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Notes to
financial statement
for the financial year ended December 31,2001....
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1.
BACKGROUND
Tadhamon Islamic Bank - a Yemeni joint-stock company - was
established under the name of the Yemen Islamic Bank for Investment
and Development in accordance with the Ministerial Decree No. (147)
for the year 1995. The name of the Bank has been changed to
Tadhamon Islamic Bank according to the Ministerial Decree No. (169)
for the year 1996. The objectives of the Bank are to finance,
invest, and offer banking services in accordance with Bank’s Article
No. (3) of the Bank’s Article of Association which states that the
bank performs its activities in conformity with the precepts of
Islamic Shari’a. The bank started its activities in July 20, 1996. |
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2.
PREPARATION BASIS OF THE FINANCIAL STATEMENTS
The financial statements are prepared in accordance with Accounting
Standards for Islamic Financial Institutions, local prevailing laws
and regulations and in the light of rules and instructions issued by
Central Bank of Yemen.
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3.
SIGNIFICANT ACCOUNTING POLICIES
a.
Translation of foreign currencies
■
The bank maintains its accounting
records in Yemeni Rial. Transactions in other currencies are
recorded during the financial year at the prevailing exchange rates
at the date of transaction. Balances of monetary assets and
liabilities in other currencies at the end of the financial year are
translated at the prevailing exchange rates on that date. Gains or
losses resulting from translation are taken to the statement of
income. |
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b.
Revenue recognition
1.
Murabaha and Istisna’
■ Profits on Murabaha and
Istisna’ contracts are recorded on the accrual basis as all profits
at the completion of Murabaha contract are recorded as deferred
revenues and taken to the statement of income, depending on finance
percentage, using the straight line method over the period of
contract.
■ In order to comply with
the requirements of CBY, the bank does not accrue the revenues
relating to non-performing debts. |
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2. Mudaraba and Musharaka
■ Profits on
Mudaraba and Musharaka financing transactions, which initiate and
terminate during the financial year, are recorded in the statement
of income.
■ Profits on Mudaraba and
Musharaka financing transactions, which last for more than one
financial year, are recorded, based on cash profits distributed on
these transactions during the year.
■ The bank’s share in
profits on its investments in securities, including subsidiary
companies, are recorded when dividends are declared. |
c. Valuation of Murabaha and Istisna’
financing transactions
■ Debts relating to
financing Murabaha and Istisna’ transactions, whether short or
long-term, are recorded at original cost in addition to agreed upon
Murabaha and Istisna’ profits.
In order to comply with the requirements of CBY, provision is
provided for specific debts and contingent liabilities, in addition
to a percentage for general risk calculated on the total of other
debts and contingent liabilities after deducting balances secured by
deposits and banks’ guarantees issued by worthy banks. Provision is
determined based on periodical comprehensive review of the portfolio
and contingent liabilities and made in accordance with the following
rates:
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Performing debts and special attention |
1% |
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Non-performing debts: |
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Substandard debts |
15% |
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Doubtful debts |
45% |
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Bad debts |
100% |
■ Debts relating to
financing Murabaha and Istisna’ transactions are written off if
procedures taken toward their collection prove useless, or if
directed by CBY examiners upon review of the portfolio. Proceeds
from debts previously written off in prior years are credited to the
provision.
■ Debts relating to
financing Murabaha and Istisna” transactions are presented on the
balance sheet net provision, deferred revenues and uncollected
revenues. |
d. Valuation of Mudaraba and
Musharaka financing transaction
· Mudaraba
and Musharaka cash contracts are recorded on the basis of the amount
paid to the capital of Mudaraba or Musharaka. Inkind Mudaraba and
Musharaka contracts are recorded based on the agreed-upon value
between the bank and the customer or partner. Accordingly, any
differences between this value and the book value are recorded as
profits or losses in the statement of income, in order to comply
with the requirements of CBY, provision is provided for specific
Mudaraba and Musharaka contracts which recognized losses, in
addition to a percentage for general risk calculated on the total of
other Mudaraba and Musharaka contracts after deducting balances
secured by deposits and banks’ guarantees issued by worthy banks.
Provision is determined based
on periodical comprehensive review of the portfolio and made in
accordance with the following rates:
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Performing debts and special attention |
1% |
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Non-performing debts: |
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Substandard
debts |
15% |
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Doubtful
debts |
45% |
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Bed debts |
100% |
·
Mudaraba and Musharaka capitals are presented on the balance sheet
at carrying value (cost less recognized losses and related
provisions). |
e. Valuation of restricted
investments
Murabaha, Istisna’, Mudaraba and Musharaka transactions financed by
restricted investment accounts are recorded on the same valuation
basis mentioned above with related profits (losses) and provisions
are taken to restricted investment accounts net of the bank’s share
for managing these investments. |
f. Valuation of assets for
which titles have been transferred to the bank as a repayment of
loans
Assets for which titles have been transferred to the Bank or assets
which the bank has otherwise taken possession are included in the
balance sheet under “Debit balances and other assets” at the values
carried by the bank. According to CBY requirements, an independent
appraisal of such assets is made at the time title is transferred or
possession is taken. Provision is provided to adjust the book value
downward if the appraised value is lower than the book value of the
asset. Subsequently, provision is adjusted to meet any additional
decline in the asset’s value at the balance sheet date. |
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g. Contingent
liabilities and commitments
Contingent liabilities, in which the bank is a party, are presented
off balance sheet under “contingent liabilities and commitments” as
they do not represent actual assets or liabilities at the balance
sheet date. |
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h. Cash and cash
equivalent
For the purpose of preparing the statement of cash flows, cash and
cash equivalent consist of cash on hand, cash balances with Central
Bank of Yemen, other than reserve balances, and demand deposits with
other banks. |
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i. Property,
equipment and depreciation
Property and equipment are stated at cost less accumulated
depreciation and impairment losses. Deprecation is charged to the
statement of income on the straight-line method over the estimated
useful lives. The estimated useful lives are as follows
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Rates |
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Building |
2% |
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Equipment |
12.5% |
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Motor
vehicles |
20% |
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Furniture
and fixtures |
2.5%-10%-20% |
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Computer
equipment |
20% |
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j. Taxation
In accordance with Article No. (26) of Law No. (21) for 1996
regarding Islamic Bank, the Bank is entitled of privileges and
exceptions as stated in the Investment Law. Accordingly, the Bank
is exempted from all taxes and duties for seven (7) years starting
from the date of commencement of operations. |
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k. Statement of
changes in restricted investments
Statement of changes in restricted investments present investments
fully financed by funds received by the bank from restricted
investment accounts holders or as a result of issuing investment
units without participation from the bank with his own sources. The
bank manages restricted investments, including investment units
portfolios, as an agent. The bank does not participate in the
investment’s outcome and the movement of restricted investments are
presented in the statement of changes in restricted investments. |
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l. Prohibited
revenues and expenses
Revenue and expenses prohibited by Islamic Sharia’ (CBY interest)
are recorded at net in a separate account under “Credit balances and
other liabilities” on the balance sheet. Fund is utilized in
granting donations and providing the provision for investment risks. |
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4.
SUPERVISION OF REGULATORY AGENCY
The bank’s business activities are subject to the supervision of
Central Bank of Yemen in accordance with the prevailing laws. |
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5.
SHARIA’ BOARD
The bank’s business activities are subject to the supervision of
Sharia’ Board consists of 3 members appointed by the Bank’s General
Assembly. |
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6. ZAKAT
Zakat is computed according to the Sharia’ Board of the bank and
collected from the shareholders and investment accounts holders on
behalf of the Government Authority. The amount collected should be
remitted to the Government, which decides on the allocation of the
Zakat. |
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7.
FINANCIAL INSTRUMENTS AND MANAGING THEIR RELATED RISKS
7.1
Financial instruments
a. The bank’s financial instruments are represented in
financial assets and liabilities. Financial assets include cash
balances, current accounts, deposits with banks and financing of
Murabaha, Istisna’, Mudaraba and Musharaka transactions and related
debts. Financial liabilities include current and saving accounts,
due to banks and investment accounts. Also, financial instruments
include rights and obligations stated in contingent liabilities and
commitments.
Note (3) to the financial statements includes significant
accounting policies applied for recording and measuring significant
financial instruments and their related revenues and expenses.
b.
Fair value of financial instruments
Based on valuation basis of the bank’s assets and
liabilities stated in the notes to the financial statements, the
fair value of the financial instruments do not differ fundamentally
from their book values at the balance sheet date.
c.
Forward contracts
The Bank does not deal in forward contracts to extent necessary to
cover its needs for foreign currencies or foreign exchange contract. |
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7.2 Managing related
risks
a.
Return rate risk
Return due on unrestricted investment accounts is determined on the
basis of Mudaraba contract, which determines profit (loss) sharing
basis during the period. Accordingly, any change in the
profitability will determine the return ratio that the bank could
pay to investors and return paid by the bank to unrestricted
investment accounts holders. Therefore, the bank is not exposed,
indirectly, to the risk of change in return rate.
b. Credit
risk
Financing of Murabaha, Mudaraba and Musharaka transactions and their
related debts, current accounts, deposits with banks and rights and
obligations from others are considered financial assets exposed to
credit risk. Credit risk represents the inability of these parties
to meet their obligations when they fall due. In order to comply
with CBY requirements; the bank adheres to certain minimum standards
in order to properly manage its credit risk. (In addition to the
standards mentioned, additional procedures applied by the bank to
minimize the credit risk exposure should be stated such as):
■
Preparing credit studies on customers
and banks before dealing with them and determining their related
credit risk rating.
■
Obtaining sufficient collaterals to
minimize the credit risk exposure which may result in cases of
insolvency of customers and banks.
■
Following up and periodical reviews of
customers and banks in order to evaluate their financial positions,
credit rating and the required provision for non-performing debts.
■
Distributing credit portfolio and
investments over diversified sectors to minimize concentration or
credit risk.
Note No. (33) to the
financial statements indicates the distribution of assets,
liabilities and contingent liabilities and commitments at balance
sheet date.
c.
Exchange rate risk
Due to the nature of the bank’s activity, the bank deals in
different foreign currencies, hence it is exposed to exchange rate
risk. In order to minimize the exposure to exchange rate risk, the
bank is trying to maintain a balanced foreign currencies positions
in compliance with the Central Bank of Yemen instructions and the
requirements of CBY circular No. 6 of 1998 specifies that individual
foreign currency position shall not exceed 15% of the bank’s capital
and reserves, and that the aggregate open position for all foreign
currencies shall not exceed 25% of a bank’s capital. Note (34) to
the financial statement indicates the significant foreign
currencies’ positions as at balance sheet date. |
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8.
CASH ON HAND AND RESERVE BALANCES WITH CENTRAL BANK
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2001
YR’000’s |
2000
YR’000’s |
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Cash on hand |
2,146,562 |
1,650,866 |
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Reserve balances with Central Bank of Yemen* |
3,318,554 |
1,929,159 |
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5,465,116 |
3,580,025 |
* The reserve balances with Central
Bank of Yemen as minimum reserve requirements, these funds are not
available for the Bank’s daily business. |
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9.
DUE FROM BANKS AND FINANCIAL INSTITUTIONS
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2001
YR’000’s |
2000
YR’000’s
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a. Central Bank of Yemen |
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Current accounts |
1,399,967 |
2,725,557 |
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b. Local banks |
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Current accounts |
196,333 |
67,247 |
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c. Foreign banks |
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Current accounts |
2,530,630 |
929,064 |
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Deposits with financial institutions |
5,249,813 |
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7,780,443 |
929,064 |
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9,376,743 |
3,721,868 |
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10.
FINANCING MURABAHA TRANSACTIONS CONTRACTS
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2001
YR’000’s |
2000
YR’000’s |
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Murabaha – local |
16,265,285 |
14,212,385 |
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Murabaha – foreign |
4,897,715 |
3,477,819 |
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21,163,000 |
17,690,204 |
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Less: Murabaha
transactions provision |
( 308,957) |
( 208,797) |
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Less: Deferred revenues |
( 519,639) |
( 374,204) |
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20,334,404 |
17,107,203 |
Non-performing financing Murahaba transactions amounted to YR
534,593 Thousand at 31/12/2001 (YR 133,779 Thousand at 31/12/2000). |
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Murabaha Transactions Contracts Provision
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2001 |
2000
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General
YR’000’s
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Specific
YR’000’s
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Total
YR’000’s
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General
YR’000’s
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Specific
YR’000’s
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Total
YR’000’s
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Beginning balance of the year |
137,044 |
71,753 |
208,797 |
85,794 |
11,076 |
96,870 |
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Provided during the year |
15,340 |
84,820 |
100,160 |
51,250 |
60,677 |
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