, delinquency status of accounts, credit judgement and, where possible, relevant historical experience. The Bank may also determine that an exposure has undergone a significant increase in credit risk based on particular qualitative indicators that it considers are indicative of such and whose effect may not otherwise be fully reflected in its quantitative analysis on a timely basis.

Credit risk grades

Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Exposures are subject to on-going monitoring, which may result in an exposure being moved to a different credit risk grade.

Generating the term structure of probability of default (PD)

The Bank employs statistical models to analyse 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.

Renegotiated financial assets

The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognised and the renegotiated loan recognised as a new loan at fair value. Where possible, the Bank seeks to restructure loans rather than to take possession of collateral, if available. This may involve extending the payment arrangements and documenting the agreement of new loan conditions. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur.

The accounts which are restructured due to credit reasons in the past 12 months will be classified under Stage 2.

90




Definition of default

The Bank considers a financial asset to be in default when:

- the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realising security (if any is held); or

- the borrower is past due 90 days or more on any material credit obligation to the Bank; or

- the borrower is classified as Substandard, Doubtful or Loss on the CBO scale.

In assessing whether a borrower is in default, the Bank also considers indicators that are:

- quantitative – e.g. overdue status and non-payment on another obligation of the same issuer to the Bank; and

- based on data developed internally and obtained from external sources.

Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by the Bank for regulatory capital purposes.

Incorporation of forward-looking information

The Bank employs statistical models to incorporate macro-economic factors on historical default rates.

Incorporating forward-looking information increases the level of judgement as to how changes in these macroeconomic factors will affect the Expected Credit Loss (ECL) applicable to the stage 1 and stage 2 exposures which are considered as performing. The methodologies and assumptions involved, including any forecasts of future economic conditions, are reviewed periodically.

The assessment of SICR and the calculation of ECL both incorporate forward-looking information. The Bank uses a mathematical function which links the credit cycle index with PD as a key input to ECL. These economic variables and their associated impact on the PD, EAD and LGD vary by financial instrument. Forecasts of these economic variables (the “base economic scenario”) are obtained from public sources (such as GDP and Oil prices from the IMF World Economic Outlook) and provide the best estimate view of the economy over the forthcoming years.

Scenarios are incorporated through the forward-looking factors selected. The weightings assigned to each macro-economic scenario, as at 31 December 2019, were 70% to Base Case and 25% to Downside and 5% to Upside Case.

91


Annual Report 2019



Measurement of ECL

The key inputs into the measurement of ECL are the term structure of the following variables:

- probability of default (PD);

- loss given default (LGD); and

- exposure at default (EAD).

These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect forward-looking information as described above.

PD estimates are estimates at a certain date, which are calculated based on statistical models. These statistical models are primarily based on internally compiled data comprising both quantitative and qualitative factors and are supplemented by external credit assessment data where available.

LGD is the magnitude of the likely loss if there is a default. The Bank estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the forecasted collateral value and recovery costs of any collateral that is integral to the financial asset.

EAD represents the expected exposure in the event of a default. The Bank derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract including amortisation. The EAD of a financial asset is its gross carrying amount. For lending commitments and financial guarantees, the EAD includes the amount drawn, as well as potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forward-looking forecasts.

Where modelling of a parameter is carried out on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics that include:

- credit risk grading; and

- customer segment;

The groups are subject to regular review to ensure that exposures within a particular group remain appropriately homogeneous.

Liquidity risk

Liquidity risk is the risk an enterprise will face in obtaining funds to meet its obligations at any given time.

The Bank’s liquidity management policies are designed to ensure that even under adverse conditions the Bank would be in a position to meet its obligations

The Board of Directors and the management monitor the Bank’s liquidity requirements.

92



Interest rate risk

Interest rate risk is the sensitivity of the Bank’s financial condition to movements in interest rates. Mismatches or gaps in the amount of assets, liabilities and off-balance sheet instruments can generate interest rate risk, the impact of which is a function of the interest rate changes and the maturity profile of the assets and liabilities. Positions are monitored regularly to manage the interest rate risk. The impact of an a minor increase interest would not result in material impact as most of the Bank’s assets and liabilities carry fixed interest rate.

Currency risk

The foreign currency risk is minimal as all the transactions are incurred in Rials Omani or United States Dollar which is pegged to Rials Omani.

Price risk

The Bank is exposed to equity price risks arising from equity investments. Equity investments are held for strategic rather than trading purposes. The Bank does not actively trade these investments.

The sensitivity analyses below have been determined based on the exposure to equity price risks at the reporting date. If equity prices had been 5% higher / lower:

• The profit for the year would have decreased / increased by RO 174,643 (2018 - RO 255,845) as a result of change in fair value of investment at fair value through profit or loss.

• Change in fair value reserves would decreased / increased by RO 65,450 (2018 - RO 71,032) as a result of the changes in fair value of investment at fair value through other comprehensive income.

Operational risk

The Bank defines operational risk as the risk to achieving your strategy or objectives as a result of inadequate or failed internal processes, people and systems, or from external events. Losses arising through fraud, unauthorised activities, errors, omission, inefficiency, systems failure or from external events all fall within the operational risk definition.

A formal governance structure provides oversight over the management of operational risk. The risk management meeting convenes monthly to discuss operational risk issues and the effectiveness of internal controls.

37 Proposed dividend

No cash dividend has been proposed by the Board of Directors for 2019 (2018 - RO Nil ).

38 Approval of financial statements

The financial statements were approved and authorised for issue on 15 March, 2020.

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Annual Report 2019

BASEL II – PILLAR III & BASEL III RELATED DISCLOSURES FOR THE FULL YEAR 2019

OMAN DEVELOPMENT BANK SAOC

Mutrah Fort94

1. Disclosure Policy

Oman Development Bank SAOC has in place a “Disclosure Policy” approved by the Board of Directors. The policy is reviewable periodically. The policy framework covers the extent of disclosures as well as the internal control processes required to ensure that such disclosures are consistent and reliable.

The Basel Committee on Banking Supervision (BCBS) first issued measures to strengthen the Basel II accord in 2009 (popularly known as Basel 2.5) and then issued a regulatory framework for increasing the resilience of banks and the banking system in December 2010, which was revised in June 2011. This framework is called Basel III.

The following detailed qualitative and quantitative public disclosures are provided in accordance with Central Bank of Oman (CBO) rules and regulations on capital adequacy standards issued through circular BM 1009 on Guidelines on Basel II, and BM 1114 on Regulatory Capital and Composition of Capital Disclosure Requirement under Basel III.

The Basel Committee has since issued its rules text on “composition of capital disclosure requirements‟. This document is available at http://www.bis.org./publ/bcbs221.htm. Accordingly, Pillar 3 disclosure requirements under Basel III are introduced for banks by the Central Bank of Oman. Banks are required to comply with the disclosure requirements from the date of publication of their first set of financial statements relating to a balance sheet date on or after June 30, 2013. In Oman, the roadmap for implementation of Basel III has indicated that there would be a gradual phase-in of the standards beginning from 2013 until 2019.The higher capital requirements will be implemented gradually from 2013 through 2015. Further to this, vide CBO letter dt. October 28, 2014, it has been decided to modify the Capital Conservation Buffer and accordingly 1.25% is to be provided as of 01-01-2017, 1.875% as of 01-01-2018 and it is 2.5% for 2019. As per Basel III, Concept Paper 3 issued by CBO, countercyclical buffer requirement is 2.5% for 2019. However, presently the countercyclical capital buffer is not operationalized.

During 2018, with the intention of enabling banks to facilitate economic growth and to streamline liquidity management, CBO has reduced the Tier 2 capital requirement from 3 per cent to 2 per cent, reducing the minimum total Capital Adequacy Ratio to 11 per cent.

Moreover, banks are now allowed to include deposits from local banks as part of their deposit base to calculate lending ratio.

In line with the Basel III requirements, CBO withdrew the minimum 100 per cent risk weightage requirements imposed on exposures to other sovereigns and central banks. Moreover, CBO increased the aggregate overseas exposure limits (credit, placements and credit and placements together) from 50 to 75 per cent of local net worth of the banks and also increased the maturity mismatch limits for tenors of three or more months.

Vide Circular No. 1155 dt 20/03/2018, CBO modified treatment of lending ratio as follows. “Local inter-bank positions shall be allowed to be reckoned for lending ratio purposes. Accordingly CBO shall include borrowings/ placements, if any from other commercial banks in their deposit base and reduce lending/ placements, if any to/ with other commercial banks from the deposit base(for lending ratio purpose)”. Also Commercial banks should treat transactions with specialized banks as customer-transactions (both deposits and loans) and not inter-bank.

Consequent to implementation of IFRS 9, classification and measurement of financial assets are to be done in a different way. It was expected that provisioning as per IFRS 9 requirements would be higher than that under IAS 39. It is required to compute the total provisions for impairment as required by extant guidelines on provisioning for non-performing and restructured loans.

Annual Report 2019

95

Banks were allowed to reckon stage 1 impairment allowances (12 month expected loss) made under IFRS 9 up to 1.25% of the total credit risk weighted assets (RWA) for inclusion in Tier 2 capital. Subsequently banks are permitted to include Stage 2 provisions in Tier 2 capital. This is subject to the condition that the total of Stage 1 and permitted stage 2 provisions (permitted: 60% of Stage 2 for 2019) would be subject to a ceiling of 1.25% of credit RWA. Also it shall not exceed the total general provision amount taken by banks for tier 2 capital as on December 31, 2017.

This document takes into account the requirements of Pillar 3 disclosure under Basel III.

2. Scope of Application (Subsidiaries /Groups)

a) Qualitative Disclosures

ODB is not a part of any group either as a member or as the top corporate entity in the group. The bank does not hold investments in any of the other banks.

b) Quantitative Disclosures

The financial statements do not include consolidation of accounts of any other entities.

Name of the entity (ies) N.A.

Country of Incorporation N.A.

Shareholding (%) N.A.

Other Major Shareholders (Name and % shareholding N.A

Main activity of the entity N.A

Total assets N.A.

Capital Adequacy Ratio(%) if applicable N.A.

Short fall in capital, if any, vis-à-vis the regulatory requirements. N.A

3. Range of Disclosures

a) Capital Structure

i) Qualitative Disclosures

The Bank’s equity comprises of issued and fully paid up share capital, Legal/Statutory Reserves (created by transferring 10% of yearly net profits-this reserve is not available for distribution), Special/Voluntary Reserves (created by transferring portion of yearly net profit, as voluntary provision, to mitigate unexpected increase of provision due to high growth of loan provision during some years), Investment Revaluation Reserves and Retained Earnings. The capital is fully contributed by the Ministry of Finance of Sultanate of Oman.

96

The Bank does not have any innovative, complex or hybrid capital instruments.

Disclosure template for main features of regulatory capital instruments

1 Issuer Oman Development Bank SAOC

2 Unique identifier (eg CUSIP, ISIN or Bloomberg identifier for private placement)

NA

3 Governing law(s) of the instrument Regulatory treatmentCommon Shares. Omani Companies Law

4 Transitional Basel III rules Common Equity Tier 1

5 Post-transitional Basel III rules Common Equity Tier 1

6 Eligible at solo/group/group & solo Solo

7 Instrument type (types to be specified by each jurisdiction)

Common Shares. Sultanate of Oman

8 Amount recognised in regulatory capital (Currency in mil, as of most recent reporting date)

RO 100 million

9 Par value of instrument RO 1 per share

10 Accounting classification Shareholder’s Equity

11 Original date of issuance

2006: RO 20 mln;

2007: RO 20 mln;

2009: RO 18 mln;

2010: RO 12 mln;

2011: RO 30 mln

12 Perpetual or dated Perpetual

13 Original maturity date No maturity

14 Issuer call subject to prior supervisory approval No

15 Optional call date, contingent call dates and redemption amount

NA

16 Subsequent call dates, if applicable NA

Coupons / dividends

17 Fixed or floating dividend/coupon Floating

18 Coupon rate and any related index NA

19 Existence of a dividend stopper NA

20 Fully discretionary, partially discretionary or mandatory Fully discretionary

21 Existence of step up or other incentive to redeem No

22 Noncumulative or cumulative Noncumulative

23 Convertible or non-convertible Non-convertible

24 If convertible, conversion trigger (s) NA

25 If convertible, fully or partially NA

Annual Report 2019

97

26 If convertible, conversion rate NA

27 If convertible, mandatory or optional conversion NA

28 If convertible, specify instrument type convertible into NA

29 If convertible, specify issuer of instrument it converts into NA

30 Write-down feature Yes

31 If write-down, write-down trigger(s) Statutory Approach

32 If write-down, full or partial Write-down fully

33 If write-down, permanent or temporary Permanent

34 If temporary write-down, description of write-up mechanism

NA

35 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument)

NA

36 Non-compliant transitioned features No

37 If yes, specify non-compliant features NA

ii) Quantitative Disclosures

The table below shows ‘Basel III common disclosure template to be used for the year ending 31-12-2019

NO Common Equity Tier 1 capital: instruments and reservesAmount in

RO 000’s

1 Directly issued qualifying common share capital 100,000

2 Retained earnings 49,492

3 Accumulated other comprehensive income (and other reserves) 13,012

4 Directly issued capital subject to phase out from CET1 0

Public sector capital injections grandfathered until 1 January 2018 0

5Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1)

0

6 Common Equity Tier 1 capital before regulatory adjustments 162,504

Common Equity Tier 1 capital: regulatory adjustments

7 Prudential valuation adjustments (58)

8 Goodwill (net of related tax liability) 0

9Other intangibles other than mortgage-servicing rights (net of related tax liability)

0

10Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability)

0

11 Cash-flow hedge reserve 0

12 Shortfall of provisions to expected losses 0

13 Securitisation gain on sale (as set out in paragraph 14.9 of CP-1) 0

14 Gains and losses due to changes in own credit risk on fair valued liabilities. 0

98


RO 000’s

15 Defined-benefit pension fund net assets 0

16Investments in own shares (if not already netted off paid-in capital on reported balance sheet)

0

17 Reciprocal cross-holdings in common equity 0

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)

0

19Significant 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)

0

20 Mortgage Servicing rights (amount above 10% threshold) 0

21Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability)

0

22 Amount exceeding the 15% threshold 0

23 of which: significant investments in the common stock of financials 0

24 of which: mortgage servicing rights 0

25 of which: deferred tax assets arising from temporary differences 0

26 National specific regulatory adjustments 0

26a Of which: [INSERT NAME OF ADJUSTMENT] 0

26b Of which: [INSERT NAME OF ADJUSTMENT] 0

26c OF WHICH: [INSERT NAME OF ADJUSTMENT] 0

27Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions

0

28 Total regulatory adjustments to Common equity Tier 1 (58)

29 Common Equity Tier 1 capital (CET1) 162,446

Additional Tier 1 capital: instruments

30Directly issued qualifying Additional Tier 1 instruments plus related stock surplus

0

31 of which: classified as equity under applicable accounting standards 0

32 of which: classified as liabilities under applicable accounting standards 0

33 Directly issued capital instruments subject to phase out from Additional Tier 1 0

34Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1)

0

35 of which: instruments issued by subsidiaries subject to phase out

36 Additional Tier 1 capital before regulatory adjustments 0

Annual Report 2019

99


RO 000’s

Additional Tier 1 capital: regulatory adjustments

37 Investments in own Additional Tier 1 instruments 0

38 Reciprocal cross-holdings in Additional Tier 1 instruments 0

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)

0

40Significant investments in the capital of banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation (net of eligible short positions)

0

41 National specific regulatory adjustments 0

41a OF WHICH: [INSERT NAME OF ADJUSTMENT]

41b OF WHICH : [INSERT NAME OF ADJUSTMENT]

41c OF WHICH: [INSERT NAME OF ADJUSTMENT]

42Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions

0

43 Total regulatory adjustments to Additional Tier 1 capital 0

44 Additional Tier 1 capital (AT1) 0

45 Tier 1 capital (T1 = CET1 + AT1) 162,446

Tier 2 capital: instruments and provisions

46 Directly issued qualifying Tier 2 instruments plus related stock surplus 0

47 Directly issued capital instruments subject to phase out from Tier 2 0

48Tier 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)

0

49 of which: instruments issued by subsidiaries subject to phase out 0

50 Provisions(provision and fair value reserve)- Stage 1 provision 2,055

51 Tier 2 capital before regulatory adjustments 2,055

Tier 2:regulatory adjustments

52 Investments in own Tier 2 instruments 0

53 Reciprocal cross-holdings in Tier 2 instruments 0

54

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 the 10% threshold)

0

55Significant investments in the capital banking, financial, insurance and takaful entities that are outside the scope of regulatory consolidation (net of eligible short positions)

0

100


RO 000’s

56 Total National specific regulatory adjustments 0

56aOf which: Investments in Tier 2 capital unconsolidated banking and financial subsidiary companies, associates or affiliates etc.

56b Of Which: shortfall in the Tier 2 capital in the unconsolidated entities

56c Of Which: [Insert NAME OF ADJUSTMENT]

57 Total regulatory adjustments to Tier 2 capital 0

58 Tier 2 capital (T2) 2,055

59 Total capital (TC = T1 + T2) 164,501

60a Of which: Credit risk weighted assets 191,653

60b Of which: Market risk weighted assets 9,602

60c Of which: Operational risk weighted assets 24,296

60 Total risk weighted assets (60a+60b+60c) 225,551

Capital Ratios and buffers

61 Common Equity Tier 1 (as a percentage of risk weighted assets) 72.0%

62 Tier 1 (as a percentage of risk weighted assets) 72.0%

63 Total capital (as a percentage of risk weighted assets) 72.9%

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)

9.5%

65 of which: capital conservation buffer requirement 2.5%

66 of which: bank specific countercyclical buffer requirement 0%

67 of which: D-SIB/G-SIB buffer requirement 0%

68Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets)

62.5%

National minima (if different from Basel 3)

69National Common Equity Tier 1 minimum ratio (if different from Basel 3 minimum)

7.0%

70 National Tier 1 minimum ratio (if different from Basel 3 minimum) 11.0%

71 National total capital minimum ratio (if different from Basel 3 minimum) 13.5%

Amounts below the thresholds for deduction (before risk weighting)

72 Non-significant investments in the capital of other financials 0

73 Significant investments in the common stock of financials 0

74 Mortgage servicing rights (net of related tax liability) 0

75Deferred tax assets arising from temporary differences (net of related tax liability)

0

Annual Report 2019

101


RO 000’s

Applicable caps on the inclusion of provisions in Tier 2

76Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap)

0

77 Cap on inclusion of provisions in Tier 2 under standardised approach 0

78Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap)

0

79Cap for inclusion of provisions in Tier 2 under internal ratings-based approach

0

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 NA

81Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities)

NA

82 Current cap on AT1 instruments subject to phase out arrangements NA

83Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities)

NA

84 Current cap on T2 instruments subject to phase out arrangements NA

85Amount excluded from T2 due to cap (excess over cap after redemptions and maturities)

NA

Reconciliation requirements

A reference is invited to paragraph 91 of the Basel III rules, which states that banks should disclose “a full reconciliation of all regulatory capital elements back to the balance sheet in the audited financial statements. The reconciliation process laid down is aimed at addressing the issues of disconnect between the numbers disclosed for the calculation of regulatory capital and the numbers used in the published financial statements. The 3 step approach indicated below will ensure that the reconciliation between these numbers is undertaken in a consistent manner. Banks are required to take a 3 step approach to show the link between their balance sheet in their published financial statements and the numbers that are used in the composition of capital disclosure template set out in Section 1.

The 3 steps require banks to:

• Step 1: Disclose the reported balance sheet under the regulatory scope of consolidation (Table 2a)

• Step 2: Expand the lines of the balance sheet under the regulatory scope of consolidation to display all of the components that are used in the composition of capital disclosure template. (Table 2b)

• Step 3: Map each of the components that are disclosed in Step 2 to the composition of capital disclosure template

102

Step 1: TABLE 2a: RECONCILIATION TEMPLATE

(RO ’000)0)

Balance sheet as in published

financial statements

Under regulatory

scope of consolidation

As at period end 31-12-2019


Assets

Cash and balances with CBO 889 889

Certificates of deposit 0 -

Due from banks 28,212 28,212

Loans and advances 150,683 150,683

Investments in securities 19,473 19,473

Loans and advances to banks 0 -

Property and equipment 964 964

Deferred tax assets 0 -

Other assets 9,051 9,051

Total assets 209,272 209,272

Liabilities

Due to banks 0 -

Customer deposits 435 435

Current and deferred tax liabilities 0 -

Other liabilities 44,995 44,995

Subordinated bonds -

Total liabilities 45,430 45,430

Shareholders' Equity

Paid-up share capital 100,000 100,000

Share premium 0 -

Legal reserve 7,471 7,471

General reserve 5,541 5,541

Impairment Reserve 776 776

Retained earnings 49,492 49,492

Cumulative changes in fair value of investments 561 561

Subordinated debt reserve 0 -

Total shareholders' equity 163,841 163,841

Total liability and shareholders’ funds 209,272 209,272

Annual Report 2019

103

Step 2: TABLE 2b: Expansion of The balance sheet under the regulatory scope of consolidation

Balance sheet as in published

financial statements

Under regulatory

scope of consolidation Reference

Assets As at period end 31-12-

2019


Cash and balances with CBO 889 889

Balance with banks and money at call and short notice

28,212 28,212

Investments of which : 19,473 19,473 x

Fair Value Through Other Comprehensive Income (FVOCI)

1,309

Fair Value Through Profit & Loss (FVTPL) 18,164

Loans and advances- Net of which: 150,683 150,683 y

Loans and advances to domestic banks - -

Loans and advances to non-resident banks - -

Loans and advances to domestic customers 167,365 167,365

Loans and advances to non-resident Customers for domestic operations

- 0

Loans and advances to non-resident Customers for operations abroad

- 0

Loans and advances to SMEs

Financing from Islamic banking window - 0

Provision against Loans and Advances, of which: (16,681) (16,681)

-Stage 3 Impairment Allowance and Reserve Interest (12,381) (12,381)

Stage 1/ 2 impairment allowance, of which (4,300) (4,300)

Amount eligible for T2 2,055 a

Amount ineligible for T2 2,245 b

Fixed assets 964 964

Other assets 9,051 9,051

Stage 1/ 2 impairment allowance, of which

Amount eligible for T2 0 0 c

Amount ineligible for T2 0 0

Total Assets 209,272 209,272

104

Capital & Liabilities

Paid-up Capital 100,000 100,000

Of which:

Amount eligible for CET1 100,000 100,000 d

Amount eligible for AT1 0 0 e

Reserves & Surplus

Legal Reserves (Eligible for CET1) 7,471 7,471 j

Special Reserves (Eligible for CET1) 5,541 5,541 k

Retained Earnings (Eligible for CET1) 49,492 49,492 l

AFS investments fair value loss (CET1 adjustment) (58)

Tier 1 Capital 162,446 m

Amount ineligible for T2 (Impairment Reserve) 776 0

Balance with banks and money at call and short notice(Eligible for Tier 2)

0 n

Investments -Fair Value Through Profit & Loss (FVTPL)- (Eligible for Tier 2)

561 278 o

Stage 1/ 2 impairment allowance (Eligible for Tier 2)* 0 1,776 p

Tier 2 Capital 2,055 q

Total Capital 163,841 164,501 r

Deposits Of which: 0

Deposits from banks 0 0

Customer deposits 435 435 s

Deposits of Islamic Banking window 0 0

Other deposits(please specify) 0 0

Borrowings Of which: From CBO 0 0

From banks 0 0

From other institutions & agencies 38,694 38,694 t

Borrowings in the form of bonds, 0 0

Debentures and sukuks 0 0

Others (Payables & Accruals) 6,301 6,301 u

Other liabilities & provisions Of which: 0 0

DTLs related to goodwill 0 0

DTLs related to intangible assets 0 0

Total Capital & Liabilities 209,272 209,931 v

*subject to maximum of 1.5% of RWA, (Stage 1 Impairment Allowance+ 60% Stage 2 Impairment Allowance) or General Provision of 2017.

Annual Report 2019

105

Step 3: Reconciliation of Regulatory Capital

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

1Directly issued qualifying common share (and equivalent for non- joint stock companies) capital plus related stock surplus

100,000 d

2 Retained earnings 49,492 l

3Accumulated other comprehensive income (and other reserves)

13,012 J + k

4Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies)

0

5Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1)

0

6Common Equity Tier 1 capital before regulatory adjustments

162,504 m

7 Prudential valuation adjustments (58)

8 Goodwill (net of related tax liability) 0

9 Total Regulatory Adjustments to CET1 (58)

10Common Equity Tier 1 capital after regulatory adjustments

162,446 n

11 Directly issued qualifying Tier 2 instruments 0

12 Provisions 1,776 p

13 Fair Value reserve of AFS investments 278 o

14 Tier 2 capital before regulatory adjustments 2,055 q

15 Regulatory Adjustments to Tier 2 0

16 Tier 2 capital after regulatory adjustments 2,055 q

106

b) Capital Adequacy

i) Qualitative Disclosures

Summary Discussion:

The capital adequacy of the bank is being calculated every quarter, considering various types of Risks (Credit, Market and Operational) and as per the guidelines of the Central Bank of Oman. The bank has considered that level of capital is sufficient not only to meet future business plans but also to cushion any unexpected losses. The bank has adopted Standardized Approach for assessing capital adequacy for Credit and Market Risks and Basic Indicator Approach for Operational Risks.

Credit Risk:

For Credit Risk, Bank has assigned following Risk Weights:

• 100% for all Corporate and Retail exposures without regard to external ratings and without availing Risk Weight of 75% allowed for Retail exposures meeting pre-defined criteria respectively.

• 150% Risk Weight for Net Unsecured Portion of all NPLs (net of specific provisions and reserve interest).

• 50% Risk Weight for Cash and Deposits with local banks.

• 20% Risk Weight for short term placement with local banks

• 0% Risk Weight for CBO Government Development Bonds.

• 100% Risk Weight for Unsecured Bonds

• 100% Risk weight for Fixed Assets and all Other Assets.

• 100% Risk Weight for Guarantees issued to banks for establishing LCs/ LPOs on behalf of Bank’s customers.

• 0% Risk Weight to off-balance sheet items, such as, Agriculture and Fisheries Development Fund, Al Raffd Fund and SANAD Fund as the Bank acts as a Trustee for these items.

• 100% Risk Weight for all other unquoted Commercial Investments

• 50% Risk Weight for undrawn loan commitments with respect of loans approved

• 100% Risk Weight for commitments for acquisition of property and equipment

• 100% Risk Weight for financial guarantees issued to third parties with respect to approved loans.

• CRM techniques for reduction in Risk Weighted Assets against collaterals have not been applied.

Market Risk:

Bank’s Trading Book comprises of only a small position in equities. Bank has assigned 8% Risk Weight for Specific Risk and 8% Risk Weight for General Market Risk for the Equities held in the Trading Book.

Operational Risk:

For calculation of Capital Adequacy Ratio for Operational Risks, the bank has used average positive Operating Profit for last three years (net interest income + other recurring income) excluding provisions and operating expenses, staff expenses, depreciation and recoveries, profit/loss on sale of assets and extraordinary items.

Annual Report 2019

107

iI) Quantitative Disclosures

a) Risk Weighted Assets (RO ‘000s)

Sl No Details Gross Balances (Book Value)

Net Balances (Book Value) *

Risk Weighted Assets

1 On-balance sheet items 218,706 209,272 215,194

2 Off-balance items 19,530 19,530 10,357

3 Derivatives 0 0 0

4 Total 238,236 228,802 225,551

* Net of Provisions, reserve interest and eligible collaterals

b) Capital

Sl No. Details (RO 000s)

1 Tier I Capital 162,446

2 Tier 2 Capital 2,055

3 Total Regulatory Capital 164,501

4 Capital Requirement for credit risk 21,082

5 Capital Requirement for market risk 1,056

6 Capital Requirement for operational risk 2,673

7 Total required capital 24,811

8 Tier I Ratio (as a percentage of risk weighted assets) 72.0%

9 Total Capital Ratio (as a percentage of risk weighted assets) 72.9%

c) Risk Exposure and Assessment

Credit Risk - General Disclosures

Qualitative Disclosures

i) Risk Management Objectives and policies

The Bank has established Risk Management Policy approved by Board of Directors (BOD). The primary responsibility for ensuring that the risks are appropriately managed is with the BOD, which shall set and approve the overall risk policies, limits, procedures and provide framework for Risk Management of the Bank. The bank has set up an independent Risk Management Committee approved by the BOD to monitor and review the implementation of risk management procedures approved by the Board. The formation and the composition of the Risk Management Committee have been approved by the Central Bank of Oman. The day-to-day management of risk, such as, identifying, monitoring, controlling, reporting, etc., lies with the Risk Management Department and the line management. The risk policy addresses risks relevant to areas of Credit, Market, Liquidity, and Operational Risks to which the bank is exposed.

The Board of Directors has approved implementation of Integrated Risk Management Framework and Risk Based Internal Audit and the bank is in the process of changing over to the framework.

108

Credit Risk:

The Risk Policy covers the management of various areas of Credit Risk, such as, maximum prudential exposure limits, exposure concentrations, credit sanctioning , approval norms, facility tenors, loan classification and provisioning norms, management of problem loans, credit origination, due diligence process, target sectors, credit assessment and underwriting standards, collateral management, risk rating framework, disbursals, monitoring and follow-up, credit reviews, pricing, reporting and post sanction loan review. The Credit Committee/ Board of Directors assess the credit worthiness of parties and business viability, before an exposure is approved. The exposures are monitored through periodic site visits as well as system generated MIS reports. Proactive action is taken by respective managers for exposures requiring remedial /recovery action.

As per CBO norms, the bank considers an exposure as non-performing if it continues to remain past due for a period of 90 days or more.

The bank does not grant any consumer loans. All ODB loans up to and RO 50,000 are categorized as Retail Portfolio and loans above RO 50,000 are treated as Corporate Portfolio. (The maximum loan that can be provided is RO 1 Million per project).

IFRS 9 has been implemented in ODB also with effect from 01-01-2018. The new impairment requirements in IFRS 9 are based on an expected credit loss model and replace the IAS 39 incurred loss model.

The expected credit loss model applies to debt instruments (such as Bank deposits, loans, and debt securities) recorded at amortized cost or at fair value through other comprehensive income, plus loan commitments and financial guarantee contracts that are not measured at fair value through profit or loss.

The new IFRS 9 impairment requirements eliminate the IAS 39 threshold for the recognition of credit losses (i.e. it is no longer necessary for a credit event to have occurred before credit losses are recognized). Instead, Expected Credit Loss (ECL) is always accounted for and the loss allowance is updated for changes in these ECLs at each reporting date to reflect changes in credit risk since initial recognition.

IFRS 9 outlines a ‘Three-Stage’ model (‘General Model’) for impairment based on changes in credit quality since initial recognition. The three stages are as follows:

1. Stage 1: Not credit impaired – Impairments equal to 12-month expected loss

2. Stage 2: Significant Increase of Credit Risk (SICR) since origination – Impairments equal to lifetime expected loss

3. Stage 3: Credit impaired – Impairments equal to lifetime expected loss

In ODB, 12 Month Expected Credit Loss (12M ECL) and Life time Expected Credit Loss (LECL) are calculated for every performing facility. Both 12M ECL and LECL amounts would be the weighted average of the ECL amounts for the three macroeconomic scenarios considered.

Stage (1 or 2) allocated to each performing facility would determine the final ECL.

All defaulted exposures are assigned to Stage 3. In addition, other facilities can be moved to Stage 3 if the account is exhibiting severe signs of distress. For these stage 3 exposures, ECLs are essentially computed based on the discounted cash flows methodology, whereby the Life time ECL is computed using the product of PD = 100%, EAD and LGD unless otherwise advised by the Regulator.

Stage 2 consists of facilities that have undergone SICR since initial recognition but have not defaulted. For all Stage 2 exposures, Lifetime Expected Credit Loss is recognized, which might have a significant impact on the overall ECL of the performing facilities.

Annual Report 2019

109

Stage 1 is the stage, when there has been no SICR since initial recognition.

All exposures would be assigned to Stage 2 based on the following criteria:

Rule Rule Trigger Stage

Days Past Due 0 ~ 29

All facilities within 30DPD are with a primary classification of Stage 1

Stage 1

Days Past Due 30 ~ 89

+30DPD is a primary trigger that will automatically move facilities from Stage 1 to Stage 2. IFRS 9 allows banks to rebut the +30DPD rule with reasonable and supportable information. In general, ODB will not classify facilities under Stage 1 once they are +30DPD, unless and on an exceptional basis and after due completion, documentation and approval of an individual assessment.

Stage 2

Rescheduled and Watch-list Credit

For IFRS9, banks need to differentiate modification of assets due to commercial reasons, credit stress or financial difficulty and treat each case differently. As a start, any facilities that have been rescheduled due to credit reasons will be classified as Stage 2. In the event that the facility is also +90DPD then the facility with be classified as Stage 3.

Stage 2

Or

Stage 3

The Stage 3 is typically aligned to accounts associated with +90DPD criterion, which under the prior CBO guidelines amounted to “Substandard”, “Doubtful”, or “Loss”. Also, no cross default is applied to reflect the contagion risk of multiple facilities belonging to the same customer.

The guiding principle of the ECL model is to reflect the general pattern of deterioration or improvement in the credit quality of financial instruments. The amount of ECLs recognized as a loss allowance or provision depends on the extent of credit deterioration since initial recognition. The extent of credit deterioration helps define the credit stage of an obligor and hence the loss allowance.

The bank has created a non-distributable special/ voluntary reserve by transferring a part of its profits in order to meet any future contingencies or sudden losses. This has been approved by bank’s Annual General Body. The special reserve continues to be RO 5.541 million from 31-12-2014. As a prudent measure, a portion of current year income may also be allocated to special reserve to meet future provisions required for new lending of the bank, subject to approval of bank’s Annual General Body Meeting.

As per CBO Circular BM 1149, for 2018, if the aggregate specific and general provisions along with reserve interest as per extant CBO requirements computed is higher than the impairment allowance computed under IFRS 9, the difference (net of the impact of taxation) should be transferred to an Impairment Reserve as an appropriation from the net profit after taxes.

For ODB, as of 31/12/2018,

RO

The aggregate provision as per extant CBO norms 15,139,484

Impairment Allowance computed as per IFRS 9 14,363,426

Difference 776,057

The above amount of RO 776,057 is transferred to Impairment Reserve. And this reserve has not been included in Regulatory Capital in year 2018.

110

As of 31/12/2019 RO


Impairment Allowance computed as per IFRS 9* 16,681,300

Difference 41,984

*For loans and Advances only

The amount of RO 776,057 is continued to be treated as Impairment Reserve as per CBO directions in 2019 also.

The total impairment allowance under IFRS 9 for all financial assets are considered, the comparison of provision is as below.

As of 31/12/2019 RO


Impairment Allowance computed as per IFRS 9** 17,230,316

Difference (507,032)

** For all financial assets

The bank will be approaching CBO for permitting the bank for reversing the Impairment Reserve of RO 776,057 during 2020.

The Bank for the first time has applied IFRS 16- Leases as of 01 January 2019. There is no material impact on the initial application of this standard on the amounts reported in these financial statements.

Provision for Losses- Expected Credit Losses (ECL) under IFRS 9 was made for Financial Assets like Customer loans, Staff Housing Loans, Customer Relationship Accounts, Deposits with other banks and Investment in Bonds.

The movement in provision for impairment for all types of financial assets together is analysed below:

2019 2018


RO RO RO RO RO



Transfers between stages (105,153) (136,525) 241,678 - -




Annual Report 2019

111

Market risk:

The bank does not have a Trading Book comprising of debt securities, foreign exchange, commodities, derivatives and other positions. The bank has Available-for Sale Equity Investments in the local market. Investments are measured at Fair value Through Other Comprehensive Income (FVTCOI) or Fair Value Through Profit or Loss (FVPL)

Operational Risk:

The Risk Policy deals with the various areas of Operational Risk. It covers procedures and controls to be followed by each department, compliance functions, internal audit functions, policies and procedures for managing human resources of the bank, money laundering, procedures for back-up and storage of data, disaster recovery plan and security policies for access rights on the core banking system.

Banking Book Interest Rate Risk:

The interest rate risk in the banking book arises due to maturity / re-pricing mismatches of the assets and liabilities in the banking book. Bank need to manage this risk by analyzing the residual contractual maturities of all interest bearing assets and liabilities. Interest rate risk is managed by the Assets and Liability cum Investment Committee of the bank.

a) From 2006, the bank’s interest bearing assets (mainly project loans) were on the fixed rate terms (interest rate of 9% p.a. including government subsidy), which were funded by its own capital and reserves. Therefore there was no impact of Interest Rate Risk in the Banking Book. During 2015, the Ministry of Finance has decided to reduce interest subsidy by 3% effective from 01-01-2015. With this, the interest income including government subsidy has become 6% for term loans.

b) The bank is lending working capital loans at variable rates (market rates). The bank is accepting Fixed Term Deposits (FTDs) at market rates. These have necessitated monitoring of interest rate risks. The bank is analyzing the situation and taking adequate measures to manage the risks and bring in mitigations to prevent any negative impact on the profitability. During the year 2017 and 2018, the bank has availed term loan of USD 50 million each from a foreign bank with fixed interest rate.

Liquidity Risk:

Liquidity risk is the risk the bank will face in obtaining funds to meet its obligations at any given time. The bank’s liquidity management policies are designed to ensure that even under adverse conditions the bank would be in a position to meet its obligations. Liquidity Risk is managed by the Assets and Liability Cum Investment Committee which analyzes the Asset and Liability mismatches and ensures a positive gap.

The bank is collecting fixed term Deposits from customers with the approval of Central Bank of Oman. The bank is also working towards mobilizing resources through long term Bonds as and when the need arises. The aim is to raise the funds for working capital lending by fixed term deposits and find resources for long term loans from equity and long term bonds. However, as and when the bank resorts to commercial borrowings for funding assets the bank might face liquidity risk, like any financial intermediary institutions. The management is aware of the risk and will actively pursue steps to mitigate this risk.

The Bank has adopted Basel III liquidity standards and is reporting the liquidity coverage ratio and net stable funding ratio to CBO.

Liquidity Coverage Ratio (LCR): This ratio aims to ensure that a bank maintains an adequate level of unencumbered, high-quality liquid assets that can be converted into cash to meet its liquidity needs for a 30 calendar day time horizon under a significantly severe liquidity stress scenario. The ratio is calculated as follows:

LCR = Stock of High Quality Liquid Assets / Cash Outflow for next 30 days

112

As per guidelines, the value of the ratio should be minimum 100% (i.e. the stock of high quality liquid assets should at least equal total net cash outflows) on monthly basis and the Bank is maintaining the same.

LCR Common Disclosure Template for the period ending: Dec 2019

(RO ‘000)

Total Unweighted

Value (average

Total Weighted Value (average)

High Quality Liquid Assets

1 Total High Quality Liquid Assets (HQLA)

Cash Outflows

2 Retail deposits and deposits from small business customers, of which:

1 0

3 Stable deposits 1 0

4 Less stable deposits 0

5 Unsecured wholesale funding, of which: 376 150

6 Operational deposits (all counterparties) and deposits in networks of cooperative banks

376 150

7 Non-operational deposits (all counterparties)

8 Unsecured debt

9 Secured wholesale funding

10 Additional requirements, of which 7,056 529

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 7,056 529

14 Other contractual funding obligations 2 2

15 Other contingent funding obligations

16 TOTAL CASH OUTFLOWS 682

Cash Inflows

17 Secured lending (e.g. reverse repos)

18 Inflows from fully performing exposures 4,447 2,223

19 Other cash inflows 5,260 5,260

20 TOTAL CASH INFLOWS 9,706 7,483

Total Adjusted Value

21 TOTAL HQLA 17,081

22 TOTAL NET CASH OUTFLOWS 170

23 LIQUIDITY COVERAGE RATIO (%) 10,020

Net Stable Funding Ratio (NSFR): The net stable funding ratio is designed to ensure that banks rely more on long term funding and they maintain a sound funding structure over a horizon of one year to withstand Bank specific stress events. The ratio aims to reduce over-reliance on short term funding to create long term assets, especially during times of volatile liquidity conditions. The ratio is calculated as follows

Annual Report 2019

113

Net Stable Funding Ratio = Available Stable Funding (ASF) / Required Stable Funding (RSF) *100

As per guidelines, this ratio needs to be greater than 100% and the Bank maintained the same.

Unweighted value by residual maturity

ASF Item

No < 6 6 months ≥ 1yr Weighted

maturity months to < 1yr value

1 Capital: 164,501 0 0 0 164,501

2 Regulatory capital 164,501 164,501

3 Other capital instruments

4Retail deposits and deposits from small business customers

0 376 59 0 413

5 Stable deposits 376 59 413

6 Less stable deposits

7 Wholesale funding: 0 0 0 0 0

8 Operational deposits

9 Other wholesale funding

10Liabilities with matching interdependent assets

11 Other liabilities:

12 NSFR derivative liabilities

13All other liabilities and equity not included in above categories

14 Total ASF 164,914

RSF Item

15Total NSFR high-quality liquid assets (HQLA)

16Deposits held at other financial institutions for operational purposes

17 Performing loans and securities: 0 0 44,561 - 15,678

18Performing loans to financial institutions secured by Level 1 HQLA

4,802 2,401

19

Performing loans to financial institutions secured by non- Level 1 HQLA and unsecured performing loans to financial institutions

14,671 734

114

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

25,088 12,544

21

-With a risk weight of less than or equal to 35% under the Basel II Standardised approach for credit risk

22.Performing residential mortgages, of which:

23

With a risk weight of less than or equal to 35% under the Basel II Standardised Approach for credit risk

24Securities that are not in default and do not qualify as HQLA, including exchange-traded equities

25Assets with matching interdependent liabilities

26 Other Assets: 0 2,531 0 2,531

27Physical traded commodities, including gold

28

Assets posted as initial margin for derivative contracts and contributions to default funds of CCPs

29 NSFR derivative assets

30NSFR derivative liabilities before deduction of variation margin posted

31All other assets not included in the above categories

2,531

2,531

32 Off-balance sheet items 976

33 TOTAL RSF

19,186

34 NET STABLE FUNDING RATIO (%) 860%

Annual Report 2019

115

Leverage Ratio

Table 1

Summary comparison of accounting assets vs leverage ratio exposure measure

Item In RO

1 Total consolidated assets as per published financial statements 209, 271,701

2 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation

0

3 Adjustment for fiduciary assets recognised on the balance sheet pursuant to the operative accounting framework but excluded from the leverage ratio exposure measure

0

4 Adjustments for derivative financial instruments 0

5 Adjustment for securities financing transactions (ie repos and similar secured lending)

0

6 Adjustment for off-balance sheet items (ie conversion to credit equivalent amounts of off-balance sheet exposures)

0

7 Other adjustments 0

8 Leverage ratio exposure 209, 271,701

116

Leverage ratio common disclosure template

Table 2

ItemLeverage ratio

framework

On-balance sheet exposures

1 On-balance sheet items (excluding derivatives and SFTs, but including collateral) 209, 271,701

2 (Asset amounts deducted in determining Basel III Tier 1 capital) 0

3 Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of lines 1 and 2)

209, 271,701

Derivative exposures

4 Replacement cost associated with all derivatives transactions (ie net of eligible cash variation margin)

0

5 Add-on amounts for PFE associated with all derivatives transactions 0

6 Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the operative accounting framework

0

7 (Deductions of receivables assets for cash variation margin provided in derivatives transactions)

0

8 (Exempted CCP leg of client-cleared trade exposures) 0

9 Adjusted effective notional amount of written credit derivatives 0

10 (Adjusted effective notional offsets and add-on deductions for written credit derivatives)

0

11 Total derivative exposures (sum of lines 4 to 10) 0

Securities financing transaction exposures

12 Gross SFT assets (with no recognition of netting), after adjusting for sale accounting transactions

0

13 (Netted amounts of cash payables and cash receivables of gross SFT assets) 0

14 CCR exposure for SFT assets 0

15 Agent transaction exposures 0

16 Total securities financing transaction exposures (sum of lines 12 to 15) 0

Other off-balance sheet exposures

17 Off-balance sheet exposure at gross notional amount 19,529,932

18 (Adjustments for conversion to credit equivalent amounts) -12,869,346

19 Off-balance sheet items (sum of lines 17 and 18) 6,660,586

Capital and total exposures

20 Tier 1 capital 162,445,544

21 Total exposures (sum of lines 3, 11, 16 and 19) 215,932,287

22 Leverage Ratio 75.2%

Annual Report 2019

117

d) Equity:

Quoted Equity Investments are measured at market value. Unquoted investments are recognized at cost and carried at fair value. These investments are managed under the guidance of the Asset and Liabilities cum Investment Committee.

Quantitative Disclosures

ii) Total gross credit risk exposures, plus average gross exposures over the period broken down by major types of credit exposure

Amount (RO.000s)

Sl. No Type of Credit Exposure Average Gross Exposure Total Gross Exposure

Current Year Previous Year 31 Dec 2019 31 Dec 2018

Current Year Previous Year 31 Dec 2019 31 Dec 2018

1 Overdraft 0 0 0 0

2 Staff Loan (Personal) 126 61 176 77

3 WC- Loans +LTR+ Pre-shipment Loans

7,809 6,451 8,059 7,558

4 Other Loans (Term Loans) 152,629 140,304 159,305 145,953

5 Bills Purchased / Discounted 0 0 0 0

6 Any Other (Staff Housing Loan)

1,261 1,302 1,213 1,310

7 Total 161,826 148,118 168,753 154,898

iii) Geographic distribution of exposures, broken down in significant areas by major types of credit exposure(RO.000s)

Sl No

Type of Credit Exposure

OmanOther GCC

countriesOECD

Countries*India Pakistan Others Total

(1) (2) (3) (4) (5) (6) (7)

1 Overdraft 0 0

2Personal Loans (Staff Loan)

176 176

3WC- Loans +LTR+ Pre-shipment Loans

8,059 8,059

4 Other Loans (Term Loans) 159,305 159,305

5Bills Purchased / Discounted

0 0

6Any Other (Staff Housing Loan)

1,213 1,213

7 Total 168,753 0 0 0 0 0 168,753

* excluding countries included in column 2 [includes staff personal loans and staff Housing Loans)

118

iv) Industry or counterparty type distribution of exposures, broken down by major types of credit exposure. (RO.000s)

Sl.No.

Economic Sector Overdraft Term Loans

WC loans

Others Total Off B/SExposure

1 Import Trade

2 Export Trade

3 Wholesale & Retail Trade

4 Mining & Quarrying 2,611 - 2,611 354

5 Construction - - -

6 Manufacturing 52,650 5,645 58,295 6,216

7 Electricity, Gas and Water 512 249 761 11

8 Transport & Communication 1,613 25 1,638 288

9 Financial Institutions - - -

10 Services 55,692 644 56,336 10,271

11 Personal Loans (Staff loan) - - -

12 Agriculture & Allied activities 40,400 1,384 41,784 2,115

13 Government - - -

14 Non-Resident Lending - - -

15 All others 5,826 113 1,389 7,328 275

Total 0 159,305 8,059 1,389 168,753 19,530

v) Residual contractual maturity breakdown of whole portfolio, broken down by major types of credit exposure. (RO.000s)

Sl.No.

Time Band Overdraft Term Loans WC loans Others TotalOff B/S

Exposure

1 Up to 1 month 0 5,900 3,208 33 9,141 984

2 1- 3 months 0 358 2391 43 2,792 3,751

3 3-6 months 0 749 2255 76 3,080 2,614

4 6-9 months 0 726 166 76 968 2799

5 9-12 months 0 1,161 19 76 1,256 3,358

6 1-3 years 0 23,173 19 250 23,443 6,024

7 3-5 years 0 52,675 0 249 52,924

8 Over 5 years 0 74,563 0 586 75,149

9 Total 0 159,305 8,059 1,389 168,753 19,530

Annual Report 2019

119

vi) By major industry or counter party type: (RO.000s)

Sl.

No.

Economic

Sectors

Gross

Loans

Of

which

NPLs

Stage 1

Impairment

Stage 2

Impairment

Stage 3

Impairment

*Provision

made

during

the year

Advances

Written

off during

the year

1 Import Trade

2 Export Trade

3Wholesale& Retail Trade

4Mining& Quarrying

2,611 96 39 1 73 61

5 Construction - - -

6 Manufacturing 58,295 7,861 707 850 4,669 523 8

7Electricity, Gas and Water

761 47 14 5 37 118

8Transport& Communication

1,638 146 24 2 105 7

9Financial Institutions

- - -

10 Services 56,336 8,992 603 767 4,200 1,760 2

11 Personal Loans - - -

12Agriculture& Allied Activities

41,784 4,517 690 328 2,847 (234) 4

13 Government - - -

14Non-Resident Lending

- - -

15 All others 7,328 792 183 143 450 145 0

Total 168,753 22,451 *2,259 2,095 12,381 **2,379 14

The item 15 comprises the following:

Others- TL+ WC loans

5,939 792 75 123 450 89 0

Staff Housing Loan

1,213 55 55

Staff Advance 176

For Loan commitment

53 20

All Others total

7,328 792 183 143 450 145 0

120

The splitup between customer loan and staff loans are given below.

Customer loans 167,365 22,451 2,205 2,075 12,381 2,324 14

Staff Loans 1,389 0 55 20 55

Grand Total 168,753 22,451 2,259 2,095 12,381 2,379 14

*Stage 1 ECL= Customer Loans: RO 2,205K+ Staff Loans: RO 55 K = 2,259K. (Difference of 1 due to rounding off)

**Provision made= Customer Loans: RO 2,324K+ Staff Loans: RO 55 K = 2,379K.

vii) Amount of impaired loans, if available, past due loans provided separately broken down significant geographic areas including if practical the amounts of specific and general allowances related to each geographical area.

(RO ’000)

Sl.

No. Countries

Gross

Loans

Of which

NPLs

Stage 1

Impairment

Stage 2

Impairment

Stage 3

Impairment

*Provision

made during

the year

Advances

Written off

during the

year

1 Oman 168,753 22,451 2,259 2,095 12,381 2,379 14

2Other GCC countries

0 0 0 0 0 0 0

3OECD countries

0 0 0 0 0 0 0

4 India 0 0 0 0 0 0 0

5 Pakistan 0 0 0 0 0 0 0

6 Others 0 0 0 0 0 0 0

7 Total 168,753 22,451 2,259 2,095 12,381 2,379 14

*Net ECL made for customer loan: RO 2,324K+ Staff Housing Loan ECL: RO 55 K

viii) Movement on Gross Loans

Figures in Table below are for Term Loan and Working capital taken together

Movement of Gross Loans during the quarter ending 31/12/2019- (RO ‘000)

Sl No Details Stage 1 Stage 2 Stage 3 Total

15.1 Opening Balance 117,288 25,762 20,369 163,419

15.2 Migration / changes (+ / -) 5,399 (8,793) 3,394 -

15.3 New Loans/ Additions 15,829 824 692 17,345

15.4 Recovery of Loans 9,946 1,449 2,001 13,396

15.5 Loans written off - - 3 3

15.6 Closing Balance 128,570 16,344 22,451 167,365

15.7 Total Provisions (IFRS 9) 2,205 2,095 12,381 16,681

Annual Report 2019

121

e) Credit Risk: Disclosures for Portfolios subject to the Standardized Approach


a) For portfolio under standardized approach, bank has not used assessments by External Credit Assessment Institutions (ECAIs) for claims on corporates and banks, but has instead used 100% risk weight for them considering the nature of Bank’s operations and size.

b) Quantitative Disclosures

The bank has not reduced exposure / applied risk mitigation based on external (ECAI) ratings.

f) Credit Risk Mitigation: Disclosures for Standardization Approaches


a) The bank has not used Credit Risk Mitigation through collaterals for reducing the Risk Weighted Assets.

b) The bank has not used on and off-balance sheet netting.

c) The bank has a Collateral Policy, which covers types of eligible collaterals, valuation, maintenance procedures and management. In accepting collaterals, the bank considers the ease of enforceability, and liquidity for tangible collaterals as well as creditworthiness and financial strength of guarantors. The bank makes an endeavor to avoid concentration of collaterals (credit and market) as far as possible. While accepting collaterals the bank evaluates the correlation, if any, between the value of collateral and the credit quality of the counterparty.

d) The bank endeavor’s to obtain acceptable collateral cover for its exposures as far as commercially practicable. The primary collateral for loan exposures is project assets financed by the bank. However, where feasible and required, the bank accepts other collaterals to mitigate the credit risk. The eligible collaterals include Pledge of Cash/ Deposit, Bonds& Shares; Bank Guarantees, Mortgage over Real Estate, Commercial Charge over Assets, Joint Registration over Assets, Personal / Corporate Guarantees, Assignment of Insurance Policies (Life/ Fire, etc.).

e) These collaterals are integrated in internal risk rating model to quantify the risk and assess the Loss Given Default (LGD)

f) Collaterals, such as, real estate and shares are valued periodically. Values of Shares are updated based on the latest market value. Real estate is valued by reputed valuers every three years.

g) Documentation for perfection of security interest in the collateral is verified by the legal department. The security documentation is maintained in fire proof cabinets.

h) The bank periodically checks and updates the documentation and ensures continuity of enforceability by keeping the related documents (life insurance, fire insurance, etc.) up to date.

i) The bank is making provision requirement as per IFRS 9 norms from 01-01-2018. As required by CBO, parallel calculation of Provision and reserve Interest as per BM 977 is also made.


The bank has not used Credit Mitigation for reducing the Risk Weighted Assets.

g) Market Risk in Trading Book: Disclosures for Banks using the Standardized duration Approach


a) As far as the Market Risk is concerned, Bank’s Trading Book comprises of only a small position in equities. The bank is not exposed to commodity risk and foreign exchange risk as it neither deals in commodities nor in foreign currencies. Bank has assigned 8% Risk Weight for Specific Risk and 8% Risk Weight for Market Risk for the Equities held in the trading Book.

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a) The capital requirement of Equity Position Risk is the following:

Market Value of Equity(RO 000s)

(A)Specific

Risk (8%)

(B)General Market

Risk (8%)

(C)RWA

[(A) + (B)]*12.5

Capital Requirement[11% of (C)]

4,801 384 384 9,602 1,056

h) Interest Rate Risk in the Banking Book (IRRBB)

Interest Rate Risk (IRR) for conventional banking: Interest rate risk is the risk where changes in market interest rates might adversely affect a Bank’s financial condition. The immediate impact (up to one year) of changes in interest rates is on the Net Interest Income (NII) and a long term impact (more than one year) of changing interest rates is on the Bank’s net worth.

Qualitative Disclosure

a) Since 2006, the bank’s interest bearing assets (mainly project loans) were on the fixed rate terms (interest rate of 9% p.a. including government subsidy), which were funded by its own capital and reserves. Therefore there was no impact of Interest Rate Risk in the Banking Book.

During 2015, the Ministry of Finance has decided to reduce interest subsidy by 3% effective from 01-01-2015. With this, the interest income including government subsidy has become 6% for term loan. In 2009, the bank had resorted to short term borrowings from banks to meet short term needs. With the injection of fresh equity, there was no much impact on the profitability. During the later years up to 2016, the bank has not availed bank borrowings.

b) The bank is providing working capital loans at variable rates (market rates) to its existing clients in a small way. The bank also started accepting Fixed Term Deposits (FTDs) at market rates. These have necessitated monitoring of interest rate risks.

c) During 2017, the bank availed a term loan of USD 50 million from a foreign financial institution. The loan carries fixed interest rate and has a tenure of ten years with grace period of two years. The instalments are payable on semi-annual basis of USD 3.5 million from years 3 to 9 and USD 1 million in the last year with first payment due on 30 September 2020.

During 2018, the bank availed a term loan of another USD 50 million from the foreign financial institution. The loan carries fixed interest rate and has a tenure of ten years with grace period of two years. The instalments are payable on semi-annual basis of USD 3.5 million from years 3 to 9 and USD 1 million in the last year with first payment due on 01 October 2021.

As the above loans are at fixed interest rate, the bank will not face interest rate risk. The bank is analyzing the situation and will be taking adequate measures to manage the risks, if any and will bring in any mitigation to prevent any negative impact on the profitability.

Quantitative Disclosure

As mentioned above, there was no impact of upward or downward rate shock as interest bearing assets were at fixed rates and the bank funded its asset portfolio mostly from its own capital and reserves.

As of 31/12/2019, the bank has outstanding fixed term deposits liability (Customer deposits-Izdihar) of RO 0.435 Million. The weighted average rate of interest as of 31/12/2019 is 1.22% p.a.

The term loan outstanding (borrowings from foreign institution) is RO 38.694 million as on 31/12/2019. Repayment of principal has not commenced.

Annual Report 2019

123

i) Liquidity Risk


a) Liquidity Risk is managed by the Assets and Liability cum Investment Committee of the bank. Asset Liability mismatches are analyzed and a positive gap is ensured. As all long term assets of the bank were funded by Equity plus reserves and there was no Liquidity Risk arising out of Asset and Liabilities mismatches.

b) During 2016, the Arab Fund for Economic and Social Development approved a loan of USD 50,000,000 to the Bank which has been disbursed to the Bank on 12 August 2017. The loan has a tenure of ten years with grace period of two years. During 2018, another term loan of USD 50 million has been availed with similar terms. With these, the bank may face liquidity risk. The management is aware of the risk and will actively pursue steps to mitigate them.

Quantitative Disclosure

As mentioned above, there was no impact of liquidity risk arising out of mismatches in assets and liabilities as all assets were mostly funded by the bank’s equity. As of 31/12/2019, the deposits outstanding in the bank are worth RO 0.435 Million.

The term loan outstanding is RO 38.694 million as at the end of the year.

j) Operational Risk


The Risk Policy of the bank specifies the policies relating to Operational Risks and covers areas, such as, Human Resources, IT, Operational Procedures, Compliance, Internal Audit, Money Laundering, etc.

The bank has used the Basic Indicator Approach for calculating the capital adequacy for Operational Risk. The bank has considered average positive Gross Income for last three years. The Gross Income is the aggregate of Net Interest Income and non-interest Income and excludes extra ordinary income and realized profit on Investment at amortised cost or Fair Value Through Comprehensive Income. The Gross Income also excludes provisions and operating expenses and also staff expenses, depreciation and recoveries.

There are no major regulatory/ supervisory actions taken against the bank during the year. No penalties have been imposed.

k) Foreign Exchange Risk:

Foreign Exchange Risk maybe defined as the risk that a Bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position, either spot or forward, or a combination of the two, in an individual foreign currency.

As of 31-12-2019, the bank has liability of USD 100 million together with interest accrued as term loan outstanding. The loans are payable in instalments till year 2028. The repayment of principal and interest is to be in USD. This give rises to foreign exchange risk. Since Omani Rial and USD are pegged, no impact is foreseen. However, any change in exchange rate between the currencies will give rise to foreign exchange risk. The bank is aware of this risk and will actively pursue steps to mitigate it, if required.

4. Overview and Conclusion

The bank’s BIS capital adequacy ratio was 72.9% at as at the end of December 2019, as against a minimum of 13.5% (including capital conservation buffer under Basel III) required by regulatory authorities.

Against the CBO stipulation of CET1, Tier 1 and Total Capital levels of 7.0%, 11.0% and 13.5% respectively, the actual ratios as of 31-12-2019 are 72.0%, 72.0% and 72.9% respectively.

The bank has created and implemented a risk management control and evaluation system that is responsive to current requirements, is compliant with Basel II and Basel III requirements of Central Bank of Oman and generally meets the objectives for the complexity and size of the bank.

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