Annual Report 2016
Corporate Governance report
Good corporate governance
is considered central to
achieving the Bank’s
objectives, and fundamental
in maintaining a leading
position within the local and
regional banking sectors.
BBK takes pride in ensuring exceptional standards of corporate governance are met. Our corporate governance policy is underpinned by international standards of best practice.
Initiatives in 2016
BBK implemented initiatives to enhance corporate governance practices at the Bank, including amending the organisational structure so that the Risk Management function reports directly to the Risk Committee of the Board, and the Compliance and AML function reports directly to the Audit Committee of the Board. Also reviewing all Bank policies, especially risk management policies. The evaluation process for the Board, its committees and Board members was successfully completed during the year and was concluded with recommendations for improvement. Furthermore, the Bank continued to publish enhanced disclosures in the annual report in line with best corporate governance practices and regulatory requirements. The Board reviewed the Board charter and Board Committees’ Terms of Reference.
A full training schedule was approved by the Board for the year 2016, and the attendance of Board members was monitored.
The Bank fully implemented the new international accounting standards IFRS9 in 2016, and was one of the first banks in the region to do so.
Corporate governance philosophy
BBK shall continue its endeavour to enhance shareholders’ value, protect their interests, and defend their rights by practising the pursuit of excellence in corporate life. The Bank shall not only comply with all statutory requirements – including the Corporate Governance Code of the Kingdom of Bahrain and the High Level Controls Module of the Central Bank of Bahrain – but also formulate and adhere to strong corporate governance practices.
BBK shall continuously strive to best serve the interests of its stakeholders, including shareholders, clients, employees, and the public at large.
The adoption and implementation of corporate governance is the direct responsibility of the Board of Directors, and this endeavour is in line with the policies of regulatory authorities and statutory requirements in the Kingdom of Bahrain and other countries where BBK operates.
Risk appetite statement
Risk appetite is the level and type of risk that the Bank is willing to assume in order to achieve its strategic and business objectives, keeping in perspective the obligations to its stakeholders.
The risk appetite of the Bank is both a qualitative and quantitative measure, and reflects its level of risk tolerance in normal as well as in stressed scenarios. It is expressed as a measurable key performance indicator (KPI), a tolerance limit, or as a qualitative guideline.
The Bank has a well-defined Risk Appetite Framework, that consists of the Risk Appetite Statement along with: (a) well-defined performance metrics in the form of Key Performance Indicators or KPIs; (b) risk limits, exposure criteria, restrictions and controls, lending and investment standards as laid out in the internal risk policies and procedures manual; (c) capital and liquidity benchmarks, which are monitored in the Asset Liability Management Committee meetings; (d) key business and risk management objectives, goals and strategy, which are defined in business, investment and risk management strategies; and (e) management and oversight structures in the Bank through Management and Board committees. Our risk appetite defines the desired performance levels, which, in turn, are embedded into management of the various risks within the Bank as well as the capital of the Bank. Our risk appetite is integrated into the strategic, capital, and risk management planning process across business verticals. The Bank measures the contribution of each business vertical towards key KPIs.
The Bank aims to optimise the risk-reward for the benefit of all stakeholders, and this is reviewed and implemented through strategies (business, investment, risk management, ICAAP), which are closely reviewed annually. The Bank’s primary exposure is to credit risk along with other Pillar 1 and Pillar 2 risks assumed in the normal course of its business. The risk appetite statement is also reviewed though a Risk Management Strategy document by management, and recommended for approval to the Risk Committee and the Board annually. The Bank’s risk appetite requires, amongst other things:
- A high level of integrity, ethical standards, respect and professionalism in our dealings.
- Taking only those risks which are transparent and understood, and those which can be measured, monitored, and managed.
- Ensuring that the Bank has adequate levels of capital adequacy on an ongoing basis as mandated by the regulator (currently 12.5 percent), and as assessed by the Bank in its ICAAP document; that the capital requirements and capital planning are incorporated in its capital management strategy.
- Ensuring that the Bank has access to adequate levels of stable, efficient, and cost-effective funding to support liquidity and lending or investing requirements on an ongoing basis; that the Bank has in place a robust liquidity management framework and contingency plans to monitor and manage liquidity both in normal and stress liquidity conditions, in addition to monitoring key liquidity ratios (internal and regulatory) in Asset Liability Management Committee meetings on a monthly basis.
- Adhering to the core principles of lending, which are enshrined in the general lending policy of the Bank.
- Maintaining a robust credit management framework with focus on geographies where the Bank has physical presence (Kuwait, India, Dubai), GCC, and select MENA and other countries; undertaking exposures to countries within the directives of the Country Risk Committee, which reviews country risk and the Bank’s strategy in those countries on a dynamic basis.
- Having in place a defined monitoring, collection and restructuring framework for effective recovery mechanism.
- Limiting exposures to high-risk activities which may culminate in tail-end risks, jeopardising the Bank’s capital and creditworthiness.
- Striving for optimum profitability through income generation, cost efficiency, and low impairment.
- Widening the product basket and delivery channels for increasing customer satisfaction; assessing new credit products in a structured form for approval by appropriate authorities, so that the underlying risks, benefits, operational processes, system/technology requirements, and legal requirements are understood and managed.
- Protecting the Bank’s and the customers’ interests through robust operational procedures, internal controls, system support, training and operational risk management processes to mitigate operational risk.
- Ensuring full compliance with legal, statutory, and regulatory requirements; ensuring adherence to anti-money laundering (AML) and other obligations under international law; providing adequate training and guidance to mitigate compliance and AML risks.
BBK’s shares are listed on the Bahrain Bourse. The Bank has issued 1,081,647,952 equity shares, each with a face value of 100 fils. All shares are fully paid.
Distribution schedule of each class of equity
Annual Ordinary General Meeting and Extraordinary General Meeting
The Annual Ordinary General Meeting (AGM) was held on 28 March 2016 and the Extraordinary General Meeting (EGM) was held on 28 January 2016.
The EGM resolved to approve increasing the Bank’s capital through offering 100 million Bahraini Dinars worth of perpetual convertible capital securities to existing shareholders, on a rights privileged subscription basis, to meet the higher regulatory capital requirements under Basel III and to fund the Bank’s future strategic initiatives. The offering was well received and the participation rate was 86.1 percent. Distribution payment amounts shall be payable, subject to the terms and conditions, on the outstanding nominal amount of the capital securities semi-annually on 2 May and 2 November each year, and the first distribution was paid on 2 November 2016. The minutes of the AGM and the EGM are published in this annual report.
The Bank submits a corporate governance report to the AGM annually, covering the status on compliance with the related regulatory requirements. The Bank discloses and/or reports to the shareholders at the AGM the details under the Public Disclosure module of the Central Bank of Bahrain’s Rule Book. Such disclosures include the total remuneration paid to the Board of Directors, the executive management and the external auditors. The total amount paid to directors and executive management is also contained in the annual report.
Board of Directors’ information
The Board’s composition is based on the Bank’s Memorandum of Association and Articles of Association, and comprises 12 members. The Board represents a mix of high-level professional skills and expertise. Furthermore, in compliance with corporate governance requirements, the Board Committees consist of members with adequate professional background and experience. Consequently, the Board has five independent Directors. The Board periodically reviews its composition and the contribution of Directors and Committees.
The appointment of Directors is subject to CBB approval. The classification of ‘Executive’ Directors, ‘Non-Executive’ Directors and ‘Independent Non-Executive’ Directors is as per definitions stipulated by the CBB. The current term of the Board started in March 2014 and ends in March 2017.
Directors are elected/appointed by shareholders at the AGM. Experts who are non-shareholders or promoters of the Bank may also be elected as Directors. Election or re-election of a Director at the AGM shall be accompanied by a recommendation from the Board, based on a recommendation from the Nomination, Remuneration, and Corporate Governance Committee, with specific information such as biographical and professional qualifications and other directorships held.
The Board is supported by the Corporate Secretary, who provides professional and administrative support to the General Assembly, the Board, its Committees and members. The Corporate Secretary also assumes the responsibilities of the Corporate Governance Officer, and in this context supports the processes of performance evaluation for the Board, the Board Committees, and individual Directors as well as the process of access to independent advice and other relevant issues. The appointment of the Corporate Secretary is subject to the approval of the Board.
BBK’s Corporate Secretary is Ahmed A. Qudoos Ahmed, who joined the Bank in 2009. His qualifications include a BSc in Engineering from the University of Bahrain in 1996, and he has since attended many advance training programmes in corporate governance both in Bahrain and abroad, accumulating over 20 years of experience in the financial sector.
Directors’ roles and responsibilities
The Board of Directors oversees the implementation of the Bank’s strategic initiatives and its functioning within the agreed framework, in accordance with relevant statutory and regulatory structures. The Board ensures the adequacy of financial and operational systems and internal control, as well as the implementation of Corporate Ethics and the Code of Conduct.
The Board reserves a formal schedule of matters for its decision to ensure that the direction and control of the Bank rest with the Board. This includes strategic issues and planning, performance reviews, material acquisition and disposal of assets, capital expenditure, authority levels, appointment of auditors, and review of the financial statements, financing and borrowing activities including annual operating plan and budget, ensuring regulatory compliance, and reviewing the adequacy and integrity of internal controls.
The Board shall exercise judgement in establishing and revising the delegation of authority for Board Committees and Management. This delegation could be for authorisation of expenditure, approval of credit facilities, and for other corporate actions. Such delegation may be approved and expressed under various policies of the Bank. The thresholds for the identified authorities will depend upon the operating requirements of the Bank.
The issues of major capital expenditure, divestitures, mergers and acquisitions, and certain strategic investments would be within the Board’s authority.
Each Director holds the position for three years, after which he must present himself to the Annual General Meeting of shareholders for reappointment. The majority of BBK Directors (including the Chairman and/or Deputy Chairman) are required to attend Board meetings in order to ensure a quorum. The Board Charter is published on the Bank’s website.
Material transactions that need Board approval
Lending transactions to Directors, at a certain level of exposure, require Board approval. Also credit and investment applications exceeding certain pre-defined exposure levels require approval of the Board.
Similarly, related party transactions relating to members of the Board require approval of the Board.
Independent professional assistance
The Bank has procedures approved by the Board for allowing Board members to obtain independent professional advice relating to the affairs of the Bank or to their individual responsibilities as members, subject to approval by the Board.
Directors’ induction and professional development
The Board is required to be up to date with current business, industry, regulatory, and legislative developments and trends that will affect the Bank’s business operations. Immediately after appointment, the Bank will provide a formal induction.
Meetings will also be arranged with executive management. This will foster a better understanding of the business environment and markets in which the Bank operates. A continuing awareness programme is essential and it may take many different forms, through distribution of publications, workshops, presentations at Board meetings and attendance at conferences encompassing topics on directorship, business, industry, and regulatory developments. As per the Training and Competency Model of the CBB, each approved person (including members of the Board of Directors) is required to complete 15 hours of continued professional development.
Development programmes arranged for Board members during 2016
Board and Committee evaluation
The Board performs a self-evaluation on an annual basis. The Board annually reviews its Charter and its own effectiveness, and initiates suitable steps for any amendments. The Board will also review self-evaluations of individual Board members and the Board Committees and consider appropriately any recommendations arising out of such evaluation. The relevant policy is published on the Bank’s website.
Remuneration of Directors
The Board has adopted a remuneration policy for Directors with well-defined procedures to apply to the Directors’ various remuneration and compensation components, reflective of their involvement and contributions in the activities of the Board of Directors and its ad hoc, temporary and permanent committees. The basic guideline of the policy is that participation would be considered in terms of attendance at meetings. Participation in a meeting via telephone/video conference shall be considered an attendance of the meeting. Members of the Board are treated equally when they are compensated for additional work or effort in their participation. Directors’ remuneration is governed by Commercial Companies Law No 21 for the year 2001, and therefore all payments comply with the provision of the law.
The Bank has a whistle-blowing policy with designated officials whom the employee can approach.
The policy provides adequate protection for the employees for any reports made in good faith. The Board’s Audit Committee oversees this policy. The whistle-blowing policy is published on the Bank’s website.
Key persons (KP) policy
The Bank has established a ‘Key Persons’ policy to ensure that key persons are aware of the legal and administrative requirements regarding holding and trading of BBK shares, with the primary objective of preventing abuse of inside information. Key persons are defined to include the Directors, executive management, designated employees, and persons under guardianship or control of Key Persons. The ownership of the Key Persons policy is entrusted to the Board’s Audit Committee. The Key Persons policy is posted on the Bank’s website.
Code of Conduct
The Board has an approved Code of Conduct for BBK Directors. The Board has also approved a Code of Ethics for the Executive Management and employees. These codes outline areas of conflict of interest, confidentiality, and the responsibilities of signatories to adhere to best practices. The high-level responsibility for monitoring the codes lies with the Board of Directors. The Directors’ Code of Conduct is published on the Bank’s website.
Relative Recruitment/Appointment Policy
The Bank has in place policies that govern the recruitment/appointment of relatives in the Bank and across its wholly owned subsidiaries. The policies are as follows:
1. Employment of relatives of first and second degrees shall be prohibited, whereas employment of relatives of third and fourth degree may be approved by the management provided it does not lead to a conflict of interest.
2. Employment of relatives at the Bank’s fully owned subsidiaries of first and second degree shall be prohibited for Senior Managers and above; any exception must approved by the Chief Executive.
As part of the annual reporting, the Chief Executive must disclose to the Board of Directors on an annual basis those individuals who are occupying controlled functions and who are relatives of any other approved persons within the Bank and its wholly owned subsidiaries.
Conflict of interest
The Bank has a documented procedure for dealing with situations involving conflict of interest of Directors. In the event of the Board or its Committees considering any issues involving conflict of interest of Directors, decisions are taken by the full Board/Committees.
The concerned Director shall leave the meeting room during the discussion of these issues. These events are recorded in the Board/Committee proceedings. The Directors are required to inform the entire Board of conflicts of interest (potential or otherwise) in their activities with, and commitments to, other organisations as they arise, and to abstain from voting on the matter. This disclosure includes all material facts in the case of a contract or transaction involving the Director.
Corporate social responsibility
BBK’s contribution towards the well-being of the community is an integral part of its corporate role. This corporate social responsibility is translated by the Bank through annual appropriation of a budget allocated for donations to finance community-related projects and initiatives. The projects may vary in nature but ought to fall into any one of the following fields: charity, culture, research, education, philanthropy, environmental protection, and sports.
BBK has an approved high-level donation policy for the distribution of the donation budget. The policy outlines guiding principles and sets criteria for the evaluation and selection of donation requests, with the ultimate objective of maximising the return on both the Bank’s social image and the benefit of the community.
Disclosures relating to the Board of Directors
Directors’ external appointments
Directors’ and related parties’ interests
The number of securities held by Directors as of 31 December 2016 was as follows:
(1) Shares related to Dr Zakareya Sultan AlAbbasi are part of the whole shares of the General Organisation for Social Insurance (GOSI) ownership.
(2) Shares related to Mutlaq Mubarak Al Sanei are part of the whole shares of the Kuwait Investment Authority ownership.
(3) Shares related to Elham Ebrahim Hasan and Hassan Mohammed Mahmood are part of the whole shares of Ithmaar Bank ownership.
Al Janabeya Company WLL owns 987,825 shares, 91,326 bonds and is related to the Chairman of the Board.
Nature and extent of transactions with related parties during 2016
On April 2016, Al Janabeya Company WLL (a family company owned by Mr Murad Ali and his family) purchased a total of 91,326 bonds.
Approval process for related parties’ transactions
The Bank has a due process for dealing with transactions involving Directors and related parties. Any such transaction will require the approval of the Board of Directors.
Material contracts and loans involving Directors
Note: The materiality amount for such disclosures is considered above BD 100,000.
Directors’ trading of BBK shares during 2016
The Board of Directors meet at the summons of the Chairman (or Deputy Chairman in event of his absence or disability) or, if requested to do so, by at least two Directors. The Board meets at least four times a year. A meeting of the Board of Directors is deemed valid if attended by more than half of the members.
Meetings of Independent Directors
Since 2012 the Board of Directors has held separate meetings for Independent Directors. As per the Board Charter, minority shareholders look to Independent Directors for representation.
For this purpose, regular Board meetings are preceded by a meeting of Independent Directors, unless it is decided by the Independent Directors that there are no issues to discuss.
The agendas for this forum’s meetings are the same as the agendas for the regular Board meetings. During these meetings the Independent Directors express their views about certain issues, especially those relating to minority shareholders. The summary of the proceedings of such meetings is recorded by the Corporate Secretary and shared with the Independent Directors.
Board meeting attendance
During 2016, seven Board meetings were held in the Kingdom of Bahrain in the following manner:
Board meetings 2016
Major issues discussed by the Board during 2016 (Subjects that fall under the Board Committee’s scope are recommended by the respective Board Committee for Board’s approval)
The Board Committees are formed and their members are appointed by the Board of Directors each year after the Annual General Meeting. They are considered the high-level link between the Board and the Executive Management. The objective of these Committees is to assist the Board in supervising the actual operations of the Bank, by reviewing any issues that are submitted by the Executive Management and making recommendations to the Board for their final review.
The Board reserves the right to form temporary Committees and discontinue them from time to time, as necessary. Furthermore, members of the Board are provided with copies of the meeting minutes of the said Committees, as required by the regulators. There are no significant issues of concern to report relating to the work of the Board Committees during the year 2016.
The full text of the Terms of Reference for Board Committees (Executive Committee, Audit Committee, Nomination, Remuneration and Corporate Governance Committee, and Risk Committee) are published on the Bank’s website.
Board Committees’ composition, roles and responsibilities
Nomination, Remuneration and Corporate Governance Committee
Board Committee meetings and record of attendance
Executive Committee meetings in 2016
* Unscheduled meetings
Audit Committee meetings in 2016
* Unscheduled meetings
Nomination, Remuneration and Corporate Governance Committee meetings in 2016
* Unscheduled meetings
Risk Committee meetings in 2016
* Unscheduled meetings
Compliance and anti-money laundering
Compliance with regulatory and statutory requirements is an ongoing process. The Bank is conscious of its responsibilities in observing all regulatory provisions and best international practices in its functioning. The Bank has established an independent compliance function in keeping with Basel and CBB guidelines. The unit acts as a focal point for all regulatory compliance and for adapting other best practice compliance principles. The Bank continuously strives to improve the level of compliance in all its activities. The Bank’s adopted corporate philosophy is: ‘BBK shall continue its endeavour to enhance shareholders’ value, protect their interests and defend their rights by practising pursuit of excellence in corporate life.’ Anti-money laundering measures form an important area of the compliance function, in addition to areas of corporate governance, disclosure standards, insiders’/key persons’ trading, conflict of interest, and adherence to best practices.
Starting from 2014, the Bank commenced implementation of an automated compliance system for the monitoring and management of regulatory requirements across the Bank. This system facilitates the prompt reporting of any compliance concerns or non-compliance incidents as and when they arise. During 2016, the system was rolled over to some concerned divisions as part of the systems’s overall implementation across the Bank.
The Bank has documented an anti-money laundering programme, including periodic awareness training to employees, record-keeping, and a designated Money Laundering Reporting Officer (MLRO). The AML policy/procedure is updated annually and was last approved by the Board of Directors and Chief Executive in July 2016.
The Bank has deployed a risk-based automated transaction monitoring system in keeping with the anti-money laundering regulations of the CBB.
The Bank’s anti-money laundering measures are regularly audited by the internal auditors, who report to the Audit Committee of the Board. The Central Bank performs periodic inspections of the Bank’s compliance with anti-money laundering regulations; the last AML/CFT examination by the Central Bank was concluded in October 2016. Additionally, the Bank’s anti-money laundering measures are audited by independent external auditors every year and their report is submitted to the CBB. The overseas branches in India and Kuwait and the subsidiary, CrediMax, have designated compliance and MLRO functions to ensure implementation of local regulations and also to meet CBB requirements as applicable. The Bank is committed to combating money-laundering and, towards this end, implements all ‘Prevention of Money Laundering Regulations’ as stipulated in the Financial Crimes Module of the CBB Rulebook and other guidelines issued by the CBB. These regulations and guidelines are consistent with the revised FATF recommendations, ‘Customer Due Diligence for Banks’ paper of the Basel Committee, and best international practices.
The Bank has an open policy on communication with its stakeholders, and has adopted a communication disclosure policy consistent with Basel II requirements. Shareholders are invited by the Chairman to attend the annual general meeting (AGM). The Chairman and other Directors attend the AGM and are available to answer any questions. The Bank is at all times mindful and conscious of its regulatory and statutory obligations regarding dissemination of information to its stakeholders.The Bank provides information on all events that merit announcement, either on its website – www.bbkonline.com – or through other forms of publication. The Bank’s annual report and three years’ financial statements are also published on the website, as well as the Bank’s Corporate Governance Report, Corporate Governance Framework, Whistle-blowing Policy, Board Charter, Code of Conduct, Key Persons’ Dealing Policy, and Terms of Reference of all Board Committees. Shareholders can complete an online form, which can be found on the website, to forward any queries they may have.
The Bank uses a bulletin board for communicating with its employees on general matters, and sharing information of common interest and concern.