Annual Report 2016

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2 Annual Report 2016

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6 The Custodian of the Two Holy Mosques King Salman Bin Abdulaziz Al Saud His Royal Highness Deputy Crown Prince Mohammad Bin Salman Bin Abdulaziz Al Saud The Second Deputy Premier and Minister of Defense His Royal Highness Crown Prince Mohammad Bin Naif Bin Abdulaziz Al Saud The Deputy Premier and Minister of Interior

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8 Content Page Board of Directors Report 9-30 Summary of Activity Independent Auditors Report Consolidated Financial Statements Basel III Pillar 3 Qualitative disclosures (Remuneration)

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11 Board of Directors Report Distinguished Shareholders: May peace be upon you, The Board of Directors is pleased to share with you this annual report, which highlights the activities of the Bank for the fiscal year ended December 31, The Bank has achieved good results during the Fiscal Year 2016, through growth in key financial indicators resulting from the Bank s business expansion, increase of customers, thereby maintaining its market leadership, especially in the Retail Sector. We are proud of being the largest Islamic Banks around the world. The bank achieved the noble goal of playing a key and main role in bridging the gap between modern banking requirements and the intrinsic value of the Islamic Sharia through establishment of professional standards to be followed. Locally, Al Rajhi Bank is the holder of the biggest network of branches totaling 554 across the kingdom, backed by the ATM network totaling 4,475 machines. Furthermore, the Bank has a large customer base in KSA and abroad, The Bank has affiliates inside KSA, namely: Al Rajhi Capital, Al Rajhi Takaful, Al Rajhi Services and Al Rajhi Real Estate Development. Globally, the Bank operates in three countries, recording a pioneering experience for the Saudi Banking Sector, where it owns an affiliate named: Al-Rajhi Bank Malaysia with 22 branches, in addition to seven branches in Jordan and one branch in Kuwait. The Bank will continue focusing on developing its pioneering position in the banking sector locally and internationally through providing the best banking services and products that comply with the Islamic Sharia and meet the expectations of corporate and individual customers. The Bank will also continue in the efforts of developing and updating the Information and communication systems with a view to reach the best in electronic services in order to provide the best services for all customers of the Bank. 1- Financial results In 2016, the Bank recorded SR 8,126 million in net profits, compared to the SR 7,130 million of 2015, which is an increase of 14.0%. The net financing and investments income amounted to SR 11,165 million compared to SR 9,959 million in 2015, with an increase of 12.1%. The revenue on banking services reached SR 2,950 million in contrast to SR 2,704 million, which shows an increase of 9.1%, whereas the total operating income amounted to SR 15,284 million compared to 2015 s SR 13,746 million ; an increase of 11.2%. The financing portfolio is characterized by its diversification in corporate and individual products. Its net asset reached SR 225 billion in 2016 compared to the SR 210 billion of 2015, with a growth rate of 7.0%. Meanwhile, shareholders equity increased to SR 52 billion in 2016 compared to SR 47 billion in 2015, with a rise of 11.4%. Total assets went up to SR 340 billion compared to the SR 316 billion of 2015 with an increase of 7.6%. Also, customers deposit balances increased to SR 273 billion in 2016 compared to SR 258 billion in 2015, showing an increase of 5.7 %. The Bank achieved a 2.5% return on assets, while return on shareholders equity amounted to 16.5%, and profit per share reached SR Board of Directors Report

12 Board of Directors Report 1-1 Impact of Bank s major activities The following analyzes the Bank s total assets and liabilities, operating income, expenses and net income for the two years ended on December 31, 2016 and (SR 000) Retail Corporate Treasury Investment & brokerage Total Total assets 177,178,353 61,796,699 98,504,030 2,232, ,711,817 Total liabilities 243,517,074 33,307,549 10,805, , ,764,945 Total income from operations 10,964,949 1,954,859 1,794, ,947 15,283,611 Total operating expenses )5,660,473( )1,186,370( )150,344( )160,464( )7,157,651( Net income 5,304, ,489 1,644, ,483 8,125, (SR 000) Retail Corporate Treasury Investment & brokerage Total Total assets 169,972,076 54,520,040 89,794,204 1,333, ,619,648 Total liabilities 245,832,559 18,092,534 4,938, , ,980,594 Total income from operations 10,380,699 1,652,751 1,080, ,412 13,745,775 Total operating expenses )5,146,273( )1,245,597( )56,088( )167,742( (6,615,700) Net income 5,234, ,154 1,024, ,670 7,130,075 Summary of net results of operations for the past five years (SR 000) Total assets 339,711, ,619, ,711, ,870, ,382,562 Net finance and investment 259,027, ,094, ,489, ,386, ,484,007 Total liabilities 287,764, ,980, ,815, ,372, ,913,825 Total equity 51,946,872 46,639,054 41,896,194 38,497,715 36,468,737 Deposits 272,593, ,821, ,077, ,589, ,394,638 Net income 8,125,960 7,130,075 6,836,172 7,437,987 7,884,706 Share profit Al Rajhi Bank - Annual Report

13 1-2 Geographical analysis of revenues The Bank s net income is derived from both its local and international activities as shown in the below table: )SR 000( Inside KSA Outside KSA 14,964, ,935 There are no debts owed by the Bank upon request or otherwise 2- Subsidiary Companies The Bank owns several subsidiary companies that contribute to managing its activities and diversifying its revenues. The following table describes the percentage and the nature of the companies ownership as per the year ended on December 31/12/2016: % Ownership Capital (SR 000) Type of Activity Country (place of operation) Country (place of establishment) Al Rajhi Capital 100% 100% 500,000 Financial Services KSA KSA Al Rajhi Banking & Investment Corporation Limited 100% 100% 1,051,714 Banking Services Malaysia Malaysia Al Rajhi Takaful Agency 99% 99% 2,000 Insurance Services KSA KSA Al Rajhi Development Company Ltd. (Riyadh) 100% 100% 1,000 Real Estate KSA KSA Al Rajhi for Administrative Services Company 100% 100% 500 Utilities KSA KSA 3- Debt securities and Sukuk The Bank confirms that there are no debt securities or Sukuk issued by the group. 4- Dividend distribution After the deduction of all overhead expenses and other costs, the Bank distributes the specified annual net profits, arranges the necessary reserves to confront doubtful debts, investment losses and urgent commitments for which the Board of Directors evaluates the risk level under the Banking Control Law and Saudi Arabian Monetary Authority (SAMA) directions as a following: 12 Board of Directors Report

14 Board of Directors Report a. The due zakat amounts scheduled to be paid by shareholders are calculated and the bank distributes them to designated parties. b. The Bank transfers no less than 25% of what is left from the net profits to the following year after deducting the zakat of the regular reserves so that the mentioned reserves become equal - at least - to the paid capital. c. It allocates no less than 5% of the paid capital to next year s transferred amount of profits after deducting the regular reserves and zakat. This is to be distributed to shareholders according to what the Board of Directors suggests and what the General Assembly approves. If the percentage left from the profits due to shareholders is insufficient to pay the above-mentioned percentage, the shareholders cannot claim to pay it during the next year(s) and the General Assembly cannot decide to distribute a bigger percentage of profit than the one suggested by the Board of Directors. d. After allocating the amounts mentioned in items (a), (b) and (c) the rest will be used according to the suggestion of the Board of Directors and the decision of the General Assembly. The profit shares are paid to shareholders in the time and place defined by the Board of Directors. As a result of its outstanding performance and achievement in terms of net profits, this year - thanks to Allah - the Board recommends distributing its net profits as follows: Description )SR 000( The year s profit 8,125,960 Profit retained from the last year 8,666,300 Interim dividend distribution during the first half of the year, at the rate of SR 0.75 per share 1,218,750 Proposed dividend distribution during the second half of the year, at the rate of SR 1.5 per share 2,437,500 Transferred to statutory reserve - Zakat accruals 900,000 Retained earnings ,236,010 Al Rajhi Bank - Annual Report

15 5- Board of Directors The Board of Directors consists of 11 members elected by the Constituent General Assembly every 3 years. Each member can be re-elected after completing his term in accordance with the Bank s regulations. The Board exercise its duties contained in the regulations. According to the definitions of Article 2 of the Corporate Governance Regulations of Saudi Arabia, issued by the Capital Market Authority, members are classified as follows: 5-1 Board of Directors Classification No Name Function(s) Membership Type Membership in other joint stock companies 1 Mr. Abdullah bin Sulaiman Al Rajhi Chairman of the Board of Directors Non-Executive Member - Al Rajhi Company for Cooperative Insurance - Al Rajhi Group Holding Company - Farabi Petrochemical Company - Al Arrab Contracting Company 2 Mr. Mohammed bin Abdullah Al Rajhi Board of Directors Member Independent Member - Tabuk Agricultural Development Company - East Asian Co. for Agricultural Development & Investment 3 Mr. Salah bin Ali AbalKhail Board of Directors Member Non-Executive Member - National Veterinary Company 4 Mr. Sulaiman bin Saleh Al Rajhi Board of Directors Member Non-Executive Member 5 Mr. Saeed bin Omar Al Issaie Board of Directors Member Independent Member - Yanbu Cement Company - SAHARA Petrochemicals 6 Mr. Abdulaziz bin Khaled Al Ghefaily Board of Directors Member Non-Executive Member - Savola Company - Herfi Company - Panda Company 7 Mr. Bader bin Mohammed Al Rajhi Board of Directors Member Independent Member - Mohammed Abdulaziz Al Rajhi & Sons Holding Company 8 Mr. Moayed bin Issa Al Qurtas Board of Directors Member Independent Member - Saudi Vitrified Clay Pipe Company - Riyadh Cables Group of Companies 9 Mr. Ali bin Saleh Al Barrak Board of Directors Member Independent Member - Arab Engineers Company - Arabian Bemco Contracting Co. - Riyadh Cables Group of Companies 10 Mr. Khaled bin Abdulrahman Al Qoaiz Board of Directors Member Independent Member - Swicorp Financial Advisory Services - Arab Company for Water and Power Development - Saudi Tabreed Company 11 Mr. Alaa bin Shakib Al Jabiri Board of Directors Member Independent Member - Construction Products Holding Company 14 Board of Directors Report

16 Board of Directors Report - There are no arrangements or agreements made under which any of the members of the Board of Directors or Senior Executives waived his salary or compensation to the Bank. - There are no arrangements or agreements made under which any of the Bank s shareholders waived any of his profit rights. 5-2 Number of sessions & attendees The Board of Directors held the following seven sessions during 2016: No Date No. of attendees attended % Absent members 1 07/02/ % Mr. Saeed bin Omar Al Issaie 2 28/03/ % Mr. Mohammed bin Abdullah Al Rajhi 3 15/05/ % Mr. Sulaiman bin Saleh Al Rajhi 4 15/08/ % /08/ % /10/ % Mr. Mohammed bin Abdullah Al Rajhi 7 19/12/ % Mr. Mohammed bin Abdullah Al Rajhi Number of each member s attended sessions during 2016: No Name Attended sessions 1 Abdullah bin Sulaiman Al Rajhi 7 sessions 2 Mr. Mohammed bin Abdullah Al Rajhi 4 sessions 3 Mr. Salah bin Ali AbalKhail 7 sessions 4 Mr. Sulaiman bin Saleh Al Rajhi 6 sessions 5 Mr. Saeed bin Omar Al Issaie 6 sessions 6 Mr. Abdulaziz bin Khaled Al Ghefaily 7 sessions 7 Mr. Bader bin Mohammed Al Rajhi 7 sessions 8 Mr. Moayed bin Issa Al Qurtas 7 sessions 9 Mr. Ali bin Saleh Al Barrak 7 sessions 10 Mr. Khaled bin Abdulrahman Al Qoaiz 7 sessions 11 Mr. Alaa bin Shakib Al Jabiri 7 sessions Al Rajhi Bank - Annual Report

17 5-3 Committees of the Board of Directors The Board of Directors committees executes its functions and missions according to their approved regulations and in accordance with the regulatory instructions. Below is a brief description of the committees of the Board and their functions Executive Committee The Executive Committee, headed by the Chairman of the Board of Directors, carries out all the functions and authorities the Bank entrusts it with, including: assuming the responsibility for all businesses of Al Rajhi Bank, taking the quick decisions with respect to urgent matters and issues related to the business of the Bank. The Executive Committee will also be responsible for approving all credit facilities exceeding the authorities of the High Credit Committee, approving the real estate guarantees documented for default facilities, approving the contracts exceeding the powers of the committees operating in the Bank and the CEO within the limits of the approved budget and within the power determined by the Board of Directors. The Committee held 8 sessions in 2016 and its members consisting of Abdullah bin Sulaiman Al Rajhi (chairman), Salah bin Ali Abal Khail, Moayed bin Issa Al Qurtas, Abdulaziz bin Khaled Al Ghefaily and Alaa bin Shakib Al Jabiri. The committee members are appointed or removed according to the decision of the Board of Directors. The membership term shall be three years, or expire with the lapse of the tenure of the Board. The BOD may reappoint the committee members, and the committee raise its recommendations and copies of its meeting minutes to the Board of Directors Nomination and Remuneration Committee The Nomination and Remuneration Committee s main purposes include: to recommend the selection of Board Members or Committee members and key executives to the Board of Directors, prepare description of abilities and qualifications required for the BOD membership, evaluate the effectiveness and efficiency of the BOD and Senior Management, ensure the independence of the Independent members, compliance of the Bank with the Internal Incentives Policies, and rules of Incentives Exercise issued by SAMA, principles and criteria of remunerations, in the way best achieves the interests of depositors, shareholders and Bank s strategic goals. The Committee held three sessions during 2016, and its members consisting of: Mr. Ali bin Saleh Al Barrak (Chairman), Abdulaziz bin Khaled Al Ghefaily, Mr. Khaled bin Abdulrahman Al Qoaiz and Mr. Saeed bin Omar Al Issaie. The committee members are appointed or removed according to the decision of the Board of Directors. The membership term shall be three years, or expire with the lapse of the tenure of the Board. The BOD may reappoint the committee members, and the committee raise its recommendations and copies of its meeting minutes to the Board of Directors Governance Committee The Governance Committee s main purpose includes the annual review of the Structure of the Board of Directors, and committees thereof, in addition to the framework of governance in the Bank, update policies related to the BOD and members thereof, Bank s governance and conflict of interests, support and maintain the application of the highest standards of corporate governance issued by SAMA and Corporate Governance Regulations issued by CMA, in addition to following the application of Governance manual and 16 Board of Directors Report

18 Board of Directors Report appendixes, Bank s matrix of authority, following up the work of administrative committees. The Committee held 3 sessions during And its members consisting of: Salah bin Ali Abal Khail (chairman), Mr. Ali bin Saleh Al Barrak and Alaa bin Shakib Al Jabiri. The committee members are appointed or removed according to the decision of the Board of Directors. The membership term shall be three years, or expire with the lapse of the tenure of the Board. The BOD may reappoint the committee members, and the committee raise its recommendations and copies of its meeting minutes to the Board of Directors Audit and Compliance Committee The Audit and Compliance Committee plays a key role in supporting the Board of Directors in having effective oversight on the operational activities of financial reports, adequacy and efficiency of the Internal Control environment, supervising the operational activities of Internal Audit Group. Additionally, recommends for the selection of external auditors. Furthermore, the Committee ensures the independence and effectiveness of Internal Audit Group, approves the internal audit annual plan, reviews issued Internal Audit reports including ARB management level of implementation of audit recommendations. As Compliance Group is concern, the Committee ensure the adequacy and effectiveness of the operational activities of Compliance Group including level of compliance with its policy and manual, approving compliance annual program, reviewing Compliance Group routine and annual reports, ensures implementation of weaknesses identified by Compliance Group. Furthermore, the Committee reviews periodical minutes of meetings pertain to Compliance Management Committee and reports issued by regulators. The Audit and Compliance Committee comprise of five members (Mr. Moayed bin Issa Al Qurtas Chairman, Mr. Mohammed bin Abdullah Al Rajhi both are Board member, Dr. Sultan bin Mohammed Sultan, and Mr. Faraj Bin Mansour Aboothnin, and Mr. Walid bin Abdullah Tmirk (Non-Board members). The committee held seven meetings during Risks Committee This committee was formed after the election of the BOD in the present tenure. The purpose of the BRMC is to assist the Board of Directors (Board) in maintaining oversight responsibility for activities and decisions related to Management of Risks in Credit, Operational, business, market, investment and financial businesses and reputation. Additionally, it includes the provision of consultation to the BOD with respect to the risk appetite and risks strategy, The Internal Capital Adequacy Assessment Process, credit policy, provisions and liquidity policy framework, dealing with the finance and liquidity limits. The committee is also responsible for approving losses arising out of (banking operations, fraud, system errors and compensation of customers) that goes beyond the powers of the Risk Management Committee. The committee consists of the following members namely: Mr. Alaa bin Shakib Al Jabiri (chairman), Mr. Bader bin Mohammed Al Rajhi, and Mr. Ali bin Saleh Al Barrak. The committee held 6 sessions during The Board of Directors appoint the committee members. The membership term shall be three years, renewable for extra three years as long as the member satisfied the requirements of membership in BOD Risks Committee. The Committee raises its recommendations and copies of its meeting minutes to the Board of Directors. Al Rajhi Bank - Annual Report

19 5-4 Ownership of Board Members & Senior Executives Changes in ownership percentages for Board Members and their families are defined as shares, Bank s debt items, or any of its subsidiary companies. Description for any interest of the Board Members and their families (wives & children) are defined as shares Bank s debt items, or any of its subsidiary companies. No Name of beneficiary No. of shares at beginning of year 2016 No. of shares at end of year 2016 Ownership Percentage Ownership Percentage % of change 1 Abdullah Sulaiman Abdulaziz Al Rajhi 35,221, ,221, Mohammed Abdullah Abdulaziz Al Rajhi 923, , Sulaiman Saleh Abdulaziz Al Rajhi 4,300, ,569, Saeed Omar Qassim Al Issaee 1,512, ,115, Salah Ali Abdullah Abal Khail 1,350, ,350, GOSI 165,667, ,667, Abdulaziz Khaled Ali Al Ghefaily (Representative of GOSI) Mohammed Abdulaziz Al Rajhi & Sons Co. for Investment Bader Mohammed AlRajhi (Representative of Mohammed Abdulaziz Al Rajhi & Sons Co. for Investment.) ,343, ,343, , , Khaled Abdulrahman Al Qoaiz 1, , Moayed Issa Al Qurtas 1, , Alaa Shakib Al Jabiri 6, , Ali Saleh Al Barrak 10, , Description for any interest of the Senior Executives Members and their families (wives & children) are defined as shares Bank s debt items, or any of its subsidiary companies, who no longer are in the list of Senior Executives either through resignation or career change No Name of beneficiary No. of shares at beginning of year 2016 Ownership Percentage 1 Adnan Saleh Al-Olayan 4, Iain George Blacklaw 10, No. of shares at end of year 2016 Ended with Resignation on 31/03/2016 Ended with career change on 04/02/2016 Ownership Percentage % of change Board of Directors Report

20 Board of Directors Report 6- Remunerations & compensations The Bank pays the expenses and remunerations of Board Members who attend the Board sessions, as well as that of the subsidiary committees. It also pays salaries, remunerations and compensations to Senior Executives in accordance with their respective contracts and SAMA list of remunerations and compensations. The following is a detailed description of all expenses, remunerations and salaries paid to Board Members and the 5 Senior Executives of the Bank, including the CEO and the CFO. Description Executive Board Members Non-Executive Board and Independent Members 5 Senior Executives (including CEO & CFO) Salaries & remunerations 0 9,526,248 Allowances 441,000 3,970,345 Periodic & annual bonuses 3,960,000 16,442,500 None Incentive plans 0 0 Other remunerations or benefits paid on a monthly/annual basis 0 0 Total 4,401,000 29,939, Penalties & fines imposed on the Bank The Bank was not subjected to any significant penalty procedures or fines in the financial year Most, penalties imposed, if any, were related to operational processes and were successfully dealt with. The following is the penalty statement imposed by the supervising authorities: Supervising No. of Fines Nature of Fines Total Fines (SAR) Ministry of Municipal and Rural Affairs Building increase and lack of sufficient backspace in ATMs Existence of advertising posters at the facets of branches 1,793, ,000 Saudi Arabian Monetary Authority 41 Fine related to Banking operations 6,656,377 Al Rajhi Bank - Annual Report

21 8- Related party transactions: In the ordinary course of business, the Bank transacts business with related parties, The related party transactions are governed by limits set by the Banking Control Law and the regulations issued by SAMA. The nature and balances resulting from such transactions as at and for the year ended December 31, are as follows: (SR 000) Related parties Members of the Board of Directors Mutajara 837, ,942 Contingent liabilities* 3, ,646 Current accounts 40, Companies and establishments guaranteed by members of the Board of Directors Mutajara 550, ,558 Contingent liabilities* 175,875 - Other major shareholders (above 5% equity share) Mutajara 2,859,571 2,758,530 Contingent liabilities* 171, ,091 Current accounts 26, Other liabilities 26,230 23,244 Mutual Funds Investments in Mutual Funds 540,318 1,201,924 * = off balance sheet items Income and expenses pertaining to transactions with related parties included in the consolidated financial statements for the two years ended December 31, are as follows: (SR 000) Income from financing 170,945 61,549 Mudaraba Fees 61, ,410 Employees salaries and benefits (air tickets) 4,274 5,272 Rent and premises related expenses 1,106 1,106 Board of Directors remunerations 4,401 4, Board of Directors Report

22 Board of Directors Report Transactions with related parties include contracts done with the bank where Board Directors, CEO, CFO or any related person have direct / indirect interest in them, details are as follows: First: Commercial Relations Name of the related party Vendor Name Nature of the Business and Contract Terms and conditions Period of the Business and contract Amount of the Business and Contracts during 2016 Abdullah Sulaiman Abdulaziz Al Rajhi (Board of Directors Member) Fursan Travel and Tourism which is a company owned by the Board member To provide ticketing services for employees There is no preferential advantages granted to the company by the bank contract is renewed automatically each year 4,274,000 SAR Al Rajhi Bank - Annual Report

23 Second: Rental Contracts Name of the related party Contractor Nature of the Business and Contract Terms and conditions Period of the Business and contract Amount of the Business and Contracts during 2016 Abdulaziz bin Khaled Al Ghefaily (Board of Directors Member) Panda Company (Board member in the company) ATM site lease Leasing contract 5 years Contract and it is renewed automatically for a similar period 45,000 SAR Abdulaziz bin Khaled Al Ghefaily (Board of Directors Member) Panda Company (Board member in the company) ATM site lease Leasing contract 5 years Contract and it is renewed automatically for a similar period 25,000 SAR Abdulaziz bin Khaled Al Ghefaily (Board of Directors Member) Panda Company (Board member in the company) ATM site lease Leasing contract 5 years Contract and it is renewed automatically for a similar period 35,000 SAR Abdulaziz bin Khaled Al Ghefaily (Board of Directors Member) Panda Company (Board member in the company) ATM site lease Leasing contract 5 years Contract and is renewed automatically for a similar period 40,000 SAR Bader bin Mohammed Al Rajhi (Board of Directors Member) Mohammed Abdulaziz Al Rajhi & Sons Holding Company (Board member in the company) South Regional Head Office Rental contract Rental contract 10 years Contract and it is renewed automatically for a similar period 246,000 SAR Bader bin Mohammed Al Rajhi (Board of Directors Member) Mohammed Abdulaziz Al Rajhi & Sons Holding Company (Board member in the company) Direct Sales Office in Abha Rental Contract Rental contract 9 years Contract and it is renewed automatically for a similar period 40,000 SAR Bader bin Mohammed Al Rajhi (Board of Directors Member) Mohammed Abdulaziz Al Rajhi & Sons Holding Company (Board member in the company) ATM site lease Leasing contract 5 years Contract and it is renewed automatically for a similar period 35,000 SAR Abdullah Sulaiman Abdulaziz Al Rajhi (Board of Directors Member) Direct Contract with Board member ATM site lease Leasing contract 3 years Contract and it is renewed automatically for a similar period 90,000 SAR Abdullah Sulaiman Abdulaziz Al Rajhi (Board of Directors Member) Direct Contract with Board member Al Batha Center for Exchange and Transfer Rental Contract Rental contract 3 years Contract and it is renewed automatically for a similar period 550,000 SAR 22 Board of Directors Report

24 Board of Directors Report The amounts of compensations recorded in favor of or paid to the Board of Directors and the executive management members during the two years ended December 31, are as follows: (SR 000) Short-term benefits 44,935 37,102 Provision for end of service benefits 2,024 1,352 The executive management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank whether directly or indirectly. 9- Regulatory payments The Bank s regulatory payments during the year 2016 consist of zakat due by shareholders, amounts paid to the General Organization for Social Insurance represented by the employees insurance contributions, and taxes mainly represented by deductible tax imposed on foreign investors. The following table explains the regulatory payments: Party (SR 000) Zakat due from shareholders 900,000 General Organization for Social Insurance 242,470 Taxes/fees or any other due payments 9,783 Total 1,152, Employee benefits & plans The employees benefits and plans are paid during or at the end of their service according to Saudi Labor Law and Bank policies. The balance for the allocations of end of service reached SR 761 million at the end of The Bank also provides its employees with a number of benefits such as: The program of granting Bank shares to benefit selected employees is one that is dedicated to the Bank s employees and its subsidiary local companies. It offers free shares to senior employees believed to be of human assets that should be maintained by the Bank, the matter which leads to enhancing the long term functional relationships, and provision of suitable incentives in recognition of their outstanding contributions. The grant is only given based on the approval of the Board of Directors in the light of recommendation of Nominations and Remunerations committee. Al Rajhi Bank - Annual Report

25 11- Books of accounts The consolidated financial statements are prepared in accordance with the Accounting Standards for Financial Institutions promulgated by the Saudi Arabian Monetary Authority (SAMA) and International Financial Reporting Standards (IFRS). The Bank also prepares its consolidated financial statements to comply with the requirements of Banking Control Law and the Companies Law in the Kingdom of Saudi Arabia, and the Bank s Articles of Association. The Board of Directors assures the following: Accounting records have been correctly prepared. The internal supervision and control system has been properly prepared and efficiently executed. There are no doubts regarding the Bank s capability to carry on with its activities. 12- Annual audit results of the internal control Procedures effectiveness Based on the assessment of the general framework of the internal controls, the bank, in general, has a sound internal control system, which is incredibly effective in terms of the design and application. It is evaluated continuously to improve it and increase its effectiveness, whenever there is any regulatory gaps or opportunities for improvement, because of the availability of the following ingredients: The bank has set up a general framework of governance, through which, the appropriate control can be imposed at the level of the bank. This framework determines the roles and responsibilities entrusted to all levels, including the Board of Directors and committees thereof and other administrative committees. The bank has a series of policies and procedures that govern its business which are subject to regular updates and reviews to verify their sufficiency and adequacy. Most of the Bank s operations are executed automatically through a sophisticated electronic system, which minimize errors and mitigate fraud opportunities. All work in general and major important decisions are supervised through committees created for this purpose and to ensure the sound conduct of business and protect the safety and quality of the Bank s assets. The bank has departments specialized in evaluating/monitoring controls, including the internal audit, compliance control, anti-fraud and various risks management. Existence of the effective Audit and Compliance Committee supervising the internal and external auditors, thereby enhancing their independence. This Committee receives regular and periodic reports about the activities of the units and activities subject to auditing. Regular supervision of the efficiency and sufficiency of the Internal Control System based on an annual plan approved by the Audit and Compliance Committee. Aspects of Internal Control are regularly supervised by the external auditors and tested by SAMA. 24 Board of Directors Report

26 Board of Directors Report Great attention is paid to the Internal Control System s results and every identified issue is taken into consideration in order to avoid repetition of mistakes. Accordingly, the Audit Committee confirms the integrity of the bank s internal control procedures and the lack of substantial notes affect the safety of the financial statements of the bank. 13- Future Vision & Potential Risks in 2017 Economic Outlook: Saudi Arabia plays a key role in global oil markets, as oil revenues represent 62% of total Kingdom revenues in Because of economic planning, the non-oil revenues rose by 20% in 2016 compared with The Saudi economy remains resistant to pressures resulting from the decline in oil prices in the short term. Saudi Arabia has been able to build large financial reserves over the past decade, which contributed to increasing the capacity of the economy to absorb shocks. Declaration of fiscal year 2017 included mainly the overall economic, financial and structural reforms. The Kingdom is looking at different options to finance the deficit where it is likely to continue in the issuance of government bonds for this purpose. We expect that this funding is designed so as not to adversely affect the domestic liquidity and to ensure the growth of the private sector to contribute to transform the Kingdom s economy to become more sustainable and less dependent on oil. Accordingly, we expect that reforms in the business market and the organization of the financial work and fiscal policy will contribute to strengthening the potential of the non-oil economy. Risk Management practices: The most important types of financial risks identified by the Group are credit risk, liquidity risk, market risk, and operational risk. Credit risk is the risk that the counterparty to a financial transaction will fail to discharge an obligation causing the Group to incur a financial loss. Liquidity risk is about the Group being unable to meet its payment obligations associated with its financial liabilities when they fall due. Market risk includes currency risk, profit rate risk, and price risk. Market risk arises when the fair value or future cash flows of a financial instrument fluctuates due to changes in market prices. It arises on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems, and external events. Operational risk is inherent in most of the Bank s activities, this necessitates an integrated approach to the identification, measurement and monitoring of operational risk. Al Rajhi Bank - Annual Report

27 The Credit & Risk Group headed by the Chief Risk Officer, is an independent function that is considered strategic to the Bank s objective of achieving prudent and effective risk management across the Bank. The function includes Credit Risk Management, Operational Risk Management and Enterprise Risk Management. The responsibilities and activities of this function are performed within the risk frameworks and policies approved by the Board of Directors. The Credit & Risk Group provides periodic reports to the Board of Directors and its related committees across a diverse spectrum of risks, the coverage of which includes credit risks and portfolio asset quality, internal controls and operational risks, liquidity risks, market risks, reputational risks, legal risks, etc. Adverse business or economic conditions may result in failure by counter-parties and customers to meet their obligations in accordance with agreed terms. Therefore, Al-Rajhi Bank aims to balance its potential risks and returns by setting policies and procedures that help to identify and analyze risks faced by the Bank. This process essentially involves agreeing on various risk thresholds based on the Bank s risk appetite. These risk management practices are key to the Bank s ability to manage its capital effectively and in providing strong and sustainable return to shareholders. The Board Risk Management Committee has oversight of the Bank s risk management framework and monitors the Bank s performance within the boundaries established by its risk appetite and advises the Board on all risk management matters. It is chaired by an independent director. The risk management function operates within the regulatory framework for risk management set out by the Saudi Arabian Monetary Authority (SAMA).The Bank s Internal Capital Adequacy Assessment Process (ICAAP) encapsulates the Bank s risk management framework and sets out the Bank s risk appetite, risk management approach and primary risk controls. The ICAAP is an ongoing process and is reviewed and approved by the Board and submitted to SAMA on an annual basis. The Board Risk Management Committee reviews and recommends for the Board s approval the credit and provisioning policy, Operational Risk policies, Risk Appetite & Pillar III disclosure Policy, Market & Liquidity Risk, Information Security Policy. Our branch network engenders a loyal customer base, which generates a high level of stable demand deposits, with positive effects on the Bank s liquidity. Our Bank s retail customer-oriented business model provides a diverse risk profile that underpins the Bank s financial performance and this is further supplemented by the Bank s strong and reliable corporate banking customer-base. Going forward our Bank will retain focus on increasing its customer base by promoting its products for Retail, Small and Medium size enterprises (SMEs) and Corporate Banking sectors while ensuring that risk management practices continue to adhere with regulatory requirements, international standards and best practices. The risk management practices regulate the process of on-boarding customers, issuance of credit and providing of a range of product and services to our customers. These characteristics enable the Bank to take a long term view and have confidence in lending through the business cycle. 26 Board of Directors Report

28 Board of Directors Report Credit rating Rating Agency Long Term Short Term S&P (Feb 16) A A-2 S&P (Mar 16) BBB+ A-2 Fitch A F1 Moody s A1 P-1 Capital Intelligence AA- A1 14- Governance (A) Corporate Governance Regulations issued by CMA The Bank works according to the provisions of Corporate Governance Regulations issued by CMA. The Bank s Board has applied the Regulations obligatory by-laws and most of the provisions of the guiding regulations, except the following: Article Requirements Reasons of not applying Clause (B) of Article (6) In voting in the General Assembly for the nomination to the board members, the accumulative voting method shall be applied. It has been voted upon it in the extraordinary General Assembly held on March 4, 2013, the Assembly approved the continuation of the bank to the normal style of the vote, and that the bank still decides the normal right to vote. During the upcoming General Assembly meeting, the Bank will amend the article of association to adopt the accumulative voting method in line with the new Corporate Law regulations. Clause (D) of Article (6) Investors who are judicial persons and who act on behalf of others - e.g. investment fundsshall disclose in their annual reports their voting policies, actual voting, and ways of dealing with any material conflict of interests that may affect the practice of the fundamental rights in relation to their investments. The bank does not have the legal capacity to bind investors with legal status who act on behalf of others - such as investment funds to make disclosures mentioned in the annual reports. We would like to note that Article 44 of the Bank s Article of Association points out that the Extraordinary General Assembly decides, upon the proposal of the Board of Directors, the method of liquidation, and paragraph No of the Bank Governance Manual states the shareholders right to receive a share of the bank s assets at the time of liquidation. (B) Governance and policies relating to governance Manual The Bank issued and adopted Corporate Governance Manual, Governance Manual Supplement, and regulations of the Committees of the Board and management committees in Al Rajhi Bank - Annual Report

29 2014 which are reviewed on an annual basis. Corporate Governance Structure, Governance Manual and Delegation of Authorities were updated and approved by the Board of Directors on 19th December 2016 with an effective date of 1st January Furthermore, the bank applies most of the key principles of corporate governance in banks operating in the Kingdom of Saudi Arabia issued by the SAMA in June 2012 and the first update issued on 23/3/2014. On the other hand, an independent policy of the Bank relating to conflict of interest was put in application of the decision of the Capital Market Authority No. ( ) and a policy for membership in the Board of Directors adopted by the General Assembly held on 4/3/2013 and became applicable. In addition, the policy of related party transactions was approved, which aims to create rules to deal with the transactions carried out by related parties. The competencies and functional succession policy has also been adopted, which aims to identify the staff with high potential so as to prepare them through career development plans for this purpose, as well as their willingness to hold the sensitive and difficult positions to meet the needs of the immediate and future work. One of the important policies that have been adopted also is the violations Reporting Policy, which aims to provide any information that will guide the bank s departments to carry out their duties by reporting wrong behaviors and violations that contradict the regulations and instructions or immoral behaviors or those violating the bank s policies, procedures and instructions. The bank management applied the Saudi Arabian Monetary Authority requirements related to the Remuneration regulation and what is stated in the Saudi Companies Law. The Bank also ensures through its internal policies and procedures complying with the disclosure of material information to stakeholders. The Bank has also an adopted policy for the disclosure of banking data and information in line with the instructions of the Saudi Arabian Monetary Authority. In addition, the bank is committed to all disclosure requirements as stated in the Capital Market Authority regulations. Furthermore, the Bank has an adopted policy for social responsibility that aims at strengthening the social role of the bank in general. Also, the bank has developed a manual to the new members of the Board, identifying the bank work, particularly, the financial and legal aspects as well as informing and training them, if necessary, on modern, legislative, regulatory and economic developments and other developments, which help in the performance of their duties as members of the Board of Directors. With regard to the policy of compensating stakeholders mechanisms in case of violating their rights recognized by the regulations and protected by contracts to clarify the settlement of complaints or disputes that may arise between the bank and its stakeholders, the bank has mechanisms required to settle customer complaints monitored by the Saudi Arabian Monetary Authority. (C) Bank policies The bank has adopted a number of policies in 2016, including: ARB Sanctions Policy, Customer Protection Policy, Call Center Department Policy, Financial Institutions Department Policy, Branch Banking Expansion and Development Policy, Customers Daily Transfer Limit on Alternative Channels Policy, General Policy for Men and Ladies Branches Network Department and Procurement and Contracting Policy. The bank, also, has adopted the updates on some policies, including: Perusal of the customers Accounts Balances Policy, Disclosure Policy, HR Policy, Policy of Prepayment of Corporate Finance Products, Accounting Policies Manual, Operational Risk Management Policy, Policy of Dealing with Politically-exposed Persons, Grievance Policy, Sharia Control Policies, ARB Outsourcing Policy, Financial Authorities Practice Policy, Group Liquidity Risk Management Policy, Group Market Risk and ALM Policy and Policy of Tahweel AlRajhi. 28 Board of Directors Report

30 Board of Directors Report (D) Delegation of authorities The Governance Department has made a comprehensive revision for the approved matrix of powers delegation, upon which it has been approved by the Board of Directors upon a recommendation from the Governance Committee. This matrix has been distributed to all bank groups to work accordingly effective from 1st January (E) Monitoring performance of BOD and committees The Governance Department has developed an integral mechanism and timetable to the process of evaluating the work of the Board of Directors and committees thereof, in addition to the development of a mechanism to increase the use of evaluation findings. Therefore, an action plan has been developed for the use of evaluation results in the nomination process for membership of the Board and committees and in determining the future vision of the training needs. In addition, the Governance Department has developed the mechanism of control over the work of the committees at the bank and to enable the Board of Directors represented by the Governance Committee to follow-up performance of committees and ensure the proper work of them. (F) Core announcements The following are the core of Al Rajhi Bank announcements that have been published on TADAWEL website during Title Announcement of annual financial results for the period ended 12/31/ /01/2016 Declaration of dividend to shareholders for the second half of the fiscal year 2015, of 1 Riyal per share. Date 21/01/2016 Invitation to attend the twenty- Seventh Ordinary General Meeting 29/02/2016 Announcing of add new item on the agenda of the twenty- Seventh Ordinary General Meeting 03/03/2016 Announcing the results of attend the twenty- Seventh Ordinary General Meeting 29/03/2016 Announcement of preliminary financial results for the period ended 03/31/ /04/2016 Announcement of preliminary financial results for the period ended 06/30/ /07/2016 Declaration of dividend to shareholders for the first half of the 2016, of 0.75 Riyal per share. 20/07/2016 Bank announces the date and method of distribution and payment dividends to shareholders for the first half of the year /07/2016 Al Rajhi Bank announces that its financial statements are compliant with IFRS. 31/08/2016 Announcement of preliminary financial results for the period ended 09/30/ /10/2016 (G) General Assembly With regard to the general assemblies, the bank always abides by the concerned government authorities regulations in all matters related to the ordinary general assembly or extraordinary ones, and all of its provisions are accompanied by sufficient information to enable shareholders to make their decisions. Al Rajhi Bank - Annual Report

31 15- Auditors During the Ordinary General Assembly of shareholders, dated 28/03/2016, PricewaterhouseCoopers and KPMG have been designated as auditors of the Bank s accounts for the fiscal year The next General Assembly will -Allah willing- re-designate the external auditors for the fiscal year of 2017, based on a recommendation from the Audit Committee. 16- Conclusion The Board of Directors is pleased to express their pride in the positive results achieved by the Bank in On this occasion, the Board wants to convey its appreciation to the Custodian of the Two Holy Mosques, Crown Prince and Deputy Crown Prince and our wise Government. The Board would also like to express its sincere appreciation to the Ministry of Finance, Ministry of Commerce & Industry, Saudi Arabian Monetary Authority (SAMA) and the Capital Market Authority (CMA) for their consistent cooperation and support in developing the banking sector, which manifests itself in the reinforcement and growth of the national economy. The Board Members present their gratitude to their eminence the Chairman, and the members of the Bank s Shariah Board for their efforts and contributions in the forms of advice, patience and explanations on all issues presented to them with regards to the banking and investment activities and services offered to the Bank s customers in addition to their monitoring of the Bank s Sharia compliance. The Board prays that Almighty Allah would most excellently reward them for their efforts. The Board would also like to seize this opportunity to express its gratitude and appreciation to the honorable shareholders, correspondents and customers for their support, trust and cooperation, which has led to the achievement of further advancement and prosperity for the Bank. Last but not least, the Board would like to present its sincere appreciation to all the loyal Bank employees for their genuine efforts and devotion in accomplishing their obligations and tasks. Board of Directors 30 Board of Directors Report

32 Board of Directors Report Al Rajhi Bank - Annual Report

33

34 Summary of Activity

35 Activity Summary Strategic direction: As one of the most important Islamic banks in the world, Al Rajhi Bank focuses on sustainable growth. Sharia Group: An independent Sharia Board, whose members include a number of Sharia scholars, has been operational at the Bank since the Bank s launch. The Sharia Board was established and its regulations were approved by the Bank s General Assembly to ensure all Bank activities are compliant with Sharia Board decisions. The Sharia Board works to ensure Bank compliance with the provisions of Islamic Sharia Law across all businesses and activities. In 2016, the Sharia board held 45 meetings, and issued 15 decisions and 240 guidelines. In order for the Sharia Board to achieve its objectives, the Sharia Group was established, consisting of two departments: 1. Sharia Board Secretariat Department: This department prepares and studies the products, agreements, and contracts received from the Bank s various groups and departments, and submits its Sharia research and studies on these matters to the Sharia Board. It prepared more than 250 subjects in Sharia Supervisory Department: This department oversees the Bank s operations to ensure compliance with, and the application of, the various decisions and instructions of the Sharia Board. It uses mechanisms such as an automated auditing systems and field visits conducted in accordance with professional standards. The department prepares the annual plan and operational quarterly plans, and identifies goals, tools, and methods for auditing; it updates the Auditing Forms according to the Sharia standards and controls issued by the Sharia Board on a regular basis. The number of auditing standards is 544. The Sharia Group approved the development of an educational site for Bank employees that seeks to explain the Sharia aspects of the Bank s products and services. Furthermore, the Sharia Group received 450 phone inquiries, and 83 mail inquiries. In addition, the Sharia Group prepared a number of educational manuals; provided, in collaboration with the Training Centre, 13 Sharia courses for new employees; and held 19 workshops for branch managers. Retail Banking Group: Retail Banking Group offers individuals a full range of financial products and banking services, such as current accounts, personal finance, and housing and auto loans. These products are available in Bank branches across the Kingdom. The Bank acknowledges the importance of its Private Account customers, thus its focus on providing the best banking services through its various service centres in Riyadh, Jeddah, Dammam, and Makah that all offer extended working hours until 9 pm. The Bank also operates a dedicated Ladies Private Account service centre in Riyadh. In 2016, the Bank launched a number of Affluent Lounges offering contemporary design that 34 Summary of Activity

36 Summary of Activity fit the expectations of its valued customers. There are now 300 Affluent Lounges across the Kingdom. The Bank also has increased the number of relationship managers for female Affluent Account customers through 58 dedicated Affluent Ladies sections. As part of the Bank s network expansion, six new branches, two new Silah branches, and 16 ladies branches/sections have been opened. The branch network expansion is part of the Bank s strategy to expand locally in order to reach customers in all regions and areas of the Kingdom. It also aims to keep up with developments in the Kingdom s banking sector by designing branches that meet the needs of all clientele. An important element of the Retail Banking Group, Tahweel Al Rajhi provides money transfer services locally and globally, exchanges currencies, and issues cheques. Tahweel Al Rajhi provides many other premium services that keep pace with the Bank s passion to meet all customers needs and provide services that exceed their expectations. Moreover, Tahweel Al Rajhi has developed new electronic channels to make its services more convenient to customers and to raise the level of service quality. Examples include the E-Remittance card and the Tahweel Mobile application, both of which will be launched in Tahweel Al Rajhi is proud to be the most important and largest money transfer organisation in Saudi Arabia, with over 217 centres covering most parts of the Kingdom and offering many competitive banking services in a distinctive contemporary style that matches modern technology, as service is non-stop around the clock. Tahweel Al Rajhi dominates the Saudi market with the largest market share, ensuring the delivery of money quickly and with complete safety. It represents the best choice for customers from different segments and all nationalities in the Kingdom, offering services in more than 30 currencies, via more than 120 partners and more than 400,000 delivery points around the world. The Bank maintained its leadership position in terms of ATM network size, diversity and spread, and the number of transactions carried out. Approximately 4,475 ATMs are available to meet customer needs for cash withdrawals, cash deposits, transfers, bill payment, government payments, and other transactions. The Bank continued the task of renovating old ATM rooms in branches and Tahweel centres, and replacing old machines with modern ones and adding other ATMs to enhance banking services at its branches. As a result, monthly cash deposits increased to more than SR 11 billion. The Bank launched its latest self-service machine Assra aa. It provides a unique service that can print ATM cards using a customer s fingerprint. Al Rajhi is considered a pioneer in providing such a service in the Middle East. This service complements other self-service machine services that were launched in 2015, including instant solutions such as printing ATM cards, and issuing cheque books and account statements. These services were well received by customers and enhanced their satisfaction. The Bank received Best Technological Innovation Award For Collaboratively-Developed Self-Service Solution at the 2016 Cards and Payments Conference and Exhibition in Dubai for the bank s Assra aa service, considered one of the most unique and distinctive self-service solutions of its kind in the world. The number of POS devices totalled more than 62,118, and this year recorded transactions worth more than SR 61 billion. The Bank is still the market leader, holding a more than 32% share of the POS market in the Kingdom. Al Rajhi Bank - Annual Report

37 Corporate Banking Group: The Corporate Banking Group renewed its focus on laying a strong foundation for growth through various initiatives that enabled the group to outperform the market by approximately 2-to-1 across key parameters. These steps included realigning the target market and risk appetite, and developing strike zones that enabled the group to grow assets at a faster pace than peer banks in the market. As well, the group reoriented segmentation strategies and enhanced the coverage model to focus on client acquisition and expanding market share. The group won key mandates and participated in a number of high-profile transactions in the syndication and corporate finance market. In 2016, the Bank maintained its dominant position as the number one payroll card issuer in the Kingdom and the largest provider of cash deposit machines in the Kingdom, while adding more clients during the year by enhancing its service offerings. Customers benefited from the opening of a new branch in Riyadh dedicated to serving corporate clients better, and from more secure Payroll cards, as the current magnetic strip cards are phased out and new EMV cards are issued. In order to improve process efficiency and the overall customer experience in the trade finance area, branches and other customer touchpoints have been digitalised with the provision of optical scanners to facilitate the move from paper-based processing. Customer service is also being enhanced by establishing one specialised unit in each of the three major regions of the Kingdom to address trade customer queries and needs. To speed response times, a unified contact system has been set up to receive all customer communications and enquiries. The Bank s Trade Finance electronic platform has been improved by enabling clients to electronically edit and amend documentary credits and guarantees. Small and Medium Enterprises: The Small and Medium Enterprises Division has made significant progress in 2016 in developing and executing its SME strategy, which is strongly aligned to Saudi Vision This strategy leverages the Bank s core strengths as a leader in Islamic banking with an extensive branch network and broad client base, allied with a focus on providing clients with high-quality products and services through the most efficient channels. This includes the establishment of a flagship SME centre in Riyadh this year that is expected to be complement by dedicated SME representation at conveniently located branches across the Bank network SME clients will also benefit from a dedicated SME call centre that will be launched early in Recognising that SME clients are increasingly sophisticated, the department is developing an SME-specific internet channel to further simplify the basic daily transaction needs, thereby allowing its clients to focus on their core business. The department s commitment to the segment is further reflected in its investment in the best local talent, having more than doubled its frontline sales, and launching a comprehensive graduate development program for future growth. During this critical phase, the department has remained focused on supporting SME clients in increasingly tough market conditions, as demonstrated by the record growth achieved through the Kafalah program. 36 Summary of Activity

38 Summary of Activity It is the department s ambition to establish Al Rajhi Bank as the bank of choice for SME clients, and in 2017, it will build on the strong foundations established to hone and broaden its product base, expand its presence, improve its channel delivery, and develop its talent to exceed SME client expectations. Treasury & Financial Institutions Group: The Treasury & FI Group is primarily responsible for managing the Bank s overall liquidity, along with maintaining relationships with international FI clients. In addition, Treasury essentially manages the Bank s portfolios of domestic and foreign currencies, which are required to meet client needs. The Bank s Treasury & FI Group is considered a pioneer in the field of Islamic financial services and products, largely responsible for creating a client-oriented culture that provides innovative solutions that aim to serve the client s best interests. The growth in Treasury & FI operations assists in maintaining the position of the bank as one of the largest participants in Sharia-compliant investment asset classes locally and globally. This long-standing strategy and commitment has enabled the Bank to sustain its high profile, which has assisted the Treasury & FI Group to build a list of more than 220 FI partners around the globe. Treasury & FI s leadership and contribution to the field of pricing foreign exchange transactions has enhanced the growth of the Bank s Retail, SME and Corporate businesses. Therefore, a professional and competent team with the necessary experience and skills has been allocated to various work sites to facilitate the delivery of Treasury & FI services and products to the Bank s clients. The Treasury & FI Group renews its commitment to enhance the development and creation of Sharia-compliant products, including hedging solutions and financial protection needs. The Treasury & FI Group is committed to continue seeking new horizons to play a greater role in enhancing growth and meeting clients expectations in alignment with the bank s 2020 strategy. International Business Group: As a leading bank in Saudi Arabia and one of the pioneers of Islamic Banking, Al Rajhi Bank has an international presence comparable to other major international leading banks all over the world. The goal of our international work is to contribute as an Islamic Bank to the promotion and development of Islamic banking in countries we are present by offering innovative banking products. Al Rajhi Bank Malaysia In 2016, as an extension of the balanced performance policy, Al Rajhi Bank achieved good growth in its financial portfolio. The bank also launched several products to serve customers through a network of branches and ATMs covering most major areas. Al Rajhi Bank - Kuwait Branch Al Rajhi Bank in Kuwait achieved excellent growth in its transactions in The Bank s assets in the sectors of retail and corporate had steady growth. The Branch has launched several new products to meet the Bank s customer needs and is looking forward in 2016 to strengthen its position in the Kuwaiti highly competitive market. Al Rajhi Bank - Annual Report

39 Al Rajhi Bank - Jordan Outstanding performance continued during 2015, and Al Rajhi Bank in Jordan continued its previous success by offering all banking services and innovative products to customers that are compatible with the provisions of Islamic Sharia law. The financing portfolio has made excellent growth in 2016 and our branch network in Jordan has expanded to reach six branches. Governance and Legal Group: Through various sub-departments, the Governance and Legal Group has added value to the work of the Bank, achieved numerous accomplishments, and developed procedures designed to govern business operations, and reduce errors and risks. For example, the Governance Department has developed a number of policies, practices, and procedures related to governance frameworks within the Bank in an effort to comply with various regulatory requirements. It also has monitored the performance of the Bank s Management Committees and ensured that each one has an approved charter. the group also has monitored Bankwide policies and procedures and ensured they are updated continuously and are in line with their preparation requirements. The Bank s Board of Directors Secretariat developed a professional work style and mechanisms for recording the minutes of Board meetings and Board and committee decisions. The Board also began using electronic archiving tools to save electronic copies of the minutes of meeting for the Board, its committees and General Assemblies. The legal department continued to provide legal and advisory services as an internal consultant within the Bank. It also continued to document the Bank s rights, in order to defend them and preserve Bank assets and earnings. The Share Register Secretariat continued to perform its services and to provide professional communication, while implementing formal regulations and abiding by applicable rules. In addition to complying with all mandatory requirements, the Secretariat also distributed all reports and declarations, enabling investors to review the Bank s performance on a regular basis. Human Resource Group: During 2016, the Human Resources Group implemented a series of Best-in-Class human resource initiatives in line with the group s strategic plan to Become the Employer of Choice. Key achievements in 2016 included using new and enhanced selection tools and methods to hire 1,180 male and female employees in a manner that continued to strengthen the Bank s Saudisation initiatives. With a Saudisation rate of 90.9%, the Bank maintained its Platinum status. Compared with 2015, the Bank achieved a significant reduction in both the overall employee attrition rate and the high performer resignation rate, while the Employee Engagement Score recorded a significant increase. These achievements reflected employee confidence in, and approval of, a range of Human Resource initiatives during the year. New programs included a Grading and Career Path model that provides structured long-term career opportunities within the Bank. As well, Human Resources made significant enhancements to its learning and development programs, with sessions covering topics such as Control & Governance, Retail Banking, Soft Skills and Leadership Development, and Technical Skills Development. Together, these programs added up to more than 80,000 training mandays during 2016, an 80% increase over the previous year. 38 Summary of Activity

40 Summary of Activity Human Resources participated in various Career Days at Saudi universities and institutes, and launched three Graduate Development Programs in order to attract young Saudi talent. As well, the Bank was awarded GCC Best Employer Brand for 2016, one of only two local banks to achieve that recognition. The overall Human Resources proposition and its People Agenda is designed, developed, and implemented with the key aim of achieving the critical goal of building an engaged and committed workforce for the Bank. This will drive inspired results that will position the Bank to Become the Employer of Choice. Shared Services Group: The Shared Services Group at Al Rajhi Bank consists of several key departments that work together in a professional, coordinated and flexible manner through employment placement and various operational mechanisms, in order to develop, maintain and operate the Bank assets and services provided to the customers and employees by the highest degree of efficiency and quality. Information Technology (IT) Department: This department is responsible for all of the Bank s technical assets, with its top priority being the establishment and implementation IT policies and practices, as well as to securely manage, support and oversee all the infrastructure components and data. Information Technology is also responsible for developing, testing, issuing, maintaining, and supporting more than 70 systems that serve customers and employees. During the year, Information Technology implemented more than 50 initiatives related to issuing and updating software. It contributed directly to increased profitability, improved customer expectations and Bank compliance with applicable local and international rules and regulations. The department also worked to implement best international practice relating to transactions and technical programs in order to improve the internal control environment. Product Operations Department: The Product Operations Department is responsible for several key functions, most important of which is the management and operation of all retail banking products, such as credit underwriting, funding requests, properties evaluation, transfer of loans, issuance of purchase orders, and warehouse management related to car rentals. One of the most important responsibilities of this department is to insure ongoing compliance with the rules and regulations of the Saudi Arabian Monetary Authority (SAMA) related to retail customer products and full compliance with credit risk policies regarding individuals, while ensuring no compromise to quality. In addition to the above, the department makes continuous improvements to transactions and technologies in order to improve the customer experience in terms of faster service and the elimination of obstacles. Contact Centre Department: The Contact Centre Department was created through the merger of the Call Center Department and the Customer Services Department. The first phase of this process, covering the Contact Center Department was successfully completed in Specific elements of this process included restructuring the IVR system to focus on product services, enabling a number of after-sales transactions and services through the Contact Center, and introducing a new Al Rajhi Bank - Annual Report

41 i-support application on the Al-Mubasher portal that allows customers to easily log complaints and requests online, in addition to and social media channels. The goal of the Contact Centre is to enhance after-sales services, respond to customers inquires and requests, and resolve complaints. During 2016, more than 70 million calls were received and over 1 million service requests were handled, of which 99 percent were completed within the SLA. Moreover over 170,000 complaints were resolved, of which 94 percent were resolved within the SLA. The Contact Center is equipped with the latest technology and is staffed by highly trained employees. Business Operations and Support Department: Business Operations and Support ensures the smooth delivery of banking services, not only to Bank customers but more broadly to society in general. The department is mainly responsible for undertaking the operational activities of all the Bank s business lines. The work undertaken by the department is quite diverse, with key activities including: Managing cash and operations for ATMs and POS devices Cash collection and dispatch to/from branches, Tahweel Centres and retailers Handling domestic and international payments Providing back office services for Treasury activities Processing trade transactions Executing lending deals for corporate, mid-corporate and SME customers Supporting all consumer products operations, such as credit cards, car leases and real estate Archiving documents and ensuring their authenticity, quality, and compliance with regulatory requirements The department focuses on improving process efficiency and improving the control environment. During the year, Business Operations and Support succeeded in optimising cash management across all channels, improving ATM availability to not only meet but exceed SAMA service level requirements, reducing turnaround time for POS support, centralising Trade Operations, screening and overseeing the payments system, and improving processes to reduce the number of customer ATM claims. As part of the department s strategic initiatives, steps were taken to automate various processes, including the ongoing implementation of robots to handle various repetitive processes. Work also continued on implementing a new payments system, following the migration to a new Direct Debit Management System (DDMS). Inward Foreign Payments and other processes will be migrated in Specialised vendors are being used to undertake non-core activities. These strategies not only improve efficiency but also support faster processes and lower operating costs. Properties Management and Support Services: The Properties Management and Support Services Department is responsible for managing and implementing all of the Bank s engineering projects, from planning, design, and construction to renovation and facilities management of all Bank properties across the Kingdom. The department currently is maintaining and supporting more than 700 branches and more than 4,000 ATMs. It anticipates further geographic expansion in the future. Properties Management also is responsible for managing all Bank suppliers and service providers in matters such as contracts, purchase orders, and invoices. 40 Summary of Activity

42 Summary of Activity As well, the department ensures the security and safety of all Bank assets in the Kingdom through the application of various policies, technologies, and security solutions that ensure a safe workflow. Compliance Group: The Compliance Group supports the Bank in achieving its objectives by complying with best practices and all rules and regulations applicable within Saudi Arabia. The group works to prevent any violations or penalties in order to support the Bank s mission to reflect World Class Compliance. During 2016, the Compliance Group accomplished a great deal regarding compliance with regulations issued by various regulators. This was done by updating the Bank s policies and procedures, and conducting monitoring visits. Moreover, Compliance worked intensively on enhancing the compliance control environment through a series of training programs and frequent awareness campaigns that use multiple channels to ensure that its messages are delivered properly. The Compliance Group also has introduced several new departments responsible for: quality, examination, and investigation; dealings with international banks; and a dedicated ladies compliance function that is ultimately responsible for all compliance and AML issues related to ladies branches, as well as related training. Through its 2017 Compliance Program, the Compliance Group is keen to continue the development and enhancement of the compliance culture, and to ensure the implementation of world-leading practices through close communication with all Saudi-based businesses and branches, and all international branches and subsidiaries. Financial Crimes and MLRO Department: The Financial Crimes and MLRO Department is responsible for combating money laundering and terrorism financing, and reporting all such suspicious transactions. The department monitors all customer transactions to ensure no dealings with illegal or suspicious transactions. This is achieved by adopting state-of-the-art monitoring and screening solutions that are updated frequently to reflect local and international money laundering and terrorism financing indicators, as well as the bank s products, services, and customers. The department continues to attract qualified professionals and provide its employees with advanced training and development programs. Internal Audit Group: The primary objective of the Internal Audit Group is to provide an independent and objective assurance to the Board of Directors and senior management regarding the effectiveness of internal control systems, risk management, procedural compliance, and governance frameworks. Internal Audit also provides reasonable assurance on reliability of information, compliance with policies and regulatory requirements, protects assets, ensures effective use of available resources, and achievement of operational objectives. To deliver effective performance, Internal Audit staff have adequate authorization to enable staff to review and access records, systems and Bank staff activities, as well as access to all Bank premises. Based on this, Internal Audit defines its scope and operates independently, as outlined within the group s approved charter. The Bank strengthens the group s independence through CIA operational reporting to the Board s Audit & Compliance Committee and administratively to the CEO. Internal Audit s scope of work includes all Bank products, business groups, support services and other control functions within Saudi Arabia, and across its overseas subsidiaries and branches. Al Rajhi Bank - Annual Report

43 Al Rajhi Bank s 2016 Social Responsibility Activities In 2016, Al Rajhi Bank initiated several social responsibility programs and launched a series of volunteer work in participation with Bank employees in an attempt to develop the Bank s social responsibility scheme. The Bank initiated 42 social responsibility programs in 2016 including 19 volunteer programs carried out by more than 600 employees of various grades who covered more than 1650 hours of work. The bank was keen to diversify those who benefited from these programs such as the disabled, the orphans, the unfortunate, the blind, and those with special needs. In addition to supporting educational and rehabilitative programs. The Bank was also keen to be present and participate at international health days to raise awareness and spread knowledge within the community. Social responsibility programs: Program Region Month 1 Open day in comprehensive rehabilitation center Riyadh January 2 Open day for the blind at the special needs center Riyadh January 3 Open day for the orphans Riyadh January 4 )Open day for the elderly center (Males Riyadh January 5 )Open day for the elderly center (Females Riyadh January 6 Blood Donation Riyadh March 7 Braille Printings for the blind Riyadh March 8 Autism Campaign Riyadh April 9 Cleaning parks campaign Riyadh April 10 Disabled children s drawing competition All regions April 11 Repainting of Homes Riyadh May 12 Blood pressure Awareness campaign Riyadh May 13 Smoking awareness campaign Riyadh May 14 Sponsoring of disabled children s Salman in their Eyes exhibition Riyadh May 15 Sponsoring the closing ceremony for the disabled Albaha May 16 Sponsoring the closing ceremony for the rehabilitation center AlQasim May 17 Sponsoring the disabled annual drawing book All regions May 18 Open day for female orphans Riyadh June 19 Umrah for 15 orphans in Ramadan Makkah June 42 Summary of Activity

44 Summary of Activity 20 Umrah for 15 blind people in Ramadan Makkah June 21 Open day for orphans Riyadh July 22 Cleaning beaches AlKhobar July 23 Refurnishing patient s rooms in KFSH Riyadh August 24 Rebuilding kitchens and dining rooms in the rehabilitation center Riyadh August 25 Sponsoring 150 orphans with RUFAQA Najran August 26 Haj for 15 blind people Makkah September 27 Haj for 15 orphans Makkah September 28 Back to school campaign for orphans Riyadh September 29 Breast cancer awareness campaign All regions October 30 Winter program campaign Arar October 31 Donation of 63 computers and 21 printers to ERTIKA Alkhobar October 32 Diabetes Awareness Campaign Riyadh November 33 )Open day for the blind (Male Jeddah November 34 )Open day for the blind (Female Jeddah November 35 Sponsoring research and social work at AlQasim University AlQasim November 36 Ahsa family development center - Diploma of social work leadership AlAhsa December 37 Ahsa family development center Nemawoona Program for 50 orphans AlAhsa December 38 Patient Friends Committee support of medical equipment purchase Riyadh December 39 Patient Friends Committee support patient transportation Riyadh December 40 Wa ay Program Pact of technology use ethics Riyadh December 41 Jaww Philanthropic Association office and technical set up of main hall Jaww December 42 Jaww Holy Quran School equipment for house of Khadija bint Khuwaylid Jaww December Al Rajhi Bank - Annual Report

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46 Consolidated Financial Statements With Independent Auditors Report

47 Independent Auditors Report 46 Independent Auditors Report

48 Independent Auditors Report Independent Auditors Report Al Rajhi Bank - Annual Report

49 48 Independent Auditors Report

50 Independent Auditors Report Al Rajhi Bank - Annual Report

51 50 Independent Auditors Report

52 Independent Auditors Report Al Rajhi Bank - Annual Report

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54 Independent Auditors Report Al Rajhi Bank - Annual Report

55 Consolidated Statement Of Financial Position As at 31 December 2016 and 2015 ASSETS Cash and balances with Saudi Arabian Monetary Authority ( SAMA ) and other central banks (SR 000) Notes 201٦ 201٥ 4 42,149,905 27,053,716 Due from banks and other financial institutions 5 26,578,525 26,911,056 Investments, net 6 34,032,879 39,876,864 Financing, net 7 224,994, ,217,868 Property and equipment, net 8 6,485,162 5,578,931 Investment properties, net 9 1,330,868 1,350,000 Other assets, net 10 4,140,354 4,631,213 TOTAL ASSETS 339,711, ,619,648 LIABILITIES AND SHAREHOLDERS EQUITY Liabilities Due to banks and other financial institutions 11 8,916,970 4,558,224 Customers deposits ,593, ,821,641 Other liabilities 13 6,254,839 6,600,729 Total liabilities 287,764, ,980,594 Shareholders equity Share capital 14 16,250,000 16,250,000 Statutory reserve 15 16,250,000 16,250,000 Other reserves 15 3,873,362 2,997,754 Retained earnings 12,236,010 8,666,300 Proposed gross dividends and Zakat 23 3,337,500 2,475,000 Total shareholders equity 51,946,872 46,639,054 8TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 339,711, ,619,648 The accompanying notes from 1 to 37 form an integral part of these consolidated financial statements. 54 Consolidated Financial Statements

56 Consolidated Financial Statements Consolidated Statement Of Income (SR 000) Notes 201٦ 201٥ INCOME Gross financing and investment income 17 11,751,445 10,258,380 Return on customers, banks and financial institutions time investments 17 )586,127( (299,438) Net financing and investment income 17 11,165,318 9,958,942 Fee from banking services, net 18 2,949,963 2,704,091 Exchange income, net 925, ,566 Other operating income, net , ,176 Total operating income 15,283,611 13,745,775 EXPENSES Salaries and employees related benefits 20 2,949,886 2,661,043 Rent and premises related expenses 277, ,718 Depreciation 8 415, ,099 Other general and administrative expenses 21 1,306,826 1,378,815 Impairment charge for financing, net 7-3 2,142,242 1,958,025 Impairment charge for available-for-sale investments 65,923 - Total operating expenses 7,157,651 6,615,700 NET INCOME FOR THE YEAR 8,125,960 7,130,075 Weighted average number of shares outstanding 14 & 22 1,625 million 1,625 million Basic and diluted earnings per share (in SAR) The accompanying notes from 1 to 37 form an integral part of these consolidated financial statements. Al Rajhi Bank - Annual Report

57 Consolidated Statement Of Comprehensive Income Notes 2015 SR SR 000 Net income for the year 8,125,960 7,130,075 Other comprehensive income Items that are or may be reclassified to consolidated statement of income in subsequent periods Available-for-sale investments Net change in fair value 15 33,327 )206,914( Net amounts transferred to consolidated statement of income 15 71, ,010 Exchange difference on translation of foreign operations 15 )10,784( )159,878( Total comprehensive income for the year 8,219,879 6,918,293 The accompanying notes from 1 to 37 form an integral part of these consolidated financial statements. 56 Consolidated Financial Statements

58 Consolidated Financial Statements Consolidated Statement Of Changes In Shareholders Equity for the years ended 31 December 2016 and 2015 (SR 000) Notes Share capital Statutory Reserve Other reserves Retained earnings Proposed gross dividends and Zakat Total 2016 Balance at 1 January ,250,000 16,250,000 2,997,754 8,666,300 2,475,000 46,639,054 Transfer to other reserves for zakat ,000 - )850,000( - Dividends for the second half of )1,625,000( (1,625,000) Interim dividends for the first half of (1,218,750) - (1,218,750) Net change in fair value of available-forsale investments , ,327 Net amounts transferred to consolidated statement of income , ,376 Net movement in foreign currency translation reserve )10,784( - - (10,784) Net income recognized directly in equity ,919-93,919 Net income for the year ,125,960-8,125,960 Total comprehensive income for the year ,919 8,125,960-8,219,879 Employees shares plan , ,274 Zakat paid (77,585) - - (77,585) Proposed gross dividends and Zakat for (3,337,500) 3,337,500 - Balance at 31 December ,250,000 16,250,000 3,873,362 12,236,010 3,337,500 51,946,872 The accompanying notes from 1 to 37 form an integral part of these consolidated financial statements. Al Rajhi Bank - Annual Report

59 consolidated statement of changes in shareholders equite (SR 000) Notes Share capital Statutory Reserve Other reserves Retained earnings Proposed gross dividends and Zakat Total Balance at 1 January ,250,000 16,250,000 2,598,599 4,828,845 1,968,750 41,896,194 Transfer to other reserves for zakat ,000 - (750,000) - Dividends for the second half of (1,218,750) (1,218,750) Interim dividends for the first half of (812,500) - (812,500) Prior period adjustment (5,120) - (5,120) Net change in fair value of available-for-sale investments (206,914) - - (206,914) Net amounts transferred to consolidated statement of income , ,010 Net movement in foreign currency translation reserve (159,878) - - (159,878) Net income recognized directly in equity - - (211,782) - - (211,782) Net income for the year ,130,075-7,130,075 Total comprehensive income for the year - - (211,782) 7,130,075-6,918,293 Employees shares plan , ,313 Zakat paid (143,376) - - (143,376) Proposed gross dividends and Zakat for (2,475,000) 2,475,000 - Balance at 31 December ,250,000 16,250,000 2,997,754 8,666,300 2,475,000 46,639,054 The accompanying notes from 1 to 37 form an integral part of these consolidated financial statements. 58 Consolidated Financial Statements

60 Consolidated Financial Statements Consolidated Statement Of Cash Flows (SR 000) Notes CASH FLOWS FROM OPERATING ACTIVITIES Net income for the year 8,125,960 7,130,075 Adjustments to reconcile net income to net cash from / (used in) operating activities: (Gain) / loss on investments held at fair value through statement of income (FVSI) 19 (9,382) 100,939 Depreciation on property and equipment 8 415, ,099 Depreciation on investment properties 19,132 - Gain on sale of property and equipment, net 19 - (5,861) Foreign currency translation reserve 15 )10,784( (159,878) Impairment charge for financing, net 7-3 2,142,242 1,958,025 Impairment charge for available-for-sale investments 65,923 - Share in earnings of associate 19 )13,762( (6,858) Expenses of employees share plan 15 9,274 4,313 (Increase) / decrease in operating assets Statutory deposit with SAMA and central banks )711,153( (1,950,858) Due from banks and other financial institutions 6,249,000 (11,761,834) Financing (17,065,604) (6,235,933) Investments held as FVSI 1,015,228 (334,906) Other assets, net 637,965 (329,887) Increase / (decrease) in operating liabilities Due to banks and other financial institutions 4,358,746 2,422,987 Customers deposits 14,771,495 (1,152,548) Other liabilities )362,960( 1,894,794 Net cash from / (used in) operating activities 19,636,915 (8,053,331) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property and equipment 8 )1,321,826( (1,141,995) Investment in an associate - (45,000) Available-for-sale investments )509,772( (514,990) Proceeds from maturities of investments recorded at amortized cost 121,001, ,773,784 Purchase of investments recorded at amortized cost (115,601,218) (261,352,114) Purchase of investment property - (1,350,000) Proceeds from sale of property and equipment - 8,767 Net cash from investing activities 3,568, ,452 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid )2,826,680( (2,031,250) Zakat paid )77,585( (143,376) Net cash used in financing activities (2,904,265) (2,174,626) NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 20,301,505 )9,849,505( Cash and cash equivalents at the beginning of the year 12,382,480 22,231,985 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 24 32,683,985 12,382,480 Gross financing and investment income received during the year 11,369,076 10,175,450 Return on customers, banks and financial institutions time investments paid during the year (495,713) (322,063) 10,873,363 9,853,387 Non-cash transactions: Other real estate 147,106 - Net change in fair value and gain/(loss) transferred to consolidated statement of income on available-for-sale investments 104,703 )51,904( The accompanying notes from 1 to 37 form an integral part of these consolidated financial statements. Al Rajhi Bank - Annual Report

61 1. GENERAL a) Incorporation and operation Al Rajhi Banking and Investment Corporation, a Saudi Joint Stock Company, (the Bank ), was formed and licensed pursuant to Royal Decree No. M/59 dated 3 Dhul Qadah 1407H (corresponding to June 29, 1987) and in accordance with Article 6 of the Council of Ministers Resolution No. 245, dated 26 Shawal 1407H (corresponding to June 23, 1987). The Bank operates under Commercial Registration No and its Head Office is located at the following address: Al Rajhi Bank Olaya Street P.O. Box 28 Riyadh Kingdom of Saudi Arabia The objectives of the Bank are to carry out banking and investment activities in accordance with its Articles of Association and By-Laws, the Banking Control Law and the Council of Ministers Resolution referred to above. The Bank is engaged in banking and investment activities for its own account and on behalf of others inside and outside the Kingdom of Saudi Arabia through 584 branches (2015: 569) including the branches outside the Kingdom and 13,684 employees (2015: 12,374 employees). The Bank has established certain subsidiary companies (together with the Bank hereinafter referred to as the Group ) in which it owns all or majority of their shares as set out below: 60

62 Name of subsidiaries Shareholding % Al Rajhi Development Company - KSA Al Rajhi Corporation Limited Malaysia % 100% A limited liability company registered in the Kingdom of Saudi Arabia to support the mortgage programs of the Bank through transferring and holding the title deeds of real estate properties under its name on behalf of the Bank, collection of revenue of certain properties sold by the Bank, provide real estate and engineering consulting services, provide documentation service to register the real estate properties and overseeing the evaluation of real estate properties. 100% 100% A licensed Islamic Bank under the Islamic Financial Services Act 2013, incorporated and domiciled in Malaysia. Al Rajhi Capital Company KSA 100% 100% A limited liability company registered in the Kingdom of Saudi Arabia to act as principal agent and/or to provide brokerage, underwriting, managing, advisory, arranging and custodial services. Al Rajhi Bank Kuwait 100% 100% A foreign branch registered with the Central Bank of Kuwait. Al Rajhi Bank Jordan 100% 100% A foreign Branch operating in Hashimi Kingdom of Jordan. providing all financial. banking. and investments services and importing and trading in precious metals and stones in accordance with Islamic Sharia a rules and under the applicable banking law. Al Rajhi Takaful Agency Company KSA Al Rajhi Company for management services KSA 99% 99% A limited liability company registered in Kingdom of Saudi Arabia to act as an agent for insurance brokerage activities per the agency agreement with Al Rajhi Cooperative insurance company. 100% 100% A limited liability company registered in Kingdom of Saudi Arabia to provide recruitment services. The subsidiaries are wholly or substantially owned by the Bank and therefore, the noncontrolling interest which is insignificant is not disclosed. All the above-mentioned subsidiaries have been consolidated. Al Rajhi Bank - Annual Report

63 b) Shari a Authority As a commitment from the Bank for its activities to be in compliance with Islamic Shari a legislations, since its inception, the Bank has established a Shari a Authority to ascertain that the Bank s activities are subject to its approval and control. The Shari a Authority had reviewed several of the Bank s activities and issued the required decisions thereon. 2. BASIS OF PREPARATION a) Statement of compliance The consolidated financial statements are prepared in accordance with the Accounting Standards for Banks promulgated by the Saudi Arabian Monetary Authority ( SAMA ) and International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). The Bank also prepares its consolidated financial statements to comply with the requirements of the Banking Control Law, the provision of Regulations for Companies in the Kingdom of Saudi Arabia and the Bank s Articles of Association. b) Basis of measurement and preparation The consolidated financial statements are prepared under the historical cost convention except for the measurement at fair value of investments held as fair value through income statement ( FVSI ) and available-for-sale investments. The Bank presents its statement of financial position in order of liquidity. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non current) is presented in note c) Functional and presentation currency The consolidated financial statements are presented in Saudi Arabian Riyals ( SAR ), which is the Bank s functional currency and are rounded off to the nearest thousand except otherwise indicated. e) Critical accounting judgments, estimates and assumptions The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgments in the process of applying the Bank s accounting policies. Such estimates, assumptions and judgments are continually evaluated and are based on historical experience and other factors, including obtaining professional advice and expectations of future events that are believed to be reasonable under the circumstances. The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Bank based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and 62

64 assumptions about future developments, however, may change due to market changes or circumstances beyond the control of the Bank. Such changes are reflected in the assumptions when they occur. Significant areas where management has used estimates, assumptions or exercised judgments is as follows: i) Impairment on financing The Bank regularly reviews its financing portfolios to assess specific and collective impairment. The specific impairment applies to financing evaluated individually for impairment and is based on management s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgments about a customer s financial situation and the net realisable value of any underlying collateral. This evidence may include observable data indicating that there has been an adverse change in the payment status of clients in a group. 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. Each impaired asset is assessed on its merits and the workout strategy and estimate of cash flows considered recoverable are independently approved by the Credit Risk function. A collective component of the total allowance is established for groups of homogeneous financing that are not considered individually significant and is established using statistical methods such as roll rate methodology and internal loss estimates. The methodology uses statistical analysis of historical data on delinquency to estimate the amount of loss. Management applies judgement to ensure that the estimate of loss arrived at on the basis of historical information is appropriately adjusted to reflect the economic conditions and product mix at the reporting date. Roll rates and loss rates are regularly benchmarked against actual loss experience. In assessing the need for collective loss allowance, management considers factors such as credit quality, portfolio size, concentrations and economic factors. To estimate the required allowance, assumptions are made to define how inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowance depends on the model assumptions and parameters used in determining the collective allowance. ii) Impairment of available for-sale and sukuk investments The Bank exercises judgement to consider impairment on the available-for-sale equity investments at each reporting date. This includes determination of a significant or prolonged decline in the fair value below its cost. In assessing whether it is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. The determination of what is significant or prolonged requires judgement. In making this judgement, the Bank evaluates among other factors, the normal volatility in share price, deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. The Al Rajhi Bank - Annual Report

65 Bank reviews its investments in sukuks at each reporting date to assess whether they are impaired. This requires similar judgement as applied to individual assessment of financing. In addition, the Bank considers impairment to be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. iii) Fair value of financial instruments The Group measures certain financial instruments at fair value at each balance sheet date. 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 by the Group. 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 categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: - Level 1 Quoted (unadjusted) market prices in active markets for identical assets or liabilities - Level 2 Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. - Level 3 Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable 64

66 iv) Classification of investments held at amortised cost The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as Investments held at amortised cost. v) Determination of control over investees The control indicators set out in note 3 (b) are subject to management s judgements that can have a significant effect in the case of the Bank s interests in investments funds. Investment funds The Group acts as Fund Manager to a number of investment funds. Determining whether the Group controls such an investment fund usually focuses on the assessment of its aggregate economic interests of the Group in the Fund (comprising any carried profits and expected management fees) and the investor s rights to remove the Fund Manager. As a result the Group has concluded that it acts as an agent for the investors in all cases, and therefore has not consolidated these funds. vi) Provisions for liabilities and charges The Bank receives legal claims against it in the normal course of business. Management has made judgments as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amount of possible outflow of economic benefits. Timing and cost ultimately depends on the due process being followed as per the Law. vii) Fees from Banking Services The management has established a threshold for the purpose of recording documentation / loan processing charges as an adjustment to effective yield. The amount below this threshold are not capitalise and the impact is considered as immaterial. viii) Going concern The consolidated financial statements have been prepared on a going concern basis. The Bank s management has made an assessment of the Bank s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Bank s ability to continue as a going concern. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the preparation of the annual consolidated financial statements for the year ended 31 December 2015 except for the change in accounting policies resulting from new and amended IFRS. The following changes have no material impact on the consolidated financial statements of the Bank: Al Rajhi Bank - Annual Report

67 a) Amendments to existing standards - Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates, applicable for the annual periods beginning on or after 1 January 2016, addresses three issues that have arisen in applying the investment entities exception under IFRS 10. The amendments to IFRS 10 clarify that the exemption from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity, when the investment entity measures its subsidiaries at fair value. Furthermore, only a subsidiary of an investment entity that is not an investment entity itself and that provides support services to the investment entity is consolidated. All other subsidiaries of an investment entity are measured at fair value. The amendments to IAS 28 allow the investor, when applying the equity method, to retain the fair value measurement applied by the investment entity associate or joint venture to its interests in subsidiaries. - Amendments to IFRS 11 Joint Arrangements, applicable for the annual periods beginning on or after 1 January 2016, require an entity acquiring an interest in a joint operation, in which the activity of the joint operation constitutes a business, to apply, to the extent of its share, all of the principles in IFRS 3 Business Combinations and other IFRSs that do not conflict with the requirements of IFRS 11 Joint Arrangements. Furthermore, entities are required to disclose the information required by IFRS 3 and other IFRSs for business combinations. The amendments also apply to an entity on the formation of a joint operation if, and only if, an existing business is contributed by one of the parties to the joint operation on its formation. Furthermore, the amendments clarify that, for the acquisition of an additional interest in a joint operation in which the activity of the joint operation constitutes a business, previously held interests in the joint operation must not be remeasured if the joint operator retains joint control. - Amendments to IAS 1 Presentation of Financial Statements, applicable for the annual periods beginning on or after 1 January 2016, clarify, existing IAS 1 requirements in relation to; The materiality requirements in IAS 1 That specific line items in the statement(s) of profit or loss and other comprehensive income ( OCI ) and the statement of financial position may be disaggregated That entities have flexibility as to the order in which they present the notes to financial statements That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss. 66

68 - The amendments further clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement(s) of profit or loss and OCI. - Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets, applicable for the annual periods beginning on or after 1 January 2016, restricts the use of ratio of revenue generated to total revenue expected to be generated to depreciate property, plant and equipment and may only be used in very limited circumstances to amortize intangible assets. - Amendments to IAS 27 Separate Financial Statements, applicable for the annual periods beginning on or after 1 January 2016, allows an entity to use the equity method as described in IAS 28 to account for its investments in subsidiaries, joint ventures and associates in its separate financial statements. - Annual improvements to IFRS cycle applicable for annual periods beginning on or after 1 January A summary of the amendments is contained as under: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, amended to clarify that changing from one disposal method to the other would not be considered a new plan of disposal, rather it is a continuation of the original plan. There is, therefore, no interruption of the application of the requirements in IFRS 5. IFRS 7 Financial Instruments: Disclosures has been amended to clarify that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. The nature of the fee and the arrangement should be assessed in order to consider whether the disclosures are required under IFRS 7 and the assessment must be done retrospectively. IFRS 7 has been further amended to clarify that the offsetting disclosure requirements do not apply to condensed interim financial statements, unless such disclosures provide a significant update to the information reported in the most recent annual report. IAS 19 Employee Benefits amendment clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used. b) Basis of consolidation These consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as set out in note 1 to these financial statements (collectively referred to as the Group ). The financial statements of subsidiaries are prepared for the same reporting year as that of the Bank, using consistent accounting policies. Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and Al Rajhi Bank - Annual Report

69 has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. The consolidated financial statements have been prepared using uniform accounting policies and valuation methods for like transactions and other events in similar circumstances. Specifically, the Group controls an investee if and only if the Group has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) ; Exposure, or rights, to variable returns from its involvement with the investee; and The ability to use its power over the investee to affect amount of its returns. When the Group has less than majority of the voting or similar rights of an investee entity, the Bank considers all relevant facts and circumstances in assessing whether it has power over the entity, including: The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Bank s voting rights and potential voting rights granted by equity instruments such as shares The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Bank loses control over a subsidiary, it: derecognises the assets and liabilities of the subsidiary derecognises the cumulative translation differences recorded in equity recognises the fair value of the consideration received recognises the fair value of any investment retained recognises any surplus or deficit in profit or loss reclassifies the parent s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate would be required if the Bank had directly disposed of the related assets or liabilities. 68

70 The subsidiaries are wholly or substantially owned by the Bank and therefore the the non-controlling interest which is insignificant is not disclosed. Intra group balances and any income and expenses arising from intra-group transactions, are eliminated in preparing these consolidated financial statements. As of 31 December 2016 and 2015, interests in subsidiaries not directly owned by the Bank are owned by representative shareholders for the beneficial interest of the Bank and hence are not separately disclosed on the consolidated statement of financial position or consolidated statement of income. Investment in associate Associates are enterprises over which the Bank exercises significant influence (but not control), over financial and operating policies and which is neither a subsidiary nor a joint arrangement. Investments in associates are initially recognized at cost and subsequently accounted for under the equity method of accounting and are carried in the consolidated statement of financial position at the lower of the equity-accounted or the recoverable amount. Equity-accounted value represents the cost plus post-acquisition changes in the Bank s share of net assets of the associate (share of the results, reserves and accumulated gains/ losses based on latest available financial statements) less impairment, if any. The previously recognized impairment loss in respect of investment in associate can be reversed through the consolidated statement of income, such that the carrying amount of the investment in the statement of financial position remains at the lower of the equityaccounted (before provision for impairment) or the recoverable amount. On derecognition the difference between the carrying amount of investment in the associate and the fair value of the consideration received is recognized in the consolidated statement of income. c) Zakat Zakat is calculated based on the Zakat rules and regulations in the Kingdom of Saudi Arabia and is considered as a liability on the shareholders to be deducted from dividends. Zakat is computed based on equity or net income using the basis defined under the Zakat regulations. In case of any differences between the Bank s calculation and the General Authority for Zakat and Tax (GAZT) assessment, a reserve is created in other reserves (Note 15) for the potential additional zakat. Also see note 23. d) Trade date All regular way purchases and sales of financial assets are recognized and derecognized on the trade date (i.e. the date on which the Bank commits to purchase or sell the assets). Regular way purchases or sales of financial assets require delivery of those assets within the time frame generally established by regulation or convention in the market place. All other financial assets and financial liabilities (including assets and liabilities designated at fair value through statement of income) are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Al Rajhi Bank - Annual Report

71 e) Foreign currencies The consolidated financial statements are presented in Saudi Arabian Riyals ( SAR ), which is also the Bank s functional currency. Each entity determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are translated into SAR at exchange rates prevailing on the dates of the transactions. Monetary assets and liabilities at the year-end (other than monetary items that form part of the net investment in a foreign operation), denominated in foreign currencies, are translated into SAR at exchange rates prevailing at the date of the consolidated statement of financial position. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year adjusted for the effective profits rate and payments during the year and the amortised cost in foreign currency translated at exchange rate at the end of the year. Realized and unrealized gains or losses on exchange are credited or charged to the consolidated statement of comprehensive income. The monetary assets and liabilities of foreign subsidiaries are translated into SAR at rates of exchange prevailing at the date of the consolidated statement of financial position. The statements of income of foreign subsidiaries are translated at the weighted average exchange rates for the year. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. As at the reporting date, the assets and liabilities of foreign operations are translated into SAR at the rate of exchange as at the statement of financial position date, and their statement of incomes are translated at the weighted average exchange rates for the year. Exchange differences arising on translation are recognized in the statements of other comprehensive income. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to the statement of income as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. f) Offsetting financial instruments Financial assets and financial liabilities are offset and are reported net in the consolidated statement of financial position when there is a legally enforceable right to set off the recognized amounts, and when the Group intends to settle on a net basis, or to realize 70

72 the asset and settle the liability simultaneously. Income and expenses are not offset in the consolidated statement of income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank. g) Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group, and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized. Income from Mutajara, Murabaha, investments held at amortized cost, installment sale, Istisna a financing and credit cards services is recognized based on effective yield basis on the outstanding balances. The effective yield is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective yield, the Group estimates future cash flows considering all contractual terms of the financial instrument but excluding future credit losses. Fees and commissions are recognized when the service has been provided. Financing commitment fees that are likely to be drawn down and other credit related fees are deferred (above certain threshold) and, together with the related direct cost, are recognized as an adjustment to the effective yield on the financing. When a financing commitment is not expected to result in the draw-down of a financing, financing commitment fees are recognised on a straight-line basis over the commitment period. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, on a time-proportionate basis. Fees received for asset management, wealth management, financial planning, custody services and other similar services that are provided over an extended period of time, are recognized over the period when the service is being provided. Asset management fees related to investment funds are recognized over the period the service is being provided. The same principle applies to Wealth management and Custody Services that are continuously recognized over a period of time. Dividend income is recognised when the right to receive income is established which is generally when the shareholders approve the dividend. Dividends are reflected as a component of net trading income, net income from FVSI financial instruments or other operating income based on the underlying classification of the equity instrument. Foreign currency exchange income / loss is recognized when earned / incurred. Net trading income results from trading activities and include all realised and unrealised gains and losses from changes in fair value and related gross investment income or expense, dividends for financial assets and financial liabilities held for trading and foreign exchange differences. Al Rajhi Bank - Annual Report

73 Net income from FVSI financial instruments relates to financial assets and liabilities designated as FVSI and include all realised and unrealised fair value changes, investment income, dividends and foreign exchange differences. h) Financing and investment The Bank offers non-profit based products including Mutajara, installment sales, Murabaha and Istisnaa to its customers in compliance with Shari a rules. The Bank classifies its principal financing and investment as follows: i. Held at amortized cost - such financing and certain investments which meets the definition of loans and receivables under IAS 39, are classified as held at amortized cost, and comprise Mutajara, installment sale, Istisnaa, Murabaha and credit cards operations accounts balances. Investments held at amortized cost are initially recognized at fair value and subsequently measured at amortized cost (using effective yield basis) less any amounts written off, and allowance for impairment. Financing are non-derivative financial assets originated or acquired by the Bank with fixed or determinable payments. Financing are recognised when cash is advanced to borrowers. They are derecognized when either borrower repays their obligations, or the financings are sold or written off, or substantially all the risks and rewards of ownership are transferred. All financings are initially measured at fair value, plus incremental direct transaction costs (above certain threshold) and are subsequently measured at amortised cost using effective yield basis. Following the initial recognition, subsequent transfers between the various classes of financings is not ordinarily permissible. The subsequent periodend reporting values for various classes of financings are determined on the basis as set out in the following paragraphs. ii. Held as FVSI - Investments in this category are classified as either investment held for trading or those designated as FVSI on initial recognition. Investments classified as trading are acquired principally for the purpose of selling or repurchasing in the short term. These investments comprise mutual funds and equity investments. Such investments are measured at fair value and any changes in the fair values are charged to the consolidated statement of income. Transaction costs, if any, are not added to the fair value measurement at initial recognition of FVSI investments and are expensed in the consolidated financial statements. Investment income and dividend income on financial assets held as FVSI are reflected under other operating income in the consolidated statement of income. Investments at FVSI are not reclassified subsequent to their initial recognition, except that non-derivative FVSI instruments, other than those designated as FVSI upon initial recognition, may be reclassified out of the FVSI (i.e. trading) category if they are no longer held for the purpose of being sold or repurchased in the near term, and the following conditions are met: If the financial asset would have met the definition of financing and receivables, if 72

74 the financial asset had not been required to be classified as held for trading at initial recognition, then it may be reclassified if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If the financial asset would not have met the definition of financing and receivables, and then it may be reclassified out of the trading category only in rare circumstances. iii. Available-for-sale - Available-for-sale investments are those non-derivative equity securities which are neither classified as Held to maturity investments, financing nor designated as FVSI, that are intended to be held for an unspecified period of time, which may be sold in response to needs for liquidity or changes in special commission rates, exchange rates or equity prices. Investments which are classified as available-for-sale are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at fair value except for unquoted equity securities whose fair value cannot be reliably measured are carried at cost. Unrealized gains or losses arising from changes in fair value are recognised in other comprehensive income until the investment is derecognised or impaired whereupon any cumulative gain or loss previously recognized in other comprehensive income are reclassified to consolidated statement of income. A security held as available-for-sale may be reclassified to Other investments held at amortized cost if it otherwise would have met the definition of Other investments held at amortized cost and if the Bank has the intention and ability to hold that financial asset for the foreseeable future or until maturity. i) Impairment of financial assets Held at amortised cost An assessment is made at the date of each consolidated statement of financial position to determine whether there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset or a group of financial assets and that a loss event(s) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If such evidence exists, the difference between the assets carrying amount and the present value of estimated future cash flows is calculated and any impairment loss, is recognized for changes in the asset s carrying amount. The carrying amount of the financial assets held at amortized cost, is adjusted either directly or through the use of an allowance for impairment account, and the amount of the adjustment is included in the consolidated statement of income. A specific provision for credit losses due to impairment of a financing or any other financial asset held at amortised cost is established if there is objective evidence that the Bank will not be able to collect all amounts due. The amount of the specific provision is the difference between the carrying amount and the estimated recoverable amount. The estimated recoverable amount is the present value of expected cash flows, including amounts estimated to be recoverable from guarantees and collateral, discounted based on the original effective yield rate. Al Rajhi Bank - Annual Report

75 Considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provision required. Such estimates are essentially based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such allowance for impairment. In addition to the specific allowance for impairment described above, the Bank also makes collective impairment allowance for impairment, which are evaluated on a group basis and are created for losses, where there is objective evidence that unidentified losses exist at the reporting date. The amount of the provision is estimated based on the historical default patterns of the investment and financing counterparties as well as their credit ratings, taking into account the current economic climate. In assessing collective impairment, the Bank also uses internal loss estimates and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than is suggested by historical trends. Loss rates are regularly benchmarked against actual outcomes to ensure that they remain appropriate. The criteria that the Bank uses to determine that there is an objective evidence of impairment loss include: Delinquency in contractual payments of principal or profit. Cash flow difficulties experienced by the customer. Breach of repayment covenants or conditions. Initiation of bankruptcy proceedings against the customer. Deterioration of the customer s competitive position. Deterioration in the value of collateral. When financing amount is uncollectible, it is written-off against the related allowance for impairment. Such financing is written-off after all necessary procedures have been completed and the amount of the loss has been determined. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the customer s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance for impairment account. The amount of the reversal is recognized in the statement of income as impairment charge. Financial assets are written-off only in circumstances where effectively all possible means of recovery have been exhausted. Available for-sale equity investments For equity investments held as available-for-sale, a significant or prolonged decline in fair value below its cost represents objective evidence of impairment. The impairment loss cannot be reversed through the statement of income as long as the asset continues to be recognized i.e. any increase in fair value after impairment has been recorded can only be recognized in equity. On derecognition, any cumulative gain or loss previously recognized in equity is included in the consolidated statement of income for the year. 74

76 j) Other real estate The Bank, in the ordinary course of business, acquires certain real estate against settlement of financing. Such real estate are considered as assets held for sale and are initially stated at the lower of net realisable value of due financing and the current fair value of the related properties, less any costs to sell (if material). No depreciation is charged on such real estate. Rental income from other real estate is recognised in the consolidated statement of income. Subsequent to initial recognition, any subsequent write down to fair value, less costs to sell, are charged to the consolidated statement of income. Any subsequent revaluation gain in the fair value less costs to sell of these assets to the extent this does not exceed the cumulative write down previously recognised, in the statement of income. Gains or losses on disposal are recognised in the statement of income. k) De-recognition of financial assets and financial liabilities A financial asset (or a part of a financial asset, or a part of a group of similar financial assets) is derecognized when the contractual rights to the cash flows from the financial asset expire or the asset is transferred and the transfer qualifies for de-recognition. A financial liability (or a part of a financial liability) can only be derecognized when it is extinguished, that is when the obligation specified in the contract is either discharged, cancelled or expired. l) Investment properties Investment properties are held for long-term rental yield and are not occupied by the Group. They are carried at cost and depreciation is charged to the consolidated statement of income. The cost of investment properties is depreciated using the straight-line method over the estimated useful life of the assets m) Property and equipment Property and equipment is stated at cost less accumulated depreciation and accumulated impairment loss. Land is not depreciated. The cost of other property and equipment is depreciated using the straight-line method over the estimated useful life of the assets, as follows: Leasehold land improvements Buildings Leasehold building improvements Equipment and furniture over the lesser of the period of the lease or the useful life 33 years over the lease period or 3 years, whichever is shorter 3 to 10 years Al Rajhi Bank - Annual Report

77 The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the date of each statement of financial position. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in consolidated statement of income. All assets are reviewed for impairment at each reporting date and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. n) Customers deposits Customer deposits are financial liabilities that are initially recognized at fair value less transaction cost, being the fair value of the consideration received, and are subsequently measured at amortized cost. o) Guarantees In the ordinary course of business the Bank gives guarantees which include letters of credit, letters of guarantee, acceptances and stand-by letters of credit. Initially, the received margins are recognized as liabilities at fair value, being the value of the premium received and included in customers deposits in the consolidated financial statements. Subsequent to the initial recognition, the Bank s liability under each guarantee is measured at the higher of the amortized premium and the best estimate of expenditure required to settle any financial obligations arising as a result of guarantees. Any increase in the liability relating to the financial guarantee is taken to the consolidated statement of income in impairment charge for credit losses, net. The premium received is recognised in the consolidated statement of income under Fees from banking services, net on a straight line basis over the life of the guarantee. p) Provisions Provisions are recognized when the Bank has present legal, or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. q) Accounting for leases 1. Where the Group is the lessee Leases that do not transfer to the Group substantially all of the risk and benefits of ownership of the asset are classified as operating leases. Consequently, all of the leases entered into by the Bank are all operating leases. Payments made under operating leases are charged to the consolidated statement of income on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty, net of anticipated rental income (if any), is recognised as an expense in the period in which termination takes place. 76

78 The Group evaluates non-lease arrangements such as outsourcing and similar contracts to determine if they contain a lease which is then accounted for separately. 2. Where the Group is the lessor When assets are transferred under a finance lease, including assets under Islamic lease arrangements (e.g. Ijara Muntahia Bittamleek or Ijara with ownership promise) (if applicable) the present value of the lease payments is recognised as a receivable and disclosed under Financing. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return. r) Cash and cash equivalents For the purposes of the consolidated statement of cash flows, cash and cash equivalents include notes and coins on hand, balances with SAMA (excluding statutory deposits) and due from banks and other financial institutions with original maturity of 90 days or less from the date of acquisition which are subject to insignificant risk of changes in their fair value. s) Short-term employee benefits Short-term employee benefits are measured on an undiscounted basis and are expensed as the related service is provided. t) Special commission excluded from the consolidated statement of income In accordance with the Shari a Authority s resolutions, special commission income received by the Bank is excluded from the determination of income, to and is recorded as other liabilities in the consolidated statement of financial position and is paid as charities. u) Provisions for employees end of service benefits The provision for employees end of service benefits is accrued using actuarial valuation according to the regulations of Saudi labor law and local regulatory requirements. v) Share-based payments The Bank operates an equity-settled, share-based compensation plan Employee share grant plan - ESGP as approved by SAMA, under which the entity receives services from the eligible employees as consideration for equity instruments (options) of the Bank. Under the terms of the ESGP, eligible employees of the Bank are offered stock options at a predetermined strike price for a fixed period of time. At maturity of the plans, the underlying allotted shares are delivered if the employees exercise the options as per the terms and conditions of the plan. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense in the consolidated statement of income over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Bank estimates the number of options that are Al Rajhi Bank - Annual Report

79 expected to vest based on the non-market vesting conditions. It recognizes the impact of the revision to original estimates, if any, in the consolidate statement of income, with a corresponding adjustment to equity. w) Mudaraba funds The Group carries out Mudaraba transactions on behalf of its customers, and are treated by the Group as being restricted investments. These are included as off balance sheet items. The Group s share of profits from managing such funds is included in the Group s consolidated statement of income. x) Investment management services The Bank provides investment management services to its customers, through its subsidiary which include management of certain mutual funds. Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in the Group s consolidated financial statements. The Group s share of these funds is included under FVSI investments. Fees earned are disclosed in the consolidated statement of income. y) Bank s products definition The Bank provides its customers with banking products based on interest avoidance concept and in accordance with Shari a regulations. The following is a description of some of the financing products: Mutajara financing: It is financing agreement whereby the Bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client with a deferred price higher than the cash price, accordingly the client becomes debtor to the Bank with the sale amount and for the period agreed in the contract. Installment sales financing: It is financing agreement whereby the Bank purchases a commodity or an asset and sells it to the client based on a purchase promise from the client with a deferred price higher than the cash price, accordingly the client becomes debtor to the Bank with the sale amount to be paid through installments as agreed in the contract. Istisnaa financing: It is a financing agreement whereby the Bank contracts to manufacture a commodity with certain known and accurate specifications according to the client s request. The client becomes a debtor to the Bank for the manufacturing price which includes cost plus profit. Murabaha financing: It is a financing agreement whereby the Bank purchases a commodity or asset and sells it to the client with a price representing the purchase price plus a profit known and agreed by the client which means that the client is aware of the cost and profit separately. 78

80 4. CASH AND BALANCES WITH SAMA AND OTHER CENTRAL BANKS Cash and balances with SAMA and central banks as of 31 December comprise of the following: )SR 000( Cash in hand 8,335,452 8,865,284 Statutory deposit 18,143,445 17,432,292 Current account with SAMA 489, ,140 Mutajara with SAMA 15,181,051 - Total 42,149,905 27,053,716 In accordance with the Banking Control Law and regulations issued by SAMA, the Bank is required to maintain a statutory deposit with SAMA and central banks at stipulated percentages of its customers demand deposits, customers time investment and other customers account calculated at the end of each Gregorian month. The above statutory deposits are not available to finance the Bank s day-to-day operations and therefore are not considered as part of cash and cash equivalents (note 24), when preparing consolidated statement of cash flows. Al Rajhi Bank - Annual Report

81 5. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS Due from banks and other financial institutions as of 31 December comprise the following: )SR 000( Current accounts 853,592 1,463,566 Mutajara 25,724,933 25,447,490 Total 26,578,525 26,911,056 The tables below depict the quality of due from banks and other financial institutions as at 31 December: )SR 000( Investment grade (credit rating (AAA to BBB-)) 26,059,374 24,624,791 Non-investment grade (credit rating (BB+ to B-)) 351, ,698 Unrated 167,948 2,063,567 Total 26,578,525 26,911,056 The credit quality of due from banks and other financial institutions is managed using external credit rating agencies. The above due from banks and other financial institutions balances are neither past due nor impaired. 80

82 6. INVESTMENTS, NET a) Investments comprise the following as of 31 December: )SR 000( Investment in an associate* 89,280 75,518 Investments held at amortized cost Murabaha with SAMA 30,451,217 36,727,031 Sukuk 2,100,895 1,225,534 Total investments held at amortized cost 32,552,112 37,952,565 Investments held as FVSI Equity investments 23,437 23,452 Mutual funds 115,272 1,121,103 Total investments held as FVSI 138,709 1,144,555 Available-for-sale investments Equity investments 827, ,405 Mutual funds 425,046 80,821 Total available-for-sale investments 1,252, ,226 Investments 34,032,879 39,876,864 The designated FVSI investments included above are designated when the financial instruments are being evaluated on a fair value basis and are in accordance with the documented risk management strategy of the Bank. All investments held at amortized costs are neither past due nor impaired as of 31 December *Investment in an associate The Bank owns 22.5% (31 December 2015: 22.5%) shares of Al Rajhi Company for Cooperative Insurance, a Saudi Joint Stock Company. Al Rajhi Bank - Annual Report

83 b) The analysis of the composition of investments is as follows: (SAR 000) 2016 Quoted Unquoted Total Murabaha with SAMA - 30,451,217 30,451,217 Sukuk 350,272 1,750,623 2,100,895 Equities 917,012 23, ,449 Mutual funds - 540, ,318 Total 1,267,284 32,765,595 34,032, Quoted Unquoted Total Murabaha with SAMA - 36,727,031 36,727,031 Sukuk 352, ,400 1,225,534 Equities 698,923 23, ,375 Mutual funds - 1,201,924 1,201,924 Total 1,051,057 38,825,807 39,876,864 c) The analysis of unrecognized gains and losses and fair values of investments are as follows: 2016 (SAR 000) Carrying value Gross unrecognized gains Gross unrecognized losses Fair value Murabaha with SAMA 30,451,217 41,880-30,493,097 Sukuk 2,100,895 14,162-2,115,057 Equities 940, ,449 Mutual funds 540, ,318 Total 34,032,879 56,042-34,088,921 82

84 2015 (SAR 000) Carrying value Gross unrecognized gains Gross unrecognized losses Fair value Murabaha with SAMA 36,727,031 - (127,317) 36,599,714 Sukuk 1,225,534 - (3,271) 1,222,263 Equities 722, ,375 Mutual funds 1,201, ,201,924 Total 39,876,864 - (130,588) 39,746,276 d) Credit quality of investments (SAR 000) Murabaha with SAMA 30,451,217 36,727,031 Investment grade 2,296,601 1,359,654 Unrated 1,285,061 1,790,179 Total 34,032,879 39,876,864 Investment Grade includes those investments having credit exposure equivalent to Standard and Poor s rating of AAA to BBB. The unrated category mainly comprises of private equities, quoted equities and mutual funds. e) The following is an analysis of foreign investments according to investment categories as at 31 December: (SAR 000) Investments held at amortized cost Sukuk 1,300,895 1,225,534 Investments held as FVSI Equity investments 21,249 21,264 Mutual funds 232, ,693 Total 1,554,748 1,355,491 Al Rajhi Bank - Annual Report

85 f) The following is an analysis of investments according to counterparties as at 31 December: (SAR 000) Government and quasi government 31,683,532 37,952,565 Companies 919, ,857 Banks and other financial institutions 889,280 75,518 Mutual funds 540,318 1,201,924 Net investments 34,032,879 39,876,864 84

86 7. FINANCING, NET 7-1 Financing a. Net financing as of 31 December comprises the following: Performing Nonperforming (SR 000) 2016 Allowance for impairment Net financing Mutajara 44,884,996 1,494,925 )3,511,098( 42,868,823 Installment sale 168,105,163 1,338,577 )3,044,834( 166,398,906 Murabaha 15,294,878 15,016 )32,912( 15,276,982 Credit cards 474,187 19,083 )43,857( 449,413 Total 228,759,224 2,867,601 (6,632,701) 224,994, (SR 000) Performing Nonperforming Allowance for impairment Net financing Mutajara 38,457,006 1,905,489 )3,517,892( 36,844,603 Installment sale 161,961,316 1,300,735 )2,214,256( 161,047,795 Murabaha 12,011,879 6,105 )39,467( 11,978,517 Credit cards 294,155 54,582 )1,784( 346,953 Total 212,724,356 3,266,911 (5,773,399) 210,217,868 Al Rajhi Bank - Annual Report

87 b. The net financing by location, inside and outside the Kingdom, as of 31 December is as follows: (SAR 000) 2016 Description Mutajara Installment sale Murabaha Credit cards Total Inside the Kingdom 46,379, ,490,407 10,775, , ,137,164 Outside the Kingdom - 3,953,333 4,534,846 1,482 8,489,661 Gross financing 46,379, ,443,740 15,309, , ,626,825 Allowance for impairment )3,511,098( )3,044,834( )32,912( )43,857( )6,632,701( Net financing 42,868, ,398,906 15,276, , ,994,124 (SAR 000) 2015 Description Mutajara Installment sale Murabaha Credit cards Total Inside the Kingdom 39,945, ,556,153 8,352, , ,200,885 Outside the Kingdom 417,172 3,705,898 3,665,651 1,661 7,790,382 Gross financing 40,362, ,262,051 12,017, , ,991,267 Allowance for impairment )3,517,892( )2,214,256( (39,467) )1,784( (5,773,399) Net financing 36,844, ,047,795 11,978, , ,217,868 86

88 c. The net financing concentration risks and the related provision, by major economic sectors at 31 December are as follows: 2016 (SAR 000) Description Performing Non- Performing Allowance for impairment Net financing Commercial 27,331, ,695 (558,190) 27,412,300 Industrial 11,852,377 34,653 (15,049) 11,871,981 Building and construction 9,229, ,399 (620,132) 9,269,387 Personal 161,111,331 1,357,660 (1,671,423) 160,797,568 Services 15,983, ,646 (69,346) 16,075,564 Agriculture and fishing 613, ,499 Others 2,637,838 14,548 (14,032) 2,638,354 Total 228,759,224 2,867,601 (2,948,172) 228,678,653 Collective allowance for impairment (3,684,529) (3,684,529) Balance (6,632,701) 224,994, (SAR 000) Description Performing Non- Performing Allowance for impairment Net financing Commercial 21,380, ,379 (492,658) 21,505,869 Industrial 10,564,357 58,151 (49,151) 10,573,357 Building and construction 9,131, ,256 (463,910) 9,517,329 Personal 153,961,181 1,355,317 (1,341,539) 153,974,959 Services 14,756, ,482 (274,953) 14,850,971 Agriculture and fishing 637, ,071 Others 2,293,174 16,326 (15,868) 2,293,632 Total 212,724,356 3,266,911 (2,638,079) 213,353,188 Collective allowance for impairment (3,135,320) (3,135,320) Balance (5,773,399) 210,217,868 Al Rajhi Bank - Annual Report

89 d. The table below depicts the categories of financing as per main business segments at 31 December: 2016 (SAR 000) Retail Corporate Total Mutajara 8,145 46,371,776 46,379,921 Installment sale 161,593,899 7,849, ,443,740 Murabaha 373,677 14,936,217 15,309,894 Credit cards 493, ,270 Financing, gross 162,468,991 69,157, ,626,825 Less: Allowance for impairment (3,088,691) (3,544,010) (6,632,701) Financing, net 159,380,300 65,613, ,994, (SAR 000) Retail Corporate Total Mutajara - 40,362,495 40,362,495 Installment sale 154,330,726 8,931, ,262,051 Murabaha 637,035 11,380,949 12,017,984 Credit cards 348, ,737 Financing, gross 155,316,498 60,674, ,991,267 Less: Allowance for impairment (2,194,641) (3,578,758) (5,773,399) Financing, net 153,121,857 57,096, ,217,868 88

90 e. The table below summarizes financing balances at 31 December that are neither past due nor impaired, past due but not impaired and impaired, as per the main business segments of the Group: 2016 (SAR 000) Neither past due nor impaired Past due but not impaired Impaired Total Allowance for impairment Net financing Retail 160,745, ,727 1,357, ,468,991 )3,088,691( 159,380,300 Corporate 64,263,237 3,384,656 1,509,941 69,157,834 )3,544,010( 65,613,824 Total 225,008,841 3,750,383 2,867, ,626,825 (6,632,701) 224,994, (SAR 000) Neither past due nor impaired Past due but not impaired Impaired Total Allowance for impairment Net financing Retail 153,669, ,829 1,355, ,316,498 (2,194,641) 153,121,857 Corporate 58,467, ,591 1,911,594 60,674,769 (3,578,758) 57,096,011 Total 212,136, ,420 3,266, ,991,267 (5,773,399) 210,217,868 Financing past due for less than 90 days is not treated as impaired, unless other available information proves otherwise. Neither past due nor impaired and past due but not impaired comprise the total performing financing. Al Rajhi Bank - Annual Report

91 f. The tables below depicts the quality of financing past due (up to 90 days) but not impaired at 31 December: 2016 (SAR 000) Retail Corporate Total Performing financing - Standard 318,551 3,012,218 3,330,769 Performing financing - Special mention 47, , ,614 Total 365,727 3,384,656 3,750, )SAR 000( Retail Corporate Total Performing financing - Standard 238, , ,504 Performing financing - Special mention 53, , ,916 Total 291, , ,420 Financing under the standard category are performing, have sound fundamental characteristics and include those that exhibit neither actual nor potential weaknesses. The special mention category includes financing that is also performing, current and up to date in terms of principal and profit payments. However, they require close management attention as they may have potential weaknesses both financial and non-financial that may, at some future date, result in the deterioration of the repayment prospects of either the principal or the profit payments. The special mention financing is not exposed the Group to sufficient risk to warrant a worse classification. g. The tables below set out the aging of financing past due but not impaired as of 31 December: 2016 (SAR 000) Age Mutajara Installment sale Credit cards Total up to 30 days 2,331, ,071 15,123 2,568, days 680,349 82, , days 372,438 47, ,614 Total 3,384, ,604 15,123 3,750,383 Fair value of collateral 8,771, ,771,194 90

92 2015 (SAR 000) Age Mutajara Installment sale Credit cards Total up to 30 days 139,079 98,873 60, , days 137,051 58,658 20, , days 19,461 31,636 21,981 73,078 Total 295, , , ,420 Fair value of collateral 4,031, ,031,637 The Bank in the ordinary course of financing activities holds collateral as security to mitigate credit risk in financing. These collaterals mostly include project receivables customer deposits and other cash deposits, financial guarantees, local and international equity securities, real estate and other property and equipment. The collateral is held mainly against commercial and consumer financing and managed against relevant exposures related to financing. The fair value of collateral is based on valuation performed by the independent experts, quoted prices (wherever available) and the valuation techniques. Experts have used various approaches in determining the fair value of real estate collateral including market comparable approach based on recent actual sales or discounted cash flow approach taking into account risk adjusted discount rates, rental yields and terminal values. h. The table below sets out gross balances of individually impaired financing, together with the fair value of related collateral held by the Group as at 31 December: 2016 (SAR 000) Retail Corporate Total Individually impaired financing - 1,509,941 1,509,941 Fair value of collateral - 1,446,712 1,446, (SAR 000) Retail Corporate Total Individually impaired financing - 1,911,594 1,911,594 Fair value of collateral - 1,891,561 1,891,561 Al Rajhi Bank - Annual Report

93 i. The tables below depict the quality of neither past due nor impaired financing as at 31 December: (SAR 000) 2016 Funded Exposure Non-funded Exposure Total Exposure Corporate Low risk(1-3) 6,910, ,690 7,172,370 Acceptable risk(4-6) 49,171,992 4,781,932 53,953,924 Watch list (7) 8,180,565 1,132,616 9,313,181 64,263,237 6,176,238 70,439,475 Retail (un-rated) 160,745, ,745,604 Total 225,008,841 6,176, ,185,079 (SAR 000) 2015 Funded Exposure Non-funded Exposure Total Exposure Corporate Low risk(1-3) 7,516, ,390 7,758,989 Acceptable risk(4-6) 44,491,252 6,230,217 50,721,469 Watch list (7) 6,459,733 1,240,907 7,700,640 58,467,584 7,713,514 66,181,098 Retail (un-rated) 153,669, ,669,352 Total 212,136,936 7,713, ,850,450 The retail financing balances that are neither past due nor impaired are classified as standard category. Those balances are performing and have strong fundamental characteristics of credit history, cash flows and timely repayment, and regular monitoring is being carried out. Those balances amounted to SAR million as at 31 December 2016 (31 December 2015: SAR million). 92

94 j. The tables below depict the quality of performing financing as at 31 December: (SAR 000) 2016 Funded Exposure Non-funded Exposure Total Low risk(1-3) 6,910, ,689 7,172,369 Acceptable risk(4-6) 50,978,127 5,621,932 56,600,059 Watch list (7) 9,759,086 1,132,616 10,891,702 67,647,893 7,016,237 74,664,130 Retail (un-rated) 161,111, ,111,331 Total 228,759,224 7,016, ,775,461 (SAR 000) 2015 Funded Exposure Non-funded Exposure Total Exposure )Low risk(1-3 5,625, ,928 5,775,028 )Acceptable risk(4-6 45,025,568 6,244,582 51,270,150 )Watch list (7 8,112,507 1,359,102 9,471,609 58,763,175 7,753,612 66,516,787 )Retail (un-rated 153,961, ,961,181 Total 212,724,356 7,753, ,477,968 Al Rajhi Bank - Annual Report

95 k. The tables below depict the quality of watch list & corporate non-performing financing and impaired retail financing as at 31 December: (SAR 000) Corporate Watch List 9,759,086 8,112,507 Non-performing: Risk Rating 8 527,111 1,212,823 Risk Rating 9 477, ,464 Risk Rating , ,307 11,269,027 10,024,101 Retail (un-rated) 1,357,660 1,355,317 Total 12,626,687 11,379,418 l. The table below stratify credit exposures from corporate financing by ranges of loanto-value (LTV) ratio. LTV is calculated as the ratio of the gross amount of the financing or the amount committed for loan commitments to the value of the collateral. The gross amounts exclude any impairment allowance. )SAR 000( Less than 50% 5,350,255 3,562, % 3,951,838 2,117, % 1,026, , % 234, ,702 More than 100% 3,021,091 6,370,276 Total exposure 13,584,171 12,784,128 94

96 m. The tables below depict the quality of neither past due nor impaired financing as at 31 December: 2016 )SAR 000( Low risk (1-3) Acceptable risk (4-6) Watch list (7) Total Retail except credit cards (un-rated) 160,278, ,278,998 Corporate 6,910,680 49,171,992 8,180,565 64,263,237 Credit cards 466, ,606 Total 167,656,284 49,171,992 8,180, ,008, )SAR 000( Low Risk(1-3) Acceptable Risk(4-6) Watch list (7) Total Retail except credit cards (un-rated) 153,477, ,477,859 Corporate 5,700,307 45,227,824 7,539,453 58,467,584 Credit cards 191, ,493 Total 159,369,659 45,227,824 7,539, ,136,936 Risk Rating 1 Exceptional - Obligors of unquestioned credit standing at the pinnacle of credit quality. Risk Rating 2 Excellent - Obligors of the highest quality, presently and prospectively. Virtually no risk in lending to this class, Cash flows reflect exceptionally large and stable margins of protection. Projected cash flows including anticipated credit extensions indicate strong liquidity levels and debt service coverage. Balance Sheet parameters are strong, with excellent asset quality in terms of value and liquidity. Risk Rating 3 Superior - Typically obligors at the lower end of the high quality range with excellent prospects. Very good asset quality and liquidity. Consistently strong debt capacity and coverage. There could however be some elements, which with a low likelihood might impair performance in the future. Al Rajhi Bank - Annual Report

97 Risk Rating 4 Good - Typically obligors in the high end of the medium range who are definitely sound with minor risk characteristics. Elements of strength are present in such areas as liquidity, stability of margins, cash flows, diversity of assets, and lack of dependence on one type of business. Risk Rating 5 Satisfactory - These are obligors with smaller margins of debt service coverage and with some elements of reduced strength. Satisfactory asset quality, liquidity, and good debt capacity and coverage. A loss year or declining earnings trend may occur, but the borrowers have sufficient strength and financial flexibility to offset these issues. Risk Rating 6 Adequate - Obligors with declining earnings, strained cash flow, increasing leverage and/ or weakening market fundamentals that indicate above average risk, such borrowers have limited additional debt capacity, modest coverage, average or below average asset quality and market share. Present borrower performance is satisfactory, but could be adversely affected by developing collateral quality/adequacy etc. Risk Rating 7 Very high risk - Generally undesirable business constituting an undue and unwarranted credit risk but not to the point of justifying a substandard classification. No loss of principal or profit has taken place. Potential weakness might include a weakening financial condition, an unrealistic repayment program, inadequate sources of funds, or a lack of adequate collateral, credit information or documentation. The entity is undistinguished and mediocre. No new or incremental credits will generally be considered for this category. Risk Rating 8 Substandard Obligors in default and 90 Days Past Due on repayment of their obligations. Unacceptable business credit. Normal repayment is in jeopardy, and there exists well defined weakness in support of the same. The asset is inadequately protected by the current net worth and paying capacity of the obligor or pledged collateral. Specific provision raised as an estimate of potential loss. Risk Rating 9 Doubtful Obligors in default and 180 Days Past Due (DPD) on their contracted obligations, however in the opinion of the management recovery/salvage value is a possibility, and hence writ-off should be deferred. Full repayment questionable. Serious problems exist to the point where a partial loss of principle is likely. Weaknesses are so pronounced that on the basis of current information, conditions and values, collection in full is highly improbable. Specific provision raised as an estimate of potential loss. 96

98 Risk Rating 10 Loss Obligors in default and 360 Days Past Due (DPD) on their obligations. Total loss is expected. An uncollectible assets which does not warrant classification as an active asset. A 100% Specific Provisioning must be triggered followed by the write-off process should be effected as per Al Rajhi Bank write-off policy. 7-2 Allowance for impairment of financing: The movement in the allowance for impairment of financing for the years ended 31 December is as follows: 2016 (SAR 000) Retail Corporate Total Balance at beginning of the year 2,194,641 3,578,758 5,773,399 Charge for the year, net 2,140, ,633 2,581,563 Bad debts written off against provision (1,246,880) (475,381) (1,722,261) Balance at the end of the year 3,088,691 3,544,010 6,632, (SAR 000) Retail Corporate Total Balance at beginning of the year 2,892,411 2,301,915 5,194,326 Charge for the year, net 1,027,363 1,378,524 2,405,887 Bad debts written off against provision )1,725,133( )101,681( )1,826,814( Balance at the end of the year 2,194,641 3,578,758 5,773,399 Al Rajhi Bank - Annual Report

99 7-3 Impairment charge movement: The details of the impairment charge on financing for the year recorded in the consolidated statement of income is as follows: (SAR 000) Charge for the year 2,581,563 2,405,887 Recovery of written off financing, net (541,268) )447,862( Bad debts written off directly 101,947 - Allowance for impairment, net 2,142,242 1,958, Financing include finance lease receivables, which are as follows: Gross receivables from finance lease 31,796,685 28,593,184 Less than 1 year 4,127,907 1,433,731 1 to 5 years 22,786,487 18,822,702 Over 5 years 4,882,291 8,336,751 31,796,685 28,593,184 Unearned future finance income on finance lease )4,334,825( )3,485,154( Net receivables from finance lease 27,461,860 25,108,030 98

100 8. PROPERTY AND EQUIPMENT, NET Property and equipment, net comprises the following as of 31 December: Land Buildings Leasehold land & buildings improvements (SAR 000) Equipment and furniture Total 2016 Total 2015 COST At January 1 1,954,611 2,783, ,429 3,704,451 9,372,961 8,236,247 Additions 55, ,795 1, ,825 1,321,826 1,141,995 Disposals )5,281( At 31 December 2,009,863 3,219, ,383 4,533,276 10,694,787 9,372,961 ACCUMULATED DEPRECIATION At January 1-294, ,738 2,627,374 3,794,030 3,422,306 Charge for the year - 57,269 16, , , ,099 Disposals )2,375( At 31 December - 352, ,632 2,968,806 4,209,625 3,794,030 NET BOOK VALUE At 31 December ,009,863 2,867,078 43,751 1,564,470 6,485,162 At 31 December ,954,611 2,488,552 58,691 1,077,077 5,578,931 Buildings include work-in-progress amounting to SAR 1,343 million as at 31 December 2016 (31 December 2015: SAR 907 million). Equipment and furniture includes information technology-related assets having net book value of SAR 984 million as at 31 December 2016 (31 December 2015: SAR 409 million). 9. INVESTMENT PROPERTIES, NET Investment properties consist of properties acquired by the Group in the year The net book value of the investment properties approximates the fair value. Al Rajhi Bank - Annual Report

101 10. OTHER ASSETS, NET Other assets, net comprise the following as of 31 December: (SAR 000) Receivables, net 1,321,131 1,618,164 Prepaid expenses 558, ,725 Investment in cars, real estate and other non-financial assets 524,579 1,014,015 Cheques under collection 357, ,296 Advance payments 315, ,383 Accrued income 305, ,336 Other real estate* 147,106 - Others, net 610, ,294 Total 4,140,354 4,631,213 * The Bank, in the ordinary course of business, acquires certain real estate against settlement of financing. Such real estate are considered as assets held for sale. 11. DUE TO BANKS AND OTHER FINANCIAL INSTITUTIONS Due to banks and other financial institutions comprise the following as of 31 December: (SAR 000) Current accounts 971, ,352 Banks time investments 7,945,762 3,942,872 Total 8,916,970 4,558,

102 12. CUSTOMERS DEPOSITS Customers deposits by type comprise the following as of 31 December: (SAR 000) Demand deposits 245,707, ,988,120 Customers time investments 21,645,586 10,389,516 Other customer accounts 5,239,735 6,444,005 Total 272,593, ,821,641 The balance of the other customers accounts includes margins on letters of credit and guarantees, checks under clearance and transfers. Customers deposits by currency comprise the following as of 31 December: (SAR 000) Saudi Arabian Riyals 259,725, ,438,409 Foreign currencies 12,867,677 10,383,232 Total 272,593, ,821,641 Al Rajhi Bank - Annual Report

103 13. OTHER LIABILITIES Other liabilities comprise the following as of 31 December: (SAR 000) Accounts payable 2,104,587 2,548,431 Provision for employees end of service benefits 761, ,265 Cheques under settlement 624,790 1,089,920 Accrued expenses 614, ,445 Charities (see note 31) 23,785 23,875 Other 2,125,307 1,638,793 Total 6,254,839 6,600, SHARE CAPITAL The authorized, issued and fully paid share capital of the Bank consists of 1,625 million shares of SAR 10 each (2015: 1,625 million shares of SAR 10 each). 15. STATUTORY AND OTHER RESERVES The Banking Control Law in Saudi Arabia and the By-Laws of the Bank require a transfer to statutory reserve at a minimum of 25% of the annual net income for the year. Such transfers continue until the reserve equals the paid up share capital. This reserve is presently not available for distribution. In accordance with the Bank s accounting policy, the Bank records the amount of Zakat it calculates in other reserves until such time when the final amount of Zakat payable can be determined, at which time, the amount of Zakat payable is transferred from other reserves to other liabilities. During the year, the Bank transferred SAR million (2015: SAR million) to other liabilities as Zakat payable which was paid during the year. In addition, other reserves includes available-for-sale investments reserve, foreign currency translation reserve and employee share plan. The movements in available-for-sale investments, foreign currency reserves, and employee share plan are summarized as follows: 102

104 (SAR 000) Availablefor-sale investments Foreign currency translation Employee share plan 2016 Total Balance at beginning of the year )46,524( )137,151( 27,836 (155,839) Net change in fair value 33, ,327 Net amount transferred to consolidated statement of income 71, ,376 Exchange difference on translation of foreign operations - )10,784( - )10,784( Employee share plan - - 9,274 9,274 Balance at the end of the year 58,179 (147,935) 37,110 (52,646) (SAR 000) Availablefor-sale investments Foreign currency translation Employee share plan 2015 Total Balance at beginning of the year 5,380 22,727 23,523 51,630 Net changes in fair value (206,914) - - (206,914) Net amount transferred to consolidated statement of income 155, ,010 Exchange difference on translation of foreign operations - (159,878) - (159,878) Employee share plan - - 4,313 4,313 Balance at the end of the year (46,524) (137,151) 27,836 (155,839) The Bank under an employee share plan grants its shares to certain eligible employees. The exercise price of the stock option is the market value of these shares at the date of granting the program to those employees. The condition for granting these options is the completion of two years of employment at the Bank. Exercising these stock options by the eligible employees is subject to fulfillment of some requirements for profitability and growth in the Bank. The Bank has no legal or expected commitment to repurchase or settle these options in cash. Al Rajhi Bank - Annual Report

105 16. COMMITMENTS AND CONTINGENCIES a) Legal proceedings As at 31 December 2016, there were certain legal proceedings outstanding against the Bank in the normal course of business including those relating to the extension of credit facilities. Such proceedings are being reviewed by the concerned parties. Provisions have been made for some of these legal cases based on the assessment of the Bank s legal advisors. b) Capital commitments As at 31 December 2016, the Bank had capital commitments of SAR 455 million (2015: SAR 227 million) relating to contracts for computer software update and development, and SAR 596 million (2015: SAR 532 million) relating to building new workstation, and development and improvement of new and existing branches. c) Credit related commitments and contingencies The primary purpose of these instruments is to ensure that funds are available to customers as required. Credit related commitments and contingencies mainly comprise letters of guarantee, standby letters of credit, acceptances and unused commitments to extend credit. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet his obligations to third parties, carry the same credit risk as financing. Letters of credit, which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods to which they relate, and therefore, carry less risk. Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most acceptances to be presented before being reimbursed by the customers. Cash requirements under guarantees and letters of credit are considerably less than the amount of the commitment because the Bank does not expect the third party to draw funds under the agreement. Commitments to extend credit represent unused portions of authorization to extended credit, principally in the form of financing, guarantees and letters of credit. With respect to credit risk relating to commitments to extend unused credit, the Bank is potentially exposed to a loss in an amount which is equal to the total unused commitments. The likely amount of loss, which cannot be reasonably estimated, is expected to be considerably less than the total unused commitments, since most commitments to extend credit are 104

106 contingent upon customers maintaining specific credit standards. The total outstanding commitments to extend credit do not necessarily represent future cash requirements, as many of these commitments could expire without being funded. 1. The contractual maturities of the Bank s commitments and contingent liabilities are as follows at 31 December: 2016 (SAR 000) Less than 3 months From 3 to 12 months From 1 to 5 years Over 5 years Total Letters of credit 367, , ,096 3,166 1,042,924 Acceptances 253, , ,989 Letters of guarantee 3, ,067 2,607,797 2,374,504 5,264,324 Irrevocable commitments to extend credit 37,286 3,155,806 1,976, ,780 5,644,159 Total 662,702 4,378,064 4,767,180 2,852,450 12,660,396 ٢٠١٥ (SAR 000) Less than 3 months From 3 to 12 months From 1 to 5 years Over 5 years Total Letters of credit 526, , ,334 23,472 1,391,999 Acceptances 308, ,057 4,016 3, ,813 Letters of guarantee 42, ,177 3,392,102 2,058,129 5,907,800 Irrevocable commitments to extend credit 11,098 1,391, , ,082 2,548,439 Total 888,961 2,596,268 4,435,950 2,380,872 10,302,051 Al Rajhi Bank - Annual Report

107 2. The analysis of commitments and contingencies by counter-party is as follows as at 31 December: (SAR 000) Corporates 10,766,791 9,157,923 Banks and other financial institutions 1,893,605 1,144,128 Total 12,660,396 10,302,051 d) Operating lease commitments The future minimum lease payments under non-cancelable operating leases, where the Bank is the lessee, are as follows as at 31 December: (SAR 000) Less than 1 year 40,391 23,405 One 1 to 5 years 185, ,250 Over 5 years 50,141 44,629 Total 276, ,

108 17. NET FINANCING AND INVESTMENT INCOME Net financing and investment income for the years ended 31 December comprises the following: (SAR 000) Financing Corporate Mutajara 1,680,957 1,320,889 Installment sale 8,287,559 7,910,838 Murabaha 599, ,042 Investments and other Murabaha with SAMA 541, ,472 Mutajara with banks 569, ,509 Income from sukuk 73,004 56,630 Gross financing and investment income 11,751,445 10,258,380 Return on customers time investments (448,324) (244,011) Return on due to banks and financial institutions time investments Return on customers, banks and financial institutions time investments (137,803) (55,427) (586,127) (299,438) Net financing and investment income 11,165,318 9,958,942 Al Rajhi Bank - Annual Report

109 18. FEE FROM BANKING SERVICES, NET Fee from banking services, net for the years ended 31 December comprise the following: (SAR 000) Fee income: Advance payments on contracts 1,236, ,557 Credit cards 641, ,435 Payment service systems 640, ,346 Share trading services 469, ,334 Remittance business 450, ,710 SADAD 154, ,169 Mudaraba 129, ,878 Other 356, ,839 Total fee income 4,078,889 3,724,268 Fee expenses: Payment service systems (984,200) (910,670) Share trading services (144,726) (109,507) Total fee expenses (1,128,926) (1,020,177) Fee from banking services, net 2,949,963 2,704,

110 19. OTHER OPERATING INCOME Other operating income for the years ended 31 December comprises the following: (SAR 000) Dividend income 31,678 51,026 Gain on sale of property and equipment, net - 5,861 Rental income from investment property 74,123 - Share in earnings of associate 13,762 6,858 Gain / (loss) on investments held as FVSI 9,382 (100,939) Income from sale of various investments 16,070 27,420 Other income, net 98, ,950 Total 243, , SALARIES AND EMPLOYEES RELATED BENEFITS The following tables provide an analysis of the salaries and employees related benefits for the years ended 31 December: 2016 Number of employees )SAR 000( Fixed Compensation Variable compensations paid Cash Shares Executives 75 76,374 14,301 1,554 Employees engaged in risk taking activities 1, ,787 75,581 1,878 Employees engaged in control functions ,857 20,094 1,223 Other employees 11,690 1,631, ,353 2,142 Total 13,684 2,208, ,329 6,797 Accrued variable compensations in , Other employees costs - 443, Gross total 13,684 2,949, ,329 6,797 Al Rajhi Bank - Annual Report

111 2015 Number of employees )SAR 000( Fixed Compensation Variable compensations paid Cash Shares Executives 65 58,604 5,978 2,807 Employees engaged in risk taking activities 1, ,180 42,029 3,989 Employees engaged in control functions ,137 15,244 1,621 Other employees 10,885 1,455, ,735 2,245 Total 12,374 1,933, ,986 10,662 Accrued variable compensations in , Other employees costs - 422, Gross total 12,374 2,661, ,986 10,662 Salaries and employees related benefits include end of services, General Organization for Social Insurance, business trips, training and other benefits. As the Kingdom of Saudi Arabia is part of the G-20, instructions were given to all financial institutions in the Kingdom to comply with the standards and principles of Basel II and the Financial Stability Board. SAMA, as the regulatory for financial institutions in Saudi Arabia, issued regulations on compensations and bonus in accordance with the standards and principles of Basel II and the Financial Stability Board. In light of the above SAMA s regulation, the Bank issued compensation and bonuses policy which was implemented after the Board of Directors approval. The scope of this policy is extended to include the Bank and its subsidiary companies (local and international) that are operating in the financial service sector. Accordingly it includes all official employees, permanent and temporary contracted employees and service providers (contribution in risk position if SAMA allows the use of external resources). For consistency with other banking institutions in the Kingdom of Saudi Arabia, the Bank has used a combination of fixed and variable compensation to attract and maintain talent. The fixed compensation is assessed on a yearly basis by comparing it to other local banks in the Kingdom of Saudi Arabia including the basic salaries, allowance and benefits which is related to the employees ranks. The variable compensation is related to the employees performance and their compatibility to achieve the agreed on objectives. It includes incentives, performance bonus and other benefits. Incentives are mainly 110

112 paid to branches employees whereby the performance bonuses are paid to head office employees and others who do not qualify for incentives. These bonuses and compensation are approved by the Board of Directors as a percentage of the Bank s income. 21. OTHER GENERAL AND ADMINISTRATIVE EXPENSES Other general and administrative expenses for the years ended 31 December comprises the following: )SAR 000( Utilities 375, ,905 Software 351, ,686 Electricity & water 267, ,122 Consultancy 49,720 63,460 Government 35,254 33,664 Others 227, ,978 Total 1,306,826 1,378, EARNINGS PER SHARE Earnings per share for the years ended 31 December 2016 and 2015 have been calculated by dividing the net income for the year by the weighted average number of shares outstanding. The weighted average number of ordinary shares outstanding during the period is the number of ordinary shares outstanding at the beginning of the period, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor. The time-weighting factor is the number of days that the shares are outstanding as a proportion of the total number of days in the period. 23. PAID AND PROPOSED GROSS DIVIDENDS AND ZAKAT The Bank distributed dividends for the first half of 2016 amounting to SAR 1,218,750 thousand (i.e. SAR 0.75 per share) (2015: SAR 812,500 thousand (i.e. SAR 0.5 per share)). Also the Board proposed gross dividends for the second half of 2016 amounting to SAR 3,337,500 thousand (2015: SAR 2,475,000 thousand) of which SAR 900 thousand (2015: SAR 850,000 thousand) will be deducted for Zakat, resulting in a net dividend of SAR 2.25 per share for 2016 (2015: SAR 1.50 per share). Al Rajhi Bank - Annual Report

113 The Bank has filed its Zakat returns with the GAZT and paid Zakat for financial years up to and including the year The Zakat assessments for the years up to 2001 have been finalized with the GAZT. The Bank has received assessments for the years 2002 to 2009 in which the GAZT raised additional demands aggregating to SAR 723 million. These additional demands mainly came from the disallowance of long-term investments, statuary deposit and financing lease to the Zakat base by the GAZT. The basis for the additional Zakat liability is being contested by the Bank before the relevant legal courts. Management is confident of a favorable outcome on the aforementioned appeals. However, as a matter of abundant caution, the Bank has set aside amounts for the potential additional Zakat exposure in other reserves. The assessments for the years 2010 to 2015 are yet to be raised by the GAZT. However, if long-term investments are disallowed and long-term financing is added to the Zakat base, in line with the assessments finalized by GAZT for the years referred to above, it would result in significant additional Zakat exposure to the Bank which remains an industry wide issue and disclosure of which might affect the Bank s position in this matter. 24. CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows comprise the following: )SAR 000( Cash in hand 8,335,452 8,865,284 Due from banks and other financial institutions maturing within 90 days from the date of purchased 8,677,525 2,761,056 Balances with SAMA and other central banks (current accounts) 489, ,140 Mutajara with SAMA 15,181,051 - Total 32,683,985 12,382,

114 25. OPERATING SEGMENTS The Bank identifies operating segments on the basis of internal reports about the activities of the Bank that are regularly reviewed by the chief operating decision maker, principally the Chief Executive Officer, in order to allocate resources to the segments and to assess its performance. For management purposes, the Bank is organized into the following four main businesses segments: Retail segment: Corporate segment: Treasury segment: Investment services and brokerage segments: Includes individual customer deposits, credit facilities, customer debit current accounts (overdrafts), fees from banking services and remittance business. Incorporates deposits of VIP, corporate customers deposits, credit facilities, and debit current accounts (overdrafts). Incorporates treasury services, Murabaha with SAMA and international Mutajara portfolio. Incorporates investments of individuals and corporates in mutual funds, local and international share trading services and investment portfolios. Transactions between the above segments are on normal commercial terms and condtions. There are no material items of income or expenses between the above segments. Assets and liabilities for the segments comprise operating assets and liabilities, which represents the majority of the Bank s assets and liabilities. The Bank carries out its activities principally in the Kingdom of Saudi Arabia, and has five subsidiaries as of 31 December 2016 and 2015, as listed in Note 1-a, of which one operate outside the Kingdom of Saudi Arabia, additional to overseas branches operating in Jordan and Kuwait. The total assets, liabilities, commitments, contingencies and results of operations of these subsidiaries are not material to the Bank s consolidated financial statements as a whole. Al Rajhi Bank - Annual Report

115 a) The Bank s total assets and liabilities, together with its total operating income and expenses, and net income, as of and for the years ended 31 December for each segment are as follows: 2016 (SAR 000) Retail segment Corporate segment Treasury segment Investment services and brokerage segment Total Total assets 177,178,353 61,796,699 98,504,030 2,232, ,711,817 Total liabilities 243,517,074 33,307,549 10,805, , ,764,945 Financing & investments income from external customers Inter-segment operating income / (expense) Gross financing & investment income 8,019,744 2,431,816 1,276,643 23,242 11,751, ,190 (652,462) (342,728) - - 9,014,934 1,779, ,915 23,242 11,751,445 Return on customers, banks and financial institutions time investments Net financing & investment income Fees from banking services, net (121,313) (327,012) (137,802) - (586,127) 8,893,621 1,452, ,113 23,242 11,165,318 1,952, ,517 38, ,813 2,949,963 Exchange income, net , ,286 Other operating income, net 118,332-34,820 89, ,044 Total operating income 10,964,949 1,954,859 1,794, ,947 15,283,611 Depreciation (402,251) (3,989) (3,746) (5,609) )415,595( Impairment charge for financing, net Impairment charge for available-for-sale investments (1,300,166) (842,076) - - )2,142,242( - - (65,923) - )65,923( Other operating expenses (3,958,056) (340,305) (80,675) (154,855) )4,533,891( Total operating expenses (5,660,473) (1,186,370) (150,344) (160,464) )7,157,651( 114

116 Net income for the year 5,304, ,489 1,644, ,483 8,125, (SAR 000) Retail segment Corporate segment Treasury segment Investment services and brokerage segment and other Total Total assets 169,972,076 54,520,040 89,794,204 1,333, ,619,648 Total liabilities 245,832,559 18,092,534 4,938, , ,980,594 Financing & investments income from external customers Inter-segment operating income / (expense) Gross financing & investment income Return on customers, banks and financial institutions time investments Net financing & investment income Fees from banking services, net 7,741,332 1,896, ,185 37,246 10,258,380 1,061,793 (579,487) (482,306) - - 8,803,125 1,317, ,879 37,246 10,258,380 (79,393) (166,156) (53,889) - )299,438( 8,723,732 1,150,974 46,990 37,246 9,958,942 1,641, ,591 47, ,106 2,704,091 Exchange income, net , ,566 Other operating income, net 15,144 2,186 6,786 79, ,176 Total operating income 10,380,699 1,652,751 1,080, ,412 13,745,775 Depreciation (364,563) (2,331) (539) (6,666) )374,099( Impairment charge for financing, net (981,965) (976,060) - - )1,958,025( Other operating expenses (3,799,745) (267,206) (55,549) (161,076) )4,283,576( Total operating expenses (5,146,273) (1,245,597) (56,088) (167,742) )6,615,700( Net income for the year 5,234, ,154 1,024, ,670 7,130,075 Al Rajhi Bank - Annual Report

117 b) The Group s credit exposure by business segments as of 31 December is as follows: 2016 (SAR 000) Retail segment Corporate segment Treasury segment Investment services and brokerage segment Total Consolidated balance sheet assets 159,191,717 61,572,881 62,522, , ,124,761 Commitments and contingencies excluding irrevocable commitments to extend credit 1,548,060 5,468, ,016, (SAR 000) Retail segment Corporate segment Treasury segment Investment services and brokerage segment Total Consolidated balance sheet assets 153,313,215 52,801,678 68,241, , ,081,489 Commitments and contingencies excluding irrevocable commitments to extend credit 1,059,590 6,694, ,753,612 Credit risks comprise the carrying value of the consolidated statement of financial position, except for cash and balances with SAMA, investment property, property and equipment and other assets. The credit equivalent value of commitments and contingencies are included in credit exposure. 26. FINANCIAL RISK MANAGEMENT The Bank s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the banking business, and these risks are an inevitable consequence of participating in financial markets. The Bank s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank s financial performance. The Bank s risk management policies, procedures and systems are designed to identify and analyze these risks and to set appropriate risk mitigants and controls. The Bank reviews its risk management policies and systems on an ongoing basis to reflect changes in markets, products and emerging best practices. 116

118 Risk management is performed by the Credit and Risk Management Group ( CRMG ) under policies approved by the Board of Directors. The CRMG identifies and evaluates financial risks in close co-operation with the Bank s operating units. The most important types of risks identified by the Bank are credit risk, liquidity risk and market risk. Market risk includes currency risk, profit rate risk, operational risk and price risk Credit risk Credit risk is considered to be the most significant and pervasive risk for the Bank. The Bank takes on exposure to credit risk, which is the risk that the counter-party to a financial transaction will fail to discharge an obligation causing the Bank to incur a financial loss. Credit risk arises principally from financing (credit facilities provided to customers) and from cash and deposits held with other banks. Further, there is credit risk in certain offbalance sheet financial instruments, including guarantees relating to purchase and sale of foreign currencies, letters of credit, acceptances and commitments to extend credit. Credit risk monitoring and control is performed by the CRMG which sets parameters and thresholds for the Bank s financing activities. a. Credit risk measurement Financing The Bank has structured a number of financial products which are in accordance with Sharia law in order to meet the customers demand. These products are all classified as financing assets in the Bank s consolidated statement of financial position. In measuring credit risk of financing at a counterparty level, the Bank considers the overall credit worthiness of the customer based on a proprietary risk methodology. This risk rating methodology utilizes a 10 point scale based on quantitative and qualitative factors with seven performing categories (rated 1 to 7) and three non-performing categories (rated 8-10). The risk rating process is intended to advise the various independent approval authorities of the inherent risks associated with the counterparty and assist in determining suitable pricing commensurate with the associated risk. This process also enables the Bank to detect any weakness in the portfolio quality and make appropriate adjustments to credit risk allowances, where credit quality has deteriorated and where losses are likely to arise. The Bank evaluates individual corporate customer balances which are past due to make appropriate allowances against financings. For the remaining (performing) corporate portfolio, the Bank applies a loss rate to determine an appropriate collective impairments allowance. The loss rate is determined based on historical experience of credit losses. Settlement risk The Bank is also exposed to settlement risk in its dealings with other financial institutions. This risk arises when the Bank pays its side of the transaction to the other bank or counterparty before receiving payment from the third party. The risk is that the third Al Rajhi Bank - Annual Report

119 party may not pay its obligation. While these exposures are short in duration but they can be significant. The risk is mitigated by dealing with highly rated counterparties, holding collateral and limiting the size of the exposures according to the risk rating of the counterparty. b. Risk limit control and mitigation policies The responsibility for credit risk management is enterprise-wide in scope. Strong risk management is integrated into daily processes, decision making and strategy setting, thereby making the understanding and management of credit risk the responsibility of every business segment. The following business units within the Bank assist in the credit control process: Corporate Credit Unit. Credit Administration, Monitoring and Control Unit. Remedial Unit. Credit Policy Unit. Retail Credit Unit. The monitoring and management of credit risk associated with these financing are made by setting approved credit limits. The Bank manages limits and controls concentrations of credit risk wherever they are identified - in particular, to individual customers and groups, and to industries and countries. Concentrations of credit risks arise when a number of customers are engaged in similar business activities, activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risks indicate the relative sensitivity of the Bank s performance to developments affecting a particular industry or geographical location. The Bank seeks to manage its credit risk exposure through diversification of its financing to ensure there is no undue concentration of risks with to individuals or groups of customers in specific geographical locations or economic sectors. The Bank manages credit risk by placing limits on the amount of risk accepted in relation to individual customers and groups, and to geographic and economic segments. Such risks are monitored on a regular basis and are subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product, economic sector and by country are reviewed at least annually by the credit committee. 118

120 Exposure to credit risk is also managed through regular analysis on the ability of customers and potential customers to meet financial and contractual repayment obligations and by revising credit limits where appropriate. Some other specific control and mitigation measures are outlined below: b-1) Collateral The Bank implements guidelines on the level and quality of specific classes of collateral, The principal collateral types are: Mortgages over residential and commercial properties. Cash, shares, and general assets for customer. Shares for Murabaha (collateralized share trading) transactions. b-2) Collateralized Credit - related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as traditional banking products of the Bank. Documentary and commercial letters of credit - which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying goods to which they relate, and therefore, risk is partially mitigated. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of further financing products, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. c. Impairment and provisioning policies Allowance for impairment is recognized for financial reporting purposes only for losses that have been incurred at the statement of financial position date based on objective evidence of impairment, and management judgment. Management determines whether objective evidence of impairment exists under IAS 39, based on the following criteria as defined by the Bank: Delinquency in contractual payments of principal or profit. Al Rajhi Bank - Annual Report

121 Cash flow difficulties experienced by the customer. Breach of repayment covenants or conditions. Initiation of bankruptcy proceedings against the customer. Deterioration of the customer s competitive position. Deterioration in the value of collateral. The Bank s policy requires the review of each individual corporate customer at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of incurred losses at the statement of financial position date on a case-by-case basis, and by using management judgment. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account. Collectively assessed impairment allowances are provided for: Portfolios of homogenous assets mainly relating to the retail financing portfolio that are individually not significant. On the corporate portfolio for financing where losses have been incurred but not yet identified, by using historical experience, judgment and statistical techniques. 120

122 The table below sets out the maximum exposure to credit risk at the reporting date without considering collateral or other credit enhancements and includes the off-balance sheet financial instruments involving credit risks as at 31 December: )SAR 000( On-balance sheet items Investments Murabaha with SAMA 30,451,217 36,727,031 Sukuk 2,100,895 1,225,534 Due from banks and other financial institutions 26,578,525 26,911,056 Financing, net Corporate 65,613,824 57,096,011 Retail 159,380, ,121,857 Total on-balance sheet items 284,124, ,081,489 Off-balance sheet items: Letters of credit and acceptances 1,751,913 1,845,812 Letters of guarantee 5,264,324 5,907,800 Irrevocable commitments to extend credit 5,644,159 2,548,439 Total off-balance sheet items 12,660,396 10,302,051 Maximum exposure to credit risk 296,785, ,383,540 The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2016 and 2015, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the consolidated statement of financial position Liquidity risks Liquidity risk is the risk that the Bank will be unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they Al Rajhi Bank - Annual Report

123 are withdrawn. The consequence may be the failure to meet obligations to repay deposits and financing parties and fulfill financing commitments. Liquidity risk can be caused by market disruptions or by credit downgrades, which may cause certain sources of funding to become unavailable immediately. Diverse funding sources available to the Bank help mitigate this risk. Assets are managed with liquidity in mind, maintaining a conservative balance of cash and cash equivalents. Liquidity risk management process The Bank s liquidity management process is as monitored by the Bank s Asset and Liabilities Committee (ALCO), includes: Day-to-day funding, managed by Treasury to ensure that requirements can be met and this includes replenishment of funds as they mature or are invested; Monitoring balance sheet liquidity ratios against internal and regulatory requirements; Managing the concentration and profile of debt maturities; Maintain diversified funding sources; and Liquidity management and asset and liability mismatching. Monitoring and reporting take the form of analyzing cash flows of items with both contractual and non-contractual maturities. The net cash flows are measured and ensured that they are within acceptable ranges. The Treasury / ALCO also monitors, the level and type of undrawn lending commitments, usage of overdraft facilities and the potential impact of contingent liabilities such as standby letters of credit and guarantees may have on the Bank s liquidity position. The tables below summarize the maturity profile of the Bank s assets and liabilities, on the basis of the remaining maturity as of the consolidated statement of financial position date to the contractual maturity date. Management monitors the maturity profile to ensure that adequate liquidity is maintained, Assets available to meet all of the liabilities and to cover outstanding financing commitments include cash, balances with SAMA and due from banks. Further, in accordance with the Banking Control Law and Regulations issued by SAMA, the Bank maintains a statutory deposit equal to a sum not less than 7% of total customers deposits, and 4% of total other customers accounts. In addition to the statutory deposit, the Bank maintains a liquid reserve of not less than 20% of the deposit liabilities, in the form of cash, gold or assets which can be converted into cash within a period not exceeding 30 days. Also, the Bank has the ability to raise additional funds through special financing arrangements with SAMA including deferred sales transactions. 122

124 The contractual maturities of financial assets and liabilities as of 31 December based on discounted cash flows are as follows. The table below reflect the expected cash flows indicated by the deposit retention history of the Group. Management monitors rolling forecast of the Group s liquidity position and cash and cash equivalents on the basis of expected cash flows. This is carried out in accordance with practice and limits set by the Group and based on the pattern of historical deposit movement. In addition, the Group s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans (SAR 000) Less than 3 months 3 to 12 months 1 to 5 years Over 5 years Total Assets Cash and balance with SAMA and central banks 24,006, ,006,460 Due from banks and other financial institutions 10,125,020 16,453, ,578,525 Financing, net Corporate Mutajara 10,717,206 12,389,090 9,045,322 10,717,205 42,868,823 Installment sale 12,729,516 35,509, ,716,438 14,443, ,398,906 Murabaha 3,819,246 4,415,048 3,223,443 3,819,245 15,276,982 Credit cards 449, ,413 Investments Investment in an associate ,280 89,280 Investments held at amortized cost 7,894,344-1,274,565 23,383,203 32,552,112 Investments held as FVSI , ,709 Available-for -sale investments ,252,778 1,252,778 Other assets, net 1,678, ,678,348 Total 71,419,553 68,767, ,398,477 53,705, ,290,336 Liabilities Due to banks and other financial institutions 8,723,822 16, ,005 8,916,970 Customer deposits 39,257,062 32,737, ,620,122 41,978, ,593,136 Other liabilities 5,469, ,469,383 Total 53,450,267 32,753, ,620,122 42,155, ,979,489 Gap 17,969,286 36,013,908 (41,221,645) 11,549,298 24,310,847 Al Rajhi Bank - Annual Report

125 Assets 2015 (SAR 000) Less than 3 months 3 to 12 months 1 to 5 years Over 5 years Total Cash and balance with SAMA and central banks 9,621, ,621,424 Due from banks and other financial institutions 9,936,803 15,854,285 1,119,968-26,911,056 Financing, net Corporate Mutajara 9,211,151 10,648,090 7,774,211 9,211,151 36,844,603 Installment sale 12,320,156 34,367, ,381,091 13,978, ,047,795 Murabaha 2,994,629 3,461,791 2,527,467 2,994,630 11,978,517 Credit cards 346, ,953 Investments Investment in an associate ,518 75,518 Investments held at amortized cost 25,963,534 10,763, , ,039 37,952,565 Investments held as FVSI - - 1,144,555-1,144,555 Available-for -sale investments , ,226 Other assets, net 2,136, ,136,460 Total 72,531,110 75,095, ,340,787 27,796, ,763,672 Liabilities Due to banks and other financial institutions 2,956, , ,672 43,699 4,558,224 Customer deposits 255,949,698 1,475, , ,821,641 Other liabilities 5,961, ,961,589 Total 264,867,298 2,410,198 1,020,259 43, ,341,454 Gap (192,336,188) 72,685, ,320,528 27,752,814 20,422,

126 The following tables disclose the maturity of contractual financial liabilities on undiscounted cash flows as at 31 December: 2016 (SAR 000) Less than 3 months 3 to 12 months 1 to 5 years Over 5 years No fixed maturity Total Due to banks and other financial institutions 8,738,410 16, ,687-8,933,360 Customer deposits 39,322,708 32,981, ,452,184 42,377, ,134,250 Other liabilities 5,469, ,469,383 Total 53,530,501 32,997, ,452,184 42,556, ,536, (SAR 000) Less than 3 months 3 to 12 months 1 to 5 years Over 5 years No fixed maturity Due to banks and other financial institutions 2,914, , ,672 43,699 43,837 4,560,298 Customer deposits 255,303,340 1,475, , , ,848,894 Other liabilities 5,961, ,961,589 Total 264,179,177 2,410,490 1,020,259 43, , ,370,781 The cumulative maturities of commitments & contingencies are given in note 16-c-1 of the financial statements. Total 26-3 Market risks The Bank is exposed to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices. Market risk exposures are monitored by Treasury / Credit & Risk department and reported to ALCO on a monthly basis. ALCO deliberates on the risks taken and ensure that they are appropriate. Al Rajhi Bank - Annual Report

127 a. Market risks - speculative operations The Bank is not exposed to market risks from speculative operations. The Bank is committed to Sharia guidelines which does not permit it to enter into contracts or speculative instruments such as hedging, options, forward contracts and derivatives. b. Market risks - banking operations The Bank is exposed to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risks arise on profit rate products, foreign currency and mutual fund products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as profit rates, foreign exchange rates and quoted market prices. Profit rate risk Cash flow profit rate risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market profit rates. The Bank does not have any significant exposure to the effects of fluctuations in prevailing level of market profit rates on its future cash flows as a significant portion of profit earning financial assets and profit bearing liabilities are at fixed rates and are carried in the financial statements at amortized cost. In addition to this, a substantial portion of the Bank s financial liabilities are non-profit bearing. Commission rate risk arises from the possibility that the changes in profit rates will affect either the fair values or the future cash flows of the financial instruments. The Board has established commission rate gap limits for stipulated periods. The Bank monitors positions daily and uses gap management strategies to ensure maintenance of positions within the established gap limits. The following table depicts the sensitivity to a reasonable possible change in profit rates, with other variables held constant, on the Bank s statement of income or equity. The sensitivity of the income is the effect of the assumed changes in profit rates on the net income for one year, based on the floating rate non-trading financial assets and financial liabilities held as at 31 December 2016 and The sensitivity of equity is same as sensitivity of income since the Bank does not have fixed rate available-for-sale financial assets as at 31 December 2016 and All the banking book exposures are monitored and analyzed in currency concentrations and relevant sensitivities are disclosed in SAR million. 126

128 2016 SAR in Million Currency Increase in basis Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum SAR Currency Decrease in basis Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum SAR SAR in Million Currency Increase in basis Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum SAR Currency Decrease in basis Sensitivity of gross financing and investment income As at 31 December Average Maximum for Minimum SAR *Profit rate movements affect reported equity through retained earnings, i.e. increases or decreases in financing and investment income. Al Rajhi Bank - Annual Report

129 Commission sensitivity of assets, liabilities and off balance sheet items 2016 (SAR 000) Less than 3 months 3 to 6 months 6 to 12 months 1 to 5 years Over 5 years Total Assets Cash and balance with SAMA 16,081, ,925,055 24,006,460 Due from banks and other financial institutions 8,998,610 4,188,366 12,265,139-1,126,410 26,578,525 Investments Investment in an associate ,280 89,280 Investments held at amortized cost 30,776,721 38,452-1,235, ,547 32,552,112 Investments held as FVSI , ,709 Available-for -sale investments ,252,778 1,252,778 Financing, net Corporate Mutajara 13,718,023 7,587,782 4,801,308 9,045,322 7,716,388 42,868,823 Installment sale 12,729,516 11,797,682 23,728, ,699,798 14,443, ,398,906 Murabaha 4,888,634 2,704,026 1,711,022 3,223,443 2,749,857 15,276,982 Credit cards 449, ,413 Other assets 1,678, ,678,348 Total Assets 89,320,670 26,316,308 42,505, ,203,955 35,943, ,290,336 Liabilities Due to banks and other financial institutions 4,175, , ,202 4,036,263 8,916,970 Customer deposits 267,506,530 2,100,984 1,911,483 1,074, ,593,136 Other liabilities 5,469, ,469,383 Total Liabilities 277,151,747 2,249,655 1,911,483 1,630,341 4,036, ,979,489 Gap (187,831,077) 24,066,653 40,549, ,573,614 31,907,187 24,310,847 Profit Rate Sensitivity - On Statement of Financial Positions 187,831,077 (24,066,653) (40,594,470) (115,573,614) (31,907,187) (24,310,847) Profit Rate Sensitivity - Off Statement of Financial Positions 408, ,353 Total Profit Rate Sensitivity 188,239,430 (24,066,653) (40,594,470) (115,573,614) (31,907,187) (23,902,494) Gap Cumulative Profit Rate Sensitivity Gap 188,239, ,172, ,578,307 8,004,693 (23,902,494) (47,804,988) 128

130 The Bank manages exposure to the effects of various risks associated with fluctuations in the prevailing levels of market commission rates on its financial position and cash flows. The Board sets limits on the level of mismatch of commission rate reprising that may be undertaken, which is monitored daily by Bank Treasury. The table below summarizes the Bank s exposure to profit rate risks. Included in the table are the Bank s financial instruments at carrying amounts, categorized by the earlier of contractual re-pricing or maturity dates. The Bank is exposed to profit rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or re-price in a given period. The Bank manages this risk by matching the re-pricing of assets and liabilities through risk management strategies. Al Rajhi Bank - Annual Report

131 2015 (SAR 000) Less than 3 months 3 to 6 months 6 to 12 months 1 to 5 years Over 5 years Total Assets Cash and balance with SAMA 9,621, ,621,424 Due from banks and other financial institutions 9,936,803 5,284,762 10,569,523 1,119,968-26,911,056 Investments Investment in an associate ,518 75,518 Investments held at amortized cost 25,963,534 10,807, , ,039 37,952,565 Investments held as FVSI ,144,555 1,144,555 Available-for -sale investments , ,226 Financing, net Corporate Mutajara 11,403,405 9,067,457 12,037,132 3,794, ,615 36,844,603 Installment sale 9,582,344 12,738,881 20,179,289 79,026,153 39,521, ,047,795 Murabaha 3,707,351 2,947,913 3,913,382 1,233, ,084 11,978,517 Credit cards 346, ,953 Other assets 2,136, ,136,460 Total Assets 72,698,274 40,846,232 46,699,326 85,524,675 42,995, ,763,672 Liabilities Due to banks and other financial institutions 2,956, , , ,672 43,699 4,558,224 Customer deposits 255,949, , , , ,821,641 Other liabilities 5,961, ,961,589 Total Liabilities 264,867, ,399 1,606,799 1,020,259 43, ,341,454 Gap (192,169,024) 40,042,833 45,092,527 84,504,416 42,951,466 20,422,218 Profit Rate Sensitivity - On Statement of Financial 192,169,024 (40,042,833) (45,092,527) (84,504,416) (42,951,466) (20,422,218) Positions Profit Rate Sensitivity - Off Statement of Financial Positions 279, ,464 Total Profit Rate Sensitivity Gap 192,448,488 (40,042,833) (45,092,527) (84,504,416) (42,951,466) (20,142,754) Cumulative Profit Rate Sensitivity Gap 192,448, ,405, ,313,128 22,808,712 (20,142,754) (40,285,508) The effective profit rate (effective yield) of a monetary financial instrument is the rate that, when used in a present value calculation, results in the carrying amount of the instrument. The rate is a historical rate for a fixed rate instrument carried at amortized cost and a current market rate for a floating rate instrument or an instrument carried at fair value. The tables below summarize the Bank s exposure to foreign currency exchange rate risk at 31 December 2016 and 2015 and the concentration of currency risks, Included in the table are the Bank s financial instruments at carrying amounts, categorized by currency: 130

132 2016 (SR 000) UAE Dirham Japanese Yen Euro Malaysian Ringgit US Dollar Pound Sterling Other Total ASSETS Cash and cash equivalents 41,334-17, , ,909 14, ,318 1,274,291 Due from banks and other financial institutions 140,601 4,634 75, , ,597 42, ,513 2,096,820 Financing, net ,259,880 4,483,395-3,107,484 12,850,759 Investments ,504,066 98, ,955 2,008,282 Fixed assets - - 4,012 36,825 41, , ,749 Other assets, net ,340 42,139-15, ,322 Total Assets 181,935 4,634 97,764 7,548,167 5,673,730 57,334 5,015,659 18,579,223 LIABILITIES Due to banks and other financial institutions 72-37, , , ,427 1,483,895 Customer deposits 8,969 2, ,404 5,635,654 2,853,232 57,161 4,180,470 12,867,677 Other liabilities 6, ,466 98,836 4,728 5, , ,410 Total Liabilities 16,012 3, ,223 6,389,525 3,643,952 62,808 4,384,015 14,694,982 Net 165,923 1,187 )97,459( 1,158,642 2,029,778 )5,474( 631,644 3,884,241 Al Rajhi Bank - Annual Report

133 2015 (SR 000) UAE Dirham Japanese Yen Euro Malaysian Ringgit US Dollar Pound Sterling Other Total ASSETS Cash and cash equivalents 21,550-61, , ,195 30, ,146 2,072,340 Due from banks and other financial institutions 240,074 21, , , ,520 6,469 1,203,041 2,688,456 Financing, net ,396,890 6,539,121-2,855,760 13,791,771 Investments ,230,346 92, ,323,428 Fixed assets ,968 61, , ,635 Other assets, net ,604 41, , ,963 Total Assets 261,624 21, ,118 6,295,406 8,423,802 37,391 5,035,433 20,255,593 LIABILITIES Due to banks and other financial institutions ,906 1,294,501 1,868 8,434 1,545,599 Customer deposits 4,809 25, ,737 5,067,733 1,241,850 21,905 3,840,913 10,383,232 Other liabilities 5,766 1,030 22,633 85, ,210 5, , ,055 Total Liabilities 10,647 26, ,188 5,393,206 2,702,561 29,620 4,002,349 12,368,886 Net 250,977 (4,496) (24,070) 902,200 5,721,241 7,771 1,033,084 7,886,

134 Foreign currency risks Currency risk represents the risk of change in the value of financial instruments due to changes in foreign exchange rates. The Bank management has set limits on positions by currencies, which are regularly monitored to ensure that positions are maintained within the limits. The table below shows the currencies to which the Bank has a significant exposure as at 31 December 2016 on its non-trading monetary assets and liabilities and forecasted cash flows. The analysis calculates the effect of reasonable possible movement of the currency rate against SAR, with all other variables held constant, on the statement of income (due to the fair value of the currency sensitive non-trading monetary assets and liabilities) and equity. A positive effect shows a potential increase in the statement of income statement of income or equity; whereas a negative effect shows a potential net reduction in the statement of income or equity. (SAR in million) Currency Exposures As at 31 December 2016 Change in Currency Rate in % Effect on Net Income Effect on Equity AED +/ USD +/ EUR +/ INR +/ PKR +/ (SAR in million) Currency Exposures As at 31 December 2015 Change in Currency Rate in % Effect on Net Income Effect on Equity AED +/ USD +/ EUR +/ INR +/ PKR +/ Al Rajhi Bank - Annual Report

135 Currency position The Bank manages exposure to the effects of fluctuations in prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. At the end of the year, the Bank had the following significant net exposures denominated in foreign currencies: 2016 SAR 000 Long/(short) 2015 SAR 000 Long/(short) US Dollar 1,727,455 5,627,664 Japanese Yen 1,187 (4,350) Euro )56,285( (30,346) Pound Sterling )3,213( 7,823 Others 353, ,146 Total 2,022,202 6,115,937 c. Price risk The Bank has certain investments which are carried at fair value through the income statement (FVSI) and includes investments in quoted mutual funds and other investments. Price risk arises due to changes in quoted market prices of these mutual funds. As these investments are in a limited number of funds and are not significant to the total investment portfolio, the Bank monitors them periodically and determines the risk of holding them based on changes in market prices. Other investments have little or no risks as these are bought for immediate sales. Investments are made only with a confirmed sale order and therefore involve minimal risk. 134

136 Equity Price Risk Equity risk refers to the risk of decrease in fair values of equities in the Bank s non-trading investment portfolio as a result of reasonable possible changes in levels of equity indices and the value of individual stocks. The effect on the Bank s equity investments held as available-for-sale due to reasonable possible change in prices, with all other variables held constant is as follows: 31 December December 2015 Market Indices Change in Equity price % Effect in SAR Million Change in Equity price % Effect in SAR Million Equity + / / / / Mutual funds + / / / / d. Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, systems, and external events. Operational risk is inherent in most of the Bank s activities this necessitates an integrated approach to the identification, measurement and monitoring of operational risk. An Operational Risk Management Unit (ORMU) has been established within the Credit and Risk Management Group which facilitates the management of Operational Risk within the Bank. ORMU facilitates the management of Operational Risk by setting policies, developing systems, tools and methodologies, overseeing their implementation and use within the business units and providing ongoing monitoring and guidance across the Bank. The three primary operational risk management processes in the Bank are Risk Control Self Assessment, Operational Loss Database and eventual implementation of Key Risk Indicators which are designed to function in a mutually reinforcing manner. Al Rajhi Bank - Annual Report

137 27. GEOGRAPHICAL CONCENTRATION a) The distribution by the geographical region of the major categories of assets, liabilities, commitments, contingencies and credit exposure accounts as of 31 December is as follows: 2016 (SR 000) Kingdom of Saudi Arabia Other GCC and Middle East Europe North America South East Asia Other Countries Assets Cash and balances with SAMA and central banks 41,249, , ,262-42,149,905 Due from banks and other financial institutions 16,271,501 9,478, ,903 9, , ,291 26,578,525 Financing, net Corporate Mutajara 42,868, ,868,823 Installment sale 162,534,805 2,260, ,603, ,398,906 Murabaha 10,775, , ,654,774-15,276,982 Credit cards 447, , ,413 Investments, net Investment in an associate 89, ,280 Investments held at amortized cost 31,251,217 68, ,232,315-32,552,112 Investments held as FVSI 2,188 32, , ,709 Available-for -sale investments 1,135, , ,252,778 Total 306,626,013 13,438, ,245 9,242 7,230, , ,755,433 Total Liabilities Due to banks and other financial institutions 3,556,926 4,571,674 8,738 62, ,102 17,405 8,916,970 Customer deposits 262,806,339 4,151, ,635, ,593,136 Total 266,363,265 8,722,818 8,738 62,125 6,335,755 17, ,510,106 Commitments and contingencies 7,890, , ,887 33,258 3,084, ,982 12,660,396 Credit exposure (stated at credit equivalent value) 4,608, , ,887 33, , ,982 7,016,

138 2015 (SR 000) Kingdom of Saudi Arabia Other GCC and Middle East Europe North America South East Asia Other Countries Assets Cash and balances with SAMA and central banks 25,972, , ,137-27,053,716 Due from banks and other financial institutions 23,115,415 2,590, , , , ,833 26,911,056 Financing, net Corporate Mutajara 36,427, , ,844,603 Installment sale 157,426,012 1,932, ,688, ,047,795 Murabaha 8,349, , ,706,293-11,978,517 Credit cards 345, , ,953 Investments, net Investment in an associate 75, ,518 Investments held at amortized cost 36,727, ,225,534-37,952,565 Investments held as FVSI 1,014,598 32, ,537-1,144,555 Available-for -sale investments 704, ,226 Total 290,157,338 6,755, , ,156 6,475, , ,059,504 Total Liabilities Due to banks and other financial institutions 3,423, ,765 18,101 9, ,562 58,759 4,558,224 Customer deposits 248,145,140 4,608, ,067, ,821,641 Total 251,568,446 5,331,533 18,101 9,731 5,393,295 58, ,379,865 Commitments and contingencies 7,978, ,752 2, ,013 1,614,367 17,006 10,302,051 Credit exposure (stated at credit equivalent value) 6,168, ,752 2, , ,618 17,006 7,753,612 Al Rajhi Bank - Annual Report

139 Credit equivalent amounts reflect the amounts that result from conversion of the Bank s off-balance sheet liabilities relating to commitments and contingencies into the risk equivalent of financing, using credit conversion factors prescribed by SAMA. Credit conversion factor is meant to capture the potential credit risk related to the exercise of that commitment. 138

140 b) The distributions by geographical concentration of non-performing financing and allowance for impairment of financing as of 31 December are as follows: 2016 (SAR 000) Kingdom of Saudi Arabia GCC & Middle East South East of Asia Total Non-performing Corporate Mutajara 1,469,909-25,016 1,494,925 Installment sale 1,328,215 9,006 1,356 1,338,577 Murabaha 4,082-10,934 15,016 Credit cards 18, ,083 Allowance for impairment of financing Corporate Mutajara (1,551,633) - - (1,551,633) Installment sale (1,347,571) (5,241) (588) (1,353,400) Murabaha (4,134) - (19,512) (23,646) Credit cards (19,430) - (63) (19,493) 2015 (SAR 000) Kingdom of Saudi Arabia GCC & Middle East South East of Asia Total Non-performing Corporate Mutajara 1,880,631-24,858 1,905,489 Installment sale 1,293,742 6, ,300,735 Murabaha 4,968-1,137 6,105 Credit cards 54, ,582 Allowance for impairment of financing Corporate Mutajara (1,592,660) - - (1,592,660) Installment sale (1,007,250) (4,047) (478) (1,011,775) Murabaha (16,943) - (15,885) (32,828) Credit cards (764) - (52) (816) Refer to Note 7-a for performing financing. Al Rajhi Bank - Annual Report

141 28. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Determination of fair value and fair value hierarchy The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments: Level 1: quoted prices in active markets for the same instrument (i.e. without modification or additions). Level 2: quoted prices in active markets for similar assets and liabilities or other valuation techniques for which all significant inputs are based on observable market data. Level 3: valuation techniques for which any significant input is not based on observable market data. 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 takes place either: - In the accessible principal market for the asset or liability, or - In the absence of a principal market, in the most advantageous accessible market for the asset or liability Carrying amounts and fair value: The following table shows the carrying amount and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. 140

142 (SAR 000) 31 December 2016 (audited) Financial assets Carrying value Level 1 Level 2 Level 3 Total Financial assets measured at fair value Investments held at FVSI 138, ,272 23, ,709 Available-for-sale investments 1,252, , ,046-1,252,778 Financial assets not measured at fair value Due from banks and other financial institutions 26,578, ,460,455 26,460,455 Investments held at amortized cost - Murabaha with SAMA 30,451, ,493,097 30,493,097 - Sukuk 2,100, ,115,057 2,115,057 Gross Financing 231,626, ,304, ,304,256 Total 292,148, , , ,396, ,764,352 Financial liabilities Financial liabilities not measured at fair value Due to banks and other financial institutions 8,916, ,916,640 8,916,640 Customers deposits 272,593, ,597, ,597,959 Total 281,510, ,514, ,514,599 Al Rajhi Bank - Annual Report

143 (SAR 000) 31 December 2015 (Audited) Carrying value Level 1 Level 2 Level 3 Total Financial assets Financial assets measured at fair value Financial assets at FVSI 1,144,555-1,121,103 23,452 1,144,555 Available-for-sale investements 704, ,405 80, ,226 Financial assets not measured at fair value Due from banks and other financial institutions 26,911, ,921,850 26,921,850 Investments held at amortized cost - Murabaha with SAMA 36,727, ,707,710 36,707,710 - Sukuk 1,225, ,222,263 1,222,263 Gross Financing 215,991, ,644, ,644,031 Total 282,703, ,405 1,201, ,519, ,344,635 Financial liabilities Financial liabilities not measured at fair value Due to banks and other financial institutions 4,558, ,557,968 4,557,968 Customers deposits 257,821, ,867, ,867,241 Total 262,379, ,425, ,425,209 FVSI and Available-for-sale investments classified as level 2 include mutual funds, the fair value of which is determined based on the latest reported net assets value (NAV) as at the date of statement of consolidated financial position. The level 3 financial assets measured at fair value represent investments recorded at cost. Gross financing classified as level 3 has been valued using expected cash flows discounted at relevant SIBOR. Investments held at amortized cost, due to / from banks and other 142

144 financial institution have been valued using the actual cash flows discounted at relevant SIBOR / SAMA murabaha rates. The value obtained from the relevant valuation model may differ from the transaction price of a financial instrument. The difference between the transaction price and the model value commonly referred to as day one profit and loss is either amortized over the life of the transaction, deferred until the instrument s fair value can be determined using market observable data, or realized through disposal. Subsequent changes in fair value are recognized immediately in the statement of income without reversal of deferred day one profits and losses. Al Rajhi Bank - Annual Report

145 29. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank transacts business with related parties, The related party transactions are governed by limits set by the Banking Control Law and the regulations issued by SAMA, The nature and balances resulting from such transactions as at and for the year ended 31 December are as follows: (SAR 000) Related parties Members the Board of Directors Mutajara 837, ,942 Contingent liabilities* 3, ,646 Current accounts 40, Companies and establishments guaranteed by members of the Board of Directors Mutajara 550, ,558 Contingent liabilities* 175,875 - Other major shareholders (above 5% equity share) Mutajara 2,859,571 2,758,530 Contingent liabilities* 171, ,091 Current accounts 26, Other liabilities 26,230 23,244 Mutual Funds Investments in Mutual Funds 540,318 1,201,924 * = off balance sheet items Income and expenses pertaining to transactions with related parties included in the consolidated financial statements for the years ended 31 December are as follows: 144

146 (SAR 000) Income from financing and other 170,945 61,549 Mudaraba Fees 61, ,410 )Employees salaries and benefits (air tickets 4,274 5,272 Rent and premises related expenses 1,106 1,106 Board of Directors remunerations 4,401 4,575 The amounts of compensations recorded in favor of or paid to the Board of Directors and the executive management personnel during the years ended 31 December are as follows: (SAR 000) Short-term benefits 44,935 37,102 Provision for end of service benefits 2,024 1,352 The executive management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank directly or indirectly. Al Rajhi Bank - Annual Report

147 30. MUDARABA FUNDS Mudaraba funds as of 31 December comprise the following: (SAR 000) Customers Mudaraba and investments 16,881,090 13,250,617 Current accounts, metals 2,031 2,040 Total 16,883,121 13,252,657 Mudaraba and investments represents customer s investment portfolio managed by Al Rajhi Capital Company and are considered as off balance sheet. Consistent with the accounting policies of the Group, such balances are not included in the Consolidated financial statements as these are held by the Group in fiduciary capacity. 31. SPECIAL COMMISSIONS EXCLUDED FROM THE CONSOLIDATED STATEMENT OF INCOME The following represents the movements in charities account, which is included in other liabilities (see note 13): (SAR 000) Balance at beginning of the year 23,875 34,475 Additions during the year 20,444 41,822 Payments made during the year (20,534) )52,422( Balance at end of the year 23,785 23, INVESTMENT MANAGEMENT SERVICES The Group offers investment services to its customers. The Group has established a number of Mudaraba funds in different investment aspects. These funds are managed by the Bank s Investment Department, and a portion of the funds is also invested in participation with the Group. The Group also offers investment management services to its customers through its subsidiary, which include management of funds with total assets under management of SAR 38,621 million (2015: SAR 35,501 million). Mutual funds financial statements are not included in the consolidated statement of financial position of the Group. The Group s share of investments in these funds is included under investments, and is disclosed under related party transactions. Funds invested by the Group in those investment funds amounted to SAR 540 million at 31 December 2016 (2015: SAR 1,202 million). 146

148 33. CAPITAL ADEQUACY The Bank s objectives when managing capital are, to comply with the capital requirements set by SAMA to safeguard the Bank s ability to continue as a going concern; and to maintain a strong capital base. Capital adequacy and the use of regulatory capital are monitored daily by the Bank s management, SAMA requires the banks to hold the minimum level of the regulatory capital and also to maintain a ratio of total regulatory capital to the risk-weighted assets at or above 8%. The Bank monitors the adequacy of its capital using ratios established by SAMA. These ratios measure capital adequacy by comparing the Bank s eligible capital with its consolidated statement of financial position, commitments and contingencies, to reflect their relative risk as of 31 December 2016 and (SAR 000) Credit risk weighted assets 221,810, ,329,555 Operational risk weighted assets 25,067,746 23,808,192 Market risk weighted assets 2,096,868 6,150,633 Total Pillar I - risk weighted assets 248,974, ,288,380 Tier I capital 51,946,872 46,639,054 Tier II capital 2,772,627 2,579,119 Total tier I & II capital 54,719,499 49,218,173 % Capital Adequacy Ratio Tier I ratio 20.86% 19.74% Tier I and II ratio 21.98% 20.83% Al Rajhi Bank - Annual Report

149 34. ISSUED IFRS BUT NOT YET EFFECTIVE The Bank has chosen not to early adopt the following new standards which have been issued but not yet effective for the Bank s accounting year beginning on or after 1 January 2017 and is currently assessing their impact. Following is a brief on the new IFRS and amendments to IFRS effective for annual periods beginning on or after 1 January Effective for annual periods beginning on or after IFRS 9 Financial instruments 1 January 2018 IFRS 15 Revenue from contracts with customers 1 January 2018 Amendments to IAS 7 Disclosure Initiative 1 January 2017 Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses 1 January 2017 Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions 1 January 2018 IFRS 16 Leases 1 January APPROVAL OF THE BOARD OF DIRECTORS The consolidated financial statements were approved by the Board of Directors on 18 Jumada I 1438 (corresponding to 15 February 2017). 36. COMPARATIVE FIGURES Figures have been rearranged or reclassified wherever necessary for the purpose of better presentation, however, no significant rearrangements or reclassifications have been made in these consolidated financial statements. 148

150 37. SUBSEQUENT EVENTS The Board of Directors proposed, in its meeting held on 19 January 2017, a distribution of dividends to the shareholders for the second half of the current year in a net amount of SAR 2,437.5 million, after Zakat deduction on shareholders, for SAR 1.5 per share. The Board s proposal is subject to the approval of the ordinary General Assembly in its next meeting. Al Rajhi Bank - Annual Report

151