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Fiduciary Rating Report Al Baraka Bank Egypt December 2020

FIDUCIARY RATING REPORT AlBaraka Bank Egypt

Report Date: Credit Rating Latest Rating Previous Rating December 16, 2020 (December 16, 2020) (January 9, 2020) International Scale(LT/ST) B- / B B- / B Analysts: Outlook (International Scale) Stable Stable M Owais A Siddiqui, FRM National Scale(LT/ST) A(eg) / A1(eg) A(eg) / A1(eg) Hikmatyar Gul Outlook(National Scale) Stable Stable

Fiduciary Scores Latest Scores Previous Scores (December 16, 2020) (January 09, 2020)

Overall Fiduciary Score 71-75 71-75 Asset Manager Quality 76-80 76-80 Corporate Governance 76-80 76-80 Shari’a Governance 61-65 61-65

Company Information Key Shareholders  Incorporated in 1980 Al Baraka Banking Group – 73.68%  Listed on The Egyptian Exchange Misr Life Insurance Company - 5.25%  External auditors: “KPMG” Office Hazem Misr Insurance Company – 4.50% Hassan & Partners and BDO Office Khaled &  Branches: 32 (December 2019) Partners  Staff Strength: 982 (December2019)  Chairman: H.E./ Mr. Abdel Aziz Mohamed Abdo Yamani  USD to EGP: 15.71 as of Oct 7,2020  Vice Chairman & Chief Executive Officer: Mr. Ashraf Ahmed El Ghamrawy

Fiduciary Rating Report – AlBaraka Bank Egypt

CORPORATE PROFILE

As a commercial bank, Al Baraka Bank Egypt (‘the Bank’ or “Al Baraka Egypt”) was established in 1980. The Articles of Association require the Bank to operate as an Islamic Commercial Bank providing Shari’a compliant banking solutions through a network of 32 branches. The Bank has been growing rapidly and exceeding market growth with its deposit market share rising from 1.4% as at en d-2018 to 1.5% by following year-end. The bank is listed on the national stock exchange and employed 982 staff at end- 2019.

Institutional shareholders held the Table 1: Key Indicators majority of ownership in the Bank. With LE mn/ % 2017 2018 2019 H1’2020 Total Assets 50,279 62,521 72,699 73,617 a share of 73.68%, Al Baraka Banking Investment Portfolio 16,994 21,883 21,650 39,153 Group (‘ABG’ or ‘Group’) is the anchor Net Financings 13,672 15,746 16,793 17,487 shareholder. Other major shareholders Deposits 44,170 54,535 64,368 65,041 Net Equity 2,633 3,432 4,072 4,299 are Misr Life Insurance Company (MLIC) Net Income 725 1,004 1,054 541 and Misr Insurance Company (MIC) RoAA (%) 1.6% 1.8% 1.6% 1.50% Total CAR (%) 15.43% 15.92% 17.44% 20.33% holding 5.25% and 4.50% stake respectively as of the year-end 2019.

Al Baraka Banking Group is licensed as an Islamic wholesale bank by the Central Bank of Bahrain (CBB) and is listed on Bahrain Bourse and Nasdaq Dubai stock exchanges. ABG is a leading international Islamic banking group with extensive geographical presence in 17 countries, including key Islamic finance markets of Bahrain, Pakistan, Turkey and Saudi Arabia with plans to expand in other jurisdictions.

MLIC and MIC are dominant players in the local life and non-life insurance industry respectively. The insurers are directly owned by Misr Insurance Holding Company, which was established pursuant to a presidential decree to hold government interest in state owned insurance companies.

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Fiduciary Rating Report – AlBaraka Bank Egypt

ECONOMIC OVERVIEW - ARAB REPUBLIC OF EGYPT (“EGYPT”)

A population of 99.2mn in 2018 and an expected GDP of USD 302.3b in 20191, makes Egypt the 3rd largest African economy. Macroeconomic environment has improved significantly during the last few years as Egypt completed a three year arrangement under the IMF Extended Fund Facility that commenced in November 2016. The country posted a higher growth rate of 5.3% during 2017-18 and is expected to have grown at a steady 5.1% during 2018/19. Egypt was expected to continue its growth trajectory with 5.9% growth during 2019/20, though interrupted by the on-going COVID-19 pandemic driving the global economy into a recession.

As the impact of change in Table 2: Economic Indicators exchange rate regime in 2017/18 2018/19 2019/20 2012/21 2016 and in turn Population (million) 97 99.2 101.5 103.8 Real GDP growth 5.3 5.6 2 2.8 devaluation diluted, both Fiscal Balance (% of GDP) -9.7 -8.1 -8.3 -7.8 core and headline inflation Inflation Rate (CPI, annual variation in %) 20.9 13.9 5.8 8.2 Current Account (% of GDP) -2.4 -3.6 -4.3 -4.6 have come to single digit, International Reserves (USD) 43.5 43.9 35 31.9 with a gradual decline in External Debt (% of GDP) 37.4 34.1 33.2 35.4 both since May 2019. (Source: IMF Consultation Report – September 2020 ) Headline inflation has trended down to 5.3% as of February 2020 from a high of 14.4% in February 2019. In line with declining inflation and global interest rate cuts, Central Bank of Egypt has also cut its discount rate successively to 9.75% in March 2020, supplemented by a further 50bps cut last month. Egyptian Pound has been strengthening against USD with 10.4% appreciation during 2019 and further 1.8% during 2020 to date, currently stood at USG/ EGP parity of 15.76.

The current account deficit has also declined to -2.5% of GDP during 2018/19 from a high of -5.6% of GDP during 2016/17. The current account position has posted a continually improving position during the first quarter of 2019/20 at -0.4% of GDP. However, we expect disruptions in 2020 due to COVID-19. A significant portion of current account receipts include tourism inflows and Suez Canal receipts which will be adversely affected due to travel restrictions and lower trade between countries amid the COVID- 19 pandemic. However, this may be offset in part by reduced import bill with record low oil prices.

As part of the fiscal consolidation efforts, the government adopted a Medium Term Revenue Strategy to alleviate fiscal pressures and has since posted a declining deficit of -8.0% of GDP during 2018/19 (2017/18:-9.7% of GDP). More significantly, Egypt posted a positive primary balance of 1.6% of GDP during 2018/19 from -4.3% of GDP during 2014/15. As an economic slowdown is imminent due to the pandemic, fiscal account is expected to be impacted with higher government expenditures, given the economic package introduced and lower tax revenues reflecting decline in economic activity. Fiscal reforms in the form of widening taxes and enhanced fee structures may be expected in the medium- term.

1Source: IMF

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Fiduciary Rating Report – AlBaraka Bank Egypt

After the constitutional changes, the sitting president may remain in power till 2030. The newly formed cabinet in 2018 has demonstrated policy continuity and investor sentiment has remained positive. The on-going COVID-19 pandemic is likely to impact the economy adversely in short to medium term, with pressure on fiscal and external accounts.

Banking Sector Review

The Banking Sector of Egypt has been growing with strong profitability indicators and supported by proactive regulation. The industry is viewed to be facing challenges with Capital Adequacy Ratio having declined to 14.0% in 2016. The Central Bank of Egypt has taken various steps including increasing minimum capital required to LE 5b to be implemented by 2020. These initiatives have led to increasing the industry’s CAR to 20.1% as of June 2020. The banking sector in Egypt has shown resilience with strong profitability, high liquidity and improving capitalization buffers. A low non-performing loan ratio of 3.9% as of June 2020 supported by higher loan provisioning to NPL ratio of 97.2% bespeaks strong asset quality.

Egypt is also getting closer to issue its maiden Sukuk as the Ministry of Finance completed the Sukuk Act. The Banking sector has remained heavily invested in government treasuries with a financing to deposit ratio of 47.1% as of June2020, which has been decreasing over time. While high investment in securities in an elevated interest rate environment has facilitated margins while being capital light, it has crowded out private sector financing. CBE has lately emphasized on increasing SME financing and requires banks to extend at least 20% financings to SMEs until 2019. Morever, the sector has shifted its focus on corporate financing in the current order to protect banks’ balance sheets from the expected economic fallout of COVID-19. A loosened monetary policy will likely reduce investment returns and hence margins for the sector during 2020.

No separate law for Islamic Banks has been issued and there are limited liquidity placement avenues in the Islamic Banking domain. More specifically, the country has not initiated issuing Sukuk while Islamic Banks have been permitted to invest in conventional securities to maintain liquidity. In April 2020, Egypt’s financial regulatory authority approved the first issuance of a corporate Sukuk. Issuance of Sukuk at government level would expand the universe of Shari’a compliant options available for liquidity management.

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Fiduciary Rating Report – AlBaraka Bank Egypt

RATING DRIVERS

Macroeconomic environment on a positive trajectory, albeit interrupted by COVID 19…

Macroeconomic indicators had been on an improving trend with real GDP growth crossing 5% for consecutive years in 2018 and 2019. As the impact of change in exchange rate regime and in turn devaluation diluted, both core and headline inflation have fallen to single digit. This has been coupled with a stable currency, and improving external and fiscal position. To blunt the economic impact of COVID-19, the Central Bank of Egypt has cut policy rate by 3% to 9.75% in March 2020, and again in September 2020 by a further 50bps, which is likely to affect banking sector margins. Moreover, with the expected deceleration of the economy, repayment capacity of financed counterparties is likely to be affected.

Liquidity position remained strong with some deterioration in asset quality…

Following the trend in the banking sector in Egypt, the Bank has maintained high level of cash and cash equivalents and investment in government securities with financing to deposits at a low 26.1% at end 2019. Asset quality of the Bank deteriorated at both gross and net levels as NPFs to loans ratio inclined to 7.3% in 2019 (2018: 4.3%). While still following traditionally conservative asset allocation and strong underwriting practices, the surge in non-performance is reflective of changes to classification methodology, with the implementation of IFRS-9. Further increase in expected losses to financing may be expected in 2020.

Margins to narrow with policy rate cuts and expectation of further such cuts…

While profitability remained strong during 2019, banking spreads shrunk with lower yields and higher cost of funding in 2019. The policy rate cut effected to blunt the economic impact of COVID-19, is likely to further narrow spreads in 2020. Exacerbated by the effects of economic slowdown during 2020 and expected higher ECL, AlBaraka Egypt’s return indicators are likely to trend lower in 2020.

Capital base increasing gradually through internal capital generation…

Strong and consistent profitability over the years coupled with increasing retained earnings have allowed the Bank to increase its capital base, while risk assets growth has remained measured translating into higher capital adequacy at 17.44% in 2019 (2016:11.88%). The quality of capital is sound with Tier 1 capital at 13.12% during 2019 (2018: 10.55%). CBE requires all banks operating in Egypt to increase capital to LE 5b by 2022. The Bank has already increased its equity to LE 4.1b by end of 2019 (2018: LE 3.4b) and is likely to generated required capital over the course of the next 2 years, with minimum or no requirement of external equity injection.

Satisfactory corporate governance framework amid COVID19 disruptions…

The Bank has updated the corporate governance framework not only to meet the local regulatory requirements, but also adopt international best practices. Potential disruptions caused by COVID-19 pandemic have been addressed ensuring constant functioning of the Bank. All major components of the

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Fiduciary Rating Report – AlBaraka Bank Egypt governance system including the risk management function, compliance, IT and internal audit have remained coordinated to ensure the well-being of the bank’s employees and customers. Implementation of IFRS-9 and ICAAP framework, have uplifted the risk management system instituted in the bank.

Segregation of independent Shari’a audit and supervision led to enhancement of Shari’a Infrastructure with support from group level oversight…

Despite lack of regulatory oversight to Islamic Banks in Egypt, the Bank’s Shari’a infrastructure is well developed with a dedicated Shari’a Supervisory Board governed by a documented charter. The Shari’a Supervisory Board has been reformed after the passing away of two of the Shari’a board members during 2020. The Bank has two Shari’a scholars in common with the parent, which enables harmonization of Shari’a practices within the group. The Bank does not have any representation from the SSB in the Board Governance and Nomination Committee, but the inclusion is under process and is expected to be presented and approved in the next Board meeting. In line with best practices, separation of Internal Shari’a Audit and Shari’s Officer is viewed favorably.

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Fiduciary Rating Report – AlBaraka Bank Egypt

FINANCIAL REVIEW

With limited Shari’a compliant investment options available to Islamic banks, Al Baraka Egypt maintains cash and cash equivalent reserves in excess, with majority of it placed in variable profit paying accounts. These largely constitute balances with banks, with the remaining placed with the Central Bank of Egypt for liquidity reserve management. Over H1’20, a diversion of cash balances into investments has been noted, which are concentrated in government securities. The bank also held 3.9% of assets in treasuries denominated in US$ and the Euro. Placements with banks posted decline of 34.1% from LE 3.5b in 2018 to LE 2.3b in 2019. On the other hand, investments in bonds increased to LE 14.0b during 2019 (2018: LE 11.1b).

Table 3: Asset Mix Total assets have been growing rapidly over the years reaching LE 72.7b with growth of 16.3% 2017 2018 2019 H1'2020 Cash and Cash 17,968 23,229 32,309 15,050 during the year (2018: LE 62.5b), fueled by a Equivalents steady supply of corporate and retail deposits. Financings Portfolio 13,672 15,746 16,793 17,487 Investment Portfolio 16,994 21,883 21,650 39,153 Net Financings have remained low at 23.1% of Other Assets 1,644 1,663 1,947 1,926 assets at end-2019 (2018: 25.2%). While the Total Assets 50,279 62,521 72,699 73,617 banking industry is marked by low exposure to financings, the bank’s loan to deposit ratio has remained significantly low at 26.1% at end-2019 against industry’s loans 44.8% during the period. The bank’s net financings grew by 6.7% to reach LE 16.8b during 2019 (2018: LE 15.7b). The financing portfolio is largely concentrated in commercial financings comprising more than two thirds of the portfolio. Consumer finance has remained low at 9.2% of total financings having grown by 5.0% during 2019 and leaving much room for growth. The Central Bank of Egypt had issued instructions to the operating banks to maintain at least 20% of the financing portfolio to be directed to SMEs (After deducting loans backed cash collaterals or loans backed by Ministry of Finance guarantee) and to be achieved by 2019. Despite achieving the required percentage in 2018, share of SME financing in total financing declined to 19.09% during 2019. The decline was largely because of the change in classification of some entities from SME in 2018 to Large Entities in 2019 as the annual sales/ revenues increased during the period. The decline in SME financing was also a reflection of shifting focus of CBE towards commercial lending to improve overall banking health indicators and further in 2020 to address the impact of COVID-19.

The Bank has maintained a diversified portfolio with manufacturing, construction and utilities/distribution sectors constituting 21.1%, 12.74% and 8.7% share respectively. Real estate and construction sector exposure continues to be noteworthy, as a segment being particularly vulnerable to economic cycles; the overall portfolio is largely defensive in nature with food and medicine, utilities, energy, trade, transport, communication and household goods forming other key sectors. FCY financing remains limited, having been extended against export receipts and fully covered through lien marking.

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Fiduciary Rating Report – AlBaraka Bank Egypt

Asset Quality

Table 4: Asset Quality Asset quality indicators have deteriorated at both gross and net levels. Gross Non LE'mn / % 2017 2018 2019 H1’2020 Net Financings 13,672 15,746 16,793 17,487 Performing Financing (NPFs) almost Gross NPFs 1,033 782 1,423 1,370 doubled to LE 1.4b (2018: LE 0.8b) during Net Non-Performing Financing 160 150 480 365 2019, and raising NPFs to Gross NPFs/ Gross Financings 6.5% 4.3% 7.3% 6.8%

Net NPFs/ Net Financings 1.2% 1.0% 2.9% 2.1% Financings to 7.3% (2018: 4.3%). Given Specific Provisions / NPFs 84.5% 80.8% 66.3% 73.3% the as yet unseasoned nature of new Net NPF to Total Assets 0.3% 0.2% 0.7% 0.5% NPFs, specific provisions to NPFs fell to 66.3% during 2019 (2018: 80.8%). As a result, net non- performance also surged to 2.9% during the period (2018: 1.0%). The Bank also booked an Expected Credit Loss (ECL) provision of LE 29.96m during 2019 against the investment portfolio. With required adjustments to ECL parameters charge-offs rose sharply in H1’20, causing a decline in net non- performance, despite further surge in stage-3 financings, despite some recoveries during the period.

Credit card for individuals registered relatively low non-performance at 1.03% (2018: 2.1%). Real estate consumer financings exhibited sharp improvement in non-performance declining to 0.2% during 2019 (2018: 1.0%). Further, gross NPFs in personal financing stood at 0.92% during 2019 vis-à-vis about 2% during 2018. A major portion of increase in the NPFs during 2019 comes from corporate (enterprise) financing which accounts for 97% of total NPFs of the Bank and was significantly contributed into by delinquencies in the commercial financing segment with a non-performance of 8.4% at end-2019 (2018: 4.2%) but led mostly by delinquencies in relatively larger exposures. The increase in gross non- performance in the SME sector to 4.61% (2018: Commercial: 4.2%, SME: 2.8%), while not substantial in terms of its overall contribution to non-performing financings, highlights the vulnerability of the segment. On a sector basis, NPFs have remained high for agriculture and fishing, chemical industries and rubber and textile sectors. The Bank has a system in place to monitor NPFs on a timely basis with early alerts for expected impairments and provisioning required.

Capitalization

Strong and consistent profitability over Table 5: Capitalization the years coupled with higher retained LE'mn / % 2017 2018 2019 H1’2020 earnings have allowed the Bank to CAR-CBE Basis 15.43% 15.92% 17.44% 20.33% Tier 1 Ratio 9.30% 10.56% 13.12% 15.28% increase capital adequacy from 11.88% in Net NPFs % Total Equity 6.1% 4.4% 11.8% 8.45% 2016 to 17.44% by 2019. The quality of Total Equity 2,633 3,432 4,072 4,322 capital remains sound with Tier-1 ratio Total Equity/Total Assets 5.2% 5.5% 5.6% 5.9% Subordinated Mudaraba 1,152 1,164 1,043 1,049 being 13.12% at end-2019 (2018: Retention Ratio 80.8% 86.0% 85.3% - 10.56%). With slower growth and largely maintained net earnings in H1’20, capital indicators have surged in the period and are likely to normalize with resumed business activity and year end distribution of net earnings.

The Bank has a Core Capital of LE 3.6b comprising Issued and Paid Up capital, Reserves, General Risk Reserves and Retained Earnings. Tier 2 capital of LE 1.1b consists mainly of subordinated finances

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Fiduciary Rating Report – AlBaraka Bank Egypt extended by shareholders. The increase in CAR comes not only from increase in capital internally generated, but also through reduced Risk Weighted Assets that declined by 4.3% to LE 26.2b during 2019 (2018: LE 27.4b), driven also by slowed pace of growth in financings and lower risk allocations within the portfolio.

Subordinated debt in Tier 2 capital is in the form of long-term Investment Mudaraba Deposits provided by Misr Insurance Company, and reinforced with a deposit of USD 25m and further USD 20m maturing in 2024 and 2025 respectively. Separately, the bank carries USD20mn Mudaraba Deposit from ABG, due to mature in 2025.

The Bank has clearly defined its capital management goals of compliance with local (CBE) requirements and reviews the capital adequacy ratio and utilizations on a daily basis. The Central Bank of Egypt revised the capital requirement of the Bank mandating all banks operating in Egypt to maintain LE 5bn as minimum issued and paid up capital and maintain capital adequacy above 12.5%. As such, the bank has resorted to increasing its earnings retention and is expected to be comfortably able to meet the minimum regulatory requirement by 2022. With a high retention ratio of 85.3% during the year 2019, the Bank has increased its total equity to LE 4.1b by end-2019 (2018: LE 3.4b). The Central Bank has also defined a minimum level of financial leverage ratio of 3%, with Al Baraka Bank Egypt at a financial leverage of4.81% in 2019 (2018: 4.47%) and therefore within requirements.

Funding & Liquidity

The Bank has shown sustained expansion Table 6: Funding and liquidity in the funding base supported by steady LE'mn / % 2017 2018 2019 H1’2020 growth in customers’ deposits. Total Total Customer Deposits 44,170 54,535 64,368 65,041 customer deposits grew by 18.0% during - Growth (y/y) 17.2% 23.5% 18.0% 1.0% Bank and FI Deposits 606 1,497 1,270 1,322 2019 to reach LE 64.4b (2018: LE 54.5b). -Growth (y/y) -34.1% 147.0% -15.2% 4.1%2 The cumulative average growth rate (CAGR) for customer deposits between 2016 and 2019 is about 19.5% suggesting steady access to fresh liquidity over time. The funding base has remained steady at H1’20 from year-end, suggestive of a slowdown in the economy in response to COVID-19. However no significant liquidity pressures seem evident.

Funds from financial institutions have Table 7: Liquidity remained limited with deposits largely % 2017 2018 2019 H1’2020 Net Financings / Total secured from a diversified corporate and 31.0% 28.9% 26.1% 27.0% Deposits retail customer base. At around 52%, Liquid Assets /Total 75.4% 78.0% 80.1% 79.8% deposits from corporate firms increased by Funding Liquid Assets /Total Assets 8.7% to LE 33.6b during 2019 (2018: LE 69.0% 71.4% 73.5% 73.0% 30.9b) while retail deposits surged 48% to LE 30.8b during 2019 (2018: LE 23.6b), driving growth. The increase in individuals’ funds largely came through new deposit pools initiated by the Bank and offering

2 YTD

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Fiduciary Rating Report – AlBaraka Bank Egypt

Shari’a compliant, remunerative deposit accounts to customers. A majority of around 93.7% of total customer deposits are remunerable with variable returns. Around 37.5% of the customer deposits have a maturity of up to one month, with sufficient coverage from available financial assets.

Significant investment in treasury securities and excess cash reserves cause liquid assets to have remained sizable in relation to assets and funding. Liquid assets to total funding and subordinated debt has further increased to 80.1% during 2019, with a further increase in cash and cash equivalents, and despite a marginal decline in net investments. Structurally, the banking sector has maintained high holdings of the treasury securities with AlBaraka Egypt’s net financings to total deposits at 26.1% during 2019 (2018: 28.9%), and declining on a timeline. Such high holding of government securities is not likely to materially reduce in the near term given the government’s deficit funding requirements, pushing up yields and resulting in favorable risk and return tradeoff for banks.

The Bank is exposed to limited foreign currency risk as the BOD has set limits for foreign currencies at total value of the each position, and which are continuously monitored on a daily basis. The Bank has a net positive position for all currencies including USD, Euro and other currencies. No imminent risks are evident in terms of currency mismatch.

CBE has implemented Liquidity Coverage Ratio (LCR) and a Net Stable Funding Ratio (NSFR) with a minimum requirement of 100% during 2019. The Bank has comfortably met the regulatory requirement with LCR at 391.5% and NSFR at 353.5% during 2019. Although LCR remains significantly high, we observed a sharp decline from 1242.6% in 2018 , as net cash outflows increased 3(x) during the year because ABBE consider funds from corporates, “insurance funds and unions” as FI with weight of 100% instead of 40%.

Profitability

AlBaraka Egypt has posted Table 8: Profitability consistent growth in earnings, LE'mn / % 2017 2018 2019 H1’2020 Gross Revenues from driven by an expanded business 5,102 6,960 8,112 3,846 Financings & Investments base and despite narrower Growth in Gross Revenues 51.7% 36.4% 16.6% - spreads in 2019. Even with Net Income (Loss) 725 1,004 1.054 541 increase in revenues from ROAA (%) 1.6% 1.8% 1.6% 1.50% ROAE (%) 31.5% 33.1% 28.1% 25.9%

finance and investment, net Spread 3.8% 3.9% 3.3% 3.8% - Return on Mark Up margin income remained steady 12.3% 13.7% 13.4% 11.7% Bearing Assets[2] at LE 1.9b due to an increase in -Cost of Funding 8.4% 9.8% 10.1% 7.9% cost of deposits. Spreads are Efficiency (%) 24.6% 21.6% 25.3% 24.4% expected to remain under pressure as benchmark rates have continued to slide and with the latest monetary policy action beinga 50bps cut last month, following a 3% cut in March 2020. Fees and commission income remained almost stable at LE 0.3b during 2019 (2018: LE 0.3b) and constitutes a decreasing portion of total revenues of the bank, indicating room for growth.

[2] Including performing finances, mark up bearing interbank placements, government notes, investment operations with banks and financial investments

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Fiduciary Rating Report – AlBaraka Bank Egypt

Administrative expenses grew by 17.4% to reach LE 0.6b during 2019 (2018: LE 0.5b) and represents wages and salaries increase of 8.6% and other administrative expenses surge by 25.9%. The increase in ‘other expenditures’ was largely driven by increase in gas and petrol prices and medical expenses, due to government imposed cooperative medical expenses. Efficiency ratio deteriorated to 25.1% during 2019 (2018: 21.6%) with increase in operating expenditures. The Bank expects expenses to remain high due to various COVID-19 related expenditures during 2020 and the drive towards digitization, continuing for the last two years. Counter measures have been taken by postponing branch renovation and expansion related expenses and digitization drive is likely to bring about efficiencies in future periods.

The Bank recorded lower Expected Credit Loss (ECL) of LE 0.25b during 2019 (2018: LE 0.34b) for financings and investments. Net earnings remained almost consistent vis-à-vis 2018, with ROAA and ROAE slightly contracting to 1.6% and 28.9% during 2019 respectively (2018: ROAA: 1.8% & ROAE: 33.1%).

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Fiduciary Rating Report – AlBaraka Bank Egypt

CORPORATE GOVERNANCE REVIEW

Regulatory Supervision

Central Bank of Egypt has taken steps recently to strengthen the banking sector through an enhanced supervisory framework. The country does not have a separate law for the Shari’a compliant banking industry. The parliament approved a new law for the Central Bank and Banking system and consultations have been held with banks and the International Monetary Fund. The Law is expected to cover some of the Islamic Banking related regulations and will further strengthen the frameworks for monetary policy and banking sector legislation.

CBE issued a number of risk management related regulations that have been adopted in 2020 to address the latest developments in international banking. Further, the Bank has prepared a detailed Internal Capital Adequacy Assessment Process (ICAAP) framework in 2019 covering detailed Basel Pillar 2 assessments. The Bank also implemented IFRS 9 in 2019 with a detailed study and disclosure of stage wise financing and expected credit losses. Both of these regulations would assist in better risk management and capital management practices in the banking sector.

During the year 2019, CBE instructed all banks to implement international best practices to protect customers’ rights and gain their confidence. The Central Bank also gave instructions regarding introduction of new products and approved new banking products and creating a department of ‘Credit Information Management’ for better customer management. The Central Bank also put increased emphasis on laws and regulations regarding Anti Money Laundering during the year.

As a listed entity, Al Baraka Bank Egypt complies with guidelines issued by the National Stock Exchange Further, as an ABG subsidiary, the Bank closely follows guidelines set by its key shareholder. CBE’s periodic audits also comprise a review of the adequacy of procedures and internal control infrastructure.

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Fiduciary Rating Report – AlBaraka Bank Egypt

Board of Directors

Bank’s Governance Manual set the operational guidelines for the Board of Directors (‘Board’ or ‘BoD’). The manual is updated on a periodic basis to reflect changes in governance practices as dictated by regulations and adopting international best practices. The Manual holds members of the Board to a high degree of diligence and accountability, towards shareholders and depositors.

. Composition: Table 9: Board of Directors

The Board comprises Representing Capacity 11 members 1. H.E./Mr. Abdel Aziz Mohamed Abdo Yamani ABG Non-Executive including the Chief (Chairman) 2. H.E./Mr. Ashraf Ahmed Moustafa El-Ghamrawy Shareholders Executive Executive Officer as (Vice Chairman/ Chief Executive) Vice Chairman of the 3. H.E./Mr. SamyFathy Mohamed Abdul Gawad Shareholders Executive (Deputy CEO) Board. The Board 4. H.E./Mr. Houssam ben El Habib ben El Hag Omar ABG Non-Executive underwent some 5. H.E/Mr. Mohamed Abdel Salam Al Bashir Al Shareholders Non-Executive changes during 2019, Shokry 6. H.E/Mrs. Omnia Ibrahim Aly al Nousiery Misr Life Non-Executive to meet the new Insurance regulatory 7. H.E./Mr. Ismail Saleh Abd El-Fattah Shareholders Non-Executive 8. H.E./Mr. HamadA.Al-Oqab ABG Non-Executive requirements. We 9. H.E./Mr. Ahmed Moustafa Abd-El-Hamid Misr Life Non-Executive noted significant Insurance 10. H.E./Mrs. Nevine Essam El-Din Gamea ABG Non-Executive changes in the Board 11. H.E/ Mr. Mohamed Ibrahim Gaaffar Banking Sector Non-Executive again during 2020. Expert The previous Chairman of the Board HE/ Mr. Ibrahim Fayez Al-Shamsi has retired and replaced by H.E./Mr. Abdel Aziz Mohamed Abdo Yamani, in addition to replacement of three other board members. The new formation as illustrated in table 9, includes high-level professionals with some gender diversity.

. Independence: The Bank currently has three independent members in the revised composition. It is recommended that one third of the Board Members be independent as per international best practices. The position of Chairman and Vice Chairman are more specifically required to be held by independent directors. Local regulations classify non-executive representatives of minority shareholders, who have less than 10% shareholding, as independent Board members.

As per independence requirements, the Bank does not grant any financing facility to any of the members of the Board or to any company that is owned or administered by them, as documented in internal policies. The restriction extends to any of the BoD members’ relatives, up to second degree.

. Directors’ induction and professional development: As per international best practices, new Board members undergo a formal induction program to create an understanding of the Bank’s operations and other issues. Although there is no regulatory requirement of conducting training of the Board, a formal training would ensure that members are made aware of the bank’s environment, business and risk appetite and assist with well-informed decision making.

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Fiduciary Rating Report – AlBaraka Bank Egypt

. Meeting frequency and attendance: The CBE mandates all banks to meet at least eight times a year. The Board of Directors (BoD) convened eight meetings in 2019. However, we noted at least two instances where two meetings were conducted on the same day. The meetings should ideally be conducted at regular intervals. The BoD had three meetings during H1’2020.

. Evaluation of the Board and its committees: The Bank has set a procedure of self-evaluation of the Board which is conducted on an annual basis and covers the performance of individual Board members and Board Committees.

. Remuneration: The Board Members are remunerated for attendance in meetings in addition to traveling and lodging expenses. Also, Board members are paid a proportion of the profit, as permitted under local regulations and established in the Bank’s Articles of Association. Remuneration of the Board Members remained same at LE 20m during 2019 (2018: LE 20m).

. Director’s Report: The Bank publishes a detailed Director’s Report in the Annual Report containing material information and detailed insights about the performance of the Bank and its future growth strategy, as well as the conduct of the BoD.

. Board Committees: The Bank has formed eight committees to delegate various responsibilities. The committees have clear terms of reference, which dictate each committee’s composition, its meetings frequency, its responsibilities, duties and powers.

During the year 2019, committees underwent changes in composition due to changes in the Board; key terms of reference and meeting frequency are covered in the table below:

Table 10: Board Committees Number of Committees Description 2018 2019 Audit Committee 11 6 The committee has been formed to assist the BoD in supervising the internal control process and reviewing the financial data before public disclosure. The committee meets on a quarterly basis at least and its sessions are also attended by Bank’s two auditors. The committee has been formed to meet all the regulatory requirements which is headed by one of the independent board members. Governance & 2 3 The committee has been formed to periodically evaluate the governance system of the Nomination Bank and suggest change to improve it further. The committee has four non-executive Committee directors. Representation from the Shari’a Supervisory Board (SSB) in accordance with IFSB and CBB recommendations would if enabled, be viewed favorably. Risk Committee 4 4 The committee has been formed with three core members and also attended by Head of Risk Sectors at the Bank. The committee is chaired by Mr. Ismael Saleh Abd El-Fattah who is a non-independent member. The committee should be chaired by an independent board member as per best practices. Salaries & 8 3 The committee is responsible for ensuring the independent supervision of all elements of Remuneration the payro lls and the other incentives structure agreed upon in addition to determining Committee the remunerations of the senior executives at the Bank. The committee is formed by three non-executive Board members and chaired by an independent director. Executive 7 9 With a representation from all major departments including Corporate Banking, Finance, Committee Risk Management, Legal department and Retail Banking among others, the committee has 7 members including 2 board members. The committee is chaired by the Vice Chairman of the Board who is also the CEO of the Bank.

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Fiduciary Rating Report – AlBaraka Bank Egypt

Zakah & Social 8 11 The committee is entrusted with various responsibilities related to branch operations, Responsibility Zakat Fund and Social responsibility. It has four board members. The committee is Committee chaired by an external consultant who was previously a Board member. The meetings of the committee are also attended by Shari'a Supervisory Board member for any Zakat related matter. Credit Committee 6 7 The committee is responsible for conforming that the credit risk decisions taken by the Bank are in line with given risk appetite of the Bank. The committee comprised of 3 board members. Senior 6 6 The Senior Management Committee has the highest administrative authority after the Management Board of Directors. It acts on behalf of the Board and in cases of necessity or difficulty in Committee convening of the Board in full. Consequently, its decisions acquire the force of the decisions of the Board by majority. The committee comprised of 6 members including Vice Chairman and CEO of the Bank.

The bank’s management team has remained stable with top management being associated with the Bank for several years. Key person risk is mitigated by the presence of a documented succession plan, which is reviewed periodically. The Bank improved committees related disclosures significantly with provision of detailed ToRs of committees, its formation, committee meetings and performance of the committees during the year.

Internal Control Infrastructure

The internal control infrastructure is being upgraded to better align it with international best practices, in addition to compliance with local regulations. The Bank has an ‘Internal Audit & Follow-up’ function, a ‘Risk Management’ function and a ‘Compliance and Anti Money Laundering (AML)’ function which forms the core of internal control infrastructure, further supported by IT department. Corporate governance at the Bank is also aided by supplementary audits undertaken by ABG. Heads of control functions are approved by the CBE.

The Internal Audit & Follow-up function:

The function currently consists of 8 staff members, in areas of technical examination; branch audit; inspection and follow-up divisions. The department is in process of hiring 3 more resources with a specialized resource for IT Audit. The staff also includes resident internal auditors posted at different branches. The department roles out an annual plan to schedule audit exercise at different branches. The audit plan for 2020 is proceeding as per the plan with no disruptions due to COVID-19.

The Bank has developed a comprehensive Internal Audit Charter which covers the purpose, authority, responsibility and scope of internal audit. It also mentions detailed terms of references (ToRs). Following international best practices, a risk-based audit plan was developed to prioritize the activity of inspection and internal audit and to be approved by the internal audit committee. Group level involvement is evident in units’ respective inspection and audit plan. The function also assists the external auditor to perform their responsibilities. To meet the annual revision requirement, the Bank has updated the Internal Audit Charter for 2020 which will be approved by the Board in the next meeting. The manual is updated annually to reflect any regulatory changes or any updates in the bank related policies and procedures.

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Fiduciary Rating Report – AlBaraka Bank Egypt

The internal audit function is required to go through an independent external audit by the regulators every two years in addition to periodic reviews by the ABG. The CBE conducted its external review in 2018 with no major observations, and all minor observations rectified. ABG conducted the external audit in February 2019 with no major observations and all recommendations adopted. The Bank is also required to conduct external review of audit processes and procedures every 5 years. The last such external audit was conducted by Grant Thornton in 2018 and will be due in 2023. Most observations required process flow improvements, which have subsequently been addressed.

The Bank has a dedicated Board Audit Committee which is headed by an independent director. Internal audit function is in constant interaction with the senior management and audit committee and all the reports are shared with the audit committee. Internal audit function also reports on the independence of the function, which is also shared annually with Board Audit Committee and the Board.

Risk Management:

Risk Management department is responsible for covering a broad spectrum of risk areas including credit risk, market risk, operational risk, liquidity risk, reputational risk among others, with continuous update of risk management and measurement methodologies. The CBE adopted two international regulations including Internal Capital Adequacy and Assessment Process (ICAAP) and IFRS 9 for expected credit loss calculations and the Bank has implemented both regulations in 2019. The department developed a detailed ICAAP document covering various pillar 2 risks and also disclosed the stage wise NPLs, provisioning and expected credit loss using IFRS 9, in the annual report for 2019.

An enterprise wide risk management system has been developed. The Risk Management function reports directly to the Board Risk Committee.

Upgrade of credit financing review and approval procedures since the Bank has restructured the model with Head Office becoming the hub of centralized credit review and approval processes, with only smaller financing amounts reviewed and approved at the branches (fully secured). Risk Management has a central role to play in reviewing and approving all credit financing of the Bank. During the process, the Bank has also standardized credit financing applications.

To assess asset quality of the Bank, Risk Management conducted a bank-wide stress testing exercise under the assumption of potentially increasing non-performance in 2020. To counter increasing credit risk, the Bank has increased its expected credit losses provisions by LE 100m; no material stress is anticipated on capital adequacy. Expected credit loss under IFRS-9 employs an externally acquired credit screening application and the Bank plans to move to its advanced version by September 2020. Enhanced focus on operational risk management is required during COVID-19, with remote access granted to staff and an increasingly digitized work environment. The Bank has developed Risk Control Self-Assessment (RCSAs) and key risk indicators (KRIs) for operational risk assessment and conducts periodic trainings for the staff to keep them abreast of the changing dynamics of operational risks.

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Fiduciary Rating Report – AlBaraka Bank Egypt

Compliance and AML

The compliance and AML departments are central to the governance structure to which 5 personnel are allocated at the Head Office and at least one staff in all of the 32 branches. The function is responsible for ensuring that the Bank adheres to relevant KYC, and Combating Financing of Terrorism (CFT) and sanctions regulations, as well as ensuring compliance with local banking and AML regulations. The importance of the compliance and AML function has further increased during the COVID-19 pandemic to ensure that all local and international applicable compliance requirements are met.

The department reports to the Audit Committee in quarterly and annual meetings, and further reports to the CBE through a comprehensive annual report. The Bank also has a purpose driven Board Compliance Committee. The department also coordinates with HR department for the development and promotion of Compliance culture among all personnel and their training in this respect and on combating money laundering and terrorism financing.

The CBE issued new guidelines to deal with the changing economic environment during COVID-19 and instructed banks to allow both retail and corporate clients to defer installments for 6 months. The CBE also issued regulations related to AML and customer due diligence (CDD). The Bank is ensuring compliance with these regulations. The Bank is also working on digitization to meet the recent ‘work from home’ requirements and have contracted with a firm to implement the digitization plan, while also forming an internal committee to monitor the process. The CBE also issued a regulation regarding customer rights and data protection and has given instructions to all banks to establish a “Customer Rights Protection” department.

The Bank has a structured complaint management system featuring multiple mediums to lodge a complaint. The CBE has given a maximum time of 15 days to resolve any complaint. The Bank resolves most of the queries in maximum 7 days, comfortably meeting the regulatory requirements.

A sophisticated IT infrastructure supported by strong systems, both bank-wide and at department level which is in line with internationally implemented set up of the Group. The Bank has implemented Al Baraka Banking Group’s Islamic Core Banking system (iMAL) starting from March 1, 2020. A Business Continuity Plan (BCP) is in place with Disaster Recovery site situated at a distance from the head office, and provides a safeguard against large-scale calamities. The Bank emphasizes on the security of customer data and the resilience of its IT systems. Provision of support required to assist staff in working remotely while ensuring utmost security of data. The Bank is also working on digitization and IT is playing its part in making the transition easier too.

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Fiduciary Rating Report – AlBaraka Bank Egypt

STAKEHOLDER RELATIONS

Investor Relations

The major shareholders of the Bank remain the Table 11: Shareholding Structure same with Al Baraka Banking Group holding the Shareholders Nationality % majority with 73.7% of the Bank’s share. Misr Life Al Baraka Banking Group Bahrain 73.68 Misr Life Insurance Company Egypt 5.25 Insurance and Misr Insurance Company also Misr Insurance Company Egypt 4.50 maintained 5.25% and 4.50% share, respectively. Others (Individuals) Egypt 4.34 Dallah Company for Real Estate Egypt 3.81 We observed minor changes in the share Investment composition of individuals, Change Global Frontier Change Global Frontier Markets LP USA 1.26 Markets LP, Private Sector (foreigners), others Private Sector Foreigners 3.80 Mohsen Badr Ali Khalaf Allah Egypt 1.15 (private sector) and others (individuals and Others (Private Sector) Egypt 0.79 King Abdullah University of Science foreigners). A dedicated investor relations function Saudi Arabia 1.04 and Technology has been instituted. Further an approved Disclosure Others (Individuals) Foreigners 0.38 and Publicity Policy in place.

Customer Relations

Al Baraka Bank Egypt serves its customers through a distribution network of 32 branches (2017: 32 branches). The National Bank of Egypt has been effectively separated from the automated teller machines, and a contract was signed with Network International as the operator of the bank's ATM network. A total of 32 teller machines have been installed in all branches of the bank. Currently, contracts are underway with external sites to expand the installation of the bank’s ATM machines. The Bank is also in process of adding other services such as Fawry (instant or rapid transfer) and E Finance. The Bank’s website provides the latest information related to product offerings, banking fees, annual reports, compliance, and a range of other relevant information. A dedicated information phone line is available 24 hours every day of the week.

Human Resources

The Bank operates with a staff strength of 982 employees during the year 2019 (2018: 955). A formal succession plan covers the risks of staff turnover, and affords the availability of leadership succession. In the present scenario, all banks in Egypt are mandated to ensure lower presence of staff in the Bank, allowing staff to work remotely and effectively.

Corporate Social Responsibility (CSR)

The CSR function is overseen by the Zakah Fund and Social Responsibility Committee, which is responsible for ensuring adequate and effective utilization of funds allotted by the Board. The Bank publishes separate audited financial statements for Zakah and Charity Donations Fund, which is viewed favorably; the publication of Social Responsibility Report is recommended for added transparency.

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Fiduciary Rating Report – AlBaraka Bank Egypt

SHARI’A GOVERNANCE REVIEW

Regulatory Environment

Central Bank of Egypt (“CBE”) regulates, supervises and licenses all banks in the country. However, at present, there are no specific regulations for Shari’a-compliant financial services. In the absence of Islamic banking specific licensing regime for Islamic Financial Institutions (IFIs), the commitment to operate in accordance with Shari’a principles is dictated in the Articles of Association of institutions. Although the CBE has indicated that it plans to develop Shari’a Governance (SG) related regulations, so far no draft regulation has been released. The IFIs operating in the country are faced with a myriad of operational issues, including a lack of Shari’a compliant liquidity placement avenues; in view of these issues, prominent scholars in the country have issued fatwa allowing IFIs to invest in conventional sovereign issued debt as an alternative. However, there has been some traction with issuance of corporate Sukuk and expectations of sovereign Sukuk in coming years.

In-house Shari’a Governance Infrastructure

Supported by its association with ABG, the Bank has a standard in-house SG infrastructure governed by a documented charter, which was last updated in 2020 to incorporate regulatory amendments. The Bank has completed the process to update Shari’a governance framework to better align with best practices. Recently, two amendments have been instituted in the charter of the SSB and have been approved by the Board,. These amendments are (a) ensuring minimum 75% attendance level in the SSB meetings and (b) separation of Internal Shari’a audit and Shari’a Officer with their own charter, to be effective from December 2020. In conjunction with best practices, IIRA views segregation of these functions favorably. The bank has also instituted a Zakah Fund Committee, which is entrusted with appropriate calculation and adequate disbursement of Zakah liabilities.

The current charter lays down rules for the composition of Shari’a Supervisory Board (SSB) members’ appointment, qualification & disqualification, scope, roles and responsibilities, terms of reference (ToRs), meetings & its conduct, and reporting structure. It also defines the relationship of SSB with the Board and the management of the bank. Further, the supervision of the Unified Shari’a Supervisory Board (“USSB”) at Group level also strengthens the governance framework of the Bank.

To improve knowledge & skills of employees, training in Shari’a specific aspects has been given focus. In addition to internal training programs, external training for Professional Diploma of Shari’a auditing & compliance were arranged for the Shari’a team specifically during 2019.

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Fiduciary Rating Report – AlBaraka Bank Egypt

SSB Composition Table 12: SSB Composition - Since our last review, the SSB Name Designation composition underwent change Dr. Abdullatif Mahmood Al Mahmood Chairman Dr. Al-Ayash Al-Sadiq Fadad Deputy Chairman due to the passing away of both Dr. Mohamed Nagib Awadeen Elmaghraby Member Dr. Abdul Sattar Abu Ghuddah Dr. Hasanean Abdul Monem Hasanean Supervisory Member and Dr. Ahmed Mohuyeldin Mr. Moustafa Abdullah Abd-Elhamid Assist of Secretary to the SSB Ahmed in 2020. The newly reformed Shari’a Supervisory Board has two members common with the parent bank. IIRA considers two common SSB members at ABBE favorably, given that it enables harmonization of Shari’a practices within the group.

- The four members of SSB are well-versed Shari’a scholars and include a resident member who is tasked with providing daily Shari’a guidance to the Bank.

- The members possess vast experience in Islamic jurisprudence and Islamic finance. The SSB issues decisions, recommendations, and opinions which are considered binding.

- For effective governance oversight, the charter requires that SSB should meet with the Board at least once in a year. In line with its charter, SSB met with the Board during 2019. In addition, it also requires including an SSB member in the Board Governance and Nomination Committee (BGNC). However, no representation of SSB in the BGNC marks a deviation from recommendations. As per the management, the SSB has approved this recommendation and it will also be presented in the next Board meeting for approval. In conjunction with best practices, IIRA views the inclusion of an SSB member in BGNC favorable for effective framework of Shari’a governance in the Bank.

Meetings

- In line with best practices, SSB members are required to meet at least quarterly. During 2019, SSB convened four meetings with a full quorum in line with its ToRs.

- The meetings of SSB cover review of the financial statements, products, Shari’a governance charter, Shari’a audit plan & report, and employee trainings.

- Meeting minutes are documented & circulated to the relevant departments. Participation of board members and senior management has been observed.

Independence

- The SSB is viewed as an independent body. The SSB members are appointed by the shareholders at the General Assembly and report directly to the shareholders annually.

- In addition, the governance charter of the Bank restricts SSB members to have any kind of affiliation with the bank which may affect its independence.

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Fiduciary Rating Report – AlBaraka Bank Egypt

Terms of Reference

- Terms of reference are well laid out in the Bank’s Articles of Association.

- The SSB is responsible for monitoring the bank’s operations and activities in terms of their compliance with Shari’a and providing an independent opinion thereof, in addition to approving all product structures prior to launch.

- The SSB also verifies the distribution of profits between shareholders and investment account holders as being in conformity with the contracts concluded and the concurrent payment and distribution of Zakah to legitimate beneficiaries.

- A representative of the SSB attends General Assembly meetings to present the Shari’a report.

- The supervisory member, who is assigned to providing daily Shari’a guidance to the Bank, also attends relevant meetings of the Zakah and Social Responsibility Committee.

Remuneration

- SSB members are remunerated in the form of fixed annual fee and meeting allowances. Based on the recommendation from the Board, the shareholders approve the remuneration of the SSB. IIRA views the remuneration of the SSB favorably, as it is not linked with the bank’s performance.

SSB Report

- In addition to the periodic reports, SSB submits an annual independent report on the Bank’s Shari’a compliance to the shareholders in the general assembly which is published in the annual report.

- The SSB report reviews the bank’s performance from a Shari’a perspective & opines on the state of compliance of all contracts and transactions and allocation of profit or loss to investment accounts & equity holders and Zakah calculation.

- The report of the Shari’a board is considered to be satisfactory and could be further supplemented with the disclosure of a statement on non-compliant income and its disbursement to the charity fund if any.

SSB Evaluation

- An annual self-assessment questionnaire has been designed for the SSB and its members which are then submitted to the Board and SSB. The questionnaire covers various aspects of SSB evaluation focusing on SSB’s duty towards the protection of the Bank’s and shareholders’ interest. As such, expanding the scope to include the protection of investment accounts holders will be more reflective of the SSB’s fiduciary responsibilities.

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Fiduciary Rating Report – AlBaraka Bank Egypt

- The evaluation criteria has a comprehensive coverage to affirm SSB’s efficiency and the eligibility of its members; its role in controlling banking activities and the extent to which it accomplishes its duties; the efficacy of the Shari’a supervision and control systems in the Bank; the involvement of the SSB in the various activities of the Bank and its contribution to bringing about necessary change.

- The extent of communication with the Board of Directors and the frequency of this communication are also evaluated. The evaluation is organized and conducted by the Governance and Nominations Committee of the Board of Directors.

Internal Shari’a Audit/Officer

- Institution of separate Shari’a audit and supervision function led changes in the structure and responsibilities of the Shari’a internal control of the bank. - An independent Internal Shari’a Audit function is in place, governed by its own charter. The charter of the function has been updated recently in 2020. The function operates independently with direct reporting to the SSB. The function staffs 3 personnel, responsible for Shari’a audit post execution of banking operations. Notwithstanding this, further reinforcement is needed, considering the size and operations of the Bank.

- The scope of Internal Shari’a audit includes all Bank’s branches and departments. The audit sample depends on the respective branch and volume of audited transactions. Samples represent no less than 30-40% of all transactions, on average. Product audits are also duly conducted. As per the management, there were no high level observations during 2019 and the bank remained in compliance with Shari’a rules and principles

- The function is also responsible for undertaking routine audits of business areas as outlined under the SSB approved Shari’a Audit plan to ensure compliance with the SSB’s juristic opinions and pronouncements. The function has adopted a risk-based Shari’a audit plan, which determines the scope based on risk assessed for each Bank segment. After finalizing observations during audit, a report is sent to concerned department or branches including details of each observation, corrective action, and timelines to resolve the observations. Further, audit findings are reported to the SSB on a bi-annual basis, with a summary of the reports sent to the Board’s Audit Committee.

- Field visits to branches are performed periodically, as outlined in the Shari’a audit plan.

- Compliance of CBB requirements of external Shari’a audit has not received concurrence from CBE, and has therefore not been undertaken.

- Shari’a Officer is another separate function of the bank’s Shari’a governance structure which has been instituted during 2020, in line with best practices. The function has its own charter and reports functionally to the SSB and administratively to the CEO. Shari’a officer performs under

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Fiduciary Rating Report – AlBaraka Bank Egypt

the guidance and supervision of the SSB and focuses on daily business operations and facilitates in the product development process. The function is responsible for reviewing of all the product proposals and related agreements, contracts, manuals, process flows following the approval of SSB. The function also reviews new product structures in collaboration with the Internal Audit and risk management departments. Further, Shari’a Officer is responsible to facilitate HR department in arranging and conducting periodic training courses on Islamic banking and raise awareness of the fatwas issued by the SSB regarding the products and services provided by the bank. The function will be responsible to submit periodic reports to the SSB and the management.

Compliance with Participation Banking Principles and Rules

Non-Compliant Income

- ABBE has a documented charter for the charity and Zakat fund. Under the supervision and guidance of SSB, all income which deviates from Shari’a principles is forfeited in a separate account. Such fund is then deployed for charitable causes and to the beneficiaries, or Islamic research events, approved by SSB. The Bank does not utilize charity fund for its operation.

- With the consent of its clients, the Bank calculates and deducts Zakat on the net asset and rights method approved by the AAOIFI. As per the policy, a client may request the Bank to calculate Zakat only. In this case the bank will not deduct Zakat from the account. The management is held responsible to submit reports to the Zakat & Charity fund committee biannually.

Fiduciary Responsibility and Performance

Profit Distribution Mechanism

- ABBE receives funds through current deposit, saving deposits and time deposits based on profit and loss sharing (Mudaraba) agreements and investment agency (Wakala) agreements, with the latter used only for corporate entities.

- Based on their risk and reward features, profit sharing accounts are classified under six different maturity groups. These accounts can be denominated in Egyptian pound, USD, or EUR and each currency comprises a separate pool. The Bank pays the profit at maturity of the deposit or in case of deposits with a term of at least one year, at pre-agreed periodic intervals. The bank has its own documented profit distribution policy. The sharing of the profits between the bank & depositors is as per a pre-agreed profit-sharing ratio which is determined using weight and profit-sharing ratio assigned to each category of deposit within a pool.

- As per the Bank’s policy, the Bank may create Profit Equalization reserves or give Hiba from own equity to smooth profit shares.

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Fiduciary Rating Report – AlBaraka Bank Egypt

Shari’a Disclosures

. The Bank made detailed Shari’a related disclosures in the annual report including separately presented audited financial statements for Funds of Zakah and Charity Donations, in accordance with relevant regulation.

. The Bank has enhanced disclosure for investment account holders with respect to its sizable investment in conventional debt securities, in accordance with SSB’s recommendations. It also advises IAH of their responsibility to purify return. Also, the Bank calculates and discloses income purification percentage at customer touch points and in the financial statements, and informs IAH that income from conventional debt securities is used in entirety to remunerate IAHs.

. Shari’a related disclosure leaves room for improvement and could be further enhanced with the inclusion of SSB members’ brief profiles, meetings’ attendance matrix, annual remuneration, and a statement providing quantum and sources of non-compliant income.

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IIRA Rating Scales & Definitions

Ratings on International Scale

Foreign Currency Ratings Local Currency Ratings The foreign currency ratings by IIRA measure the ability of the The local currency ratings by IIRA measure the ability of the rated rated entities to service their foreign currency obligations. These entities to service their local currency obligations. These ratings ratings incorporate all the sovereign risks of a country, including incorporate all the sovereign risks of a country, except the risk of the risk of converting local currency to foreign currency. converting local currency to foreign currency.

Ratings on National Scale The national scale local currency ratings assigned by IIRA are tiered against an assumed local government rating of ‘AAA’ and, there- fore, do not incorporate all the sovereign risks of a country. FIDUCIARY RATING REPORT Issue/Issuer Rating Scale & Definitions Medium to Long Term Short Term IIRA uses a scale of AAA to D to rate credit worthiness of the IIRA uses a scale of A1+ to C to rate credit worthiness of the Khaleeji Commercial Bank issuer and long term issues, with AAA being the highest possible issuer and its short term obligations, with A1+ being the highest rating and D being the lowest possible rating. possible rating and C being the lowest possible rating. Report Date: Credit Rating AAA: Highest credit quality. Represent the least credit risk. A1+ : Highest certainty of timely payment. Short-term liquidity, December 2, 2015 including internal operating factors and / or access to alternative AA : High credit quality. Protection factors are strong. Risk is source of funds, is outstanding and safety is just below risk free Latest Rating modest but may vary slightly from time to time because of short-term obligations. Analysts: (December 2, 2015) economic conditions. Raza Lakhani, CFA A1 : High certainty of timely payment. Liquidity factors are International Scale (LT/ST) BB/B A : Good credit quality. Protection factors are adequate. Risk excellent and supported by good fundamental protection factors. Avinash Asar factors may vary with possible changes in the economy. Risk factors are minor. National Scale (LT/ST) BBB-(bh)/A3(bh) BBB : Adequate credit quality. Protection factors are reasonable A2 : Good certainty of timely payment. Liquidity factors and and sufficient. Risk factors are considered variable if changes company fundamentals are sound. Access to capital markets is Rating Outlook Stable occur in the economy. good. Risk factors are small. BB : Obligations deemed likely to be met. Protection factors are A3 : Satisfactory liquidity and other protection factors qualify capable of weakening if changes occur in the economy. Overall entities / issues as to investment grade. Risk factors are larger quality may move up or down frequently within this category. and subject to more variation. Nevertheless, timely payment is Fiduciary Score expected. B : Obligations deemed likely to be met. Protection factors are Latest capable of fluctuating widely if changes occur in the economy. B : Speculative investment characteristics. Liquidity may not be Overall quality may move up or down frequently within this sufficient to ensure timely payment of obligations. Fiduciary Score 71 - 75 category or into higher or lower rating grade. C : Capacity for timely payment of obligations is doubtful. Asset Manager Quality 66- 70 CCC : Considerable uncertainty exists towards meeting the Corporate Governance 71 - 75 obligations. Protection factors are scarce and risk may be Fiduciary Rating Score substantial. Shari'a Governance 71 - 75 (91-100) – Very Strong Fiduciary Standards CC : A high default risk (91-93), (94-97), (98-100)* Fiduciary Score 71-75 Rights of various stakeholders are adequately protected. Certain weak- C : A very high default risk Rights of various stakeholders are well protected and the overall nesses have been identified in a few governance related areas. governance framework is strong. D: Defaulted obligations (76-90) – Strong Fiduciary Standards Note: IIRA appends modifiers + or - to each generic rating (76-80), (81-85), (86-90)* classification from AA through B. The modifier + indicates that Rights of various stakeholders are protected. Minor weaknesses Company Information the obligation ranks in the higher end of its generic rating have been identified in the overall governance framework. • Incorporated in 2004 • Shareholding Pattern: category; no modifier indicates a mid-range ranking; and the (61-75) – Adequate Fiduciary Standards Gulf Finance House BSC – 47.00% modifier - indicates a ranking in the lower end of that generic • Chairman: Dr. Ahmed Khalil Al Mutawa (61-65), (66-70), (71-75)* Al Imtiaz Investment Company KSCC- 14.01% rating category. Rights of various stakeholders are adequately protected. Certain • Chief Executive Officer:Mr. Khalil Ismaeel Al-Meer weaknesses have been identified in a few governance related Emirates Islamic Bank PJSC– 8.91% areas. • Listed on Bahrain Bourse Rating Outlook : The three outlooks 'Positive', 'Stable' and (40-60) – Basic Fiduciary Standards • External auditors: KPMG Fakhro 'Negative' qualify the potential direction of the assigned rating(s). (40-46), (47-53), (54-60)* An outlook is not necessarily a precursor of rating change. Rights of various stakeholders are relatively vulnerable. Significant weaknesses have been identified in the overall governance frame- Rating Watch-list : IIRA places entities and issues on 'Watch-list' work. when it deems that there are conditions present that necessitate The information contained herein is obtained by IIRA from sources believed to be accurate and reliable. IIRA does not audit or verify the re-evaluation of the assigned rating(s). A 'Watch-list' (Less than 40) – Low Fiduciary standards truth or accuracy of any such information. As a result, the information herein is provided "as is" without any representation or warranty announcement means that the status of the assigned rating(s) is Rights of various stakeholders are at high risk and the overall gov- of any kind. IIRA, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest ernance framework is weak. relating to the rating(s) / score(s) mentioned. Rating is an opinion and not a warranty of a rated entity's current or future ability to meet uncertain and an event or deviation from an expected trend has contractual obligations, nor it is a recommendation to buy, sell or hold any security. occurred or is expected and additional information is necessary *Apart from the lowest score range, all score ranges have been to take a rating action. split into three sub-divisions for further clarity Islamic International Rating Agency The rating assignment has been carried out with cooperation of the rated entity. The information contained herein is obtained by IIRA from sources believed to be accurate and reliable. IIRA does not audit or verify the truth or accuracy of any such information. As a result, the information herein is provided “as is” without any representation or warranty of any kind. IIRA, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s) mentioned. Rating is an opinion and not a warranty of a rated entity’s current or future ability to meet contractual obligations, nor it is a recommendation to buy, sell or hold any security.