ANNUAL

REPORT
2016

Building AFFINITY
Our Vision
A premier partner for
Financial Growth and
Innovative Services.

Cover
Rationale
Seeking AFFINITY with our customers,
partners, employees and the community
we serve marks the way forward for
AFFIN ISLAMIC. It drives a new
phase of evolution where we go beyond
the conventional to reshape our existing
portfolio and introduce new possibilities.
 ANNUAL REPORT 2016

Our Mission
To provide innovative financial solutions and services to
target customers in order to generate profits and create
value for our shareholders and other stakeholders.

In so doing, we provide opportunities for employees to

contribute and excel; and be competitive in providing our
solutions and services to our valued customers.

We shall conduct our business with integrity and

professionalism in compliance with good corporate
governance, principles and practices.

Table of
Contents

ORGANISATION CORPORATE GOVERNANCE

02 Corporate Information 23 Statement on Corporate Governance

03 Corporate Structure
04 Board of Directors OTHER INFORMATION
05 Profile of Directors 35 Network of Branches
10 Management Team 36 Notice of Annual General Meeting
11 Profile of Shariah Committee

FINANCIAL STATEMENTS
EXECUTIVE SUMMARY 37 Financial Statements
13 Management Discussion & Analysis
20 Corporate Diary

22 Financial Highlights
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

Corporate Information

NAME
Affin Islamic Bank Berhad (Co. No.: 709506-V)

DATE OF INCORPORATION
13 September 2005

PRINCIPAL ACTIVITIES
Affin Islamic Bank Berhad is principally involved in the
carrying out of Islamic banking and finance related services.
Other associate companies are primarily engaged in property
management services.

BOARD OF DIRECTORS AUTHORISED SHARE CAPITAL

CHAIRMAN No of shares
YBhg. Jen Tan Sri Dato’ Seri Ismail Dr. Rosnah Binti Omar 1,000,000,000
Bin Haji Omar (Bersara) (Independent Non-Executive Director) Par value
(Non-Independent Non-Executive Director) (Appointed as Director w.e.f.
RM1.00
19 December 2016)
DIRECTORS
Total
YBhg. Tan Sri Dato’ Seri Lodin Bin
YBhg. Laksamana Madya Tan Sri Wok Kamaruddin RM1,000,000,000
Dato’ Seri Ahmad Ramli Bin
(Non-Independent Non-Executive Director)
Mohd Nor (Bersara)
(Completed his tenure of directorship w.e.f. ISSUED AND PAID-UP SHARE
(Non-Independent Non-Executive Director) 4 October 2016)
CAPITAL
YBhg. Tan Sri Dato’ Seri Mohamed
No of shares
Jawhar CHIEF EXECUTIVE OFFICER
(Non-Independent Non-Executive Director) 460,000,002
En. Nazlee Bin Khalifah
(Redesignated w.e.f. 1 June 2016) Par value
En. Mohd Suffian Bin Haji Haron RM 1.00
SECRETARY
(Non-Independent Non-Executive Director)
Total
(Redesignated w.e.f. 1 June 2016) Nimma Safira Binti Khalid
RM460,000,002
YBhg. Tan Sri Dato’ Sri Abdul Aziz
Bin Abdul Rahman REGISTERED OFFICE
SUBSTANTIAL SHAREHOLDER
(Non-Independent Non-Executive Director) 17th Floor, Menara AFFIN,
(Redesignated w.e.f. 25 October 2016) 80, Jalan Raja Chulan, No of shares
50200 Kuala Lumpur. Affin Bank Berhad
Assoc. Prof. Dr. Said. Bouheraoua
(Independent Non-Executive Director)
Tel : 03-2055 9000 460,000,002
Fax : 03-2026 1415
EXTERNAL AUDITORS
PricewaterhouseCoopers
(No. AF: 1146)
 ANNUAL REPORT 2016

Corporate Structure
as at 31 December 2016

58.48%

Lembaga Tabung Angkatan Tentera

OTHERS
Boustead Holdings Berhad Bank of East Asia Limited

35.42% 20.69% 23.52% 20.37%

AFFIN HOLDINGS BERHAD

100%

AFFIN Bank Berhad 100%

100% 30%
AFFIN MoneyBrokers Sdn Bhd AFFIN Islamic Bank Berhad KL South Development Sdn Bhd 1
(jointly owned by AFFIN Islamic Bank Berhad
100% 50% and Albatha Bukit Kiara Holdings Sdn Bhd
AFFIN-i Nadayu Sdn Bhd 1 with a 30:70 ownership)
AFFIN-ACF Holdings Sdn Bhd
(jointly owned by AFFIN Islamic
Bank Berhad and Jurus Positif
100% Sdn Bhd with a 50:50 ownership)
AFFIN Investment Berhad
(formerly known as AFFIN Investment Bank Berhad)
16.7%
Raeed Holdings Sdn Bhd 5

100%
AFFIN Hwang Investment Bank Berhad
100% 100%
100% ABB Nominee (Tempatan) Sdn Bhd AFFIN-ACF Nominees (Tempatan) Sdn Bhd 3

AFFIN Hwang Nominees

(Tempatan) Sdn Bhd 100% 100%
PAB Properties Sdn Bhd PAB Property Development Sdn Bhd 3
100%
AFFIN Hwang Nominees 100% 100%
ABB Trustee Berhad 2 BSNC Nominees (Tempatan) Sdn Bhd 3
(Asing) Sdn Bhd
(80% held in trust by Directors of
AFFIN Bank Berhad)
100%
AFFIN Hwang Futures Sdn Bhd
100%
100% AFFIN Recoveries Berhad 4
AFFIN Nominees (Tempatan) Sdn Bhd
100%
100% AFFIN Factors Sdn Bhd 3
AFFIN Nominees (Asing) Sdn Bhd
100%
70% ABB Nominee (Asing) Sdn Bhd
AFFIN Hwang Asset Management
Berhad 100%
AFFIN Futures Sdn Bhd 3
100%
Asian Islamic Investment
Management Sdn Bhd 100%
ABB IT & Services Sdn Bhd 3
100%
AFFIN Capital Services Berhad 100%
(formerly known as AFFIN Fund BSNCB Nominees (Tempatan) 1
Associate companies.
Management Berhad) Sdn Bhd 3 2
Acquired by Affin Investment Bank Berhad
on 25 January 2017.
51% 3
Under members voluntary winding-up.
4
AXA AFFIN Life Insurance Berhad Dormant companies – inactive but
company currently holding asset.
5
Equally owned by Affin Islamic Bank Berhad,
36.9% Bank Kerjasama Rakyat Malaysia Berhad,
AXA AFFIN General Insurance Berhad Bank Islam Malaysia Berhad, Bank Muamalat
Malaysia Berhad, Maybank Islamic Berhad
and Bank SImpanan Nasional.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

Board of Directors

LEFT TO RIGHT:

YBHG. JEN. TAN SRI DATO’ SERI ISMAIL

BIN HAJI OMAR (BERSARA)
Chairman / Non-Independent Non-Executive Director

YBHG. TAN SRI DATO’ SERI LODIN

BIN WOK KAMARUDDIN
Non-Independent Non-Executive Director
(Completed his tenure of directorship w.e.f.
4 October 2016)

LEFT TO RIGHT:

YBHG. LAKSAMANA MADYA TAN

SRI DATO’ SERI AHMAD RAMLI BIN
MOHD NOR (BERSARA)
Non-Independent Non-Executive Director

YBHG.TAN SRI DATO’ SERI

MOHAMED JAWHAR
Non-Independent Non-Executive Director
(Redesignated w.e.f. 1 June 2016)

EN. MOHD SUFFIAN BIN HAJI HARON

Non-Independent Non-Executive Director
(Redesignated w.e.f. 1 June 2016)

LEFT TO RIGHT:

YBHG. TAN SRI DATO’ SRI ABDUL AZIZ

BIN ABDUL RAHMAN
Non-Independent Non-Executive Director
(Redesignated w.e.f. 25 October 2016)

ASSOC. PROF. DR. SAID BOUHERAOUA

Independent Non-Executive Director

DR. ROSNAH BINTI OMAR

Independent Non-Executive Director
(Appointed as Director w.e.f. 19 December 2016)
 ANNUAL REPORT 2016

Profile of Directors

LEFT TO RIGHT:

YBHG. JEN. TAN SRI DATO’ SERI

ISMAIL BIN HAJI OMAR (BERSARA)
YBHG. TAN SRI DATO’ SERI LODIN
BIN WOK KAMARUDDIN

YBHG. JEN. TAN SRI DATO’ SERI ISMAIL BIN YBHG. TAN SRI DATO’ SERI LODIN BIN
HAJI OMAR (BERSARA) WOK KAMARUDDIN
Chairman / Non-Independent Non-Executive Director Non-Independent Non-Executive Director
(Completed his tenure of directorship with the Bank
Jen. Tan Sri Dato’ Seri Ismail Bin Haji Omar, aged 75,
w.e.f. 4 October 2016)
was appointed as the Director and Chairman of AFFIN
ISLAMIC on 1 April 2006. He is also the Chairman of Board Tan Sri Dato’ Seri Lodin Bin Wok Kamaruddin, aged 67,
Loan Review and Recovery Committee of AFFINBANK. was reappointed to the Board of Directors of AFFIN ISLAMIC
He was formerly the Chief of Defence Force (CDF) of Malaysia on 4 October 2010. He was appointed as the Managing
from 1995 until his retirement in 1998, after 38 years of military Director of Affin Holdings Berhad in February 1991 and
service. He graduated from the Royal Military Academy, redesignated as Deputy Chairman on 1 July 2008.
Sandhurst, United Kingdom in 1961 and subsequently He has extensive experience in managing a provident fund
attended professional and management development courses and in the establishment, restructuring and management of
at several institutions including the Land Forces Command various business interests ranging from plantation, trading,
and Staff College, Canada; the United Nations International financial services, property development to oil and gas,
Peace Academy, Vienna; the National Defence College, India pharmaceuticals and shipbuilding.
and the National Institute of Public Administration (INTAN),
Malaysia. Tan Sri Dato’ Seri Lodin is the Chief Executive of Lembaga
Tabung Angkatan Tentera (LTAT) and the Deputy Chairman/
His military service saw Key Command and Staff appointments Group Managing Director of Boustead Holdings Berhad.
at all levels of the Armed Forces. As CDF, his responsibilities Prior to joining LTAT, he was the General Manager of
included key roles in Malaysia’s Regional and International Fraser’s Hill Development Coorperation for 9 years.
Defence Relations.
He is also the Chairman of Boustead Heavy Industries
He was the Chairman of Affin Holdings Berhad and Corporation Berhad, Boustead Naval Shipyard Sdn Bhd,
Affin-ACF Finance Berhad from 1999, prior to joining Pharmaniaga Berhad and Boustead Petroleum Marketing Sdn
the Issuer. He currently holds directorships in the Material Bhd. He sits on the Board of The University of Nottingham in
Subsidiary, ABB Trustee Berhad, EP Engineering Sdn Bhd Malaysia, Minority Shareholder Watchdog Group, FIDE Forum,
and Global Medical Alliance Sdn Bhd. AFFINBANK, Affin Hwang Investment Bank Berhad, AXA Affin
Jen. Tan Sri Dato’ Seri Ismail Bin Haji Omar (Bersara) attended Life Insurance Berhad and Boustead Plantations Berhad.
all 10 scheduled monthly Board Meetings and all 10 Special Tan Sri Dato’ Seri Lodin graduated from the University of Toledo,
Board Meetings held during the financial year ended Ohio, USA with a Bachelor of Business Administration and a
31 December 2016. Master of Business Administration. Among the many awards he
received todate include the Chevalier De La Legion D’Honneur
from the French Government, the Malaysian Outstanding
Entrepreneurship Award, the Degree of Laws honoris causa
from the University of Nottingham, United Kingdom, the UiTM
Alumnus of the Year 2010 Award and The BrandLaureate Most
Eminent Brand ICON Leadership Award 2012 by Asia Pacific
Brands Foundation. He is also a Chartered Banker, AICB.
Tan Sri Dato’ Seri Lodin Bin Wok Kamaruddin attended all
8 scheduled monthly Board Meetings and 6 out of 9 special
Board Meetings held from January until completion of his
tenure of directorship on 4 October 2016.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

Profile of Directors

LEFT TO RIGHT:

YBHG. LAKSAMANA MADYA

TAN SRI DATO’ SERI AHMAD RAMLI
BIN MOHD NOR (BERSARA)
YBHG.TAN SRI DATO’ SERI
MOHAMED JAWHAR

YBHG. LAKSAMANA MADYA TAN SRI DATO’ SERI YBHG.TAN SRI DATO’ SERI MOHAMED JAWHAR
AHMAD RAMLI BIN MOHD NOR (BERSARA) Non-Independent Non-Executive Director
Non-Independent Non-Executive Director
Tan Sri Dato’ Seri Mohamed Jawhar, aged 72, was appointed
Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor, aged 72, to the Board of Directors of AFFIN ISLAMIC on 1 July 2006
was appointed to the Board of Directors of AFFIN ISLAMIC and was subsequently redesignated to Non-Independent
on 1 July 2006. He is currently a member of Board Nomination Non-Executive Director w.e.f. 1 June 2016. He is currently
and Remuneration Committee of AFFIN ISLAMIC and a member of Board of Nomination and Remuneration
a member of Board Loan Review and Recovery Committee Committee of AFFINBANK and AFFIN ISLAMIC, Board Audit
of AFFINBANK (representing AFFIN ISLAMIC). Committee, Board Risk Management Committee and Board
Oversight Transformation Committee of AFFINBANK.
He graduated from the Brittania Royal Naval College
Dartmouth, United Kingdom in 1965, the Indonesia Naval Staff His other positions include: Non-Independent Non-Executive
College in 1976, the United States Naval War College and Director, AFFINBANK; Non-Executive Chairman, New
Naval Post-Graduate School Monterey in 1981. He also holds Straits Times Press (Malaysia) Berhad; Member of Securities
a Masters Degree in Public Administration from the Harvard Commission Malaysia; Member, Operations Review Panel,
University, United States of America. He was in the Malaysian Malaysian Anti-Corruption Commission; Distinguished
Navy and retired as Chief of Royal Malaysian Navy in 1999. Fellow, Institute of Diplomacy and Foreign Relations (IDFR);
Distinguished Fellow, Malaysian Institute of Defence and
Presently he is the Executive Deputy Chairman / Managing Security (MiDAS); Fellow, Institute of Public Security of
Director of Boustead Heavy Industries Corporation Berhad. Malaysia (IPSOM), Ministry of Home Affairs; Board Member,
He is also the Board member of Favelle Favco Berhad, Institute of Advanced Islamic Studies (IAIS); and Member,
Maritime Institute of Malaysia, Irat Hotels & Resorts Sdn Laureate Advisory Board, INTI International University and
Bhd, BCM Electronics Corporations SdnBhd, Intan Permata Colleges. He is also the Expert and Eminent Person from
Properties Sdn Bhd, Ibu Kota Steel Industries Sdn Bhd, Malaysia for the ASEAN Regional Forum (ARF).
Boustead Naval Shipyard Sdn Bhd, Perstim Industries
SdnBhd, BHIC Assets Holdings SdnBhd and CB International He was also the Co-Chair, Network of East Asia Think-Tanks
Engineering Sdn Bhd. (NEAT) 2005-2006; Chairman, Malaysian National Committee,
Pacific Economic Cooperation Council (PECC) 2006-2010;
Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor attended and Co-Chair, Council for Security Cooperation in the Asia
all 10 scheduled monthly Board Meetings and 9 out of 10 Pacific (CSCAP) 2007-2009.
Special Board Meetings held during the financial year ended
31 December 2016. He served with the Government for over 20 years before
he joined Institute of Strategic & International Studies
(ISIS) Malaysia as Deputy Director-General in 1990.
He was appointed Director-General in March 1997 and
was subsequently appointed Chairman and CEO in 2006.
He was appointed Chairman ISIS Malaysia on 9 January 2010
and relinquished the position on 8 January 2015.
 ANNUAL REPORT 2016

Profile of Directors

EN. MOHD SUFFIAN BIN HAJI HARON

During his Government service, his positions include He started his career as a Diplomatic and Administrative
Director-General, Department of National Unity; Officer, attached to the Prime Minister’s Department and
Under-Secretary, Ministry of Home Affairs; Director (Analysis) the Ministry of Public Enterprises. Whilst at the Prime
Research Division, Prime Minister’s Department; and Principal Minister’s Department, he was also assigned as Assistant
Assistant Secretary, National Security Council. He also served to the Special Economic Adviser to the Government. He
as Counselor in the Malaysian Embassies in Indonesia and served as the Board of Directors of Fraser’s Hill Development
Thailand. Corporation, the State Development Corporations of Perak,
Pahang and Terengganu as well as the Board of Directors of
He currently holds directorships in AFFINBANK, Bank Pembangunan Malaysia Berhad, Kompleks Kewangan
SistemTelevisyen Malaysia Berhad, EkuitiNasionalBerhad and Malaysia Berhad, HICOM and the Council of Majlis Amanah
the Securities Commission. Rakyat (MARA). After thirteen years of service, he left the
Government Service to serve a GLC involved in international
Tan Sri Dato’ Seri Mohamed Jawhar attended all 10 scheduled
business, after which he ventured on his own to be the
monthly Board Meetings and all 10 Special Board Meetings
Managing Director of Insurance Broking Company. Amongst
held during the financial year ended 31 December 2016.
his other involvements after that were in the securities industry
and asset management activities. He has also served as
a Director of Hitachi Sales (Malaysia) Sdn Bhd, Meiden Electric
EN. MOHD SUFFIAN BIN HAJI HARON Engineering Sdn Bhd, Far East Computers (India) and Affin
Non-Independent Non-Executive Director Discount Berhad. He also brings with him vast experience in
general trading, power generation and transmission, aircraft
En. Mohd Suffian Bin Haji Haron, aged 71, was appointed maintenance as well as the oil and gas services sectors.
to the Board of Directors of AFFIN ISLAMIC on 1 July 2006
and was subsequently redesignated to Non-Independent Presently he is a Board member of AFFINBANK, ABB Trustee
Non-Executive Director w.e.f. 1 June 2016. He is currently Berhad, L.K & Associates Sdn Bhd and Pharmaniaga Berhad.
a member of Board Nomination and Remuneration
Committee of AFFINBANK and AFFIN ISLAMIC, Board Loan En. Mohd Suffian Bin Haji Haron attended all 10 scheduled
Review and Recovery Committee, Board Risk Management monthly Board Meetings and all 10 Special Board Meetings
Committee and Board Oversight Transformation Committee held during the financial year ended 31 December 2016.
of AFFINBANK.

He graduated from the University of Malaya (1970) with

a Bachelor of Economics and holds a Master of Business
Administration from University of Oregon (USA) in 1976.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

Profile of Directors

LEFT TO RIGHT:

YBHG. TAN SRI DATO’ SRI

ABDUL AZIZ BIN ABDUL RAHMAN
ASSOC. PROF. DR. SAID BOUHERAOUA

YBHG. TAN SRI DATO’ SRI ABDUL AZIZ BIN ASSOC. PROF. DR. SAID BOUHERAOUA
ABDUL RAHMAN Independent Non-Executive Director
Non-Independent Non-Executive Director
Assoc. Prof. Dr. Said Bouheraoua, an Algerian, aged 49,
Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman, aged 70, was appointed to the Board of Directors of AFFIN ISLAMIC
was appointed to the Board of Directors of AFFIN ISLAMIC on 19 June 2014. He is currently the Chairman of Board
on 1 November 2011 and was subsequently redesignated to Nomination and Remuneration Committee and Shariah
Non-Independent Non-Executive Director w.e.f. 25 October Committee of AFFIN ISLAMIC, and a member of Board Audit
2016. He is currently a member of Board Nomination and Committee and Board Oversight Transformation Committee
Remuneration Committee of AFFIN ISLAMIC, Board Audit of AFFINBANK.
Committee and Board Risk Management Committee of
Dr. Said obtained his Ph.D in Fiqh/UsulFiqh (Shariah) from
AFFINBANK.
International Islamic University Malaysia (IIUM) in 2002.
He graduated with a Bachelor of Commerce from University He was also an Associate Professor at Department of Islamic
of New South Wales, Sydney, Australia. He is a member of Law, Ahmad Ibrahim Kulliyyah of Laws, IIUM. He is currently
the Malaysian Institute of Certified Public Accountants (MICPA) a Director of Research Affairs Department at the International
and the Malaysian Institute of Accountants (MIA). Shariah Research Academy for Islamic Finance (ISRA)
and the editor-in-chief of ISRA International Journal of
He has served as Chairman and Board member of several Islamic Finance.
government institutions, agencies and public listed companies,
both in Australia and Malaysia. At the corporate level, he Dr. Said has throughout his career as Lecturer/Researcher
was with PricewaterhouseCoopers Sydney, Malaysia Airlines published several books and articles in international referred
Berhad and Managing Director of Bank Kerjasama Rakyat journals. He has also presented papers in international
Malaysia Berhad before venturing into politics and public conferences and conducted training sessions in Islamic
service as the Pahang State Assemblyman, State Executive finance in Malaysia and abroad.
Councillor and Deputy Chief Minister of Pahang. He was
Dr. Said Bouheraoua attended 9 out of 10 scheduled monthly
a Senator of Malaysian Parliament for a maximum period
Board Meetings and 9 out of 10 Special Board Meetings held
of two (2) terms.
during the financial year ended 31 December 2016.
Presently he is a Board member of International Islamic
University Malaysia, Chuan Huat Resources Berhad, Alam
Venture Sdn Bhd, Arcoza Holdings Sdn Bhd, Green Effect
Sdn Bhd, IIUM Holdings Sdn Bhd, Bagan Datoh Solar Farm
Sdn Bhd, Tanah Makmur Berhad and Asian Healthcare
Group Bhd.

Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman attended all
10 scheduled monthly Board Meetings and 9 out of 10 Special
Board Meetings held during the financial year ended
31 December 2016.
 ANNUAL REPORT 2016

Profile of Directors

DR. ROSNAH BINTI OMAR

DR. ROSNAH BINTI OMAR

Independent Non-Executive Director
(Appointed as Director w.e.f. 19 December 2016)

Dr. Rosnah Binti Omar, a Malaysian aged 63, was Dr. Rosnah was appointed the Director-General of the Labuan
appointed to the Board of Directors of AFFIN ISLAMIC Offshore Financial Services Authority by the Malaysian
on 19 December 2016. Government effective July 2003-June 2005. She was on the
Board of the Islamic International Financial Market (IIFM) based
Dr. Rosnah has more than 30 years of Banking and Finance
in Bahrain and attended the first program in International
experience since 1976, having worked for Bank Bumiputra
Centre for Leadership in Finance (ICLIF) conducted by the
Malaysia Berhad (Kuala Lumpur, London and New York),
ICLIF Leadership and Governance Centre in Malaysia.
Prudential Bache (London), Bankers Trust International
(London) Security Pacific Hoare Govett (London) and NM Dr. Rosnah became Chairman and Managing Director of
Rothschild (Singapore). Her working exposure covered Rothschild Malaysia Sdn. Bhd. in 2006. Dr. Rosnah left
commercial and investment banking in Malaysia, London, Rothschild in 2008 after having re-established Rothschild’s
New York and Singapore and asset management in Malaysia. Investment Banking operations in Malaysia to pursue her
She became Board Member of all the Bank Bumiputra interest in Islamic Finance and Risk Management advisory.
Malaysia Berhad financial subsidiaries in Merchant Banking, She was adviser on Islamic Finance for the Commonwealth
Securities Company, Futures entity and offshore operations Business Council in London from April 2009 - December
in Labuan. She was also a Managing Director and Board 2010 and on Banking Risk in Malaysia with Algorithmics
Director in NM Rothschild in Singapore. She represented (Singapore) from June 2009 - June 2010. She has completed
Rothschild in Bumiputra Merchant Bank, KN Kenanga Asset the Financial Institutions Directors’ Education (FIDE) program
Management and Investment Management in Malaysia. and the Advanced Risk Management conducted by ICLIF.
She completed her PhD in Islamic Banking and Finance at the
In 2000, Dr. Rosnah ventured in the risk management
International Islamic University Malaysia in the International
advisory business as Executive Director of PK Tech. Sdn Bhd
Institute of Islamic Banking and Finance.
responsible for the Information Technology risk management
strategy for the company. Subsequently, she became Chief
Executive Officer at Malaysia Building Society Berhad,
a subsidiary of the Employees Provident Fund and a listed
company on the KLSE from 2001-2003.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

10

Management Team

01. EN NAZLEE BIN KHALIFAH

Chief Executive Officer

02. EN FERDAUS TOH BIN ABDULLAH

Deputy Chief Executive Officer

01 02

03. EN HAZLAN BIN HASAN

Head, Islamic Client Solutions

04. EN MOHD FAIZ BIN RAHIM

Head, Shariah Supervisory

05. EN MOHD FIZAR BIN MOHIDIN

Head, Islamic Treasury

06. EN MOHD RUSLEE BIN OMAR

Head, Strategic Business Alliances

03 04 05 06

07. PN ZURINA AYU BINTI SAMSUDIN

Head, Product Development

08. PN JOZAIMAH BINTI JOHAN ALI

Head, Strategic Management

09. PN RADZIAH BINTI AHMAD

Head, Islamic Consumer & Bancatakaful

10. CIK NORAZLINDA BINTI MOHD FADZIL

Head, Promotion and Marketing Communications

07 08 09 10
 ANNUAL REPORT 2016

11

Profile of Shariah Committee

as at 9 March 2017

LEFT TO RIGHT:

ASSOCIATE PROFESSOR
DR. SAID BOUHERAOUA
ASSOCIATE PROFESSOR
DR. AHMAD AZAM
OTHMAN
ASSOCIATE PROFESSOR
DR. ZULKIFLI HASAN

ASSOCIATE PROFESSOR Takaful as well as comparative laws. Financial Centre whereby he was
DR. SAID BOUHERAOUA He has vast experience in teaching for involved in developing corporate
postgraduate as well as undergraduate governance guidelines for Islamic
Associate Professor Dr. Said courses. He is also an internal examiner Financial Institutions in the Middle East
Bouheraoua was appointed as a and supervisor to a number of PhD and North Africa (MENA) as well as
Director of AFFIN ISLAMIC on 19 June Theses and Master Dissertation in in the Task Force on Environmental,
2014. Dr. Said, an Algerian, obtained various areas including Islamic Banking, Social and Governance (ESG) which
a Bachelor in Fiqh and Usul Fiqh from Islamic Microfinance, Islamic Capital led towards development of the S&P/
the University of Algiers in 1991, Market, Takaful and Waqf. Dr. Ahmad Hawkamah Pan Arab ESG Index.
Master of Quran and Sunnah in 1998 Azam Othman holds a PhD from His articles have been numerously
and Ph.D in Fiqh/Usul Fiqh (Shariah) University of Wales, UK. In addition, he published in various academic journals
from International Islamic University holds a Master of Comparative Laws and he has presented many papers
Malaysia (IIUM) in 2002. He was also from IIUM where he also obtained his in various conferences both local and
an Associate Professor at Department LLB (Bachelor of Laws) and LLB.S abroad. His research includes corporate
of Islamic Law, Ahmad Ibrahim Kulliyyah (Bachelor of Shariah) as his first degree. and Shariah governance and regulation
of Laws, IIUM. He is currently the in Islamic finance. His recent book
Director of Research Affairs Department ASSOCIATE PROFESSOR entitled ‘Shari’ah Governance in Islamic
at the International Shariah Research DR. ZULKIFLI HASAN Banks: Edinburgh Guides to Islamic
Academy for Islamic Finance (ISRA), Finance’ published by the Edinburgh
and is the editor-in-chief of ISRA Associate Professor Dr. Zulkifli Hasan University Press, UK is available in
International Journal of Islamic Finance. is an Associate Professor and the the market. Dr. Zulkifli also received
Dr. Said has throughout his career as Dean of Shariah and Law Faculty, the prestigious Global Islamic Finance
Lecturer/ Researcher published four Islamic Science University of Malaysia Award as the Upcoming Scholar 2016.
books, five chapters in books and (USIM). He is also a Shariah panel for Dr. Zulkifli Hasan holds a PhD
several articles in international referred the Institute of Fatwa Management in Islamic Finance from Durham
journals. He has also presented several and Research, USIM. Besides these University, UK. Besides this, he holds
papers in international conferences and appointments, he is involved as editor a Master of Comparative Laws from
conducted several training sessions in and reviewer for various journals International Islamic University of
Islamic finance in Malaysia and abroad. such as the Malaysian Journal of Malaysia where he also obtained his
Shariah and Law, the International LLB (Bachelor of Laws) and LLB.S
ASSOCIATE PROFESSOR Journal of Business and Finance (Bachelor of Shariah) as his first degree.
DR. AHMAD AZAM OTHMAN Research, Shariah Law Reports and
the Global Islamic Finance Magazine.
Dr. Ahmad Azam Othman is currently His industry experience was as an
an Associate Professor at Islamic Law in-house advocate and solicitor for
Department, Ahmad Ibrahim Kulliyyah Bank Muamalat Malaysia Berhad,
of Laws (AIKOL), International Islamic member of Rules and Regulations
University Malaysia (IIUM). He was Working Committee for Association of
the Director of Harun M. Hashim Law Islamic Banking Institutions Malaysia
Centre, AIKOL, IIUM and the Head of and member of corporate governance
Islamic Law Department, AIKOL, IIUM. working committee for Awqaf South
His specialised areas are Islamic Law Africa. He also underwent internship at
of Property, Obligations, Transactions, Hawkamah, the Institute for Corporate
Personal Bankruptcy, Banking and Governance, Dubai International
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

12

Profile of Shariah Committee

LEFT TO RIGHT:

USTAZ MOHAMMAD
MAHBUBI ALI
DR. NOR FAHIMAH
MOHD RAZIF
USTAZ AHMAD
ALFISYAHRIN JAMILIN

USTAZ MOHAMMAD and Finance from the Institute of Islamic Ahmad Alfisyahrin Jamilin was the
MAHBUBI ALI Banking and Finance, International Head of Shariah at First Gulf Bank,
Islamic University Malaysia (IIUM). United Arab Emirates. He was
Mohammad Mahbubi Ali is currently previously the Chief Shariah Officer at
a research fellow at International DR. NOR FAHIMAH MOHD RAZIF Al Rajhi Bank Malaysia and Shariah
Institute of Advanced Islamic Studies (Appointed w.e.f. 1 February 2016) Counsel at HSBC (Amanah) Middle East
(IAIS) of Malaysia. He was previously a based in Dubai, United Arab Emirates.
researcher at the International Shari’ah Dr. Nor Fahimah Mohd Razif is currently
Alfisyahrin came with a colorful
Research Academy (ISRA) for Islamic a senior lecturer at Department of Fiqh
experience in his career where he was
Finance. During his stint in ISRA, he and Usul, University of Malaya (UM).
a Vice President in Global Markets and
has contributed to numerous ISRA’s She started her career as Executive for
Structured Investment for Al Rajhi Bank
research publications, mainly Central the Project Management Office under
Malaysia and a Shariah specialist for
Bank of Malaysia’s Shari’ah Standards. the Islamic Capital Market Development
Sukuk and syndication for Global HSBC
He also serves as a Shariah Consultant Project at the Securities Commission
Amanah while he holds a Bachelor
for various advisory and consultancy Malaysia. She was previously attached
in Shariah (honours) from the Islamic
services including ZICO Shariah at the International Shari’ah Research
University of Madinah, Saudi Arabia.
Advisory and Roosdiono & Partners. Academy for Islamic Finance (ISRA)
In his young age, he has managed as a Research Assistant to conduct Alfisyahrin practiced Islamic banking
to contribute extensively in Islamic research on hedging mechanism and finance in multiple areas such
Finance through his regular writings through option product in Islamic as front-liner, product structurer and
featured in the Islamic Finance News finance. developer, Shariah specialist and
(IFN), Business Islamica, The General documentation expert. He used to be
She also wrote numerous articles
Council for Islamic Banks and Financial the originator, transactor and developer
in the field of Islamic economics,
Institutions (CIBAFI) and many others. for Sukuk and Treasury products and
Islamic finance, sukuk and debt from
He has published numerous articles transactions, and had experience in
Islamic perspective, which some
in international and local refereed the conversion of conventional bank
were presented in international and
academic journals, written several book to Islamic. Apart from that, he
local Islamic banking and finance
chapters and presented a number undertake corporate financial
proceedings and conferences also
of papers in various international advisory for specialised or non-vanilla
published in books and journals.
conferences. His paper entitled: requirements in the areas which include
Her specialized area are transactional
“A Framework of Income Purification general corporate finance, structured
law (Fiqh al-Muamalat), Islamic Capital
for Islamic Financial Institutions,” finance, capital management, contract
Market as well as Islamic Finance.
co-authored with Dato’ Dr. Asyraf Wajdi finance and project finance, managing
Dusuki and Lokmanulhakim Hussain, Dr. Nor Fahimah holds a Bachelor’s global Shariah affairs in the global
was conferred best paper presentation Degree in Fiqh and Usul from University Islamic banking presence including but
in Sharia Economics Conference, of Malaya. She also has completed her not limited to United Arab Emirates,
University of Hannover, Germany, 2013. PhD (Fiqh al-Muamalat) from the same Bahrain, Qatar, Saudi Arabia, United
university which her thesis is related States of America, United Kingdom,
He received a bachelor degree in to Islamic hedging and derivatives Mauritius, Bangladesh, Malaysia,
Shari’ah Business and Finance from instruments. Indonesia, Brunei and Singapore.
Islamic Business School, Tazkia He also has experience in establishing
Indonesia and Chartered Islamic USTAZ AHMAD and managing Shariah division and
Finance Professional (CIFP) from fund custodial and administrative
ALFISYAHRIN JAMILIN
INCEIF, The Global University in services by providing Shariah advisory,
(Voluntary leave w.e.f. 5 August 2016)
Islamic Finance, Malaysia. He is equity screening, audit and purification
a PhD candidate in Islamic Banking process.
 ANNUAL REPORT 2016

13

Management Discussion & Analysis

“AFFIN ISLAMIC BANK BERHAD GAINED TRACTION ON SEVERAL

STRATEGIC FRONTS AND ACHIEVED NEW MILESTONES ON ITS 10TH
ANNIVERSARY IN 2016. STAYING ON TRACK OF ITS BUSINESS STRATEGY,
THE BANK SUCCESSFULLY NAVIGATED THROUGH A CHALLENGING
ENVIRONMENT OF CONTRACTING MARGINS AND INTENSIFIED COMPETITION
AND CONTINUED TO REGISTER GROWTH IN ALL KEY PARAMETERS.”
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

14

Management Discussion & Analysis

PROFIT AFTER ZAKAT

AND TAXATION

+32.8
2015 : RM84.8 MILLION
%

2016 : RM 112.6 MILLION

2016 OBJECTIVE & STRATEGY Growing on AFFINITY amidst challenges

AFFIN ISLAMIC aspires to be a major player in Malaysia’s The market environment in 2016 was challenged by significant
Islamic Financial Services industry. In 2016, we continued volatility amidst uncertainty over growth prospects on the
to emerge in distinct Islamic banking areas, supported by back of fluctuating commodity prices, moderating global
strategic marketing to niche customer segments. economic growth and foreign exchange volatility. The rise in
general prices as well as weaknesses in the labour market also
The Bank’s business strategy for the year was to focus on contributed to higher risk of delinquencies and more intense
increasing revenue by emphasising transactional banking and competition industry-wide for both financing and deposit.
improving business efficiency. At Group level, a Priority Islamic
Policy was implemented in June 2016 as a strategic move to AFFIN ISLAMIC was prudent in preserving its asset quality
align with Bank Negara Malaysia’s 10-year Financial Sector during this challenging time. We adopted proactive monitoring
Strategic Blueprint in which we aim to enhance our Islamic of potential problematic accounts and were prudent in
financing portfolio to 40% of Group portfolio by the year 2019. making decisions for both credit extension and investment
opportunities. The Bank also focused on new collaborative
Under this new business approach and on best effort basis, possibilities between Islamic financial institutions to reinforce
all accounts and facility applications are encouraged to be our foundation and sustainability within the Islamic banking
booked under Islamic banking. This supports societal and industry.
national development as a whole through the generation of
annual Zakat contributions and Corporate Social
Responsibility initiatives.

Earnings Per Share Profit Before Zakat Total Assets

(EPS) And Taxation

2015 23.5 sen 2015 RM117.4 million 2015 RM13.4 billion

2016
24.4 sen
2016
146.3
RM million
2016
15.3
RM billion

+3.8% +24.6% +14.2%

 ANNUAL REPORT 2016

15

Management Discussion & Analysis

Net Financing, Advances Deposits From Shareholders’

& Other Financing Customers Equity

2015 RM9.2 billion 2015 RM10.0 billion 2015 RM1.0 billion

2016
11.9
RM billion
2016
RM 10.5 billion
2016
RM 1.2 billion

+29.3% +5 % +20%

Islamic Banking comprehensively protects

the interest of its customer through:
One such significant collaboration was the establishment
and launch of the Investment Account Platform (“IAP”) on s 0ROVISIONOFCAPPEDlNANCINGRATEUNDER
17 February 2016, together with five other Islamic banks. Islamic financial packages.
IAP is the first Shariah-compliant digital investment platform
s %STABLISHMENTOFlNANCIALJUSTICEBYPROHIBITING
that has penetrated the Islamic finance domain. Currently in
unlawful gain and paving the way of sharing
the infancy phase, IAP is expected to gain higher participation
the risk and net profit/loss between the Bank
momentum in the future from the growing demand of online
and customer.
crowdfunding that has the support of robust risk management
infrastructure. The platform benefits entrepreneurs and small s %NSURINGBENElTSTOALLCLASSESRICHAND
and medium enterprises (SME) that require financing in a more poor alike.
structured and cost-effective manner by allowing investors
s 0ROMOTINGSIMPLICITYANDTRANSPARENCY
to invest directly into business ventures and enjoy higher
with stricter standards, contracts and an
potential returns.
asset-focused approach.
There were three inaugural investment accounts offered on s 0ROVIDINGSTABLEINVESTMENTSINWHICHRISKY
the IAP during the year, one of which was developed by AFFIN investments with uncertainty and hazard
ISLAMIC. The Bank embarked on its pioneering IAP venture are avoided.
with ICT Zone Ventures Berhad for a total financing of RM4
million. This is to aid in the supply of computer notebook for
Program Latihan Khidmat Negara (PLKN) on rental basis.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

16

Management Discussion & Analysis

On 30 March 2016, AFFIN ISLAMIC, together with seven Promoting AFFINITY to SMEs and Millennials
other banks, participated in Syndicated Islamic Financing
Facility with UDA Holdings Berhad. This was for a syndicated AFFIN ISLAMIC continues to explore consumer-friendly
facility of up to RM500 million to partly-fund the property and excellent services in order to improve customer
developer’s eight upcoming projects, which includes serviced experience. The core strategy for the year was to concentrate
apartments at Jalan Sultan Ismail in Kuala Lumpur and on marketing and promotional activities for the SME and
condominiums in Cheras. millennials segments.

AFFIN ISLAMIC achieved another milestone with the signing The Bank is enhancing its services by strengthening the
of a memorandum of understanding (MOU) on 5 October SME’s facility creation processes and developing new
2016 with the Islamic Corporation for the Development of business products that will offer higher profitability. For the
the Private Sector (ICD), at ICD Headquarters in Jeddah, consumer segment, the Bank will continue to leverage on
Saudi Arabia. ICD is the private sector arm of Islamic its Mortgage and Hire Purchase portfolio.
Development Bank Group in Saudi Arabia. The MOU inked
In the effort to widen customer reach among the millennials,
was towards identifying areas for strategic collaborations
all marketing campaigns are geared towards the
within the Asian region. Through this collaboration, both
technology-savvy trend by utilising online engagement and
parties will offer technical and advisory support on product
social media interaction. This included social media campaigns
development and Shariah concepts such as placement
and collaboration with The New Straits Times Press Malaysia
of funds, lines of finance and liquidity management. It is
(NSTP) as the main sponsor for Harian Metro Mountain Bike
hoped that this strategic alliance will raise new revolutionary
Grand Prix 2016 to promote a healthy lifestyle. The event
possibilities in the Islamic Finance landscape.
consists of a series of road and off road cycling competitions
The year also saw the Bank’s collaboration with Danajamin which received overwhelming response from local and
to provide financing facility of RM160 million to KNM Group international cyclists, and garnered wide coverage in
Berhad for projects related to Refinery and Petrochemical the print and online media. Supplementing our online efforts,
Integrated Development (RAPID) in Pengerang, Johor. we extended our reach to younger consumers via a more
direct approach, such as presenting talks to universities.

These targeted efforts were fortified by mass advertising in

order to increase brand visibility among the public. We ran
a nationwide advertisement campaign in shopping malls,
Light Rail Transit (LRT) stations and digital screens at selected
locations. In the near future we aim to venture further into
digital marketing by actively promoting our products and
campaigns on the Youtube channel.
 ANNUAL REPORT 2016

17

Management Discussion & Analysis

Growing AFFINITY through product expansion AFFINITY Involvement in the industry

Two new products were launched during the year. In 2016, AFFIN ISLAMIC firmly imprinted its footprints in
The first was AFFIN Education Financing-i, which offers several prominent industry events.
Shariah-compliant financing facility with a financing amount
from RM5,000 to RM150,000 to deserving students from On 10-12 May 2016, AFFIN ISLAMIC participated in the
universities/colleges to further their studies in Diploma/Degree/ Global Islamic Finance Forum (GIFF 2016). The forum
Postgraduate courses. For this product, AFFIN ISLAMIC promoted intellectual discussions and business ideas aimed
collaborates with Management & Science University (MSU) at spurring growth in the Islamic Finance industry and forging
as one of its panel universities. international market linkages. Our Chief Executive Officer
(CEO), En Nazlee Khalifah was appointed the GIFF 2016
The other new product launched was the Restricted Organising Chairman.
Investment Account (RIA) under a Mudarabah concept
(profit sharing and loss bearing). The RIA offers returns Subsequently, on 21-23 November 2016, the Bank
based on performance of underlying assets, investment into participated in the 13th Annual Kuala Lumpur Islamic
specified assets with mandate by customers and maturity Finance Forum (KLIFF 2016). This platform facilitated the
and withdrawal conditions agreed at inception. nurturing of key client relationships and developing solutions
to issue-centric matters in collaboration with other
participants, from regulators to professionals in legal
and financial services industries.

The 6th ISRA-IRTI-Durham University Strategic Round was

held on 31 December 2016 to discuss holistic solutions for
financial inclusion and poverty alleviation through the use
of Islamic social finance. Our Deputy CEO, En Ferdaus Toh
Abdullah represented the Islamic Banks in Malaysia with
his presentation on the establishment of social justice that
alleviates poverty in both wealth creation and distribution.

The Bank is committed to continuously support societal

and industry growth with the development of innovative
consumer-centric products and a corporate responsibility
mindset.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

18

Management Discussion & Analysis

Community Engagement
Asnaf category Amount (RM)
Collaborations were also sought with local communities as
AFFIN ISLAMIC undertook to support worthy causes through Fakir Miskin (Poor & needy) 1,081,850.00
community outreach programmes and zakat (business tithes) Fisabilillah 207,740.00
contributions. In 2016, AFFIN ISLAMIC contributed a total of Gharimin (Settling of debts for 29,188.75
RM3.1 million in zakat to different causes and sectors of eligible recipients)
the underserved population. Muallaf (Assisted reverted Muslims 31,500.00
through organisations)
We contributed a total of RM1.1 million to deserving Amil 534.68
individuals and charitable organisations. From this sum, Others* 1,800,000.00
AFFIN ISLAMIC under the AFFINBANK Group worked with
the New Straits Times Press (Malaysia) Berhad and became Total 3,150,813.43
the main sponsor for Harian Metro Kotak Rezeki 2016,
a programme to distribute 10,000 boxes worth RM144,000 * Pusat Zakat Negeri, Tabung Zakat ATM and Universities
of food baskets containing dates, food and beverages to
the poor and underprivileged, including welfare homes, Besides zakat contribution, through the AFFIN Barakah
orphanages, single mothers, poor families and security Charity Account-i, AFFIN ISLAMIC contributed a total of
forces all over Malaysia. Zakat contribution for Kotak Rezeki 50 wheelchairs worth RM18,500 to Hospital Kuala Lumpur
benefitted 11,000 recipients nationwide. (HKL). This Wadiah savings account enables account holders
to donate a certain percentage of their monthly earned profit/
The year marked a significant milestone for AFFIN ISLAMIC dividend (or ‘Hibah’) to a worthy cause.
as the Bank celebrated its 10th Anniversary in 2016. The Bank
decided to celebrate with the underprivileged by distributing The Bank also collaborated with our parent bank, AFFINBANK
RM120,000 to 12 orphanages throughout Malaysia. on several corporate sustainability initiatives. In 2016,
Celebrations were held in each orphanage with the children we joined forces to hold a ‘Majlis Berbuka Puasa Bersama
being entertained with scrumptious food, fun activities and Anak-Anak Yatim’ to bring festive cheer to orphans. About
motivational talks by our Shariah officers. 160 orphans from four orphanages in the Klang Valley were
invited to a ‘buka puasa’ (breaking of fast) dinner which was
The Bank contributed a total of RM1 million to 10 state zakat attended by Senior Management from both banks during the
centres (Johor, Perak, Selangor, Perlis, Kedah, Melaka, month of Ramadhan.
Kelantan, Terengganu, Kuala Lumpur and Pulau Pinang).
A total of RM207,740 was channelled towards knowledge In addition, AFFIN ISLAMIC jointly sponsored the Utusan
causes (Fisabillilah), inclusive of Muallaf activities. Our Muallaf Malaysia Tutor Pull-out Programme where specially prepared
contributions included RM40,000 to Multiracial Reverted Tutor Pull-outs were distributed to primary and secondary
Muslim (MRM) and RM25,000 to Interactive Da’wah Training school students. AFFIN ISLAMIC also jointly sponsored
Centre to assist newly reverted Muslims. As educational aid, My Coral: MSU Eco-Marine Youth Expedition 2016 which
AFFIN ISLAMIC contributed RM450,000 to support deserving saw participation from 60 Management Science University
students pursuing tertiary education at local universities of (MSU) students and 20 employees from the AFFINBANK
higher learning such as Universiti Teknologi MARA (UiTM), Group. The programme comprised coral reef replanting,
Management & Science University (MSU), Universiti Putra creation of a turtle sanctuary, beach cleaning and free medical
Malaysia (UPM) and Universiti Kebangsaan Malaysia (UKM). checkups for the local community to increase awareness
on nature preservation and the importance of basic health
In addition, we contributed RM350,000 to Tabung Zakat checks.
Angkatan Tentera Malaysia, which manages funds to be
allocated to deserving members of the armed forces.
 ANNUAL REPORT 2016

19

Management Discussion & Analysis

2017 AFFIN ISLAMIC’S STRATEGIC THRUST:

3 Islamic Product Expansion 4 Smart Partnership Business

New

Expanding Product Offerings Business Partnership (Musharakah)

Products

1 Optimizing Resources 2 New Customer Segment

Existing

Voluntary Conversion from conventional s &OCUSEDTARGETSEGMENTS

to Shariah-compliant product (SME and Milennials population)
s 0ROMOTE0RIORITY)SLAMIC0OLICY
Existing New
Customer

GROWTH IN 2016 MOVING FORWARD

Notwithstanding the challenging year, the Bank recorded Risks and opportunities in 2017
outstanding results.
In 2017, Malaysia’s national real Gross Domestic Product’s
For the financial year ended 31 December 2016 (FY16), growth is expected to edge up moderately between 4.0% to
AFFIN ISLAMIC registered a 32.8% increase in profit after 5.0%. Although the economy is slowly rebounding, it will be
zakat and taxation (PAZT) to RM112.6 million. This was a staggered and uneven recovery. The operating environment
on the back of 29.1% financing growth and 5.0% deposit for the banking industry in Malaysia is expected to remain
growth. Net financing income grew from RM240.3 million to challenging as asset quality and profitability continue to be
RM275.4 million, an increment of 14.6%.Total assets stood negatively impacted.
at RM15.3 billion, a 14.2% increase from 2015. The Bank’s
good asset quality was reflected by an improvement of 0.7% However, we are optimistic in retaining our competitive edge
in gross impaired financing ratio from 1.5% to 0.8%. Net and business growth with our Priority Islamic Policy. Through
impaired financing ratio declining substantially to 0.6% from Priority Islamic, both our financing and deposit portfolio base are
1.1% the previous year, while Return on Equity (‘ROE’) and expected to increase steadily. As at December 2016, we have
Return on Asset (‘ROA’) improving to 10.58% and 0.79% successfully achieved our aim to increase our Islamic financing
respectively. portfolio by 29.1%. Moving forward, the Bank anticipates higher
funding cost and compression of Net Profit Margin (NPM) mainly
The Bank’s deposit portfolio continued to grow by 5.0% due to stiff competition for deposits among domestic banks and
despite intense competition for deposits during the year. OPR reduction. Four strategic thrusts have been identified to
This was a result of various collaborations with our parent, guide our journey in 2017.
AFFINBANK. These included promotions such as the OMG
Deposit Campaign, Joyful Raya Merdeka Deposit Campaign, These encompass Optimising Resources, Growing New
20% Cash Back for Debit/Credit Card usage, AFFIN E-Fair Customer Segments, Catalysing Islamic Product Expansion
campaign (for online services, bill payment and financing). and Furthering Smart Partnership Business.
The Bank’s financing portfolio benefitted from RM2.7 billion
It is our aspiration to become the preferred bank for the
to record 29.1% growth from the previous year. Together,
SME and millennials segments. The Bank is solidifying
these enabled AFFIN ISLAMIC to end the year with total
our network presence and customer reach with the upcoming
assets of RM15.3 billion, an expansion by 14.2% from
launch of mobile banking and enhanced internet banking to
the previous financial year.
reach out to these segments by addressing the significant
In an increasingly competitive environment, it is important change in market trends, whereby we are seeing increased
to operate at a high level of efficiency, and constant efforts utilisation of online transactions and online marketing channels
towards this end have sustained our cost to income ratio such as Facebook, Instagram, Youtube and Twitter.
at 48.2%. This played a part in the increase in profits
The Bank also targets to further enhance our financing
as reported above.
portfolio, in line with the Priority Islamic implementation; with
a dedicated focus on resilient and recession proof industries.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

20

Corporate Diary

30 MAR 2016
AFFIN ISLAMIC participated
in Syndicated Islamic
Financing Facility with
UDA Holdings Berhad.

01 APR 2016
07 JAN 2016 2016 marks
a significant
AFFIN ISLAMIC’s Director, YBhg. Tan Sri Dato’ Seri milestone for
Mohamed Jawhar presented a zakat contribution to AFFIN ISLAMIC
KDYTM Tengku Mahkota Pahang, Tengku Abdullah ibni as the Bank
Sultan Ahmad Shah. celebrated its
10th Anniversary.

04 FEB 2016 10-12 MAY 2016

CEO of AFFIN ISLAMIC, En. Nazlee Khalifah, presented GIFF 5.0 is organised by the Association of Islamic Banking
zakat contribution to Vice Chancellor of Universiti Utara Institutions Malaysia (AIBIM), where AFFIN ISLAMIC
Malaysia, YBhg.Prof. Dato’ Seri Dr. Mohamed Mustafa is a member and Encik Nazlee Khalifah is the Organising
Ishak. Chairman.

01 JUN 2016 21 JUN 2016

Officiated by AFFIN ISLAMIC
AFFINBANK’s MD/CEO contributed zakat funds to
En. Kamarul Ariffin Mohd ‘Tabung Zakat Angkatan
17 FEB 2016 Jamil, Kotak Rezeki is Tentera Malaysia’.
AFFIN ISLAMIC and five Islamic banking institutions a programme to The zakat contribution
launched the first bank-intermediated financial technology distribute 10,000 boxes was presented by
‘fintech’ platform known as the Investment Account of food baskets to AFFINBANK’s MD/CEO
Platform (IAP). The IAP was launched by Governor of eligible individuals. En Kamarul Ariffin to
Bank Negara Malaysia, YBhg.Tan Sri Dato’ Sri Dr. Zeti Minister of Defence, YB
Akhtar Aziz. Datuk Seri Hishammuddin
Tun Hussein.
 ANNUAL REPORT 2016

21

Corporate Diary

24 JUN 2016
AFFINBANK & AFFIN
ISLAMIC teamed up to
be the main sponsor of
Mountain Bike Grand Prix
2016. The event consists of
a series of road and off road
cycling competitions.

18 OCT 2016
Hospital Kuala Lumpur (HKL) received 50 wheelchairs derived
from customers’ contributions through AFFIN Barakah
Charity Account-i.

22 OCT 2016
The Harian Metro
Mountain Bike
28 & 29 JUL 2016 (Grand Prix)
continued at the
The AFFIN ISLAMIC 10th Anniversary celebration continues second location
with employees visiting to orphanage homes in 12 states. in Lukut, Negeri
Sembilan.

30 JUL 2016 05 OCT 2016 25 NOV 2016

The first Mountain Bike AFFIN ISLAMIC inked
AFFIN ISLAMIC embarked on its first Investment Account
Grand Prix 2016 kicked an MOU with Islamic
Platform (IAP) venture with ICT Zone Ventures Berhad, an
off in Kulim, Kedah and Corporation for the
ICT equipment leasing and rental enterprise. The event was
attracted over 1,200 Development of the
witnessed by BNM Deputy Governor, Encik Abdul Rasheed
participants nationwide. Private Sector (ICD) in
Ghaffour and BNM Assistant Governor Dato’ Bakarudin
Saudi Arabia.
Ishak.

10 OCT 2016 03 DEC 2016

A financing facility with Mountain Bike Grand Prix’s
KNM Group Berhad final event was held in Universiti
was inked for projects Teknologi Malaysia Skudai,
related to the Refinery Johor. Director, Consumer
and Petrochemical Banking AFFINBANK, En. Idris
Integrated Development Abd Hamid and Deputy Group
(RAPID) in Pengerang, Editor Harian Metro, En. Ahmad
Johor. @ Salim Bachok flagged off the
Mountain Bike event.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

22

Financial Highlights

Earnings Profit Before Zakat

Per Share (EPS) And Taxation
Sen RM’million

23.5 24.4 146.3

117.4
18.5
16.4
87.3 91.7

‘13 ‘14 ‘15 ‘16 ‘13 ‘14 ‘15 ‘16

Total Assets Net Financing, Advances

RM’billion
& Others Financing
RM’billion

11.9

15.3 9.2
12.7 13.4
12.3 7.2
6.0

‘13 ‘14 ‘15 ‘16 ‘13 ‘14 ‘15 ‘16

Deposits From Shareholders’

Customers Equity
RM’billion RM’billion

1.2
10.5
9.9 10.0 1.0
9.3
0.8
0.7

‘13 ‘14 ‘15 ‘16 ‘13 ‘14 ‘15 ‘16

 ANNUAL REPORT 2016

23

Statement on Corporate Governance

The Board of Directors (‘the Board’) of AFFIN ISLAMIC BANK BERHAD (‘the Bank’) and Management seek to embrace high
standards and principles of Corporate Governance in all areas of the Islamic banking industry towards enhancing business
prosperity and corporate integrity, having the ultimate objective of safeguarding shareholder’s value and interest of the
stakeholders. The Board continuously reviews its governance model to ensure its relevance, effectiveness and ability to meet
the challenges of the future. The Board provides guidance and oversight of the Bank’s strategic agenda and operations.
The Board acknowledges its responsibility to act diligently and responsibly in accordance with legislation and regulations in
serving the interests of shareholder, customers, employees and the community at large.

The Board and Management are fully committed and constantly strive in ensuring the Bank operates in accordance with the
Islamic Financial Services Act 2013 (‘IFSA’), Malaysian Code of Corporate Governance 2012 (‘MCCG’), Bank Negara Malaysia
Policy Document on Corporate Governance dated 3 August 2016 (‘BNM CG’), Shariah Governance Framework for Islamic
Financial Institutions (‘SGF2010’) and other applicable laws and regulations. The Board and Management place great importance
on the safety and soundness of the Bank as an Islamic financial institution where risks and business prudence are appropriately
balanced in line with Shariah Principles. Throughout 2016 and to-date, the Bank continues to conduct its business with integrity
and exert a high level of transparency and objectivity.

The Bank adhere to the fit and proper requirement for Directors pursuant to the IFSA. The Board and Management remain
dedicated in ensuring adherence to Code of Ethics for the Financial Services Industry issued by the Financial Services Professional
Board in December 2015 (‘FPSB-01’), which aims at instilling the five values, namely, discipline, integrity, humility, caring and
creativity. The Board and Management set a high ethical business standard and practice for business conduct and the code of
behaviour for employees. The responsibility for implementing the policies and guidelines within the contemplation of the Code of
Ethics rest primarily with the Management with oversight by the Board Audit Committee. In addition, the Bank also has its own
Code of Ethics that sets out sound principles and standards of best practices which are observed by the employees.

The following sections set out the commitment of the Bank in applying the best principles of Corporate Governance and the extent
of compliance with the recommended practice.

BOARD OF DIRECTORS

The Board is committed in establishing long term sustainable value to the shareholders as well as the stakeholders. Testament
to the Board’s commitment in this respect, the Board is pleased to report that the Bank has complied with the principles and
recommendations of the MCCG. The Board had adopted a Group Policy on the maximum tenure of service for Independent
Non-Executive Directors (‘INED’) to be in line with the BNM CG. In relation to this, BNM has allowed transitional arrangements
for the Bank to fully comply with all other requirement thereunder.

Board’s Role and Responsibilities

The Board acknowledges its role and responsibilities for the overall performance of the Bank.

The Board’s responsibilities remain within the framework of IFSA, MCCG, BNM CG and the Bank’s Board Policy Manual.
The Board exercises great perseverance and diligence to ensure that high ethical standards are upheld and that the interests of
stakeholders are not compromised. These include responsibility for determining the Bank’s general policies and strategies for
approving business plans including targets and budgets and in approving major strategic decisions.

The Bank’s Board Policy Manual, which sets out the key corporate governance principles of the Bank, clearly defines the role
and responsibilities of the Board, Chairman and the CEO in the areas of strategy setting, management of the company, integrity
of internal control and communication, succession planning and risk management.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

24

Statement on Corporate Governance

Board Composition and Balance

The Board had, during the financial year ended 2016, undertaken changes at board leadership level pursuant to the requirement
set out in the BNM CG.

The Board believes that it is important to build and refresh itself since it serves as a strategic asset and a source of long term
competitive advantage for the Bank in today’s highly competitive world. This includes a long term succession plan for the Board
which is of equal importance.

The Board as a team, collectively provide a collection of mixed of skills, knowledge and competencies which include banking,
accountancy, finance, strategic management, business administration and risk management.

The Board composition comprised a majority of independent directors since year 2011. The Board currently comprise eight (8)
directors, two (2) of whom are Independent Non-Executive Directors (‘INED’) and six (6) Non-Independent Non-Executive Directors
(‘NINED’); the Chairman of the Board is a NINED. The profiles of the directors are set out in this Annual Report.

The composition of INEDs was initially 57.14% of the Board prior to the re-designation of YBhg. Tan Sri Dato’ Seri Mohamed
Jawhar, En. Mohd Suffian Bin Haji Haron and YBhg. Tan Sri Dato’ Sri Abd Aziz Bin Abdul Rahman; they have served the Bank
for a period of more than (nine) 9 years. Consequently, the Board has undertaken important steps to initiate and effect changes
at its level which will position the Bank for continued growth and create sustained value. In relation to this, the Board had made
concerted efforts and continue its focus in ensuring that the Board’s composition fall within the contemplation of the BNM CG
requirement on majority INEDs within the stipulated time frame.

The current two (2) INEDs have no relationships or circumstances which are likely to affect, or could appear to affect their
judgment. They bring with them an external perspective and viewpoint and assist in developing proposals on strategy. Further,
they scrutinize the performance of the Management in meeting approved goals and objectives, and monitor the risk profile of
the Bank’s business and the reporting of monthly business performance.

The Board Nomination and Remuneration Committee (BNRC) and the Board have upon their annual assessment, concluded that
the two (2) INEDs continue to demonstrate conduct and behaviour that are essential indicators of independence, and that each of
them continues to fulfil the definition of independence pursuant to the BNM CG.

The role of INEDs are particularly important in ensuring that the strategies proposed by the Management are fully deliberated
and evaluated impartially in line with the long term objectives of the Bank. No individual or small group of individuals dominate the
Board’s decision making process. Notwithstanding, the BNRC determines on an annual basis whether an INED remains objective
and is free from relationship or influence that could undermine his ability to execute an independent judgment.

Notwithstanding that, at this juncture the Board consists of a majority of NINEDs. Whilst it continues its efforts to have a majority of
INEDs, the Board is committed and strongly believes that all directors act in the best interest of the Bank through the adoption of
sound corporate governance standards and practice.

Board Committees

The Board has established a number of Board Committees whose compositions and terms of reference are in accordance with
the BNM CG and consistent with the recommendations of the MCCG.

In relation to this, the Board has delegated specific of its authority and responsibilities to these Board Committees, which operate
under approved terms of reference of the respective Board Committees, primarily to assist the Board in the execution of its
duties and responsibilities. The Board Committees shall report the outcome of their meetings to the Board for deliberation at the
Board’s level, if required. Reports and deliberations are incorporated into the minutes of the Board meetings. The various Board
Committees are listed as below:-
 ANNUAL REPORT 2016

25

Statement on Corporate Governance

Board Nomination and Remuneration Committee (BNRC)

On 27 September 2016, the Board approved the adoption of Affin Holdings Berhad’s (“AHB”) approval at its meeting held
on 11 August 2016 on the group policy to establish a joint Board Nomination and Remuneration Committee for the Bank.

Previously, the Bank’s Board Nominating Committee (BNC) and Board Remuneration Committee (BRC) were separate.

The attendance of Members at the BNC meetings in 2016 is reflected as follows:-

Number of Board Meetings

No. Name of Director Attendance No. of Meetings
1. YBhg. Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman 6 6
Chairman / Independent Non-Executive Director
(Appointed as Chairman of BNC w.e.f. 1 June 2016)
2. YBhg. Tan Sri Dato’ Seri Lodin Bin Wok Kamaruddin 4 6
Member / Non-Independent Non-Executive Director
(Completed his tenure of directorship with the Bank w.e.f. 4 October 2016)
3. YBhg. Laksamana Madya Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor 6 6
Member / Non-Independent Non-Executive Director
4. YBhg. Tan Sri Dato’ Seri Mohamed Jawhar ^ 6 6
Member / Non-Independent Non-Executive Director
5. En. Mohd Suffian Bin Haji Haron ^ 6 6
Member / Non-Independent Non-Executive Director
Note: ^ Redesignated to Non-Independent Non-Executive Director w.e.f. 1 June 2016

The attendance of Members at the BRC meetings in 2016 is reflected as follows:-

Number of Board Meetings

No. Name of Director Attendance No. of Meetings
^
1. YBhg. Tan Sri Dato’ Seri Mohamed Jawhar 2 2
Chairman / Independent Non-Executive Director
2. YBhg. Tan Sri Dato’ Seri Lodin Bin Wok Kamaruddin 2 2
Member / Non-Independent Non-Executive Director
(Completed his tenure of directorship with the Bank w.e.f. 4 October 2016)
3. YBhg. Laksamana Madya Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor 2 2
Member / Non-Independent Non-Executive Director
Note: ^ Redesignated to Non-Independent Non-Executive Director w.e.f. 1 June 2016

The BNRC is responsible for providing a formal and transparent procedure for the appointment of Chief Executive Officer and
Senior Management. The BNRC also developing the remuneration policy for Directors, Chief Executive Officer, Senior Management
and other material risk takers, whereby it assesses the effectiveness of individual Director, the Board as a whole and the
performance of the Chief Executive Officer as well as Senior Management.

BNRC reviews and recommends the process for successions planning for the Board, Chief Executive Officer and Senior
Management; making appropriate recommendations to the Board, ensures that compensation is competitive and consistent with
the Bank’s culture and strategic objectives. The BNRC obtains advice from experts in compensation and benefits, both internally
and externally.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

26

Statement on Corporate Governance

Board Nomination and Remuneration Committee (BNRC)

The attendance of Members at the BNRC meetings in 2016 is reflected as follows:

Number of Board Meetings

No. Name of Director Attendance No. of Meetings
1. Associate Professor Dr. Said Bouheraoua 1 1
Chairman / Independent Non-Executive Director
(Appointed as Chairman w.e.f. 15 November 2016)
2. En. Mohd Suffian Bin Haji Haron ^ 1 1
Member / Non-Independent Non-Executive Director
3. YBhg. Tan Sri Dato’ Seri Mohamed Jawhar ^ 1 1
Member / Non-Independent Non-Executive Director
4. YBhg. Laksamana Madya Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor (Bersara) 1 1
Member / Non-Independent Non-Executive Director
5. YBhg. Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman ^^ 1 1
Member / Non-Independent Non-Executive Director
Note: ^ Redesignated to Non-Independent Non-Executive Director w.e.f. 1 June 2016
^^ Redesignated to Non-Independent Non-Executive Director w.e.f. 25 October 2016

Shariah Committee (SC)

The key responsibilities of the Shariah Committee are to advise the Board on Shariah matters pertaining to the Islamic operations
and to deliberate and endorse Shariah related matters. The Shariah Committee is supported by the Shariah compliance and
research functions.

Members at the SC meetings in 2016 is reflected as follows:

Number of Meetings
No. Name of Director Attendance No. of Meetings
1. Associate Professor Dr. Said Bouheraoua 8 8
2. Associate Professor Dr. Ahmad Azam Othman 8 8
3. Associate Professor Dr. Zulkifli Hasan 8 8
4. Ustaz Mohammad Mahbubi Ali 8 8
5. Ustaz Ahmad Alfisyahrin Jamilin 4 5
(Voluntary leave w.e.f. 5 August 2016)
6. Dr. Nor Fahimah Mohd Razif 7 7
(Appointed w.e.f. 1 February 2016)

Board Committee That Are Established At Group Level

In addition to the above, there are group committees (which are established at AFFIN Bank Berhad) to assist the Board and
Management in governing the business activities and operations of the Bank.
 ANNUAL REPORT 2016

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Statement on Corporate Governance

Board Risk Management Committee (BRMC)

The BRMC is responsible for overseeing management’s activities in managing credit, market, liquidity, operational, legal
reputational and other risks so as to ensure that the risk management process is adequately in place and function effectively.

The attendance of Members at the BRMC meetings in 2016 is reflected as follows:

Number of Board Meetings

No. Name of Director Attendance No. of Meetings
1. En. Abd Malik Bin A Rahman 2 2
Chairman / Independent Non-Executive Director
(Appointed as Chairman w.e.f. 25 October 2016)
2. YBhg. Tan Sri Mohd Ghazali Bin Mohd Yusoff 8 8
Member / Independent Non-Executive Director
3. YBhg. Tan Sri Dato’ Seri Mohamed Jawhar ^ 8 8
Member / Non-Independent Non-Executive Director
4. YBhg. Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman ^^ 8 8
Member / Non-Independent Non-Executive Director
(Represent AFFIN ISLAMIC)
5. En. Mohd Suffian Bin Haji Haron 8 8
Member / Independent Non-Executive Director
Note: ^ Redesignated to Non-Independent Non-Executive Director w.e.f. 1 June 2016
^^ Redesignated to Non-Independent Non-Executive Director w.e.f. 25 October 2016

Board Loan Review and Recovery Committee (BLRRC)

The BLRRC is responsible in providing critical review of loans and other credit facilities with higher risk implications, after
due process of checking, analysis, review and recommendation by the Financings Group Risk Management function, and if
found necessary, exercise the power to veto financing applications that have been approved by the Group Management Loan
Committee.

The attendance of Members at the BLRRC meetings in 2016 is reflected as follows:

Number of Board Meetings

No. Name of Director Attendance No. of Meetings
1. YBhg. Jen. Tan Sri Dato’ Seri Ismail Bin Haji Omar (Bersara) 14 14
Chairman / Non-Independent Non-Executive Director
2. YBhg. Tan Sri Dato’ Seri Lodin Bin Wok Kamaruddin 11 14
Member / Non-Independent Non-Executive Director
(Completed his tenure of directorship with the Bank w.e.f. 4 October 2016)
3. En. Mohd Suffian Bin Haji Haron ^ 14 14
Member / Non-Independent Non-Executive Director
4. YBhg. Laksamana Madya Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor (Bersara) 14 14
Member / Non-Independent Non-Executive Director
(Represent AFFIN ISLAMIC)
Note: ^ Redesignated to Non-Independent Non-Executive Director w.e.f. 1 June 2016
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

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Statement on Corporate Governance

Board Audit Committee (BAC)

The BAC is responsible for providing oversight on reviewing the adequacy and integrity of the internal control systems and
oversees the work of the internal and external auditors.

The attendance of Members at the BAC meetings in 2016 is reflected as follows:

Number of Board Meetings

No. Name of Director Attendance No. of Meetings
1. YBhg. Tan Sri Mohd Ghazali Bin Mohd Yusoff 9 9
Chairman / Independent Non-Executive Director
(Appointed as Chairman w.e.f. 25 October 2016)
2. YBhg. Tan Sri Dato’ Seri Mohamed Jawhar ^ 9 9
Member / Non-Independent Non-Executive Director
3. YBhg. Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman ^^ 9 9
Member / Non-Independent Non-Executive Director
(Represent AFFIN ISLAMIC)
4. Assoc. Prof. Dr. Said Bouheraoua 7 9
Member / Independent Non-Executive Director
(Represent AFFIN ISLAMIC)
Note: ^ Redesignated to Non-Independent Non-Executive Director w.e.f. 1 June 2016
^^ Redesignated to Non-Independent Non-Executive Director w.e.f. 25 October 2016

Board Oversight Transformation Committee (BOTC)

The Board had at its meeting held on 26 July 2016 approved the establishment of BOTC and its terms of reference.

The BOTC is responsible for overseeing the transformation plan (AFFINITY Programme), secure the consistency of strategic
decision and ensure that the transformation plan is implemented effectively in a timely manner.

The attendance of Members at the BOTC meetings in 2016 is reflected as follows:

Number of Board Meetings

No. Name of Director Attendance No. of Meetings
1. En. Abd Malik Bin A Rahman 2 2
Chairman / Independent Non-Executive Director
2. YBhg. Tan Sri Dato’ Seri Mohamed Jawhar ^ 2 2
Member / Non-Independent Non-Executive Director
3. En. Mohd Suffian Bin Haji Haron ^ 2 2
Member / Non-Independent Non-Executive Director
4. Assoc. Prof. Dr. Said Bouheraoua 2 2
Member / Independent Non-Executive Director
(Represent AFFIN ISLAMIC)
Note: ^ Redesignated to Non-Independent Non-Executive Director w.e.f. 1 June 2016
 ANNUAL REPORT 2016

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Statement on Corporate Governance

Independence and Conflict of Interest

It is the Directors’ responsibility to declare whether they have a potential or actual interest in any transaction of the Bank.
Where issues involve conflict of interest, the interested Directors declared and abstained from discussing or voting on the matter.
This is important to mitigate risk arising from potential conflict of interest situation or undue influence from interested parties.

New Appointment and Re-appointment to the Board

Pursuant to provisions of the IFSA and policy documents and guidelines issued by BNM, all appointment and reappointment of
directors are subject to the approval of BNM, and the BNM approval will be for a specific term of appointment.

The proposed appointments of new Board members, as well as re-appointment of the Board members are recommended by
the BNRC to ensure that the level and make-up of its members are of the necessary credibility, integrity and calibre with the
required skills and knowledge.

The re-appointment of a director would be subject to the fit and proper criteria as approved by the Board and based on the peer
evaluation on his/her effectiveness, contribution and participation. This in line with Principle 2, Recommendation 2.2 of MCCG.

Re-election of Directors

In accordance with the Section 91(a) of the Company’s Articles of Association, at least one-third (1/3) of the Directors for the time
being, or, if their number is not three (3) or a multiple of three (3), the number nearest to one-third (1/3), shall retire from office at
each Annual General Meeting and they may offer themselves for re-election.

Continuing Education

The Board of Directors recognises the importance of continuous education and training, to ensure they remain updated with
the latest developments in the areas related to their duties. All newly appointed Non-Executive Directors are furnished by the
Bank with copies of the IFSA and other relevant legislation governing the banking industry to facilitate their understanding and
requirements of banking business. All Directors have attended various training programmes organised internally as well as
externally by the relevant authorities such as BNM, Securities Commission (SC) and Bursa Malaysia Berhad (Bursa Malaysia).
All Directors are required to complete the Financial Institutions Directors’ Education training (FIDE) organised by BNM within
one year from the date of appointment. The Board member acknowledge the importance of upgrading members’ skills set and
competencies in facing current as well as future competitive and innovative disruptions. The members of the Board keep abreast
with the relevant developments in business, banking and finance industry as well as new regulatory requirements on a continuous
basis through various conferences, seminars and training programmes. The development and training programmes attended by
the Directors during the financial year ended 31 December 2016 are set out below.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

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Statement on Corporate Governance

YBhg. Jen. Tan Sri Dato’ Seri Ismail Bin Haji Omar (Bersara)
Trainer/Organiser Course Title Date
1. BNM BNM Annual Report 2015/Financial Stability & payment System Report 2015 – 23 March 2016
Briefing Session
2. MINDA Corporate Directors Advanced Programme (CDAP): Cyber Security Risk 24 March 2016
Management for the Boardroom and C-Suite
3. AHB Half Day Talk On 26 September 2016
i) Shariah Non-Compliance Risk And Its Impact to Islamic Banks
ii) Malaysia Financial Reporting Standard (MFRS) 9
- Financial Instruments And Key Audit Matters
iii) Internal Capital Adequacy Assessment Process (ICAAP)

YBhg. Tan Sri Dato’ Seri Lodin Bin Wok Kamaruddin

(Completed his tenure of Directorship with the Bank w.e.f. 4 October 2016)
Trainer/Organiser Course Title Date
1. FIDE Economic and Financial Services Sector: Trends and Challenges Moving Forward 3 March 2016
for the Banking Industry
2. SEACEN SEACEN Conference on Central Bank Cooperation and Mandates in Honor of 14 March 2016
Former Governor of Bank of Thailand Dr. Puey Unghakorn
3. SC Global Emerging Markets Programme 2016 – Risk Vulnerability of Global Markets: 15 March 2016
Reinforcing Resilience in Emerging Markets
4. ICLIF Independent Directors Programme : “The Essence of Independence” 28 March 2016
5. BNM 3rd BNM-FIDE Forum Annual Dialogue with Governor of BNM 29 March 2016
6. FIDE FIDE Forum 2nd Distinguished Board Leadership Series – “Avoiding Financial 19 April 2016
Myopia” by Professor Jeffrey L. Sampler
7. MINDA CG Breakfast Series with Directors “The Strategy, the Leadership, 6 May 2016
the Stakeholders and the Board”
8. AHB Risk Management Workshop on Cyber Security and Fraud by IBM 9 May 2016
9. AIBIM Global Islamic Finance Forum (GIFF) 5.0 11 May 2016
10. FIDE Briefing Session B For Directors: Implementation of FIDE Forum’s Directors 2 June 2016
Register by FIDE Forum
11. WIEF 12th World Islamic Economic Forum by World Islamic Economic Foundation 2 August 2016
12. FIDE FinTech: Business Opportunity of Disruptor? By Mr. Markus Gnirck and Mr. 4 August 2016
Veiverne Yuen
13. Bursa Malaysia Advocacy Sessions on Management Discussion & Analysis (“MD&A”) 8 August 2016
For Chief Executive Officers (“CEO”) and Chief Financial Officers (“CFO”) Of
Listed Companies by Bursa Malaysia
14. Affin Hwang Affin Hwang Capital Conference Series 2016 : Navigating Through Shifting Sands 11 August 2016
15. BNM & The 2016 Global Symposium on Innovative Financial Inclusion “Harnessing Technology 21 September 2016
World Bank for Inclusive Finance”
16. AHB Half Day Talk On 26 September 2016
i) Shariah Non-Compliance Risk And Its Impact to Islamic Banks
ii) Malaysia Financial Reporting Standard (MFRS) 9 - Financial Instruments And
Key Audit Matters
iii) Internal Capital Adequacy Assessment Process (ICAAP)
 ANNUAL REPORT 2016

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Statement on Corporate Governance

YBhg. Laksamana Madya Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor (Bersara)
Trainer/Organiser Course Title Date
1. BNM 3rd BNM-FIDE Forum Annual Dialogue with Governor of BNM 29 March2016
2. FIDE Directors and Officers Liability Insurance: Are Directors Sufficiently Protected for 5 April 2016
Exercising
Their Fiduciary Duty
3. Affin Hwang Affin Hwang Capital Conference Series 2016 : Navigating Through Shifting Sands 11 August 2016
Capital
4. MIDAS MiDAS Talk 14/2016 “Malaysia in Facing the Triangle of Conflict in Southeast Asia” 8 November 2016
5. FIDE Strategy to Leverage Technology for Business Solutions 14 November 2016

YBhg. Tan Sri Dato’ Seri Mohamed Jawhar

Trainer/Organiser Course Title Date
1. MINDA Corporate Directors Advanced Programme (CDAP): Cyber Security Risk 24 March 2016
Management for the Boardroom and C-Suite
2. BNM 3rd BNM-FIDE Forum Annual Dialogue with Governor of BNM 29 March 2016
3. FIDE Directors and Officers Liability Insurance: Are Directors Sufficiently Protected for 5 April 2016
Exercising Their Fiduciary Duty
4. FIDE Global Islamic Finance Forum (GIFF) 5.0 10 – 12 May 2016
5. FIDE FIDE Forum’s Directors Register: “Identify the Right Board Talent” 14 September 2016
6. BNM & The 2016 Global Symposium on Innovative Financial Inclusion “Harnessing Technology 21 – 22 September
World Bank for Inclusive Finance” 2016

En. Mohd Suffian Bin Haji Haron

Trainer/Organiser Course Title Date
1. FPLC Annual National Seminar on Directors’ Duties, Governance, Regulatory Updated & 26 – 27 January
Current Issues 2016 2016
2. FIDE Briefing on Directors Register 17 February 2016
3. FIDE An Exclusive Session for Directors: Implementation 1 June 2016
of FIDE Forum’s Directors Register
4. FIDE 3rd Distinguished Board Leadership Series – “Effective Board Evaluation” by Ms 25 July 2016
Beverly Behan
5. FIDE Strategy to Leverage Technology for Business Solutions 14 November 2016

YBhg. Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman
Trainer/Organiser Course Title Date
1. AWS 8th Annual Corporate Government Summit 2016 21 & 22 March 2016
2. MINDA Corporate Directors Advanced Programme (CDAP): Cyber Security Risk 24 March 2016
Management for the Boardroom and C-Suite
3. BNM 3rd BNM-FIDE Forum Annual Dialogue with Governor of BNM 29 March 2016
4. AIBIM Global Islamic Finance Forum (GIFF) 5.0 10-12 May 2016
5. FIDE Strategy to Leverage Technology for Business Solutions 14 November 2016
6. MeLearn Global 4th Annual Corporate Governance Symposium 2016. 28 & 29
-“It Starts From You” November 2016
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

32

Statement on Corporate Governance

Associate Prof Dr Said Bouheraoua

Trainer/Organiser Course Title Date
1. FPLC Annual National Seminar on Directors’ Duties 26 & 27 January
2016
2. BNM 3rd BNM-FIDE Forum Annual Dialogue with 29 March 2016
Governor of BNM
3. AIBIM Global Islamic Finance Forum (GIFF) 5.0 10-12 May 2016
4. FIDE Securities Commission – FIDE Forum Dialogue: FinTech’s Impact on Financial 29 August 2016
Institutions

Dr. Rosnah Binti Omar

Trainer/Organiser Course Title Date
1. ICLIF Independent Directors Programme: “The Essence 28 March 2016
of Independence”
2. FIDE Directors and Officers Liability Insurance: Are Directors Sufficiently Protected for 5 April 2016
Exercising Their Fiduciary Duty
3. FIDE Avoiding Financial Myopia by Professor Jeffrey I. Sampler 19 April 2016
4. RedMoney Shariah Governance, Audit, Risk Management & Reporting 20 April 2016
Group
5. AHB Risk Management Workshop on Cyber-Security & Fraud 9 May 2016
6. FIDE An Exclusive Session for Directors: Implementation of FIDE Forum’s Directors 1 June 2016
Register
7. FIDE 3rd Distinguished Board Leadership Series – “Effective Board Evaluation” by Ms 25 July 2016
Beverly Behan
8. LTAT Power Talk: What will distinguish the Great Board of Tomorrow” by Beverly Behan 25 July 2016
9. ICLIF/FIDE FIDE ICAAP (Internal Capital Adequacy Assessment Process – Banks Programme 15-16 August 2016
10. AHB Half Day Talk on 26 September 2016
s -ALAYSIA&INANCIAL2EPORTING3TANDARD-&23 n&INANCIAL)NSTRUMENT
s +EY!UDIT-ATTERS
s )NTERNAL#APITAL!DEQUACY!SSESSMENT0ROCESS)#!!0 AND
s 3HARIAH.ON #OMPLIANCE2ISKAND)TS)MPACTTO)SLAMIC"ANK
11. FIDE Technology-based Innovation that Counts by 2 November 2016
Steven Lewis, Patrick Menard and Shankar Kanabiran, Ernst & Young

Abbreviation
Affin Hwang - Affin Hwang Investment Bank Berhad
AHB - Affin Holdings Berhad
AIBIM - Association of Islamic Banking Institutions Malaysia
AWS - Asian World Summit
BNM - Bank Negara Malaysia
FIDE - Financial Institutions Directors’ Education
FPLC - Federation of Public Listed Companies Berhad
ICLIF - The Iclif Leadership and Governance Centre
LTAT - Lembaga Tabung Angkatan Tentera
MIDAS - Malaysia Institute of Defence and Security
MINDA - Malaysian Directors Academy
SC - Securities Commission
WIEF - World Islamic Economic Forum Foundation
 ANNUAL REPORT 2016

33

Statement on Corporate Governance

Meetings and Supply of Information to the Board

Board meetings are scheduled in advance at the beginning of calendar year with additional meetings duly convened as and when
necessary to review progress reports on the Bank’s financial performance, approved strategies, business plans and significant
policies as well as to consider business and other proposals which require the Board’s approval. For the financial year ended
31 December 2016, twenty (20) Board meetings were held i.e 10 monthly scheduled Board Meetings and 10 Special Board
Meetings. Meetings are usually held at the Board Room at 19th Floor, Menara Affin, 80, Jalan Raja Chulan, 50200 Kuala Lumpur.

The Board has full and timely access to information with Board via BoardPac software distributed papers in advance of meetings
to enable the Directors to obtain further explanation, where necessary, in order to be properly briefed prior to the meetings.
The Board papers include the minutes of previous Board meeting, minutes of meeting of Board Committees and reports
relevant to the issues of the meetings covering all related banking aspects such as financial, investment, information technology,
operational, human resource and regulatory compliance matters. Chief Executive Officer keeps the Board informed, on timely
basis, of all material matters affecting the Bank’s performance and major developments.

Members of the Senior Management are invited to attend the Board meetings to present and brief the Board on matters/reports
relating to their areas of responsibility as and when required.

All the Board members have unrestricted access to timely and accurate information and access to the advice and services of
the Company Secretary, who is responsible for ensuring that the Board meeting’s procedures are followed and that all applicable
rules and regulations are complied with.

Procedures are in place for Directors to seek independent professional advice at the Bank’s expense. The Bank also provides
the Board full access to necessary materials and relevant information including the services of the Company Secretary in order
for the Board to fulfill their duties and specific responsibilities.

The Directors’ commitment in carrying out their duties and responsibilities is affirmed by their attendance at the Board of meetings
held during the financial year ended 31 December 2016, as reflected below:

Number of Board Meetings

No. Name of Director Attendance No. of Meetings
1. YBhg. Jen. Tan Sri Dato’ Seri Ismail Bin Haji Omar (Bersara) 20 20
Chairman / Non-Independent Non-Executive Director
2. YBhg. Tan Sri Dato’ Seri Lodin Bin Wok Kamaruddin 14 17
Non-Independent Non-Executive Director
(Completed his tenure of directorship with the Bank w.e.f. 4 October 2016)
3. YBhg. Laksamana Madya Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor (Bersara) 19 20
Non-Independent Non-Executive Director
4. YBhg. Tan Sri Dato’ Seri Mohamed Jawhar ^ 20 20
Non-Independent Non-Executive Director
5. En. Mohd Suffian Bin Haji Haron ^ 20 20
Non-Independent Non-Executive Director
6. YBhg. Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman ^^ 20 20
Non-Independent Non-Executive Director
7. Associate Professor Dr. Said Bouheraoua 18 20
Member / Independent Non-Executive Director
8. Dr. Rosnah Binti Omar
Independent Non-Executive Director Not Applicable
(Appointed as Director w.e.f. 19.12.2016)
Note: ^ Redesignated to Non-Independent Non-Executive Director w.e.f. 1 June 2016
^^ Redesignated to Non-Independent Non-Executive Director w.e.f. 25 October 2016
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

34

Statement on Corporate Governance

DIRECTORS’ REMUNERATION

The Bank acknowledges the importance of attracting and retaining Directors with high calibre having the necessary skills,
qualifications and experience for effective Board oversight of the Bank’s business activities and affairs.

The Bank believes that one area that the Board needs to focus on in order to remain effective in the discharge of its duties and
responsibilities is the setting of a fair and comprehensive remuneration package that commensurate with the expertise, skills,
responsibilities and the risks of being a director of a financial institution.

The determination of remuneration packages for Non-Executive Directors (NEDs) including the non-executive Chairman is a matter
for the Board as a whole following the relevant recommendation made by the BNRC after independent benchmarking with relevant
external peers.

Remuneration package for Non-executive Directors is structured such that it is competitive with the industry and consistent with
the Bank’s business policy and so as to link to their level of responsibilities undertaken and contribution to the effective functioning
of the Board. Non-executive Directors’ emoluments mainly consist of three (3) components – an annual fee as a Board member,
an allowance for attendance of meetings and a committee fee.

The make-up of the Chief Executive Officer’s remuneration consists of salary, allowances, bonus and other customary benefits
as appropriate. Any salary review, takes into account market rates and the performance of the individual and of the Bank.
A significant portion of the Chief Executive Officer’s compensation package has been made variable in nature depending on the
Bank’s performance during the year, which is determined based on the individual Key Performance Indicators aligned with the
corporate objectives, and approved by the Board.

In line with good corporate governance, the Board has set out its intention to periodically review the Directors’ remuneration,
the existing remuneration framework was in line with AFFIN Holdings Group’s overall practice on compensation and benefits.
Chief Executive Officer does not participate in any way in determining his individual remuneration. The Board as a whole
determines the remuneration of Non-Executive Directors.

Directors’ emoluments are disclosed in the relevant note to the financial statements as an aggregate sum, in conformance to
the relevant legislation.

SHAREHOLDER

The Bank is a wholly-owned subsidiary of AFFIN Bank Berhad.

ANNUAL GENERAL MEETING (AGM)

The Annual Report and financial statements for the year ended 31 December 2015 were tabled at the 10th AGM on 22 March
2016. Likewise the Annual Report and financial statements for the year ended 31 December 2016 will be tabled at the 11th AGM
on Thursday, 30 March 2017.
 ANNUAL REPORT 2016

35

Network of Branches

WILAYAH PERSEKUTUAN JOHOR

1. Fraser 1. Taman Molek
20-G & 20-1, No. 23, 23-01, 23-02,
Jalan Metro Pudu, Jalan Molek 1/29,
Fraser Business Park, Taman Molek,
55100 Kuala Lumpur. 81100 Johor Bahru, Johor.
Tel : 03-9222 8877 Tel : 07-351 9522
Fax : 03-9222 9877 Fax : 07-357 9522

SELANGOR PULAU PINANG

1. Bangi 1. Juru
No.175 & 177 Ground Floor, No. 1813A,
Jalan 8/1, Seksyen 8, Jalan Perusahaan, Auto-City,
43650 Bandar Baru Bangi, North-South Highway,
Selangor. Juru Interchange,
Tel : 03-8925 7333 13600 Prai, Pulau Pinang.
Fax : 03-8927 4815 Tel : 04-507 7422
Fax : 04-507 6522 / 0522
2. MSU Shah Alam
Management & Science University,
2nd Floor, University Drive, KEDAH
Persiaran Olahraga, Section 13, 1. Jitra
40100 Shah Alam, No. 17, Jalan Tengku Maheran 2,
Selangor. Taman Tengku Maheran, Fasa 4,
Tel : 03-5510 0425 06000 Jitra, Kedah.
Fax : 03-5510 0563 Tel : 04-919 0888
3. SS2 Fax : 04-919 0380
161-163,
Jalan SS 2/24, TERENGGANU
47300 Petaling Jaya, 1. Kuala Terengganu
Selangor. 63 & 63-A,
Tel : 03-7874 3513 Jalan Sultan Ismail,
Fax : 03-7874 3480 20200 Kuala Terengganu,
Terengganu.
NEGERI SEMBILAN Tel : 09-622 3725
1. Senawang Fax : 09-623 6496
No. 312-G & 312-1,
Jalan Bandar Senawang 17,
Pusat Bandar Senawang,
70450 Seremban,
Negeri Sembilan.
Tel : 06-675 7066
Fax : 06-675 7188
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

36

Notice of Annual General Meeting

NOTICE IS HEREBY GIVEN THAT THE 11TH ANNUAL GENERAL MEETING

OF AFFIN ISLAMIC BANK BERHAD WILL BE HELD AT THE BOARD ROOM,
19TH FLOOR, MENARA AFFIN, 80, JALAN RAJA CHULAN, 50200
KUALA LUMPUR ON THURSDAY, 30 MARCH 2017 AT 9.30 A.M.
FOR THE TRANSACTION OF THE FOLLOWING BUSINESSES:-

AGENDA
1. To receive the Statutory Statements of Accounts for NOTE:
the year ended 31 December 2016 together with the 1. A member entitled to attend and vote at
Directors’ and Auditors’ Reports thereon the Meeting is entitled to appoint a proxy
to attend and vote instead of him and
2. To re-elect the following Directors who retire pursuant
the proxy need not be a member of the
to Article 68 of the Articles of Association and who,
Company.
being eligible, offer themselves for re-election:-
The instrument appointing a proxy shall be
(a) En. Mohd Suffian Bin Haji Haron in writing under the hand of the appointor
(b) YBhg. Laksamana Madya Tan Sri Dato’ Seri Ahmad or his attorney duly authorised in writing
or, if the appointor is a corporation, either
Ramli Bin Mohd Nor (Bersara)
under the seal or in some other manner
3. To re-elect Dr. Rosnah Binti Omar who retires approved by Directors.
in accordance with Article 73 of the Company’s Article
The instrument appointing a proxy and
of Association and who being eligible, offers herself the power of attorney or other authority,
for re-election. if any, under which it is signed or a
4. To approve the payment of Directors’ fees and notarially certified copy of such power
or authority shall be deposited at the
Committees’ fees for financial year ended
Company’s registered office at the
31 December 2016.
17th Floor, Menara Affin, 80, Jalan Raja
5. To re-appoint Messrs PricewaterhouseCoopers as Chulan, 50200 Kuala Lumpur, at least
Auditors for the financial year ending 31 December 2017 forty-eight (48) hours before the time
and to authorise the Directors to fix their remuneration. appointed for holding the Meeting or
adjourned Meeting as the case may be
6. To transact any other ordinary business of the Company. otherwise the person so named shall
not be entitled to vote in respect thereof.

BY ORDER OF THE BOARD

NIMMA SAFIRA BINTI KHALID

Secretary
 Financial Statements

38 Directors’ Report 50 Summary of Significant

Accounting Policies
43 Statements of Financial
Position 65 Notes to the Financial
Statements
44 Income Statements
141 Statement by Directors
45 Statements of
Comprehensive Income 141 Statutory Declaration

46 Statements of Changes in 142 Shariah Committee’s Report

Equity
144 Independent Auditors’
48 Statements of Cash Flows Report

147 Basel II Pillar 3 Disclosures

 AFFIN ISLAMIC BANK
BERHAD (709506-V)

38

Directors’ Report
for the financial year ended 31 December 2016

The Directors hereby submit their report together with the audited financial statements of the Bank for the financial year ended
31 December 2016.

PRINCIPAL ACTIVITIES

The principal activities of the Bank are Islamic banking business and the provision of related financial services. There were no
significant changes in these activities during the financial year.

FINANCIAL RESULTS

Economic Entity
and The Bank
RM’000

Profit before zakat and taxation 146,289

Zakat (2,887)

Profit before taxation 143,402

Taxation (30,804)

Net profit for the financial year 112,598

DIVIDENDS

No dividends have been paid by the Bank in respect of the financial year ended 31 December 2015 and 2016.

The Directors do not recommend the payment of any dividend in respect of the current financial year.

RESERVES AND PROVISIONS

All material transfers to or from reserves or provisions during the financial year are shown in the financial statements and notes to
the financial statements.

BAD AND DOUBTFUL FINANCING

Before the financial statements of the Bank were made out, the Directors took reasonable steps to ascertain that actions had been
taken in relation to the writing off of bad financing and the making of allowances for doubtful financing, and have satisfied themselves
that all known bad financing had been written off and adequate allowances had been made for bad and doubtful financing.

At the date of this report, the Directors are not aware of any circumstances which would render the amount written off for bad
financing, or the amount of the allowance for doubtful financing in the financial statements of the Bank, inadequate to any substantial
extent.

CURRENT ASSETS

Before the financial statements of the Bank were made out, the Directors took reasonable steps to ascertain that any current assets,
other than financing, which were unlikely to be realised in the ordinary course of business, their values as shown in the accounting
records of the Bank have been written down to an amount which they might expected so to realise.

At the date of this report, the Directors are not aware of any circumstances which would render the values attributed to the current
assets in the financial statements of the Bank misleading.
 ANNUAL REPORT 2016

39

Directors’ Report
for the financial year ended 31 December 2016

VALUATION METHODS

At the date of this report, the Directors are not aware of any circumstances which have arisen which render adherence to the existing
methods of valuation of assets or liabilities in the Bank’s financial statements misleading or inappropriate.

CONTINGENT AND OTHER LIABILITIES

At the date of this report there does not exist:

(a) any charge on the assets of the Bank which has arisen since the end of the financial year which secures the liabilities of any
other person; or

(b) any contingent liability in respect of the Bank that has arisen since the end of the financial year other than those in the ordinary
course of banking business or activities of the Bank.

No contingent or other liability of the Bank has become enforceable, or is likely to become enforceable within the period of twelve
months after the end of the financial year which, in the opinion of the Directors, will or may substantially affect the ability of the Bank
to meet its obligations as and when they fall due.

CHANGE OF CIRCUMSTANCES

At the date of this report, the Directors are not aware of any circumstances, not otherwise dealt with in this report or the financial
statements of the Bank, that would render any amount stated in the financial statements misleading.

ITEMS OF AN UNUSUAL NATURE

The results of the operations of the Bank during the financial year were not, in the opinion of the Directors, substantially affected by
any item, transaction or event of a material and unusual nature.

There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of
a material and unusual nature likely, in the opinion of the Directors, to affect substantially the results of the operations of the Bank for
the current financial year in which this report is made.

SIGNIFICANT EVENT DURING THE FINANCIAL YEAR

There is no significant event during the financial year.

SUBSEQUENT EVENTS

There were no material events subsequent to the reporting date that require disclosure or adjustments to the financial statements.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

40

Directors’ Report
for the financial year ended 31 December 2016

DIRECTORS

The Directors of the Bank who have held office since the date of the last report and at the date of this report are:

Jen Tan Sri Dato’ Seri Ismail Bin Haji Omar (Bersara)
Chairman / Non-Independent Non-Executive Director

Tan Sri Dato’ Seri Lodin Bin Wok Kamaruddin

Non-Independent Non-Executive Director
(Completion of directorship on 4 October 2016)

Laksamana Madya Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor (Bersara)
Non-Independent Non-Executive Director

Tan Sri Dato’ Seri Mohamed Jawhar

Non-Independent Non-Executive Director
(Redesignated as Non-Independent Non-Executive Director on 1 June 2016)

En. Mohd Suffian Bin Haji Haron

Non-Independent Non-Executive Director
(Redesignated as Non-Independent Non-Executive Director on 1 June 2016)

Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman

Non-Independent Non-Executive Director
(Redesignated as Non-Independent Non-Executive Director on 1 June 2016)

Associate Professor Dr. Said Bouheraoua

Independent Non-Executive Director

Pn. Rosnah Binti Omar

Independent Non-Executive Director (appointed on 19 December 2016)

RESPONSIBILITY STATEMENT BY BOARD OF DIRECTORS

In the course of preparing the annual financial statements of the Bank, the Directors are collectively responsible in ensuring that these
financial statements are drawn up in accordance with Malaysian Financial Reporting Standards, International Financial Reporting
Standards and the requirements of the Companies Act, 1965 in Malaysia.

It is the responsibility of the Directors to ensure that the financial reporting of the Bank present a true and fair view of the state of affairs
of the Bank as at 31 December 2016 and of the financial results and cash flows of the Bank for the financial year then ended.

The financial statements are prepared on the going concern basis and the Directors have ensured that proper accounting records
are kept, applied the appropriate accounting policies on a consistent basis and made accounting estimates that are reasonable and
fair so as to enable the preparation of the financial statements of the Bank with reasonable accuracy.

The Directors have also taken the necessary steps to ensure that appropriate systems are in place for the assets of the Bank to be
properly safeguarded for the prevention and detection of fraud and other irregularities. The systems, by their nature, can only provide
reasonable and not absolute assurance against material misstatements, whether due to fraud or error.

The Statement by Directors pursuant to Section 169 of the Companies Act, 1965 is set out on page 141 of the financial statements.
 ANNUAL REPORT 2016

41

Directors’ Report
for the financial year ended 31 December 2016

DIRECTORS’ INTERESTS

According to the register of Directors’ shareholdings, the interest of Directors in office at end of the financial year in shares, warrants
and options of related companies is as follows:
Ordinary shares of RM10 each; RM5 uncalled

As at As at
1.1.2016 Bought Sold 31.12.2016
ABB Trustee Berhad**
Jen Tan Sri Dato’ Seri Ismail Bin Haji Omar (Bersara) 20,000 - - 20,000
Laksaman Madya Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor
(Bersara) 20,000 - - 20,000

** Shares held in trust in AFFIN Bank Berhad

Other than the above, the Directors in office at the end of the financial year did not have any other interest in shares, warrants and
options over shares in the Bank or its related corporations during the financial year.

DIRECTORS’ BENEFITS

Neither at the end of the financial year, nor at any time during the financial year, did there subsist any arrangement to which the Bank
is a party with the object or objects of enabling Directors of the Bank to acquire benefits by means of the acquisition of shares in, or
debenture of, the Bank or any other body corporate.

Since the end of the previous financial year, no Director of the Bank has received or become entitled to receive a benefit (other
than the fees and other emoluments shown in Note 33 to the financial statements) by reason of a contract made by the Bank or a
related corporation with the Director or with a firm of which he is a member or with a company in which he has a substantial financial
interest.

BUSINESS PLAN AND STRATEGY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2016 AND FUTURE OUTLOOK

Amidst the global Islamic banking slowdown and commodity prices plunge, Malaysia has strengthened its standing in the Islamic
banking and finance domain through progressive set of regulations and innovations. From the launching of Bursa Malaysia-i (world’s
first end-to-end integrated Islamic securities exchange platform) to the extension of exemption period for stamp duty and income
tax, the initiatives have accelerated the nation’s Islamic banking industry into one of the most developed Islamic banking markets in
the world.

In 2016, Affin Islamic Bank Berhad (‘the Bank’) has been actively extending its customer reach while focusing on business capabilities
enhancement and products refinement. The strategic focus resulted in outstanding results. The Bank recorded its profit before tax
and zakat at RM146.3 million and its net impaired financing ratio at 0.64%. Furthermore, the Bank’s ROA and ROE respectively stood
at 1.02% and 13.75%, a significant improvement from the previous year.

BUSINESS OUTLOOK FOR 2017

Although the growth in the Asia-Pacific economies is expected to decelerate slightly in 2017, Malaysia remains as a dynamic region
in the Islamic banking field. The national real GDP is expected to strengthen at 4.0% - 5.0%, while the export sector to experience
positive movement from a higher external demand on Electrical and Electronic sector. The previously moderated Sukuk market
poised for growth with high impact infrastructure projects and other driving forces from government agencies to continue next year.
Likewise, private investment is also projected to continue drive economic growth (albeit moderately) at 5.8%.

Bank Negara Malaysia (BNM) maintains its accommodative stance in supporting economic growth with the Overnight Policy Rate
(OPR) stable at 3.00% and reduction of Statutory Reserve Rate (SRR) to 3.5%. However, cost-push inflation is estimated to be
between the 2.0% - 3.0% range.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

42

Directors’ Report
for the financial year ended 31 December 2016

BUSINESS OUTLOOK FOR 2017

The Bank remains optimistic for the year 2017. It has established a solid foundation and is well-positioned to gain further business
growth and competitive edge. Living up with our aspiration to become the preferred bank for SME and millennial customer segment,
we are developing new customer-centric products while strengthening our digital banking line to ameliorate customer experience.
We are further strengthening our portfolio foothold through the implementation of ‘Priority Islamic Policy’ by encouraging new and
repeat customers to switch for Islamic products. The Bank’s strategic move aligns with BNM’s 10-year Financial Sector Blueprint
on the direction of financial institutions to enhance its Islamic financing portfolio to 40% by the year 2020. Moving forward with
‘AFFINITY’, the Group’s Strategic Transformation Program; the Bank foresees tangible benefits in the form of lower cost-to-income
ratio, robust fee income generation and efficient business operations in the near future.

AFFIN Islamic Bank Berhad will continue to support AFFIN Group’s strategic vision in providing excellent banking services to our
customers in the future.

RATING BY EXTERNAL AGENCIES

The Bank was not rated by any external rating agencies during the financial year.

ZAKAT OBLIGATIONS

The Bank did not pay zakat on behalf of its depositors.

HOLDING COMPANY, PENULTIMATE AND ULTIMATE HOLDING CORPORATE BODY

The holding company of the Bank is AFFIN Bank Berhad. The penultimate holding company is AFFIN Holdings Berhad and ultimate
holding corporate body is Lembaga Tabung Angkatan Tentera, a statutory body incorporated under the Tabung Angkatan Tentera
Act, 1973.

AUDITORS

The auditors, PricewaterhouseCoopers, have expressed their willingness to continue in office.

Signed on behalf of the Board of Directors in accordance with their resolution dated 21 March 2017.

Mohd Suffian Bin Haji Haron

Director

Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman

Director
 ANNUAL REPORT 2016

43

Statements of Financial Position

as at 31 December 2016

Economic Entity The Bank

2016 2015 2016 2015
Note RM’000 RM’000 RM’000 RM’000

ASSETS
Cash and short-term funds 2 1,057,844 1,918,570 1,057,844 1,918,570
Deposits and placements with banks and
other financial institutions 3 - 35,034 - 35,034
Derivative financial assets 4 8,987 132 8,987 132
Financial investments available-for-sale 5 1,833,408 1,475,373 1,833,408 1,475,373
Financial investments held-to-maturity 6 72,122 76,283 72,122 76,283
Financing, advances and other financing 7 11,914,943 9,201,909 11,914,943 9,201,909
Other assets 9 7,901 3,759 7,901 3,759
Amount due from holding company 10 - 367,172 - 367,172
Amount due from joint ventures 11 46,725 39,936 46,725 39,936
Amount due from associate 12 500 - 500 -
Deferred tax assets 13 8,056 3,598 8,056 3,598
Statutory deposits with Bank Negara Malaysia 14 332,000 259,600 332,000 259,600
Investment in joint ventures 15 - - 650 650
Investment in associate 16 750 - 750 -
Property and equipment 17 2,347 2,613 2,347 2,613
Intangible assets 18 - 426 - 426

TOTAL ASSETS 15,285,583 13,384,405 15,286,233 13,385,055

LIABILITIES AND EQUITY

Deposits from customers 19 10,528,698 10,001,695 10,528,698 10,001,695
Deposits and placements of banks and
other financial institutions 20 1,248,993 1,041,392 1,248,993 1,041,392
Investment accounts due to designated
financial institutions 21 2,110,049 1,331,318 2,110,049 1,331,318
Derivative financial liabilities 22 1,412 1,035 1,412 1,035
Other liabilities 23 36,331 44,119 36,331 44,119
Amount due to holding company 24 196,828 - 196,828 -
Provision for taxation 6,015 10,031 6,015 10,031
TOTAL LIABILITIES 14,128,326 12,429,590 14,128,326 12,429,590

Share capital 25 560,000 460,000 560,000 460,000

Reserves 26 597,257 494,815 597,907 495,465
TOTAL EQUITY 1,157,257 954,815 1,157,907 955,465

TOTAL LIABILITIES AND EQUITY 15,285,583 13,384,405 15,286,233 13,385,055

COMMITMENTS AND CONTINGENCIES 37 3,317,468 2,499,754 3,317,468 2,499,754

The accounting policies and notes form an integral part of these financial statements.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

44

Income Statements
for the financial year ended 31 December 2016

Economic Entity The Bank

2016 2015 2016 2015
Note RM’000 RM’000 RM’000 RM’000

Income derived from investment of

depositors’ funds and others 27 563,363 489,929 563,363 489,929
Income derived from investment of
investment accounts 28 99,644 66,608 99,644 66,608
Income derived from investment of
shareholders’ funds 29 51,286 39,773 51,286 39,773
Allowances for impairment losses on financing,
advances and other financing 30 3,761 (8,512) 3,761 (8,512)

Total distributable income 718,054 587,798 718,054 587,798

Income attributable to the depositors 31 (438,943) (356,017) (438,943) (356,017)

Total net income 279,111 231,781 279,111 231,781

Other operating expenses 32 (132,822) (114,406) (132,822) (114,406)

Profit before zakat and taxation 146,289 117,375 146,289 117,375

Zakat (2,887) (3,779) (2,887) (3,779)

Profit before taxation 143,402 113,596 143,402 113,596

Taxation 34 (30,804) (28,811) (30,804) (28,811)

Net profit after zakat and taxation 112,598 84,785 112,598 84,785

Attributable to:
Equity holder of the Bank 112,598 84,785 112,598 84,785

Earnings per share (sen):

- Basic 35 24.4 23.5 24.4 23.5

The accounting policies and notes form an integral part of these financial statements.
 ANNUAL REPORT 2016

45

Statements of Comprehensive Income

for the financial year ended 31 December 2016

Economic Entity The Bank

2016 2015 2016 2015
Note RM’000 RM’000 RM’000 RM’000

Profit after zakat and taxation 112,598 84,785 112,598 84,785

Other comprehensive income:

Items that may be reclassified subsequently to profit
and loss:
Net fair value change in financial
investments available-for-sale (13,363) (2,674) (13,363) (2,674)
Deferred tax on financial investments
available-for-sale 13 3,207 642 3,207 642

Other comprehensive expense for the financial year,

net of tax (10,156) (2,032) (10,156) (2,032)

Total comprehensive income for

the financial year 102,442 82,753 102,442 82,753

Attributable to equity holder of the Bank:

- Total comprehensive income 102,442 82,753 102,442 82,753

The accounting policies and notes form an integral part of these financial statements.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

46

Statements of Changes in Equity

for the financial year ended 31 December 2016

Attributable to Equity Holder of the Bank

AFS
Share Statutory revaluation Regulatory Retained
capital reserves reserves reserves profits Total
Economic Entity RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

At 1 January 2016 460,000 248,717 (7,908) 58,400 195,606 954,815

Net profit for the financial year - - - - 112,598 112,598

Other comprehensive income

(net of tax)
- Financial investments
available-for-sale - - (10,156) - - (10,156)

Total comprehensive income - - (10,156) - 112,598 102,442

Issued during the financial year 100,000 - - - - 100,000

Transfer to statutory reserves /
regulatory reserves - 56,299 - 14,778 (71,077) -

At 31 December 2016 560,000 305,016 (18,064) 73,178 237,127 1,157,257

Economic Entity

At 1 January 2015 360,000 206,324 (5,876) 49,020 162,594 772,062

Net profit for the financial year - - - - 84,785 84,785

Other comprehensive income

(net of tax)
- Financial investments
available-for-sale - - (2,032) - - (2,032)

Total comprehensive income - - (2,032) - 84,785 82,753

Issued during the financial year 100,000 - - - - 100,000

Transfer to statutory reserves /
regulatory reserves - 42,393 - 9,380 (51,773) -

At 31 December 2015 460,000 248,717 (7,908) 58,400 195,606 954,815

The accounting policies and notes form an integral part of these financial statements.
 ANNUAL REPORT 2016

47

Statements of Changes in Equity

for the financial year ended 31 December 2016

Non-Distributable Distributable

AFS
Share Statutory revaluation Regulatory Retained
capital reserves reserves reserves profits Total
The Bank RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

At 1 January 2016 460,000 248,717 (7,908) 58,400 196,256 955,465

Net profit for the financial year - - - - 112,598 112,598

Other comprehensive income

(net of tax)
- Financial investments
available-for-sale - - (10,156) - - (10,156)

Total comprehensive income - - (10,156) - 112,598 102,442

Issued during the financial year 100,000 - - - - 100,000

Transfer to statutory reserves /
regulatory reserves - 56,299 - 14,778 (71,077) -

At 31 December 2016 560,000 305,016 (18,064) 73,178 237,777 1,157,907

The Bank

At 1 January 2015 360,000 206,324 (5,876) 49,020 163,244 772,712

Net profit for the financial year - - - - 84,785 84,785

Other comprehensive income

(net of tax)
- Financial investments
available-for-sale - - (2,032) - - (2,032)

Total comprehensive income - - (2,032) - 84,785 82,753

Issued during the financial year 100,000 - - - - 100,000

Transfer to statutory reserves /
regulatory reserves - 42,393 - 9,380 (51,773) -

At 31 December 2015 460,000 248,717 (7,908) 58,400 196,256 955,465

The accounting policies and notes form an integral part of these financial statements.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

48

Statements of Cash Flows

for the financial year ended 31 December 2016

Economic Entity The Bank

2016 2015 2016 2015
RM’000 RM’000 RM’000 RM’000

CASH FLOWS FROM OPERATING ACTIVITIES

Profit before taxation 143,402 113,596 143,402 113,596

Adjustments for items not involving the movement of cash
and cash equivalents:

Finance income and hibah from:

- financial investments available-for-sale (56,923) (49,589) (56,923) (49,589)
- financial investments held-to-maturity (5,172) (5,597) (5,172) (5,597)
Accretion of discount less amortisation of premium
- financial investments available-for-sale (5,083) (7,680) (5,083) (7,680)
Gain on sale/redemption:
- financial investments available-for-sale (9,372) (2,232) (9,372) (2,232)
Gain on unrealised foreign exchange (8,480) 882 (8,480) 882
Depreciation of property and equipment 983 1,033 983 1,033
Property and equipment written-off 3 8 3 8
Amortisation of intangible assets 426 465 426 465
Net individual impairment (16,523) 3,512 (16,523) 3,512
Net collective impairment 13,897 5,959 13,897 5,959
Bad debt on financing written-off 21 7 21 7
Zakat 2,887 3,779 2,887 3,779

Operating profit before changes in working capital 60,066 64,143 60,066 64,143

Decrease/(increase) in operating assets:

Deposits and placements with banks and other financial

institutions 35,034 (35,034) 35,034 (35,034)
Financing, advances and other financing (2,710,429) (2,047,766) (2,710,429) (2,047,766)
Other assets 6,844 42,231 6,844 42,231
Statutory deposits with Bank Negara Malaysia (72,400) 38,400 (72,400) 38,400
Amount due from holding company 367,172 (125,114) 367,172 (125,114)
Amount due from joint ventures (6,789) (25,081) (6,789) (25,081)
Derivative financial instruments (8,477) 882 (8,477) 882
 ANNUAL REPORT 2016

49

Statements of Cash Flows

for the financial year ended 31 December 2016

Economic Entity The Bank

2016 2015 2016 2015
RM’000 RM’000 RM’000 RM’000

CASH FLOWS FROM OPERATING ACTIVITIES

Increase/(decrease) in operating liabilities:

Deposits from customers 527,003 131,301 527,003 131,301

Deposits and placements of banks and other financial
institutions 207,601 (359,100) 207,601 (359,100)
Investment accounts due to designated financial institutions 778,731 686,090 778,731 686,090
Amount due to holding company 196,828 - 196,828 -
Other liabilities (7,811) 15,495 (7,811) 15,495

Cash used in operations (626,627) (1,613,553) (626,627) (1,613,553)

Zakat paid (2,862) (5,511) (2,862) (5,511)
Tax paid (36,071) (22,909) (36,071) (22,909)
Net cash used in operating activities (665,560) (1,641,973) (665,560) (1,641,973)

CASH FLOWS FROM INVESTING ACTIVITIES

Finance income and hibah received from:

- financial investments available-for-sale 62,006 49,589 62,006 49,589
- financial investments held-to-maturity 5,172 5,597 5,172 5,597
Redemption of financial investments held-to-maturity 4,161 6,472 4,161 6,472
Net (purchase)/sale of financial investments available-for-sale (363,276) 64,365 (363,276) 64,365
Purchase of property and equipment (554) (408) (554) (408)

Net cash (used in)/generated from investing activities (292,491) 125,615 (292,491) 125,615

CASH FLOWS FROM FINANCING ACTIVITIES

Increase in share capital 100,000 100,000 100,000 100,000

Net cash generated from financing activities 100,000 100,000 100,000 100,000

Net decrease in cash and cash equivalents (858,051) (1,416,358) (858,051) (1,416,358)
Net (decrease)/ increase in foreign exchange (2,675) 1,456 (2,675) 1,456
Cash and cash equivalents at beginning of the financial year 1,918,570 3,333,472 1,918,570 3,333,472

CASH AND CASH EQUIVALENTS AT END OF

THE FINANCIAL YEAR (Note 2) 1,057,844 1,918,570 1,057,844 1,918,570

The accounting policies and notes form an integral part of these financial statements.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

50

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

The following accounting policies have been used consistently in dealing with items which are considered material in relation to the
financial statements. These policies have been consistently applied to all the financial years presented, unless otherwise stated.

(A) BASIS OF PREPARATION

The financial statements of the Bank have been prepared in accordance with Malaysian Financial Reporting Standards (‘MFRS’),
International Financial Reporting Standards and the requirements of the Companies Act, 1965 in Malaysia.

The financial statements of the Bank have been prepared under the historical cost convention, unless otherwise indicated in
this summary of significant accounting policies.

The preparation of financial statements in conformity with MFRS requires the use of certain critical accounting estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.
It also requires Directors to exercise their judgment in the process of applying the Bank’s accounting policies. Although these
estimates and judgment are based on the Directors’ best knowledge of current events and actions, actual results may differ.
The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the
financial statements are disclosed in Note 43.

Standards, amendments to published standards and interpretations that are effective

The Bank has applied the following amendments for the first time for the financial year beginning on 1 January 2016:

s !MENDMENTSTO-&23@*OINTARRANGEMENTS !CCOUNTINGFORACQUISITIONOFINTERESTSINJOINTOPERATIONS
s !MENDMENTSTO-&23@0RESENTATIONOFlNANCIALSTATEMENTS $ISCLOSUREINITIATIVE
s !MENDMENTSTO-&23h%QUITYMETHODINSEPARATElNANCIALSTATEMENTSv
s !NNUAL)MPROVEMENTSTO-&23S #YCLE

The adoption of these amendments did not have any impact on the current period or any prior period and is not likely to affect
future periods.

Standards, amendments to published standards and interpretations to existing standards that are applicable to
the Bank but not yet effective

A number of new standards and amendments to standards and interpretations are effective for financial year beginning on or
after 1 January 2016. None of these is expected to have a significant effect on the financial statements of the Bank, except the
following:

s !MENDMENTSTO-&23@3TATEMENTOF#ASH&LOWS $ISCLOSURE)NITIATIVEEFFECTIVEFROM*ANUARY INTRODUCEAN

additional disclosure on changes in liabilities arising from financing activities.

s !MENDMENTSTO-&23@)NCOME4AXES 2ECOGNITIONOF$EFERRED4AX!SSETSFOR5NREALISED,OSSESEFFECTIVEFROM
1 January 2017) clarify the requirements for recognising deferred tax assets on unrealised losses arising from deductible
temporary difference on asset carried at fair value.

s )NADDITIONINEVALUATINGWHETHERANENTITYWILLHAVESUFlCIENTTAXABLEPROlTSINFUTUREPERIODSAGAINSTWHICHDEDUCTIBLE
temporary differences can be utilised, the amendments require an entity to compare the deductible temporary differences
with future taxable profits that excludes tax deductions resulting from the reversal of those temporary differences.

The amendments shall be applied retrospectively.

 ANNUAL REPORT 2016

51

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(A) BASIS OF PREPARATION

Standards, amendments to published standards and interpretations to existing standards that are applicable to the
Bank but not yet effective (continued)

s -&23@&INANCIAL)NSTRUMENTSEFFECTIVEFROM*ANUARY WILLREPLACE-&23h&INANCIAL)NSTRUMENTS2ECOGNITION
AND-EASUREMENTv

MFRS 9 retains but simplifies the mixed measurement model in MFRS 139 and establishes three primary measurement
categories for financial assets: amortised cost, fair value through profit or loss and fair value through other comprehensive
income (‘OCI’). The basis of classification depends on the entity’s business model and the cash flow characteristics of
the financial asset. Investments in equity instruments are always measured at fair value through profit or loss with an
irrevocable option at inception to present changes in fair value in OCI (provided the instrument is not held for trading).
A debt instrument is measured at amortised cost only if the entity is holding it to collect contractual cash flows and the
cash flows represent principal and profit.

For liabilities, the standard retains most of the MFRS 139 requirements. These include amortised cost accounting for
most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in cases where the fair value
option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other
comprehensive income rather than the income statement, unless this creates an accounting mismatch.

MFRS 9 introduces an expected credit loss model on impairment that replaces the incurred loss impairment model used in
MFRS 139. The expected credit loss model is forward-looking and eliminates the need for a trigger event to have occurred
before credit losses are recognised.

s -&23@2EVENUEFROMCONTRACTSWITHCUSTOMERSEFFECTIVEFROM*ANUARY REPLACES-&23@2EVENUEAND
MFRS 111 ‘Construction contracts’ and related interpretations. The core principle in MFRS 15 is that an entity recognises
revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services.

Revenue is recognised when a customer obtains control of goods or services, i.e. when the customer has the ability to
direct the use of and obtain the benefits from the goods or services.

A new five-step process is applied before revenue can be recognised:

s )DENTIFYCONTRACTSWITHCUSTOMERS
s )DENTIFYTHESEPARATEPERFORMANCEOBLIGATIONS
s $ETERMINETHETRANSACTIONPRICEOFTHECONTRACT
s !LLOCATETHETRANSACTIONPRICETOEACHOFTHESEPARATEPERFORMANCEOBLIGATIONSAND
s 2ECOGNISETHEREVENUEASEACHPERFORMANCEOBLIGATIONISSATISlED

Key provisions of the new standard are as follows:

s !NYBUNDLEDGOODSORSERVICESTHATAREDISTINCTMUSTBESEPARATELYRECOGNISEDANDANYDISCOUNTSORREBATESONTHE
contract price must generally be allocated to the separate element.
s )FTHECONSIDERATIONVARIESSUCHASFORINCENTIVESREBATESPERFORMANCEFEESROYALTIESSUCCESSOFANOUTCOMEETC 
minimum amounts of revenue must be recognised if they are not at significant risk of reversal.
s 4HEPOINTATWHICHREVENUEISABLETOBERECOGNISEDMAYSHIFTSOMEREVENUEWHICHISCURRENTLYRECOGNISEDATAPOINT
in time at the end of a contract may have to be recognised over the contract term and vice versa.
s 4HEREARENEWSPECIlCRULESONLICENSESWARRANTIESNON REFUNDABLEUPFRONTFEESANDCONSIGNMENTARRANGEMENTS
to name a few.
s !SWITHANYNEWSTANDARDTHEREAREALSOINCREASEDDISCLOSURES
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

52

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(A) BASIS OF PREPARATION

Standards, amendments to published standards and interpretations to existing standards that are applicable to the
Bank but not yet effective (continued)

s -&23@,EASESEFFECTIVEFROM*ANUARY SUPERSEDES-&23@,EASESANDTHERELATEDINTERPRETATIONS

Under MFRS 16, a lease is a contract (or part of a contract) that conveys the right to control the use of an identified asset
for a period of time in exchange for consideration.

The right-of-use asset is depreciated in accordance with the principle in MFRS 116 ‘Property, Plant and Equipment’ and
the lease liability is accreted over time with financing expense recognised in the income statement.

For lessors, MFRS 16 retains most of the requirements in MFRS 117. Lessors continue to classify all leases as either
operating leases or finance leases and account for them differently.

The Bank will apply these standards when effective. The adoption of the above standards, amendments to published standards
and interpretations to existing standards are not expected to have any significant impact on the financial statements of the Bank
except for MFRS 9. The financial effect of adoption of MFRS 9 is still being assessed by the Bank.

(B) JOINT ARRANGEMENTS

A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed
sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous
consent of the parties sharing control. A joint arrangement is either a joint operation or a joint venture.

Interests in joint ventures are accounted for using the equity method, after initially being recognised at cost in the consolidated
statement of financial position. Under the equity method, the investment in a joint venture is initially recognised at cost, and
adjusted thereafter to recognise the Economic Entity’s share of the post-acquisition profits or losses of the joint venture in
profit or loss, and the Economic Entity’s share of movements in other comprehensive income of the joint venture in other
comprehensive income. Dividends received or receivable from a joint venture are recognised as a reduction in the carrying
amount of the investment. When the Economic Entity’s share of losses in a joint venture equals or exceeds its interests in the
joint venture, including any long-term interests that, in substance, form part of the Economic Entity’s net investment in the joint
venture, the Economic Entity does not recognise further losses, unless it has incurred legal or constructive obligations or made
payments on behalf of the joint venture.

The Economic Entity determines at each reporting date whether there is any objective evidence that the investment in the joint
venture is impaired. An impairment loss is recognised for the amount by which the carrying amount of the joint venture exceeds
its recoverable amount.

Unrealised gains on transactions between the Economic Entity and its joint ventures are eliminated to the extent of the Economic
Entity’s interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an
impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure
consistency with the policies adopted by the Economic Entity.

When the Economic Entity ceases to equity account its joint venture because of a loss of joint control, any retained interest in
the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. This fair value becomes
the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate or financial
asset. In addition, any amount previously recognised in other comprehensive income in respect of the entity is accounted
for as if the Economic Entity had directly disposed of the related assets or liabilities. This may mean that amounts previously
recognised in other comprehensive income are reclassified to profit or loss.

If the ownership interest in a joint venture is reduced but joint control is retained, only a proportionate share of the amounts
previously recognised in other comprehensive income is reclassified to profit or loss where appropriate.
 ANNUAL REPORT 2016

53

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(C) INTANGIBLE ASSETS

Computer Software

Costs associated with maintaining computer software programmes are recognized as an expense as incurred. Development
costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Bank
are recognised as intangible assets when the following criteria are met:

(i) it is technically feasible to complete the software product so that it will be available for use;
(ii) management intends to complete the software product and use or sell it;
(iii) there is an ability to use or sell the software product;
(iv) it can be demonstrated how the software product will generate probable future economic benefits;
(v) adequate technical, financial and other resources to complete the development and to use or sell the software product are
available; and
(vi) the expenditure attributable to the software product during its development can be reliably measured.

Directly attributable costs that are capitalised as part of the software product include the software development employee costs
and an appropriate portion of relevant overheads.

Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs
previously recognised as an expense are not recognised as an asset in a subsequent period.

Computer software development costs recognised as assets are amortised from the point at which the asset is ready for use
over their estimated useful lives of five years.

(D) IMPAIRMENT ON NON-FINANCIAL ASSETS

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are
subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable.

An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of
assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows which are
largely independent of the cash inflows from other assets or group of assets (cash-generating units). Non-financial assets other
than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

The impairment loss is charged to the income statement unless it reverses a previous revaluation in which case it is charged to
the revaluation surplus. Impairment losses on goodwill are not reversed. In respect of other assets, any subsequent increase in
recoverable amount is recognised in the income statement unless it reverses an impairment loss on a revalued asset in which
case it is taken to revaluation surplus reserve.

(E) RECOGNITION OF FINANCING INCOME AND EXPENSE

Financing income and expense for all profit-bearing financial instruments are recognised within ‘income derived from investment
from depositors’ funds’, ‘income derived from investment from shareholders’ funds’ and ‘income attributable to depositors’
respectively, in the income statement using the effective profit method.

The effective profit method is a method of calculating the amortised cost of a financial asset or a financial liability and of
allocating the financing income or expense over the relevant period. The effective profit rate is the rate that exactly discounts
estimated future cash payments or receipts through the expected life of the financial instruments or, when appropriate, a shorter
period to the net carrying amount of the financial asset or financial liability. When calculating the effective profit rate, the Bank
takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly
attributable to the instrument and are an integral part of the effective profit rate, but not future credit losses.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

54

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(E) RECOGNITION OF FINANCING INCOME AND EXPENSE

Profit or income on impaired financial assets is recognised using the rate of profit used to discount the future cash flows for the
purpose of measuring the impairment loss. A financial asset or a group of financial assets is deemed to be impaired if, and only
if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the
asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial
asset or the group of financial assets that can be reliably estimated.

When a financing receivable is impaired, the Bank reduces the carrying amount to its recoverable amount, being the estimated
future cash flow discounted at the original effective profit rate of the instrument, and continues unwinding the discount as profit
income. Profit income on impaired financing and receivables are recognised using the original effective profit rate.

Al-Bai’ Bithaman Ajil

A contract of sale of an asset where the payment of price is deferred either be paid in lump-sum or instalment basis within
an agreed period of time. Income is recognised on effective profit rate basis over the expected life of the contract based on
outstanding financing amount.

Ijarah Muntahiah bil Tamleek/Al-Ijarah Thumma Al-Bai’

A contract of lease ending with transfer of ownership from the lessor to the lessee either in the form of gift or sale transaction
based on agreed terms and conditions. Two contracts are involved in this arrangement with the first contract is Ijarah where the
lessee enjoys the usufruct of the assets at an agreed rental during an agreed period while the ownership remains with the lessor.
The second contract is to transfer the ownership of the assets which may takes place at the end of the Ijarah tenure or at any
point of time during the tenure subject to the terms and conditions that are agreed between the contracting parties. Income is
recognised on effective Ijarah profit rate basis over the lease term.

Murabahah

A contract of sale where the assets cost and profit margin shall be made transparent and agreed upon between buyer and
seller. Income is recognised on effective profit rate basis over the expected life of the contract based on outstanding financing
amounts.

Musyarakah Mutanaqisah

A contract of partnership with a declining ownership (diminishing partnership) which one of the partners promises (wa’d) to buy
the equity share of the other partner gradually until the ownership of the asset is completely transferred to him. It is a hybrid of
three contracts known as shirkah (partnership), ijarah (lease) and bay’ (sale).

Tawarruq

An arrangement that involves a purchase of an asset based on musawamah or murabahah contract on deferred term and
a subsequent sale of the same asset to a third party in order to obtain cash. Income is recognised on effective profit rate basis
over the expected life of the contract based on the outstanding financing amount.

Istisna’

An arrangement where contract of construction or manufacturing or request to build or renovation (refurbishment), and bridging
or project financing.

Financing income is recognised using effective profit rate through the expected life of the financing based on the principal
amount outstanding.
 ANNUAL REPORT 2016

55

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(F) RECOGNITION OF FEES AND OTHER INCOME

Fees and commissions are recognised as income when all conditions precedent are fulfilled.

Guarantee fees which are material are recognised as income based on a time apportionment method.

Dividends are recognised when the right to receive payment is established. This applies even if they are paid out of
pre-acquisition profits. However, the investment may need to be tested for impairment as a consequence.

Net profit from financial assets held at fair value through profit or loss and financial instruments available-for-sale are recognised
upon disposal of the assets, as the difference between net disposal proceeds and the carrying amount of the assets.

(G) FINANCIAL ASSETS

Classification

The Bank classifies its financial assets in the following categories: at fair value through profit or loss, financing and receivables,
available-for-sale and held-to-maturity. The classification depends on the purpose for which the financial assets were acquired.
Management determines the classification at initial recognition and in the case of assets classified as held-to-maturity,
re-evaluate this designation at the end of each reporting period.

(i) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held-for-trading. A financial asset is classified in this
category if it is acquired or incurred principally for the purpose of selling or repurchasing it in the short term. Derivatives are
also categorised as held for trading unless they are designated as hedges (Note L).

The Bank has not elected to designate any financial assets at fair value through profit or loss.

(ii) Financing and receivables

Financing and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in
an active market. Financing and receivables consist of murabahah, ijarah and musharakah contracts. These contracts
are initially recognised at fair value, including direct and inceremental transactions costs, and subsequently measured at
amortised cost using the effective yield method.

(iii) Financial investments available-for-sale

Financial investments available-for-sale are non-derivatives that are either designated in this category or not classified in
any of the other categories.

(iv) Financial investments held-to-maturity

Financial investments held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed
maturities that the Bank’s management has the positive intention and ability to hold to maturity. If the Bank was to sell other
than an insignificant amount of held-to-maturity financial assets, the whole category would be tainted and reclassified as
available for sale.

Recognition and initial measurement

Regular purchases and sales of financial assets are recognised on the settlement date, the date that an asset is delivered to
or by the Bank.

Financial assets are initially recognised at fair value plus transaction costs that are directly attributable to the acquisition of the
financial asset for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through
profit or loss are initially recognised at fair value, and transaction costs are expensed in profit or loss.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

56

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(G) FINANCIAL ASSETS

Subsequent measurement – gains and losses

Financial investments available-for-sale and financial assets at fair value through profit or loss are subsequently carried at fair
value. Financing and receivables and held-to-maturity financial assets are subsequently carried at amortised cost using the
effective profit method.

Changes in the fair values of financial assets at fair value through profit or loss, including the effects of currency translation, profit
and dividend income are recognised in income statement in the period in which the changes arise.

Changes in the fair value financial investments available-for-sale are recognised in other comprehensive income, except for
impairment losses (Note H) and foreign exchange gains and losses on monetary assets (Note M).

Profit and dividend income on financial investments available-for-sale are recognised separately in income statements. Profit
on financial investments available-for-sale calculated using the effective profit method is recognised in income statements.
Dividend income on available-for-sale equity instruments are recognised in income statements when the Bank’s right to receive
payments is established.

De-recognition

Financial assets are de-recognised when the rights to receive cash flows from the investments have expired or have been
transferred and the Bank has transferred substantially all risks and rewards of ownership.

Financing and receivables that are factored out to banks and other financial institutions with recourse to the Bank are not
derecognised until the recourse period has expired and the risks and rewards of the receivables have been fully transferred. The
corresponding cash received from the financial institutions is recorded as fundings.

When financial investments available-for-sale are sold, the accumulated fair value adjustments recognised in other comprehensive
income are reclassified to profit or loss.

Reclassification of financial assets

The Bank may choose to reclassify a non-derivative trading financial asset out of the held-for-trading category if the financial
asset is no longer held for the purpose of selling it in the near term. Financial assets other than financings and receivables are
permitted to be reclassified out of the held-for-trading category only in rare circumstances arising from a single event that is
unusual and highly unlikely to recur in the near term. In addition, the Bank may choose to reclassify financial assets that would
meet the definition of financings and receivables out of the held-for-trading or available-for-sale categories if the Bank has the
intention and ability to hold these financial assets for the foreseeable future or until maturity at the date of reclassification.

Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortised cost as
applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made. Effective
profit rates for financial assets reclassified to financing and receivables and held-to-maturity categories are determined at the
reclassification date. Further increases in estimates of cash flows adjust the effective profit rates prospectively.
 ANNUAL REPORT 2016

57

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(H) IMPAIRMENT OF FINANCIAL ASSETS

Assets carried at amortised cost

The Bank assesses at the end of the reporting period whether there is objective evidence that a financial asset or group of
financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if
there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset
(a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group
of financial assets that can be reliably estimated.

The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include among others:

s PASTDUECONTRACTUALPAYMENTS
s SIGNIlCANTlNANCIALDIFlCULTIESOFTHECUSTOMER
s PROBABILITYOFBANKRUPTCYOROTHERlNANCIALRE ORGANISATION
s DEFAULTOFRELATEDCUSTOMER
s MEASURABLEDECREASEINESTIMATEDFUTURECASHmOWTHANWASORIGINALLYENVISAGEDAND
s SIGNIlCANTDETERIORATIONINISSUERSCREDITRATING

The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated
future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective
profit rate. The asset’s carrying amount of the asset is reduced and the amount of the loss is recognised in income statement.
If ‘financing and receivables’ or a ‘held-to-maturity investment’ has a variable profit rate, the discount rate for measuring any
impairment loss is the current effective profit rate determined under the contract.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an
event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the
previously recognised impairment loss is recognised in income statement.

When an asset is uncollectible, it is written off against the related allowance account. Such assets are written off after all the
necessary procedures have been completed and the amount of the loss has been determined.

For financing, advances and other financing, the Bank first assesses whether objective evidence of impairment exists individually
for financing, advances and other financing that are individually significant, and individually or collectively for financing, advances
and other financing that are not individually significant. If the Bank determines that no objective evidence of impairment exists
for individually assessed financing, advances and other financing, whether significant or not, it includes the asset in a group of
financing, advances and other financing with similar credit risk characteristics and collectively assesses them for impairment.

(i) Individual impairment allowance

Financing, advances and other financing that are individually assessed for impairment and for which an impairment loss
is or continues to be recognised are not included in a collective assessment of impairment. Financing that are individually
assessed for impairment and for which no impairment loss is required (over-collateralised financing) are collectively
assessed as a separate segment.

The amount of the loss is measured as the difference between the financing’s carrying amount and the present value
of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financing’s
original effective profit rate. The carrying amount of the financing is reduced through the use of an allowance account and
the amount of the loss is recognised in the income statements. If a financing has a variable profit rate, the discount rate for
measuring any impairment loss is the current effective profit rate determined under the contract.

The calculation of the present value of the estimated future cash flows of a collateralised financing reflects the cash flows
that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

58

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(H) IMPAIRMENT OF FINANCIAL ASSETS

Assets carried at amortised cost (continued)

(ii) Collective impairment allowance

For the purposes of a collective evaluation of impairment, financing, advances and other financing are grouped on the
basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for
groups of such financing, advances and other financing by being indicative of the customers’ ability to pay all amounts
due according to the contractual terms of the financing being evaluated.

Future cash flows in a group of financing that are collectively evaluated for impairment are estimated on the basis of the
contractual cash flows of the financing in the Bank and historical loss experience for financing with credit risk characteristics
similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the
effects of current conditions that did not affect the period on which the historical loss experience is based and to remove
the effects of conditions in the historical period that do not currently exist.

Estimates of changes in future cash flows for groups of financings should reflect and be directionally consistent with
changes in related observable data from period to period (for example, changes in unemployment rates, property prices,
payment status, or other factors indicative of changes in the probability of losses in the Bank and their magnitude). The
methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any
differences between loss estimates and actual loss experience.

Based on the Guideline on Classification and Impairment Provisions for Financing, banking institutions are required to
maintain, in aggregate, collective impairment allowances and regulatory reserves of no less than 1.2% of total outstanding
financing (excluding financing, advances and other financing with an explicit guarantee from the Federal Government of
Malaysia), net of individual impairment provisions. Banking institutions are required to comply with the requirement by
31 December 2015.

As at reporting date, the Bank has maintained the collective impairment provisions and regulatory reserves of no less than
1.2% in the books.

Assets classified as available-for-sale

The Bank assesses at the end of the reporting period whether there is objective evidence that a financial asset or a group of
financial assets is impaired.

For debt securities, the Bank assesses at each date of the statement of financial position whether there is any objective
evidence that a financial investment or group of financial investments is impaired. The criteria the Bank uses to determine
whether there is objective evidence of impairment include non-payment of coupon or principal redemption, significant financial
difficulty of issuer or obligor and significant drop in rating.

In the case of equity securities classified as available-for-sale, in addition to the criteria above, a significant or prolonged
decline in the fair value of the security below its cost is also considered as an indicator that the assets are impaired. If any such
evidence exists for available-for-sale financial assets, the cumulative loss that had been recognised directly in equity is removed
from equity and recognised in income statement. The amount of cumulative loss reclassified to profit or loss is the difference
between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in
income statements. Impairment losses recognised in income statements on equity instruments classified as available-for-sale
are not reversed through income statement.

If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be
objectively related to an event occurring after the impairment loss was recognised in income statement, the impairment loss is
reversed through income statement in subsequent periods.
 ANNUAL REPORT 2016

59

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(I) FINANCIAL LIABILITIES

All financial liabilities which include derivative financial instruments have to be recognised in the statement of financial position
and measured in accordance with their assigned category.

The Bank’s holding in financial liabilities are in financial liabilities at fair value through profit or loss (including financial liabilities
held for trading and those that designated at fair value) and financial liabilities at amortised cost. Financial liabilities are initially
recognised at fair value plus transaction costs for all financial liabilities not carried at fair value through profit or loss.

Financial liabilities at fair value through profit or loss

This category comprises two sub-categories: financial liabilities classified as held-for-trading, and financial liabilities designated
by the Bank as at fair value through profit or loss upon initial recognition. The Bank does not have any non-derivative financial
liabilities designated at fair value through profit or loss.

A financial liability is classified as held-for-trading if it is acquired or incurred principally for the purpose of selling or repurchasing
it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is
evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorised as held-for-trading unless they
are designated and effective as hedging instruments.

Financial liabilities classified as held-for-trading are initially recognised at fair value, and transaction costs are expensed in profit
or loss. Gains and losses arising from changes in fair value of financial liabilities classified held-for-trading are included in the
income statement.

Other liabilities measured at amortised cost

Financial liabilities that are not classified as at fair value through profit or loss fall into this category and are measured at
amortised cost.

De-recognition

Financial liabilities are de-recognised when they have been redeemed or otherwise extinguished.

(J) OFFSETTING FINANCIAL INSTRUMENTS

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when there is
a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the
assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be
enforceable in the normal course of business and in the event of default, insolvency or bankruptcy.

(K) PROPERTY AND EQUIPMENT

Property and equipment are initially stated at cost, net of the amount of goods and services tax (GST), except where the
amount of GST incurred is not recoverable from the government. When the amount of GST incurred is not recoverable from the
government, the GST is recognised as part of the cost of acquisition of the property and equipment.

Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. The cost
of an item of property and equipment initially recognised includes its purchase price and any cost that is directly attributable
to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by
management. Cost also include funding costs that are directly attributable to the acquisition, construction or production of a
qualifying asset.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate assets, as appropriate, only when
it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be
measured reliably. The carrying amount of the placed part is de-recognised. All the repairs and maintenance are recognised as
expenses in profit or loss during the financial period in which they are incurred.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

60

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(K) PROPERTY AND EQUIPMENT

Property and equipment are depreciated on the straight-line basis to allocate the cost, to their residual values over their
estimated useful lives summarised as follows:

Renovation 5 years or the period of the lease whichever is greater

Office equipment and furniture 10 years
Computer equipment and software 5 years
Motor vehicles 5 years

Depreciation on capital work in progress commences when the assets are ready for their intended use.

The assets’ residual value and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

At the end of the reporting period, the Bank assesses whether there is any indication of impairment or whenever events or
changes in circumstances indicate the carrying amount may not be recoverable. A write-down is made if the carrying amount
exceeds the recoverable amount (Note D).

Gains and losses on disposal are determined by comparing proceeds with carrying amount and are recognised within other
operating income in the income statement.

(L) OPERATING LEASES

Leases of assets where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as
operationg leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the
income statement on the straight-line basis over the lease period.

Initial direct costs incurred by the Group in negotiating and arranging operating leases are recognised in income statement
when incurred.

(M) FOREIGN CURRENCY TRANSLATIONS

Functional and presentation currency

The financial statements are presented in Ringgit Malaysia, which is the Bank’s functional and presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the dates of
the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement
of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in
foreign currencies are recognised in the income statement. However, exchange differences are deferred in other comprehensive
income when they arose from qualifying cash flow or net investment hedge or are attributable to items that form part of the net
investment in a foreign operation.

Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analysed
between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying
amount of the security. Translation differences related to changes in the amortised cost are recognised in income statement,
and other changes in the carrying amount are recognised in other comprehensive income.

Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date
when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of
the fair value gain or loss. Translation differences on non-monetary financial assets and liabilities such as equities held at fair
value through profit and loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary financial
assets such as equities classified as available-for-sale are included in other comprehensive income.
 ANNUAL REPORT 2016

61

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(N) DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives are initially recognised at fair values on the date on which derivative contracts are entered into and are subsequently
remeasured at their fair values at the end of each reporting period. Fair values are obtained from quoted market prices in active
markets, including recent market transactions, and valuation techniques, including discounted cash flow models and option
pricing models, as appropriate. All derivatives are carried as assets when fair values are positive and as liabilities when fair
values are negative.

The best evidence of fair value of a derivative at initial recognition is the transaction price (i.e the fair value of the consideration
given or received) unless fair value of the instrument is evidenced by comparison with other observable current market
transactions in the same instrument (i.e without modification or repackaging) or based on a valuation technique whose variables
include only data from observable markets.

The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument,
and if so, the nature of the item being hedged.

As at reporting date, the Bank has not designated any derivative as hedging instruments.

Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in
the income statement.

(O) CURRENT AND DEFERRED INCOME TAXES

Current tax

Tax expense for the period comprises current and deferred income tax. The income tax expense or credit for the period is the
tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by
changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. Tax is recognised
in income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity.
In this case the tax is also recognised in other comprehensive income or directly in equity, respectively.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the
reporting period in the countries where the Bank and jointly controlled entity operate and generate taxable income.

Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation
is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax
authorities. This liability is measured using the single best estimate of the most likely outcome.

Deferred tax

Deferred tax is provided in full, using the liability method, on temporary differences arising between the amounts attributed to
assets and liabilities for tax purposes and their carrying amounts in the financial statements. However, deferred tax liabilities are
not recognised if they arise from the initial recognition of goodwill. Deferred tax is also not accounted for if it arises from initial
recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects
neither accounting nor taxable profit or loss.

Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the
deductible temporary differences, unused tax losses or unused tax credits can be utilised.

Deferred tax is determined using tax rates (and tax laws) that have been enacted or substantively enacted by the end of
the reporting period and are expected to apply when the related deferred tax assets is realised or the deferred tax liability is
settled.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

62

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(O) CURRENT AND DEFERRED INCOME TAXES

Deferred tax (continued)

Deferred tax liability is recognised for all temporary differences associated with investment in joint venture where the timing of the
reversal of the temporary difference can be controlled by the Economic Entity and it is probable that the temporary difference
will not reverse in the foreseeable future. Generally, the joint venturer is unable to control the reversal of the temporary difference
for joint ventures. Only where there is an agreement in place that gives the joint venturer the ability to control the reversal of the
temporary difference, a deferred tax liability is not rcognised.

Deferred income tax assets are recognised on deductible temporary differences arising from investment in joint arrangements
only to the extent that it is probable the temporary difference will reverse in future and there is sufficient taxable profit available
against which the deductible temporary difference can be utilised.

Deferred and income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets
against current tax liabilities and when the deferred income tax assets and liabilities relate to taxes levied by the same taxation
authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on net basis.

(P) ZAKAT

The Bank pays zakat based on 2.5775% of the prior year’s net asset method, to comply with the principles of Shariah and as
approved by the Shariah Committee. The Bank does not pay zakat on behalf of the depositors.

(Q) CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash in hand, bank balances and deposits and placements maturing within one month
which are held for the purpose of meeting short term commitments and are readily convertible to known amount of cash without
significant risk of changes in value.

(R) FORECLOSED PROPERTIES

Foreclosed properties are stated at the lower of their carrying amount and fair value less cost to sell.

(S) CONTINGENT LIABILITIES AND CONTINGENT ASSETS

The Bank does not recognise contingent assets and liabilities other than those arising from business combination, but disclose
its existence in the financial statements. A contingent liability is possible obligation that arises from past events whose existence
will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Bank
or a present obligation that is not recognised because it is not probable that an outflow of resources will be required to settle the
obligation. A contingent liability also arises in the extremely rare case where there is a liability that cannot be recognised because
it cannot be measured reliably. However, contingent liabilities do not include financial guarantee contracts.

A contingent asset is a possible asset that arises from past events whose existence will be confirmed by the occurrence or non-
occurrence of one or more uncertain future events beyond the control of the Bank. The Bank does not recognise a contingent
asset but discloses its existence where inflows of economic benefits are probable, but not virtually certain.

(T) BILLS AND ACCEPTANCES PAYABLE

Bills and acceptances payable, which are financial liabilities, represent the Bank’s own bills and acceptances rediscounted and
outstanding in the market (Note I).
 ANNUAL REPORT 2016

63

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(U) PROVISIONS

Provisions are recognised by the Bank when all of the following conditions have been met:

s THE"ANKHASAPRESENTLEGALORCONSTRUCTIVEOBLIGATIONASARESULTOFPASTEVENTS
s ITISPROBABLETHATANOUTmOWOFRESOURCESTOSETTLETHEOBLIGATIONWILLBEREQUIREDAND
s ARELIABLEESTIMATEOFTHEAMOUNTOFOBLIGATIONCANBEMADE

Where the Bank expects a provision to be reimbursed (for example, under an insurance/takaful contract), the reimbursement
is recognised as a separate asset but only when the reimbursement is virtually certain. Provisions are not recognised for future
operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by
considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any
one item included in the same class of obligations may be small.

Provisions are measured at the present value of management’s best estimate of the expenditures expected to be required to
settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks
specific to the obligation. The increase in the provision due to passage of time is recognised as finance cost expense.

(V) EMPLOYEE BENEFITS

Short-term employee benefits

Wages, salaries, paid annual leave and sick leave, bonuses, and non-monetary benefits that are expected to be settled wholly
within 12 months after the end of the period in which the employees render the related service are recognised in respect of
employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the
liabilities are settled.

Defined contribution plan

The defined contribution plan is a pension plan under which the Bank pays fixed contributions to the National Pension Scheme,
the Employees’ Provident Fund (‘EPF’) and will have no legal or constructive obligations to pay further contributions if the fund
does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.

The Bank’s contribution to defined contribution plans are charged to the income statement in the period to which they relate.
Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is
available.

Termination benefits

Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or
whenever an employee accepts voluntary redundancy in exchange for these benefits. The Bank recognises termination benefits
when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal
plan without any possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary
redundancy.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

64

Summary of Significant Accounting Policies

for the financial year ended 31 December 2016

(W) FINANCIAL GUARANTEE CONTRACTS

Financial guarantee contracts are contracts that require the Bank to make specified payments to reimburse the holder for a loss
it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such
financial guarantees are given to financial institutions and other bodies on behalf of customers to secure banking facilities.

Financial guarantee contracts are recognised as a financial liability at the time the guarantee is issued. The liability is initially
measured at fair value and subsequently at the higher of the amount determined in accordance with MFRS 137 ‘Provisions,
contingent liabilities and contingent assets’ and the amount initially recognised less cumulative amortisation, where
appropriate.

The fair value of financial guarantees is determined as the present value of the difference in net cash flows between the
contractual payments under the debt instrument and the payments that would be required without the guarantee, or the
estimated amount that would be payable to a third party for assuming the obligations.

Where financial guarantees in relation to payables of subsidiaries are provided by the Bank for no compensation, the fair values
are accounted for as contributions and recognised as part of the cost of investment in subsidiaries.

(X) RESTRICTED INVESTMENT ACCOUNTS (‘RIA’)

These deposits are used to fund specific financing. The RIA is a contract based on Shariah concept of Mudharabah between
two parties, i.e. investor and entrepreneur to finance a business venture where the investor provides capital and the business
venture is managed solely by the entrepreneur. The profit of the business venture will be shared based on pre-agreed ratios with
the Bank as Mudarib (manager or manager of funds), and losses shall be borne solely by capital provider.

(Y) SHARE CAPITAL

Classification

Ordinary shares are classified as equity. Other shares are classified as equity and/or liability according to the economic
substance of the particular instrument.

Share issue costs

Incremental costs directly attributable to the issue of new shares or options are deducted against share premium account.

Dividend distribution

Liability is recognised for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of
the Bank, on or before the end of the reporting period but not distributed at the end of the reporting period.

Distributions to holders of an equity instrument are recognised directly in equity.

Earnings per share

Basic earnings per share

Basic earnings per share is calculated by dividing:

s THEPROlTATTRIBUTABLETOOWNERSOFTHE"ANKEXCLUDINGANYCOSTSOFSERVICINGEQUITYOTHERTHANORDINARYSHARESAND
s BYTHEWEIGHTEDAVERAGENUMBEROFORDINARYSHARESOUTSTANDINGDURINGTHElNANCIALYEARADJUSTEDFORBONUSELEMENTSIN
ordinary shares issued during the year.

Diluted earnings per share

Diluted earnings per share adjusts the figures in the determination of basic earnings per share to take into account:
s THEAFTERINCOMETAXEFFECTOFlNANCINGCOSTSASSOCIATEDWITHDILUTIVEPOTENTIALORDINARYSHARESAND
s THEWEIGHTEDAVERAGENUMBEROFADDITIONALORDINARYSHARESTHATWOULDHAVEBEENOUTSTANDINGASSUMINGTHECONVERSIONOF
all dilutive potential ordinary shares.
 ANNUAL REPORT 2016

65

Notes to the Financial Statements

for the financial year ended 31 December 2016

1 GENERAL INFORMATION

The Bank, a wholly-owned subsidiary of AFFIN Bank Berhad, was incorporated on 13 September 2005 and commenced operations
on 1 April 2006. The net assets of AFFIN Bank’s Islamic Division was transferred to AFFIN Islamic Bank on 1 April 2006.

The Bank is principally engaged in all aspects of Islamic banking and finance business and in the provision of related financial
services in accordance with the Shariah principles.

There have been no significant changes in the nature of these activities during the financial year.

The holding company of the Bank is AFFIN Bank Berhad. The penultimate holding company is AFFIN Holdings Berhad and
ultimate holding corporate body is Lembaga Tabung Angkatan Tentera, a statutory body incorporated under the Tabung
Angkatan Tentera Act, 1973.

The Bank is a limited liability company, incorporated and domiciled in Malaysia.

2 CASH AND SHORT-TERM FUNDS

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Cash and bank balances with banks and other financial institutions 6,807 7,605
Money at call and interbank placements with remaining maturity not exceeding one month 1,051,037 1,910,965

1,057,844 1,918,570

3 DEPOSITS AND PLACEMENTS WITH BANKS AND OTHER FINANCIAL INSTITUTIONS

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Other financial institutions - 35,034

- 35,034

4 DERIVATIVE FINANCIAL ASSETS

Economic Entity and The Bank

2016 2015
Contract/ Contract/
notional notional
amount Assets amount Assets
RM’000 RM’000 RM’000 RM’000

At fair value
Foreign exchange derivatives
- Currency forwards 939,223 8,987 61,967 132
939,223 8,987 61,967 132
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

66

Notes to the Financial Statements

for the financial year ended 31 December 2016

5 FINANCIAL INVESTMENTS AVAILABLE-FOR-SALE

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

At fair value
Malaysian Government investment issues 628,785 613,857
Sukuk Perumahan Kerajaan 129,431 187,219
Khazanah Sukuk 173,287 165,280

931,503 966,356

Unquoted securities:
Shares in Malaysia - 1,075
Corporate bonds/Sukuk in Malaysia 901,905 508,492

1,833,408 1,475,923
Allowance for impairment losses - (550)

1,833,408 1,475,373

Movement in allowance for impairment losses

At beginning of the financial year 550 550

Writeback of allowance for impairment loss (550) -

At end of the financial year - 550

6 FINANCIAL INVESTMENTS HELD-TO-MATURITY

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

At amortised cost
Unquoted securities:
Corporate bonds/Sukuk in Malaysia 72,122 76,283
72,122 76,283
 ANNUAL REPORT 2016

67

Notes to the Financial Statements

for the financial year ended 31 December 2016

7 FINANCING, ADVANCES AND OTHER FINANCING

(i) By type

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Cash line 278,880 314,426

Term financing
- House financing 2,857,530 2,096,258
- Hire purchase receivables 3,181,358 2,710,393
- Syndicated financing 582,739 490,723
- Business term financing 3,541,779 2,860,153
Bills receivables 21,376 36,637
Trust receipts 6,938 12,600
Claims on customers under acceptance credits 174,623 123,897
Staff financing (of which RM Nil to Directors) 13,109 9,536
Revolving credit 1,319,609 622,473

Gross financing, advances and other financing 11,977,941 9,277,096

Less:
Allowance for impairment losses
- Individual (18,003) (38,516)
- Collective (44,995) (36,671)

Total net financing, advances and other financing 11,914,943 9,201,909

Included in business term financing as at reporting date is RM53.7 million (2015: RM53.7 million) and RM78.0 million
(2015: RM63.9 million) of term financing disbursed by the Bank to joint ventures with AFFIN-i Nadayu Sdn Bhd and KL
South Development Sdn Bhd respectively.

(ii) By maturity structure

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Maturing within one year 2,038,888 1,426,334

One year to three years 1,009,718 542,303
Three years to five years 1,375,861 927,366
Over five years 7,553,474 6,381,093

11,977,941 9,277,096
Notes to the Financial Statements 68
for the financial year ended 31 December 2016
BERHAD (709506-V)

7 FINANCING, ADVANCES AND OTHER FINANCING

AFFIN ISLAMIC BANK

(iii) By contract
Economic Entity and The Bank
2016 Al-Bai Al-Ijarah
RM’000 Bithaman Ajil Ijarah Thumma Al-Bai Murabahah Musyarakah Istisna’ Others Total

Cash line - - - 192,690 - - 86,189 278,879

Term financing
House financing 921,406 - - 1,612 1,934,289 - - 2,857,307
Hire purchase receivables - - 3,181,357 - - - - 3,181,357
Syndicated financing - 144,898 - 341,769 - - 96,072 582,739
Business term financing 419,323 789,192 - 1,382,270 258,827 686,279 6,113 3,542,004
Bills receivables - - - - - - 21,376 21,376
Trust receipts - - - 6,938 - - - 6,938
Claims on customers under acceptance credits - - - 174,623 - - - 174,623
Staff financing 7,546 - - 5,289 274 - - 13,109
Revolving credit - - - 1,319,609 - - - 1,319,609

Total Financing 1,348,275 934,090 3,181,357 3,424,800 2,193,390 686,279 209,750 11,977,941

2015

Cash line - - - 237,431 - - 76,995 314,426

Term financing
House financing 1,011,560 - - - 1,084,698 - - 2,096,258
Hire purchase receivables - - 2,710,393 - - - - 2,710,393
Syndicated financing - 191,591 - 192,317 - - 106,815 490,723
Business term financing 470,659 596,813 - 912,308 150,671 724,333 5,369 2,860,153
Bills receivables - - - - - - 36,637 36,637
Trust receipts - - - 12,600 - - - 12,600
Claims on customers under acceptance credits - - - 123,897 - - - 123,897
Staff financing 8,499 - - 1,037 - - - 9,536
Revolving credit - - - 622,473 - - - 622,473

Total Financing 1,490,718 788,404 2,710,393 2,102,063 1,235,369 724,333 225,816 9,277,096
 ANNUAL REPORT 2016

69

Notes to the Financial Statements

for the financial year ended 31 December 2016

7 FINANCING, ADVANCES AND OTHER FINANCING

(iv) By type of customer

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Domestic non-banking institutions

- Others 209,499 128,201
Domestic business enterprises
- Small medium enterprises 1,774,697 1,009,214
- Others 2,517,012 2,630,241
Government and statutory bodies 1,381,918 603,070
Individuals 5,966,553 4,731,527
Other domestic entities 9,690 25,785
Foreign entities 118,572 149,058

11,977,941 9,277,096

(v) By profit rate sensitivity

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Fixed rate
- House financing 45,937 52,555
- Hire purchase receivables 3,181,357 2,710,393
- Other fixed rate financing 1,354,586 1,315,546
Variable rate
- BFR plus 5,389,570 3,786,002
- Cost plus 2,006,491 1,412,600

11,977,941 9,277,096
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

70

Notes to the Financial Statements

for the financial year ended 31 December 2016

7 FINANCING, ADVANCES AND OTHER FINANCING

(vi) By economic sectors

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Primary agriculture 402,119 278,908

Mining and quarrying 11,348 13,037
Manufacturing 334,745 225,820
Electricity, gas and water supply 64,369 57,371
Construction 523,091 554,160
Real estate 1,455,409 1,170,597
Wholesale & retail trade and restaurants & hotels 407,649 218,502
Transport, storage and communication 284,216 206,002
Finance, takaful/insurance and business services 460,983 566,877
Education, health & others 2,031,720 1,201,117
Household 6,002,241 4,761,002
Others 51 23,703

11,977,941 9,277,096

(vii) By economic purpose

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Purchase of securities 275,516 2,433

Purchase of transport vehicles 3,250,531 2,735,838
Purchase of landed property of which:
- Residential 2,943,870 2,175,552
- Non-residential 1,112,190 979,335
Fixed assets other than land and building 72,421 76,336
Personal use 53,593 36,495
Construction 895,685 801,745
Working capital 3,137,471 2,336,306
Others 236,664 133,056

11,977,941 9,277,096
 ANNUAL REPORT 2016

71

Notes to the Financial Statements

for the financial year ended 31 December 2016

7 FINANCING, ADVANCES AND OTHER FINANCING

(viii) By geographical distribution

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Perlis 147,438 121,729

Kedah 661,893 559,401
Pulau Pinang 362,260 231,126
Perak 442,731 387,683
Selangor 3,460,892 3,078,014
Wilayah Persekutuan 4,234,116 2,882,646
Negeri Sembilan 448,601 330,752
Melaka 199,155 148,843
Johor 834,371 445,391
Pahang 302,330 293,827
Terengganu 395,910 418,636
Kelantan 153,175 161,609
Sarawak 132,131 69,266
Sabah 55,896 28,552
Labuan 63,974 56
Outside Malaysia 83,068 119,565

11,977,941 9,277,096

8 IMPAIRED FINANCING

(i) Movements of impaired financing

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

At beginning of the financial year 141,708 129,157

Classified as impaired 164,338 108,375
Reclassified as non-impaired (111,590) (67,897)
Amount recovered (87,213) (18,862)
Amount written-off (9,745) (9,065)

At end of the financial year 97,498 141,708

Ratio of gross impaired financing, advances and other financing to gross

financing, advances and other financing 0.81% 1.53%
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

72

Notes to the Financial Statements

for the financial year ended 31 December 2016

8 IMPAIRED FINANCING

(i) Movements of impaired financing (continued)

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Gross financing, advances and other financing 11,977,941 9,277,096

Restricted investment accounts financing (2,112,243) (1,316,026)

9,865,698 7,961,070
Less:
- Individual impairment allowance (18,003) (38,516)
- Collective impairment allowance on impaired financing (16,454) (12,921)

Total net financing, advances and other financing 9,831,241 7,909,633

Net impaired financing, advances and other financing as a percentage of

net financing, advances and other financing 0.64% 1.14%

(ii) Movements in allowance for impairment on financing

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Individual impairment
At beginning of the financial year 38,516 31,519
Allowance made during the financial year 19,340 3,559
Amount recovered (35,863) (47)
Amount written-off (4,149) (2,383)
Unwinding of income (198) (628)
Exchange differences 357 6,496

At end of the financial year 18,003 38,516

Collective impairment
At beginning of the financial year 36,671 37,393
Net allowance made during the financial year 13,897 5,959
Amount written-off (5,573) (6,681)

At end of the financial year 44,995 36,671

As a percentage of gross financing, advances and other financing

(excluding RIA financing) less individual assesment allowance 0.46% 0.46%
 ANNUAL REPORT 2016

73

Notes to the Financial Statements

for the financial year ended 31 December 2016

8 IMPAIRED FINANCING

(iii) Impaired financing by economic sectors

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Primary agriculture 43 -
Mining and quarrying 57 -
Manufacturing 1,028 348
Electricity, gas and water supply 111 -
Construction 5,081 388
Real estate 33,635 85,867
Wholesale & retail trade and restaurants & hotels 589 1,900
Transport, storage and communication 307 301
Finance, takaful/insurance and business services 492 111
Education, health & others 162 142
Household 55,993 52,651

97,498 141,708

(iv) Impaired financing by economic purpose

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Purchase of transport vehicles 16,330 12,626

Purchase of landed property of which:
- Residential 41,395 39,463
- Non-residential 6,153 1,376
Fixed assets other than land and building 227 -
Personal use 825 495
Construction - 85,867
Working capital 32,568 1,881

97,498 141,708
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

74

Notes to the Financial Statements

for the financial year ended 31 December 2016

8 IMPAIRED FINANCING

(v) Impaired financing by geographical distribution

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Perlis 4,801 41
Kedah 3,016 1,008
Pulau Pinang 2,105 1,525
Perak 4,326 3,922
Selangor 30,969 28,622
Wilayah Persekutuan 2,670 5,930
Negeri Sembilan 4,849 2,719
Melaka 938 482
Johor 1,517 2,078
Pahang 1,694 1,345
Terengganu 5,016 3,918
Kelantan 3,643 3,633
Sarawak 198 252
Sabah 172 366
Outside Malaysia 31,584 85,867

97,498 141,708

9 OTHER ASSETS

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Other debtors, deposits and prepayments 2,494 3,062

Cheque clearing accounts 2,962 302
Foreclosed properties (a) 2,445 395

7,901 3,759

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

(a) Foreclosed properties

At beginning of the financial year 395 395
Amount arising during the financial year 2,050 -

At end of the financial year 2,445 395

 ANNUAL REPORT 2016

75

Notes to the Financial Statements

for the financial year ended 31 December 2016

10 AMOUNT DUE FROM HOLDING COMPANY

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Advances to holding company - 367,172

The advances to holding company are unsecured, bear no profit rate (2015:0%) and payable on demand.

11 AMOUNT DUE FROM JOINT VENTURES

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Advances to joint ventures 46,725 39,936

The advances to joint ventures are unsecured, bear profit rate of 7.60% (2015: 7.85%) and payable on demand.

12 AMOUNT DUE FROM ASSOCIATE

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Advances to associate 500 -

The advances to associate are unsecured, bear profit rate of 0% and payable on demand.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

76

Notes to the Financial Statements

for the financial year ended 31 December 2016

13 DEFERRED TAX ASSETS

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current
tax liabilities and when the deferred taxes relate to the same tax authority. The following amounts determined after appropriate
offsetting, are shown in the statement of financial position:

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Deferred tax assets 8,056 3,598

Deferred tax assets:

- settled more than 12 months (20) -
- settled within 12 months 8,076 3,967
Deferred tax liabilities:
- settled more than 12 months - (206)
- settled within 12 months - (163)

Deferred tax assets 8,056 3,598

At beginning of the financial year 3,598 2,900

Credited to income statements (Note 34) 1,251 56
Credited to equity 3,207 642

At end of the financial year 8,056 3,598

The movement in deferred tax assets and liabilities during the financial year are as follow:

Property Provision for Financial

Economic Entity and The Bank and Intangible other instrument
2016 equipment assets liabilities AFS Total

At beginning of the financial year (267) (102) 1,470 2,497 3,598

Credited to income statements 15 102 1,134 - 1,251
Credited to equity - - - 3,207 3,207

At end of the financial year (252) - 2,604 5,704 8,056

Property Financial
Economic Entity and The Bank and Intangible Provision for instrument
2015 equipment assets other liabilities AFS Total

At beginning of the financial year (311) (214) 1,570 1,855 2,900

Credited/(charged) to income statements 44 112 (100) - 56
Charged to equity - - - 642 642

At end of the financial year (267) (102) 1,470 2,497 3,598

 ANNUAL REPORT 2016

77

Notes to the Financial Statements

for the financial year ended 31 December 2016

14 STATUTORY DEPOSITS WITH BANK NEGARA MALAYSIA

The statutory deposits are maintained with Bank Negara Malaysia in compliance with Section 26(2)(c) of the Central Bank of
Malaysia Act 2009, the amounts of which are determined at set percentages of total eligible liabilities.

15 INVESTMENT IN JOINT VENTURES

Economic Entity The Bank

2016 2015 2016 2015
RM’000 RM’000 RM’000 RM’000

Unquoted shares at cost 650 650 650 650

Economic Entity’s share of post acquisition retained losses (650) (650) - -

- - 650 650

2016 2015
RM’000 RM’000

The summarised financial information of joint ventures are as follows:

Revenue 60,158 14,268
Loss after tax (3,777) (268)
Total assets 286,991 269,037
Total liabilities 297,038 275,307

AFFIN-i KLSD
2016 2015 2016 2015
RM’000 RM’000 RM’000 RM’000

Net assets
At beginning of the financial year (4,155) (2,714) (3,559) (4,732)
(Loss)/profit for the financial year (328) (1,441) (3,449) 1,173

At end of the financial year (4,483) (4,155) (7,008) (3,559)

Issued and paid up share capital 1,000 1000 500 500

Investment in joint venture (%) 50 50 30 30
Loss in joint venture (RM’000) (2,242) (2,078) (2,102) (1,068)

Both the joint ventures’ principal activities are property development.

As the Bank’s share of cumulative losses of RM3.7 million (2015: RM2.5 million) as at 31 December 2016 has exceeded its
investment in the joint ventures, the Bank does not recognise further losses in its Economic Entity financial statements.

AFFIN-i Nadayu Sdn Bhd (‘AFFIN-i’)

On 1 April 2008, the Bank and Jurus Positif Sdn Bhd, a subsidiary of Nadayu Properties Berhad, entered into a Musharakah
Joint Venture Agreement under the Shariah principles (‘Musharakah Agreement’) to joint develop a land into a housing scheme
at Bukit Gambir, Pulau Pinang.

The Musharakah Agreement also includes an arrangement whereby Jurus Positif Sdn Bhd may acquire the Bank’s shares
upon the completion of the project at a mutually agreed price, unless both shareholders decide to continue the joint venture
for subsequent projects.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

78

Notes to the Financial Statements

for the financial year ended 31 December 2016

15 INVESTMENT IN JOINT VENTURES

AFFIN-i Nadayu Sdn Bhd (‘AFFIN-i’) (continued)

Major strategic operation and financial decisions relating to the activities of AFFIN-i Nadayu Sdn Bhd requires unanimous consent
by both joint venture parties. The Economic Entity’s interest in AFFIN-i Nadayu Sdn Bhd has been treated as investment in joint
venture, which has been accounted for in the Economic Entity’s financial statements using the equity method of accounting.

KL South Development Sdn Bhd (‘KLSD’)

On 2 January 2013, the Bank entered into a Musharakah Joint Venture Agreement (‘Musharakah Agreement’) with Albatha
Bukit Kiara Holdings Sdn Bhd (‘Albatha’), a subsidiary of Bukit Kiara Capital Sdn Bhd, to joint develop a property project namely
h6%26%3UITES+,3OUTHvAT*ALAN+LANG,AMA+UALA,UMPUR

Pursuant to the Musharakah Agreement, the Bank acquired 30% stake in the joint venture company namely KL South
Development Sdn Bhd (‘KL South’) by way of subscription of 150,000 shares of RM1.00 each in KL South at par. The remaining
stake of 70% in KL South is held by Albatha.

Under the Musharakah structure, the Bank would be the sole banker to KL South, providing financing using the Islamic concept
such as Ijarah for the purchase of building and Istisna’ for the bridging financing.

Major strategic operation and financial decisions relating to the activities of KL South requires consent by both joint venture
parties. The Bank’s interest in KL South has been treated as investment in joint venture, which has been accounted for in the
consolidated financial statements using the equity method of accounting.

Block B was launched on 1st July 2013 and its construction was completed with Certificate of Completion and Compliance
(CCC) duly issued on 30th August 2016. Construction of Block A shall complete by April 2017.

16 INVESTMENT IN ASSOCIATE

Raeed Holdings Sdn Bhd

Raeed Holdings Sdn Bhd (‘Raeed’) is a consortium formed by six Islamic banking institutions in Malaysia namely Affin Islamic
Bank Berhad, Bank Islam Malaysia Berhad, Bank Muamalat Malaysia Berhad, Maybank Islamic Berhad, Bank Kerjasama
Rakyat Malaysia and Bank Simpanan Nasional. Raeed has set up a wholly-owned subsidiary, IAP Integrated Sdn Bhd to
develop and operate a multi-bank platform known as the Investment Account Platform (‘IAP’).

IAP Integrated started its business in 2015 as an internet based multibank investment portal. The portal will facilitate efficient
intermediation by the Sponsoring Banks to match financing requirement of ventures with investment from retail and institutional
investors via Investment Account (IA). IAP Integrated aims to be the leading multibank platform for Shariah compliant capital
mobilisation, supported by a conducive ecosystem.
Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Unquoted share at cost 750 -

The summarised financial information of associate is as follows:

Revenue - -
Loss after tax (1,754) -
Total assets 8,632 -
Total liabilities 6,431 -

As the Bank’s share of cumulative losses of RM0.4 million as at 31 December 2016 its interest in the associate, the Bank does
not recognise losses in its current financial statements.
Notes to the Financial Statements
for the financial year ended 31 December 2016

17 PROPERTY AND EQUIPMENT

Economic Entity and The Bank Renovation Office equipment and furniture Computer equipment and software Motor vehicles Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000

Cost
At beginning of the financial year 3,511 2,343 2,482 496 8,832
Additions 32 41 481 - 554
Write-off (5) (6) - - (11)
Reclassification from/(to) holding company 2 4 (163) - (157)

At end of the financial year 3,540 2,382 2,800 496 9,218

Accumulated depreciation
At beginning of the financial year 2,793 1,262 1,916 248 6,219
Charge for the financial year 328 234 322 99 983
Write-off (5) (4) - - (9)
Reclassification from/(to) holding company - 7 (329) - (322)

At end of the financial year 3,116 1,499 1,909 347 6,871

Net book value at end of the financial year 424 883 891 149 2,347
2015

Cost
At beginning of the financial year 3,429 2,334 2,362 496 8,621
Additions 87 22 299 - 408
Write-off (5) (14) - - (19)
Reclassification - 1 (179) - (178)

At end of the financial year 3,511 2,343 2,482 496 8,832

Accumulated depreciation
At beginning of the financial year 2,380 1,037 1,794 149 5,360
Charge for the financial year 418 231 285 99 1,033
Write-off (5) (6) - - (11)
Reclassification - - (163) - (163)
At end of the financial year 2,793 1,262 1,916 248 6,219
ANNUAL REPORT 2016

Net book value at end of the financial year 718 1,081 566 248 2,613
79
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

80

Notes to the Financial Statements

for the financial year ended 31 December 2016

18 INTANGIBLE ASSETS
Economic Entity
and The Bank
2016 2015
Computer software RM’000 RM’000

Cost
At beginning/end of the financial year 6,402 6,402

Less: Accumulated amortisation

At beginning of the financial year 5,976 5,511
Charge for the financial year 426 465

At end of the financial year 6,402 5,976

Net book value at end of the financial year - 426

19 DEPOSITS FROM CUSTOMERS

(i) By type of deposit

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Non-Mudharabah
Demand deposits 2,572,559 2,435,998
Savings deposits 477,284 412,394
Murabahah term deposits 6,606,396 6,413,389
Commodity Murabahah 768,412 630,118

Mudharabah
General investment deposits 104,047 109,796

10,528,698 10,001,695
 ANNUAL REPORT 2016

81

Notes to the Financial Statements

for the financial year ended 31 December 2016

19 DEPOSITS FROM CUSTOMERS

(ii) Maturity structure of Murabahah term deposits, general investment deposits and NIDC
Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Due within six months 4,729,087 4,781,599

Six months to one year 1,793,301 1,630,224
One year to three years 31,431 111,216
Three years to five years 156,624 146

6,710,443 6,523,185

(iii) By type of customer

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Government and statutory bodies 3,204,538 2,945,481

Business enterprises 4,318,973 4,004,165
Individuals 1,320,223 1,278,221
Domestic banking institutions 117 814
Domestic non-banking financial institutions 1,280,170 1,313,150
Foreign entities 73,693 64,584
Others entities 330,984 395,280

10,528,698 10,001,695

20 DEPOSITS AND PLACEMENTS OF BANKS AND OTHER FINANCIAL INSTITUTIONS

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Wadiah
Licensed banks 84,392 84,001

84,392 84,001
Tawarruq
Licensed banks 801,436 552,216
Other financial institution 363,165 405,175

1,164,601 957,391

1,248,993 1,041,392

Maturity structure of deposits

Due within six months 1,201,454 1,041,392
Six months to one year 47,539 -

1,248,993 1,041,392
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

82

Notes to the Financial Statements

for the financial year ended 31 December 2016

21 INVESTMENT ACCOUNTS DUE TO DESIGNATED FINANCIAL INSTITUTIONS

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Mudharabah
Licensed banks 2,110,049 1,331,318

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Movement in investment accounts

At beginning of the financial year 1,331,318 -
Amount transferred from RPSIA - 695,588
New placement during the year 800,000 1,630,000
Redemption during the year (10,606) (1,012,803)
Finance expense on RIA 89,272 33,414
Profit distributed (99,935) (14,881)

At end of the financial year 2,110,049 1,331,318

Profit Sharing Ratio and Rate of Return

Economic Entity and The Bank

2016 2015
Average Average Average Average
profit rate of profit rate of
sharing ratio return sharing ratio return
(PSR) (ROR) (PSR) (ROR)
% % % %

Investment accounts:

Due within:
Six months to one year 96 4.76 98 4.87
One year to three years 95 5.07 96 4.68
Three years to five years - - 93 6.37
Five years and above 95 5.02 96 4.81

The above table provides analysis of PSR & ROR as at reporting date into relevant maturity tenures based on remaining
contractual maturities.

Inclusive of RIA placed by the holding company amounting to RM2,110.0 million. These investments are used to fund certain
specific financing. The RIA is a contract based on the Mudharabah principle between two parties to finance a financing
where the investor (i.e.’AFFIN BANK’) solely provides capital and the business venture is managed solely by the enterpreneur
(i.e. ‘AFFIN Islamic’). The profit of the business venture is shared between both parties based on pre-agreed ratio. Losses shall
be borned by the investor.
 ANNUAL REPORT 2016

83

Notes to the Financial Statements

for the financial year ended 31 December 2016

22 DERIVATIVE FINANCIAL LIABILITIES

Economic Entity and The Bank

2016 2015
Contract/ Contract/
notional notional
amount Liabilities amount Liabilities
RM’000 RM’000 RM’000 RM’000

At fair value
Foreign exchange derivatives
- Currency forwards 110,639 1,412 160,810 1,035

110,639 1,412 160,810 1,035

23 OTHER LIABILITIES

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Margin and collateral deposits 8,413 13,000

Other creditors and accruals 3,449 3,872
Cheque clearing accounts - 13,621
Sundry creditors 18,729 8,292
Provision for zakat 2,332 2,307
Defined contribution plan (a) 1,057 1,143
Accrued employee benefits 2,261 1,521
Charity funds (b) 90 363

36,331 44,119

(a) Defined contribution plan

The Bank contributes to the Employee Provident Fund (‘EPF’), the national defined contribution plan. Once the contributions
have been paid, the Bank has no further payment obligations.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

84

Notes to the Financial Statements

for the financial year ended 31 December 2016

23 OTHER LIABILITIES

(b) Charity funds

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Sources and uses of charity funds

At beginning of the financial year 363 3

Sources of charity funds

- Non-Islamic/prohibited income - 360

Uses of charity funds

- Contribution to medical aid (55) -
- Contribution to non profit organisation (40) -
- Contribution to program/event (50) -
- Contribution to public usage (128) -
(273) -

At end of the financial year (90) 363

The source of charity fund comes from purification of fees income earned from use of debit card at certain merchants as well
as Shariah non-compliant events that involve mixed of Shariah compliant and non-Shariah compliant products and services.
The charity fund was channeled to a number of charitable or public purposes for example centre of disabled children,
association for less fortunate ex-government servants and module development for Islamic financial learning program.

The Bank does not charge gharamah for its financing facilities.

24 AMOUNT DUE TO HOLDING COMPANY

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Advances from holding company 196,828 -

196,828 -

The advances from holding company are unsecured, bear no profit (2015: 0%) and repayable on demand.
 ANNUAL REPORT 2016

85

Notes to the Financial Statements

for the financial year ended 31 December 2016

25 SHARE CAPITAL

Number of ordinary Economic Entity

shares of RM 1 each and The Bank
2016 2015 2016 2015
Authorised ‘000 ‘000 RM ‘000 RM ‘000

At beginning/end of the financial year 1,000,000 1,000,000 1,000,000 1,000,000

Issued and fully paid

At beginning/end of the financial year 460,000 360,000 460,000 360,000
Issued during the financial year 100,000 100,000 100,000 100,000

At end of the financial year 560,000 460,000 560,000 460,000

26 RESERVES

Economic Entity The Bank

2016 2015 2016 2015
RM’000 RM’000 RM’000 RM’000

Retained profits 237,127 195,606 237,777 196,256

AFS revaluation reserves (18,064) (7,908) (18,064) (7,908)
Statutory reserves 305,016 248,717 305,016 248,717
Regulatory reserves 73,178 58,400 73,178 58,400

597,257 494,815 597,907 495,465

(a) As at 31 December 2016, the Bank has tax exempt account balance of RM34,165,467 (2015: RM15,253,964) under
Section 12 of the Income Tax (Amendment) Act 1999, subject to agreement by the Inland Revenue Board.
(b) The statutory reserves of the Bank are maintained in compliance with Section 57(2)(f) of the Islamic Financial Services Act
2013 and is not distributable as cash dividends.
(c) AFS revaluation reserves represent the unrealised gains or losses arising from the change in fair value of investments
classified as financial investment available-for-sale. The gains or losses are transferred to the income statement
upon disposal or when the securities become impaired. The depositors’ portion of net unrealised gains or losses on
‘Available-for-sale’ at the end of financial year is net unrealised losses of RM28,835,477.82 (2015: net unrealised losses
of RM9,711,083).
(d) The Bank is required to maintain in aggregate collective impairment allowances and regulatory reserves of no less than
1.2% of total outstanding financing, advances and other financing, net of individual impairment allowances.

27 INCOME DERIVED FROM INVESTMENT OF DEPOSITORS’ FUNDS AND OTHERS

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Income derived from investment of:

- General investment deposits (a) 290,695 279,553
- Other deposits (b) 272,668 210,376

563,363 489,929
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

86

Notes to the Financial Statements

for the financial year ended 31 December 2016

27 INCOME DERIVED FROM INVESTMENT OF DEPOSITORS’ FUNDS AND OTHERS

(a) Income derived from investment of general investment deposits

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Finance income and hibah

Financing, advances and other financing 221,444 195,397
Financial investments available-for-sale 23,166 23,247
Financial investments held-to-maturity 2,105 2,624
Money at call and deposits with financial institutions 23,064 38,441

269,779 259,709
Accretion of discount less amortisation of premium 2,069 3,601

Total finance income and hibah 271,848 263,310

Other operating income

Fee income:
Commission 810 896
Service charges and fees 3,392 2,554
Guarantee fees 1,235 1,008

5,437 4,458
Income from financial instruments:
Gain on sale of financial investments available-for-sale 3,814 1,046

3,814 1,046
Other income:
Foreign exchange profit
- realised 3,690 9,585
- unrealised 3,451 (413)
Other non-operating income 2,455 1,567

9,596 10,739

Total income derived from investment of general investment deposits 290,695 279,553
 ANNUAL REPORT 2016

87

Notes to the Financial Statements

for the financial year ended 31 December 2016

27 INCOME DERIVED FROM INVESTMENT OF DEPOSITORS’ FUNDS AND OTHERS

(b) Income derived from investment of other deposits

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Finance income and hibah

Financing, advances and other financing 207,711 147,044
Financial investments available-for-sale 21,729 17,494
Financial investments held-to-maturity 1,975 1,975
Money at call and deposits with financial institution 21,634 28,929

253,049 195,442
Accretion of discount less amortisation of premium 1,940 2,710

Total finance income and hibah 254,989 198,152

Other operating income

Fee income:
Commission 759 675
Service charges and fees 3,182 1,922
Guarantee fees 1,159 759
5,100 3,356
Income from financial instruments:
Gain on sale of financial investments available-for-sale 3,578 787
3,578 787
Other income:
Foreign exchange profit
- realised 3,461 7,213
- unrealised 3,237 (311)
Other non-operating income 2,303 1,179

9,001 8,081

Total income derived from investment of other deposits 272,668 210,376

 AFFIN ISLAMIC BANK
BERHAD (709506-V)

88

Notes to the Financial Statements

for the financial year ended 31 December 2016

28 INCOME DERIVED FROM INVESTMENT OF INVESTMENT ACCOUNTS

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Finance income and hibah

Financing, advances and other financing 75,906 46,556
Financial investments available-for-sale 7,941 5,539
Financial investments held-to-maturity 721 625
Money at call and deposits with other financial institutions 7,906 9,159

92,474 61,879
Accretion of discount less amortisation of premium 709 858

Total finance income and hibah 93,183 62,737

Other operating income

Fee income:
Commission 278 214
Service charges and fees 1,163 609
Guarantee fees 423 240

1,864 1,063
Income from financial instruments:
Gain on sale of financial investments available-for-sale 1,307 249

1,307 249
Other income:
Foreign exchange profit
- realised 1,265 2,284
- unrealised 1,183 (98)
Other non-operating income 842 373
3,290 2,559

Total income derived from investment of investment accounts 99,644 66,608

 ANNUAL REPORT 2016

89

Notes to the Financial Statements

for the financial year ended 31 December 2016

29 INCOME DERIVED FROM INVESTMENT OF SHAREHOLDERS’ FUNDS

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Finance income and hibah

Financing, advances and other financing 39,069 27,800
Financial investments available-for-sale 4,087 3,308
Financial investments held-to-maturity 371 373
Money at call and deposits with financial institutions 4,069 5,469

47,596 36,950
Accretion of discount less amortisation of premium 365 512
Total finance income and hibah 47,961 37,462

Other operating income

Fee income:
Commission 143 128
Service charges and fees 598 363
Guarantee fees 218 143

959 634
Income from financial instruments:
Gain on sale of financial investments available-for-sale 673 149

673 149
Other income:
Foreign exchange profit
- realised 651 1,364
- unrealised 609 (59)
Other non-operating income 433 223

1,693 1,528

Total income derived from investment of shareholders’ funds 51,286 39,773

 AFFIN ISLAMIC BANK
BERHAD (709506-V)

90

Notes to the Financial Statements

for the financial year ended 31 December 2016

30 ALLOWANCES FOR IMPAIRMENT LOSSES ON FINANCING, ADVANCES AND OTHER FINANCING

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Individual impairment
- made during the financial year 19,340 3,559
- written-back (35,863) (47)
Collective impairment
- net allowance made during the financial year 13,897 5,959
Bad debts on financing:
- recovered (1,156) (966)
- written-off 21 7

(3,761) 8,512

31 INCOME ATTRIBUTABLE TO THE DEPOSITORS

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Deposits from customers

- mudharabah 3,032 4,252
- non-mudharabah 283,536 262,684
Deposits and placement of banks and other
financial institutions
- mudharabah 63,103 42,374
Profit distributed to Restricted Profit Sharing
Investment Account (‘RIA’) account holders 89,272 13,293
Profit distributed to investment account holders - 33,414

438,943 356,017

32 OTHER OPERATING EXPENSES

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Personnel costs (a) 81,301 71,067

Establishment costs (b) 35,639 31,073
Marketing expenses (c) 2,433 2,287
Administrative and general expenses (d) 13,449 9,979

132,822 114,406
 ANNUAL REPORT 2016

91

Notes to the Financial Statements

for the financial year ended 31 December 2016

32 OTHER OPERATING EXPENSES

(a) Personnel costs

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Wages, salaries and bonuses 61,860 54,457

Defined contribution plan (‘EPF’) 10,391 9,117
Other personnel costs 9,050 7,493

81,301 71,067

(b) Establishment costs

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Rental of premises 5,214 4,604

Equipment rental 71 87
Repair and maintenance 7,020 5,503
Depreciation of property and equipment 983 1,033
Amortisation of intangible assets 426 465
IT consultancy fees 10,171 8,953
Dataline rental 1,141 949
Security services 3,797 3,151
Electricity, water and sewerage 1,774 1,578
Licence fees 350 366
Insurance/takaful and indemnities 783 1,459
Other establishment costst 3,909 2,925

35,639 31,073

(c) Marketing expenses

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Business promotion and advertisement 788 769

Entertainment 319 285
Traveling and accommodation 827 773
Other marketing expenses 499 460

2,433 2,287
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

92

Notes to the Financial Statements

for the financial year ended 31 December 2016

32 OTHER OPERATING EXPENSES

(d) Administration and general expenses

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Telecommunication expenses 958 846

Auditors’ remuneration 415 251
Professional fees 1,179 1,052
Property and equipment written-off 3 8
Mail and courier charges 699 502
Stationery and consumables 2,534 2,294
Commissions expenses 1,047 537
Brokerage expenses 1,150 1,205
Directors’ fees and allowances 1,694 1,263
Donations 562 113
Settlement, clearing and bank charges 1,007 813
Operational and litigation write-off expenses 261 20
GST Input tax-non recoverable 1,827 1,030
Other administration and general expenses 113 45

13,449 9,979

The expenditure includes the following statutory disclosures:

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Directors’ remuneration (Note 33) 2,654 2,676

Auditors’ remuneration
- statutory audit fees 235 158
- over provision prior year (13) (12)
- regulatory related fees 153 146
- tax fees (inclusive of under/(over)provision in prior years) 40 (41)
 ANNUAL REPORT 2016

93

Notes to the Financial Statements

for the financial year ended 31 December 2016

33 CEO, DIRECTORS AND SHARIAH COMMITTEE MEMBERS’ REMUNERATION

The CEO and Directors of the Bank who have held office during the period since the date of the last report are:

CEO
Nazlee Bin Khalifah

Non-Executive Directors
Jen Tan Sri Dato’ Seri Ismail Bin Haji Omar (Bersara) (Chairman)
Tan Sri Dato’ Seri Lodin Bin Wok Kamaruddin
(Completion of directorship on 4 October 2016)
Laksamana Madya Tan Sri Dato’ Seri Ahmad Ramli Bin Mohd Nor (Bersara)
Tan Sri Dato’ Seri Mohamed Jawhar Bin Hassan
En. Mohd Suffian Bin Haji Haron
Tan Sri Dato’ Sri Abdul Aziz Bin Abdul Rahman
Associate Professor Dr. Said Bouheraoua
Pn. Rosnah Binti Omar
(Appointed on 19 December 2016)

The aggregate amount of remuneration for the CEOs, Directors and Shariah Committee members of the Bank for the financial
year are as follows:

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

CEO
Salaries 438 421
Bonuses 250 709
Defined contribution plan (‘EPF’) 125 191
Other employee benefits 117 79
Benefits-in-kind 30 13

Non-executive Directors
Fees 1,614 1,176
Benefits-in-kind - 4

Shariah Committee fees

Shariah fees 80 83

Directors’ remuneration (Note 32) 2,654 2,676

 AFFIN ISLAMIC BANK
BERHAD (709506-V)

94

Notes to the Financial Statements

for the financial year ended 31 December 2016

33 CEO, DIRECTORS AND SHARIAH COMMITTEE MEMBERS’ REMUNERATION

A summary of the total remuneration of the CEO and Directors, distinguishing between Executive and Non-Executive Directors.

Directors’ * Other Benefits- Shariah

Economic Entity and The Bank Salaries Bonuses Fees emoluments in-kind fees Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

CEO
Nazlee Bin Khalifah 438 250 - 242 30 - 960
Total 438 250 - 242 30 - 960

Non-executive Directors
Jen Tan Sri Dato’ Seri Ismail
Bin Haji Omar (Bersara) - - 220 - - - 220
Tan Sri Dato’ Seri Lodin Bin
Wok Kamaruddin - - 170 - - - 170
Laksamana Madya Tan Sri Dato’ Seri
Ahmad Ramli Bin Mohd Nor (Bersara) - - 262 - - - 262
Tan Sri Dato’ Seri Mohamed Jawhar - - 212 - - - 212
En. Mohd Suffian Bin Haji Haron - - 199 - - - 199
Tan Sri Dato’ Sri Abdul Aziz Bin
Abdul Rahman - - 309 - - 309
Associate Professor Dr. Said Bouheraoua - - 231 - - 80 311
Puan Rosnah bt Umar - - 11 - - - 11
Total - - 1,614 - - 80 1,694

Grand total 438 250 1,614 242 30 80 2,654

Directors’ * Other Benefits- Shariah

Economic Entity and The Bank Salaries Bonuses Fees emoluments in-kind fees Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

CEO
Kamarul Ariffin Bin Mohd Jamil 165 673 - 146 10 - 994
Nazlee Bin Khalifah 256 36 - 124 3 - 419
Total 421 709 - 270 13 - 1,413

Non-executive Directors
Jen Tan Sri Dato’ Seri Ismail
Bin Haji Omar (Bersara) - - 152 - - - 152
Tan Sri Dato’ Seri Lodin Bin
Wok Kamaruddin - - 157 - - - 157
Laksamana Madya Tan Sri Dato’ Seri
Ahmad Ramli Bin Mohd Nor (Bersara) - - 187 - 2 - 189
Tan Sri Dato’ Seri Mohamed Jawhar - - 160 - - - 160
En. Mohd Suffian Bin Haji Haron - - 143 - - - 143
Tan Sri Dato’ Sri Abdul Aziz
Bin Abdul Rahman - - 215 - 2 217
Associate Professor Dr. Said Bouheraoua - - 162 - - 83 245
Total - - 1,176 - 4 83 1,263

Grand total 421 709 1,176 270 17 83 2,676

* Executive Director’s other emoluments include allowance and EPF

 ANNUAL REPORT 2016

95

Notes to the Financial Statements

for the financial year ended 31 December 2016

34 TAXATION

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Malaysian income tax

Current tax 31,848 28,364
Under provision in prior year 207 503
Deferred tax (Note 13) (1,251) (56)

30,804 28,811

Numerical reconciliation between the average effective tax rate and the Malaysian tax rate:

% %

Malaysian tax rate 24.00 25.00

Tax effect of:

Non-allowable expenses 0.18 0.11
Non taxable income (0.16) (0.35)
Tax savings arising from income exempt from tax for International Currency Business Unit
(ICBU) (3.10) (0.41)
Other temporary differences not recognised in prior years - (0.23)
Under provision in prior years 0.14 0.43

Average effective tax rate 21.06 24.55

35 EARNINGS PER SHARE

The basic earnings per ordinary share for the Economic Entity and the Bank have been calculated based on the net profit
attributable to ordinary equity holders of the Economic Entity and the Bank of RM112,597,999 (2015: RM84,785,000). The
weighted average number of shares in issue during the financial year of 460,546,448 (2015: 360,548,000) is used for the
computation.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

96

Notes to the Financial Statements

for the financial year ended 31 December 2016

36 SIGNIFICANT RELATED PARTY TRANSACTIONS AND BALANCES

Related parties Relationships

Lembaga Tabung Angkatan Tentera (‘LTAT’) Ultimate holding corporate body, which is Government-Link
Investment Company (‘GLIC’) of the Government of Malaysia

AFFIN Holdings Berhad (‘AHB’) Penultimate holding company

AFFIN Bank Berhad (‘ABB’) Holding company

Subsidiaries and associates of LTAT Subsidiary and associate companies of the ultimate holding
corporate body

Subsidiaries and associates of AHB as disclosed in its Subsidiary and associate companies of the penultimate holding
financial statements company

Subsidiaries of ABB as disclosed in its financial statements Subsidiary companies of the holding company

Joint ventures as disclosed in Note 11 Joint ventures with AFFIN Islamic Bank Berhad

Associate as disclosed in Note 12 Associate of AFFIN Islamic Bank Berhad

Voting shares in body corporate not less than 15% of votes Other related companies

Key management personnel The key management personnel of the Bank consist of:
- Directors
- Chief Executive Officer
- Member of Senior Management team

Related parties of key management personnel (deemed as - Close family members and dependents of key management
related to the Bank) personnel
- Entities that are controlled, jointly controlled or for which
significant voting power in such entity resides with, directly
or indirectly by key management personnel or its close family
members

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the
activities of the Bank either directly or indirectly.

The Bank do not have any individually or collectively significant transactions outside the ordinary course of business with the
Government of Malaysia and government related entities. In addition to related party disclosures mentioned elsewhere in the
financial statements, set out below are other significant related party transactions and balances.
Notes to the Financial Statements
for the financial year ended 31 December 2016

36 SIGNIFICANT RELATED PARTY TRANSACTIONS AND BALANCES

(a) Related parties transactions and balances

Ultimate holding Penultimate holding Holding
corporate body company company
2016 2015 2016 2015 2016 2015
Economic Entity and The Bank RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Expenditure
Profit paid on Commodity Murabahah 231 - - - - -

Profit paid on deposits and placements of banks

and other financial institutions - - - - 1,484 1,256
Profit paid on Restricted Investment Account (RIA) - - - - 89,272 47,846
Other expenditure - - - - 87,365 73,305

231 - - - 178,121 122,407

Companies in which
Other related certain Directors have Key management
companies substantial interest personnel
2016 2015 2016 2015 2016 2015
Economic Entity and The Bank RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Income
Income on financing, advances and other financing 9,104 6,589 5,564 - 24 16

9,104 6,589 5,564 - 24 16

Expenditure
Profit paid on Murabahah term deposits 4,496 5,377 53 - 157 115
Profit paid on general investment deposits 8 8 - - - -
Profit paid on Commodity Murabahah 1,727 3,485 - - - -
Other expenditure 57 104 - - - -

6,288 8,974 53 - 157 115

ANNUAL REPORT 2016

97
Notes to the Financial Statements 98
for the financial year ended 31 December 2016
BERHAD (709506-V)

36 SIGNIFICANT RELATED PARTY TRANSACTIONS AND BALANCES

AFFIN ISLAMIC BANK

(a) Related parties transactions and balances (continued)

Ultimate holding Penultimate Holding

corporate body holding company company
2016 2015 2016 2015 2016 2015
Economic Entity and The Bank RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Amount due from

Intercompany balances - - - - - 367,172

- - - - - 367,172

Amount due to
Demand and saving deposits 4,496 1,172 - - - -
Commodity Murabahah 7,507 - - - - -
Deposits and placements of banks and other
financial institutions - - - - 285,026 84,001
Restricted Investment Account (RIA) - - - - 2,110,079 1,331,318
Intercompany balances - - - - 196,828 -

12,003 1,172 - - 2,591,933 1,415,319

Commitment and contigencies - - - - - -

Notes to the Financial Statements
for the financial year ended 31 December 2016

36 SIGNIFICANT RELATED PARTY TRANSACTIONS AND BALANCES

(a) Related parties transactions and balances (continued)

Companies in which
Other related certain Directors have Key management
companies substantial interest personnel
2016 2015 2016 2015 2016 2015
Economic Entity and The Bank RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Amount due from

Financing, advances and other financing 599,601 448,742 99,624 - 630 374
Intercompany balances 47,225 39,936 - - - -

646,826 488,678 99,624 - 630 374

Amount due to
Demand and saving deposits 379,875 24,045 3,011 596 3,171 2,627
Murabahah term deposits 147,813 204,905 - - 2,385 5,325
General investment deposits 270 261 - - - -
Commodity Murabahah 251,018 99,544 - - - -

778,976 328,755 3,011 596 5,556 7,952

Commitments and contingencies 164,067 47,212 - - - -

No impairment allowances were required at the Bank in 2016 and 2015 for financing, advances and other financing made to key management personnel.
ANNUAL REPORT 2016

99
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

100

Notes to the Financial Statements

for the financial year ended 31 December 2016

36 SIGNIFICANT RELATED PARTY TRANSACTIONS AND BALANCES

(b) Key management personnel compensation
Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Directors’ fees and allowances

Fees 1,614 1,176
Benefits-in-kind - 4
Shariah committee fees 80 83

1,694 1,263

Short-term employment benefits

Salaries 798 631
Bonuses 410 739
Defined contribution plan (‘EPF’) 220 237
Other employee benefits 207 133
Benefits-in-kind 57 13

1,692 1,753

Included in the above table is CEO and directors’ remuneration as disclosed in Note 33.

37 COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities with legal
recourse to their customers. No material losses are anticipated as a result of these transactions. These commitments and
contingencies are not secured over the assets of the Bank.
The commitments and contingencies consist of:
Economic Entity
and The Bank
Principal Principal
amount amount
2016 2015
RM’000 RM’000

Direct credit substitutes (*) 33,386 9,383

Transaction-related contingent items (*) 282,867 147,960
Short-term self-liquidating trade related contingencies 312,550 368,567
Irrevocable commitments to extend credit:
- maturity less than one year 1,129,279 1,387,337
- maturity more than one year 469,986 348,409
Any commitments that are unconditionally cancelled at any time by the bank without
prior notice or that effectively provide for automatic cancellation due to deterioration
in a customer’s creditworthiness 39,538 15,321
Foreign exchange related contracts (#):
- less than one year 1,049,862 222,777

3,317,468 2,499,754

* Included in direct credit substitutes as above are financial guarantee contracts of RM33.4 million at the Bank (2015: RM9.4
million), of which fair value at the time of issuance is zero.
 4HEFAIRVALUEOFTHESEDERIVATIVESHAVEBEENRECOGNISEDAShDERIVATIVElNANCIALASSETSvANDhDERIVATIVElNANCIALLIABILITIESv
in the statement of financial position and disclosed in Note 4 and 22 to the financial statements.
 ANNUAL REPORT 2016

101

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(i) Credit risk

Credit risk is the potential financial loss resulting from the failure of the customer to settle financial and contractual obligations
through financing, hedging, trading and investing activities. It includes both pre-settlement and settlement risks of trading
counterparties. Credit risk emanates mainly from financing, advances and other financing, financing commitments arising
from such financing activities, as well as through financial transaction with counterparties including interbank money
market activities as well as derivative instruments used for hedging and debt securities.

The management of credit risk in the Bank is governed by the Credit Risk Management Framework which is supported by
a set of approved credit policies, guidelines and procedures. Approval authorities are delegated to Senior Management
and GMLC to implement the credit policies and ensure sound credit granting standards. BLRRC has review/veto power.

An independent Group Credit Management function is headed by Group Chief Credit Officer (‘GCCO’) with direct reporting
line to Managing Director (‘MD’)/Chief Executive Officer (‘CEO’) to ensure sound credit appraisal and approval process.
Group Risk Management (‘GRM’) with direct reporting line to Board Risk Management Committee (‘BRMC’) has functional
responsibilities for the management of credit risk, to ensure adherence to risk standards and discipline.

Credit guidelines and procedures are incorporated within the Credit Policy. The Credit Authority Framework facilitates the
approval of all new, restructured and continuing credit facilities. New and existing businesses are governed by Credit Plan
which is developed as part of the annual business planning and budgeting process. The Credit Plan is reviewed at least
annually to ensure the guidelines and criteria reflect portfolio strategy and market environment.

Credit risk measurement

Financing, advances and other financing

Credit evaluation is the process of analysing the creditworthiness of the prospective customer against the Bank’s underwriting
criteria and the ability of the Bank to make a return commensurate with the level of risk undertaken. Assessment and
quantification of credit risk are supported by the use of internal rating models, scorecards and decision support tools.

The Bank adopts a credit risk grading methodology encompassing probability of default (‘PD’) driven scorecards for
business financing, advances and other financing. Separate scorecards have been developed for two categories of
business customers, Large Corporate (‘LC’) and Small Medium Enterprise (‘SME’).

For consumer mass market products, statistically developed application scorecards are used to assess the risks associated
with the credit application as a decision support tool at financing, advances and other financing origination.

Stress Testing supplements the overall assessment of credit risk across the Bank.

Over-the-Counter (‘OTC’) Derivatives

The OTC Derivatives credit exposure is computed using the Current Exposure Method. Under the Current Exposure
Method, computation of credit equivalent exposure for rate of return and exchange rate related contracts is derived from the
summation of the two elements; the replacement costs (obtained by marking-to-market) of all contracts and the potential
future exposure of outstanding contracts (Add On charges depending on the specific remaining tenor to maturity).
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

102

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(i) Credit risk (continued)

Risk limit control and mitigation policies

The Bank employs various policies and practices to control and mitigate credit risk.

Financing limits

The Bank establishes internal limits and related financing guidelines to manage large exposures and avoid undue
concentration of credit risk in its credit portfolio. The limits include single customer groupings, connected parties,
geographical and industry segments. These risks are monitored regularly and the limits reviewed annually or sooner
depending on changing market and economic conditions.

The credit risk exposure for derivative and financing, advances and other financing books is managed as part of the overall
financing limits with customers together with potential exposure from market movements.

Collateral

Credits are established against customer’s capacity to pay rather than rely solely on security. However, collateral may be
taken to mitigate credit risk. The main collateral types accepted and given value by the Bank are:-

- mortgage over residential properties;

- charges over commercial real estate or vehicles financed;
- charges over business assets such as business premises, inventory and accounts receivable; and
- charges over financial instruments such as marketable securities.

Documentary and commercial letters of credit are collateralised by the underlying shipments of goods to which they relate
and therefore carry less risk than a direct financing.

Credit Related Commitments

Commitment to extend credit represents unutilised portion of approved credit in the form of financing, guarantees or
letters of credit. In terms of credit risk, the Bank is potentially exposed to loss in an amount equal to the total unutilised
commitments. However, the potential amount of loss is less than the total unutilised commitments, as most commitments
to extend credit are contingent upon customers maintaining specific minimum credit standards.

The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have
a greater degree of credit risk than short-term commitments.

Credit risk monitoring

Corporate credits and large individual accounts are reviewed by the Business Units at least once a year using updated
financial and other relevant information. This is to ensure that the credit grades remain appropriate and any signs of
weaknesses or deterioration in the credit quality are detected. Remedial action is taken where evidence of deterioration
emanates.

Retail credits are actively monitored and managed on a portfolio basis by product type. A collection management system
is in place to promptly identify, monitor and manage delinquent accounts at early stages of delinquency.

An Early Alert Process is adopted to pro-actively identify, report, and manage warning signs of potential credit deterioration.
Watchlist accounts are closely reviewed and monitored with corrective measures initiated to prevent them from turning
impaired. As a rule, watchlist accounts are either worked up or worked out within a period of twelve months.

Active portfolio monitoring as well as exceptions reporting is in place to manage the overall risk profile, identify, analyse and
mitigate adverse trends or specific areas of risk concerns.
 ANNUAL REPORT 2016

103

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(i) Credit risk (continued)

Maximum exposure to credit risk

For financial assets recognised on the statement of financial position, the exposure to credit risk equals their carrying
amount. For financial guarantees granted, the maximum exposure to credit risk is the maximum amount that the Bank
would have to pay if the guarantee was to be called upon. For financing commitments and other credit related commitments,
the maximum exposure to credit risk is the full amount of the undrawn credit facilities granted to customers.

All financial assets of the Bank are subject to credit risk except for cash in hand, equity securities held as financial assets
held-for-trading or financial investments available-for-sale, as well as non-financial assets.

The exposure to credit risk of the Bank equals their carrying amount in the statement of financial position as at reporting
date, except for the followings:

Economic Entity
and The Bank
2016 2015
Maximum Maximum
Credit Credit
Exposure Exposure
RM’000 RM’000

Credit risk exposures of on-balance sheet assets:

Financial investments available-for-sale # 1,833,408 1,474,848
Other assets 5,302 3,045

Credit risk exposure of off-balance sheet items:

Financial guarantees 33,386 9,383
Financing commitments and other credit related commitments 2,234,220 2,267,594

Total maximum credit risk exposure 4,106,316 3,754,870

The following have been excluded for the purpose of maximum credit risk exposure calculation:

# investment in quoted and unquoted shares

Whilst the Bank’s maximum exposure to credit risk is the carrying value of the assets, or in the case of off-balance sheet
items, the amount guaranteed, committed or accepted, in most cases the likely exposure is far less due to collateral, credit
enhancements and other actions taken to mitigate the credit exposure.

The financial effect of collateral held for financing, advances and other financing of the Bank is 78.0% (2015: 74.0%). The
financial effects of collateral for the other financial assets are insignificant.
Notes to the Financial Statements 104
for the financial year ended 31 December 2016
BERHAD (709506-V)

38 FINANCIAL RISK MANAGEMENT

AFFIN ISLAMIC BANK

(i) Credit risk (continued)

Credit risk concentration

Credit risk is the risk of financial loss from the failure of customers to meet their obligations. Exposure to credit risk is managed through portfolio management. The credit portfolio’s
risk profiles and exposures are reviewed and monitored regularly to ensure that an acceptable level of risk diversification is maintained. Exposure to credit risk is also managed in
part by obtaining collateral security and corporate and personal guarantees.

The credit risk concentrations of the Bank, by industry concentration, are set out in the following tables:

Deposits and
placements Financial
with banks Financial investments Financing, On
and other Derivative investments held-to- advances balance Commitments
Short-term financial financial available- maturity and other Other sheet and
Economic Entity and The Bank funds institutions assets for-sale securities financing assets total contingencies
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000t RM’000

Agriculture - - - - - 401,637 - 401,637 59,978

Mining and quarrying - - - - - 11,295 - 11,295 12,288
Manufacturing - - - 40,223 - 334,158 - 374,381 243,376
Electricity, gas and water supply - - - 50,072 - 64,058 - 114,130 2,958
Construction - - - - - 520,349 - 520,349 506,432
Real estate - - - - - 1,435,603 - 1,435,603 133,749
Transport, storage and communication - - - 30,102 - 283,062 - 313,164 90,879
Finance, takaful/insurance and business
services 4,826 - 8,987 293,107 72,122 459,810 - 838,852 413,737
Government and government agencies 1,053,018 - - 1,419,904 - 1,381,918 - 3,854,840 464,839
Wholesale & retail trade and restaurants
& hotels - - - - - 406,120 - 406,120 45,770
Others - - - - - 6,616,933 5,302 6,622,235 293,600

Total assets 1,057,844 - 8,987 1,833,408 72,122 11,914,943 5,302 14,892,606 2,267,606
Notes to the Financial Statements
for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(i) Credit risk (continued)

Credit risk concentration (continued)

Deposits and
placements Financial
with banks Financial investments Financing, On
and other Derivative investments held-to- advances balance Commitments
Short-term financial financial available- maturity and other Other sheet and
Economic Entity and The Bank funds institutions assets for-sale securities financing assets total contingencies
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000t RM’000

Agriculture - - - - - 278,606 - 278,606 29,427

Mining and quarrying - - - - - 12,998 - 12,998 10,610
Manufacturing - - - 80,575 - 224,726 - 305,301 320,780
Electricity, gas and water supply - - - - - 57,205 - 57,205 1,250
Construction - - - - - 551,695 - 551,695 424,837
Real estate - - - - - 1,133,968 - 1,133,968 103,902
Transport, storage and communication - - - 45,669 - 205,152 - 250,821 245,712
Finance, takaful/insurance and business
services 7,500 35,034 132 257,118 76,283 565,751 - 941,818 115,965
Government and government agencies 1,911,070 - - 1,091,486 - 603,070 - 3,605,626 668,130
Wholesale & retail trade and restaurants
& hotels - - - - - 216,538 - 216,538 190,598
Others - - - - - 5,352,200 3,045 5,355,245 165,766

Total assets 1,918,570 35,034 132 1,474,848 76,283 9,201,909 3,045 12,709,821 2,276,977
ANNUAL REPORT 2016

105
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

106

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(i) Credit risk (continued)

Collaterals

The main collateral types accepted and given value by the Bank are:

s -ORTGAGESOVERRESIDENTIALPROPERTIES
s #HARGESOVERCOMMERCIALREALESTATEORVEHICLESlNANCED
s #HARGESOVERBUSINESSASSETSSUCHASBUSINESSPREMISESINVENTORYANDACCOUNTRECEIVABLESAND
s #HARGESOVERlNANCIALINSTRUMENTSSUCHASMARKETABLESECURITIES

Total financing, advances and other financing - credit quality

All financing, advances and other financing are categorised into ‘neither past due nor impaired’, ‘past due but not impaired’
and ‘impaired’.

Past due financing refers to financing, advances and other financing that are overdue by one day or more.

Financing, advances and other financing are classified impaired when they fulfill any of the following criteria:
i) the principal or interest/profit or both is past due more than 90 days or 3 months from the first day of default
ii) where the account is in arrears for less than 90 days or 3 months, there is evidence of impairment to indicate that the
borrower/customer is ‘unlikely to pay’ its credit obligations
iii) the financing is classified as rescheduled and restructured in Central Credit Reference Information System (CCRIS).

Distribution of financing, advances and other financing by credit quality

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Neither past due nor impaired (a) 11,234,317 8,607,759

Past due but not impaired (b) 646,126 527,629
Impaired (c) 97,498 141,708
Gross financing, advances and other financing 11,977,941 9,277,096
less: Allowance for impairment
- Individual (18,003) (38,516)
- Collective (44,995) (36,671)

Net financing, advances and other financing 11,914,943 9,201,909

 ANNUAL REPORT 2016

107

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(i) Credit risk (continued)

Total financing, advances and other financing - credit quality (continued)

(a) Financing neither past due nor impaired

Analysis of financing, advances and other financing that are neither past due nor impaired analysed based on the
Bank’s internal credit grading system is as follows:

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Quality classification
Satisfactory 10,956,340 8,571,615
Special mention 277,977 36,144

11,234,317 8,607,759

Quality classification definitions

Satisfactory: Exposures demonstrate a strong capacity to meet financial commitments, with negligible or low
probability of default and/or levels of expected loss.

Special mention: Exposures require varying degrees of special attention and default risk is of greater concern which
are under the monitoring of Group Early Alert Committee (‘GEAC’).

(b) Financing past due but not impaired

Certain financing, advances and other financing are past due but not impaired as the collateral values of these
financing are in excess of the principal and profit outstanding. Allowances for these financing may have been set
aside on a portfolio basis. The Bank’s financing, advances and other financing which are past due but not impaired
are as follows:

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Past due up to 30 days 192,501 241,430

Past due 31-60 days 365,009 212,980
Past due 61-90 days 88,616 73,219

646,126 527,629
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

108

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(i) Credit risk (continued)

Total financing, advances and other financing - credit quality (continued)

(c) Financing impaired

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Analysis of impaired assets:

Gross impaired financing 97,498 141,708

Individually impaired financing 44,964 102,199

Collateral and other credit enhancements obtained

The Bank obtained assets by taking possession of collateral held as security or calling upon other credit enhancements.

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Nature of assets
Industrial and residential properties 2,445 395

Foreclosed properties are sold as soon as possible, with the proceeds used to reduce the outstanding in debtness. The
carrying amount of the foreclosed properties held by the Bank at end of the financial year has been classified as other
assets as disclosed in Note 9.

Deposits and short-term funds, corporate bonds/sukuk, treasury bills and derivatives - credit quality

Corporate bonds/sukuk, treasury bills and other eligible bills included in financial assets held-for-trading and financial
investments available-for-sale are measured on a fair value basis. The fair value will reflect the credit risk of the issuer.

Most listed and some unlisted securities are rated by external rating agencies. The Bank mainly uses external credit ratings
provided by RAM, MARC, Standard & Poor’s or Moody’s.
Notes to the Financial Statements
for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(i) Credit risk (continued)
The table below presents the deposits and short-term funds, corporate bonds/sukuk, treasury bills and other eligible bills that neither past due nor impaired and impaired, analysed
by rating:

Economic Entity and The Bank Sovereign AAA AA- to AA+ A- to A+ Unrated Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Short-term funds 1,053,018 - 920 3,906 - 1,057,844

Derivative financial assets - - 8,987 - - 8,987
Financial investments available-for-sale
Malaysian Government investment issues 628,785 - - - - 628,785
Sukuk Perumahan Kerajaan 129,431 - - - - 129,431
Khazanah Sukuk 173,287 - - - - 173,287
Corporate bonds/sukuk 488,402 322,112 91,391 - - 901,905
Financial investments held-to-maturity
Corporate bonds/sukuk - - - - 72,122 72,122
2,472,923 322,112 101,298 3,906 72,122 2,972,361

Economic Entity and The Bank

2015

Short-term funds 1,911,070 - 261 7,239 - 1,918,570

Deposits and placements with banks and other financial institutions - - 35,034 - - 35,034
Derivative financial assets - - 132 - - 132
Financial investments available-for-sale
Malaysian Government investment issues 613,857 - - - - 613,857
Sukuk Perumahan Kerajaan 187,219 - - - - 187,219
Khazanah Sukuk 165,280 - - - - 165,280
Corporate bonds/sukuk 125,131 312,001 71,360 - - 508,492
Financial investments held-to-maturity
Corporate bonds/sukuk - - - - 76,283 76,283
3,002,557 312,001 106,787 7,239 76,283 3,504,867

Collateral is not generally obtained directly from the issuers of debt securities. Certain debt securities may be collateralised by specifically identified assets that would be obtainable
in the event of default.
Deposits and short-term funds, Corporate bonds/sukuk, treasury bills and derivarives which are past due but not impaired is not significant.
ANNUAL REPORT 2016

109
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

110

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(i) Credit risk (continued)

Other financial assets - credit quality

Other financial assets of the Bank is neither past due nor impaired are summarised as below:

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Other assets 5,302 3,045

Amount due from holding company - 367,172
Amount due from joint ventures 46,725 39,936
Amount due from associate 500 -

Other financial assets that are past due but not impaired or impaired are not significant.

(ii) Market risk

Market risk is the risk of losses in on and off-balance-sheet positions arising from movements in market prices. The Bank’s
exposure to market risk results largely from profit rate and foreign exchange rate risks.

The Market Risk Management Framework governs the market risk activities of the Bank which is supported by a set of
approved market risk management policies, guidelines and procedures.

Risk control parameters are established based on risk appetite, market liquidity and business strategies as well as
macroeconomic conditions. These parameters are reviewed at least annually.

Market risk arising from the Trading Book is primarily controlled through the imposition of Stop-loss and Value-at-Risk
(‘VaR’) risk control parameters.

Profit rate risk is quantified by analysing the mismatches in timing repricing of the rate sensitive assets and rate sensitive
liabilities. Earnings-at-Risk (‘EaR’) or Net Profit Income simulation is conducted to assess the variation in short term
earnings under various rates scenarios. The potential long term effect of the overall exposure is tracked by assessing the
impact on Economic Value of Equity (‘EVE’), also known as Economic Value-at-Risk (‘EVaR’). Thresholds are set for EaR
and EVaR as management triggers.

Periodic stress tests are conducted to quantify market risk arising from probability of abnormal market movements.

Value-at-Risk (‘VaR’)

Value-at-Risk (‘VaR’) is used to compute the maximum potential loss amount over a specified holding period of the Trading
portfolio.

It measures the risk of losses arising from potential adverse movements in profit rates and foreign exchange rates that
could affect values of financial instruments.

The Bank adopts Historical Pricing Simulation Method (‘HPS’) to compute potential loss or Value-at-Risk (‘VaR’) amount.
The HPS Method uses the relative change of historical prices to estimate future potential changes in the market value
of outstanding positions. The Bank currently adopts 250 simulated business days for its HPS VaR computation. After
applying these price changes to the outstanding portfolios, 250 simulated market values for the portfolio are generated
and the change in the day-to-day market value is taken as simulated Profit & Loss (‘P&L’) for the portfolio. As VaR
calculates the worst expected loss over a given day horizon and confidence level under normal market condition, the
250 values are sorted from the lowest to the highest simulated P&L. The VaR focuses on the tail of the distribution (i.e. the
loss figures) at the 99th percentile.

Backtesting of the VaR computation system is conducted regularly to gauge the accuracy of the risk measurement system.
 ANNUAL REPORT 2016

111

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(ii) Market risk (continued)

Other risk measures

(i) Mark-to-market valuation tracks the current market value of the outstanding financial instruments.

(ii) Stress tests are conducted to attempt to quantify market risk arising from abnormal market movements. Stress tests
measure the changes in values arising from extreme movements in profit rates and foreign exchange rates based on
past experiences and simulated stress scenarios.

Profit rate sensitivity

The table below shows the sensitivity for the financial assets and financial liabilities held as at reporting date.

Impact on profit after tax is measured using Repricing Gap Simulation methodology based on 100 basis point parallel
shifts in profit rate.

Impact on equity represents the changes in fair value of fixed income instruments held in available-for-sale portfolio arising
from the shift in the profit rate.

+100 -100
Economic Entity and The Bank basis point basis point
2016 RM million RM million

Impact on profit after tax (13.4) 13.4

Impact on equity (66.6) 71.4

+100 -100
Economic Entity and The Bank basis point basis point
2015 RM million RM million

Impact on profit after tax (13.9) 13.9

Impact on equity (45.2) 48.1
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

112

38 FINANCIAL RISK MANAGEMENT

(ii) Market risk (continued)

Foreign exchange risk sensitivity analysis

An analysis of the exposure to assess the impact of a one per cent change in exchange rate to the profit after tax are as
follows:

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

+1%
Euro 1,651 370
United States Dollar 5,527 2,034
Great Britain Pound 18 131
Australian Dollar 2 6
Japanese Yen 1 6
Others 15 1,023

7,214 3,570

-1%
Euro (1,651) (370)
United States Dollar (5,527) (2,034)
Great Britain Pound (18) (131)
Australian Dollar (2) (6)
Japanese Yen (1) (6)
Others (15) (1,023)

(7,214) (3,570)

Foreign exchange risk

The Bank is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position
and cash flows. The risk of fluctuations in foreign currency exchange rates is managed via setting of thresholds on the level
of exposure by currency and in aggregate for both overnight and intra-day positions, which are monitored daily.

The following table summarises the Bank’s exposure to foreign currency exchange rate risk at reporting date. Included in
the table are the Bank’s financial instruments at carrying amounts, categorised by currency.
Notes to the Financial Statements
for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(ii) Market risk (continued)

Foreign exchange risk

United States Great Britain Australian Japanese

Economic Entity and The Bank Euro Dollar Pound Dollar Yen Others Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Assets
Cash and short-term funds 395 2,944 398 317 165 607 4,826
Derivative financial assets 3,404 5,571 12 - - 1 8,988
Financing, advances and other financing - 65,542 - - - - 65,542

Total financial assets 3,799 74,057 410 317 165 608 79,356

Liabilities
Deposits from customers 358,458 22,552 249 19 5 - 381,283
Deposits and placements of banks and other financial institutions - 84,392 - - - - 84,392
Derivative financial liabilities - 421 - - - 9 430

Total financial liabilities 358,458 107,365 249 19 5 9 466,105

Net on-balance sheet financial position (354,659) (33,308) 161 298 160 599 (386,749)
Off balance sheet commitments 571,894 760,499 2,200 - - 1,342 1,335,935
ANNUAL REPORT 2016

113
Notes to the Financial Statements 114
for the financial year ended 31 December 2016
BERHAD (709506-V)

38 FINANCIAL RISK MANAGEMENT

AFFIN ISLAMIC BANK

(ii) Market risk (continued)

Foreign exchange risk (continued)

United States Great Britain Australian Japanese

Economic Entity and The Bank Euro Dollar Pound Dollar Yen Others Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Assets
Cash and short-term funds 1,234 2,828 1,883 261 (177) 1,472 7,501
Derivative financial assets - 120 - - - 1 121
Financing, advances and other financing - 84,444 - - - - 84,444

Total financial assets 1,234 87,392 1,883 261 (177) 1,473 92,066

Liabilities
Deposits from customers 9,359 12,784 7 4 5 2,592 24,751
Deposits and placements of banks and other financial institutions - 84,001 - - - - 84,001
Derivative financial liabilities 27 576 44 - - - 647
Total financial liabilities 9,386 97,361 51 4 5 2,592 109,399

Net on-balance sheet financial position (8,152) (9,969) 1,832 257 (182) (1,119) (17,333)
Off balance sheet commitments 57,432 281,188 15,654 596 933 137,583 493,386
Notes to the Financial Statements
for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(ii) Market risk (continued)

Profit rate risk

Profit rate risk is the risk to earnings and capital arising from exposure to adverse movements in profit rates mainly due to mismatches in timing repricing of assets and liabilities.
These mismatches are actively managed from an earnings and economic value perspective. Profit rate risk thresholds are established in line with the Group’s strategy and risk
appetite. These thresholds are reviewed regularly to ensure relevance in the context of prevailing market conditions.

Non-trading book
Up to >1-3 >3-12 >1-5 Over 5 Non-profit Trading
Economic Entity 1month months months years years sensitive book Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Assets
Cash and short-term funds 1,049,000 - - - - 8,844 - 1,057,844
Derivative financial assets - - - - - - 8,987 8,987
Financial investments available-for-sale 5,000 4,998 82,364 563,516 1,158,452 19,078 - 1,833,408
Financial investments held-to-maturity - - 72,065 - - 57 - 72,122
Financing, advances and other financing
- non-impaired 5,724,520 1,285,393 704,981 2,806,480 1,314,074 - - 11,835,448
- impaired - - - - - 79,495 # - 79,495
Others (1) - - 26,931 - - 24,602 - 51,533
Statutory deposits with Bank Negara Malaysia - - - - - 332,000 - 332,000

Total Assets 6,778,520 1,290,391 886,341 3,369,996 2,472,526 464,076 8,987 15,270,837

# Net of individual impairment allowance.

(1) Others include other assets and amount due from joint ventures.
ANNUAL REPORT 2016

115
Notes to the Financial Statements 116
for the financial year ended 31 December 2016
BERHAD (709506-V)

38 FINANCIAL RISK MANAGEMENT

AFFIN ISLAMIC BANK

(ii) Market risk (continued)

Profit rate risk (continued)

Non-trading book
Up to >1-3 >3-12 >1-5 Over 5 Non-profit Trading
Economic Entity 1month months months years years sensitive book Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Liabilities
Deposits from customers 4,478,001 1,725,983 4,047,582 187,599 - 89,533 - 10,528,698
Deposits and placements of banks and
other financial institutions 496,681 703,163 47,125 - - 2,024 - 1,248,993
Investment accounts due to designated
financial institutions - 697,210 130,000 439,946 835,023 7,870 - 2,110,049
Derivative financial liabilities - - - - - - 1,412 1,412
Amount due to holding company - - - - - 196,828 - 196,828
Other liabilities - - - - - 36,331 - 36,331

Total liabilities 4,974,682 3,126,356 4,224,707 627,545 835,023 332,586 1,412 14,122,311

Net profit sensitivity gap 1,803,838 (1,835,965) (3,338,366) 2,742,451 1,637,503

Notes to the Financial Statements
for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(ii) Market risk (continued)

Profit rate risk (continued)

Non-trading book
Up to 1 >1-3 >3-12 >1-5 Over 5 Non-profit Trading
Economic Entity month months months years years sensitive book Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Assets
Cash and short-term funds 1,910,490 - - - - 8,080 - 1,918,570
Deposits and placements with banks and
other financial institutions - 35,000 - - - 34 - 35,034
Derivative financial assets - - - - - - 132 132
Financial investments available-for-sale - 5,005 110,738 602,369 741,792 15,469 - 1,475,373
Financial investments held-to-maturity - - 76,223 - - 60 - 76,283
Financing, advances and other financing
- non-impaired 4,627,128 324,348 773,052 2,001,938 1,372,251 - - 9,098,717
- impaired - - - - - 103,192 # - 103,192
Others (1) - - 22,237 - - 20,414 - 42,651
Amount due from holding company - - - - - 367,172 - 367,172
Statutory deposits with Bank Negara Malaysia - - - - - 259,600 - 259,600

Total assets 6,537,618 364,353 982,250 2,604,307 2,114,043 774,021 132 13,376,724

# Net of individual impairment allowance.

(1) Others include other assets and amount due from joint ventures.
ANNUAL REPORT 2016

117
Notes to the Financial Statements 118
for the financial year ended 31 December 2016
BERHAD (709506-V)

38 FINANCIAL RISK MANAGEMENT

AFFIN ISLAMIC BANK

(ii) Market risk (continued)

Profit rate risk (continued)

Non-trading book
Up to 1 >1-3 >3-12 >1-5 Over 5 Non-profit Trading
Economic Entity month months months years years sensitive book Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Liabilities
Deposits from customers 5,082,450 1,758,085 2,986,641 109,941 - 64,578 - 10,001,695
Deposits and placements with banks and
other financial institutions 269,485 768,496 - - - 3,411 - 1,041,392
Investment accounts due to designated
financial institutions - - 197,210 270,321 845,628 18,519 - 1,331,318
Derivative financial liabilities - - - - - - 1,035 1,035
Other liabilities - - - - - 44,119 - 44,119

Total liabilities 5,351,935 2,526,581 3,183,851 380,262 845,628 130,267 1,035 12,419,559

Net profit sensitivity gap 1,185,683 (2,162,228) (2,201,601) 2,224,045 1,268,415

Notes to the Financial Statements
for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(ii) Market risk (continued)

Profit rate risk (continued)

Non-trading book
Up to 1 >1-3 >3-12 >1-5 Over 5 Non-profit Trading Total
The Bank month months months years years sensitive book Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Assets
Cash and short-term funds 1,049,000 - - - - 8,844 - 1,057,844
Derivative financial assets - - - - - - 8,987 8,987
Financial investments available-for-sale 5,000 4,998 82,364 563,516 1,158,452 19,078 - 1,833,408
Financial investments held-to-maturity - - 72,065 - - 57 - 72,122
Financing, advances and other financing
- non-impaired 5,724,520 1,285,393 704,981 2,806,480 1,314,074 - - 11,835,448
- impaired - - - - - 79,495 # - 79,495
Others (1) - - 26,931 - - 25,252 - 52,183
Statutory deposits with Bank Negara Malaysia - - - - - 332,000 - 332,000

Total assets 6,778,520 1,290,391 886,341 3,369,996 2,472,526 464,726 8,987 15,271,487

# Net of individual impairment allowance.

(1) Others include other assets and amount due from joint ventures.
ANNUAL REPORT 2016

119
Notes to the Financial Statements 120
for the financial year ended 31 December 2016
BERHAD (709506-V)

38 FINANCIAL RISK MANAGEMENT

AFFIN ISLAMIC BANK

(ii) Market risk (continued)

Profit rate risk (continued)

Non-trading book
Up to 1 >1-3 >3-12 >1-5 Over 5 Non-profit Trading Total
The Bank month months months years years sensitive book Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Liabilities
Deposits from customers 4,478,001 1,725,983 4,047,582 187,599 - 89,533 - 10,528,698
Deposits and placements of banks and
other financial institutions 496,681 703,163 47,125 - - 2,024 - 1,248,993
Investment accounts due to designated
financial institutions - 697,210 130,000 439,946 835,023 7,870 - 2,110,049
Derivative financial liabilities - - - - - - 1,412 1,412
Amount due to holding company - - - - - 196,828 - 196,828
Other liabilities - - - - - 36,331 - 36,331

Total liabilities 4,974,682 3,126,356 4,224,707 627,545 835,023 332,586 1,412 14,122,311

Net profit sensitivity gap 1,803,838 (1,835,965) (3,338,366) 2,742,451 1,637,503

Notes to the Financial Statements
for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(ii) Market risk (continued)

Profit rate risk (continued)

Non-trading book
Up to 1 >1-3 >3-12 >1-5 Over 5 Non-profit Trading
The Bank month months months years years sensitive book Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Assets
Cash and short-term funds 1,910,490 - - - - 8,080 - 1,918,570
Deposits and placements with banks and
other financial institutions - 35,000 - - - 34 - 35,034
Derivative financial assets - - - - - - 132 132
Financial investments available-for-sale - 5,005 110,738 602,369 741,792 15,469 - 1,475,373
Financial investments held-to-maturity - - 76,223 - - 60 - 76,283
Financing, advances and other financing
- non-impaired 4,627,128 324,348 773,052 2,001,938 1,372,251 - - 9,098,717
- impaired - - - - - 103,192 # - 103,192
Others (1) - - 22,237 - - 21,064 - 43,301
Amount due from holding company - - - - - 367,172 - 367,172
Statutory deposits with Bank Negara Malaysia - - - - - 259,600 - 259,600

Total assets 6,537,618 364,353 982,250 2,604,307 2,114,043 774,671 132 13,377,374

# Net of individual impairment allowance.

(1) Others include other assets and amount due from joint ventures.
ANNUAL REPORT 2016

121
Notes to the Financial Statements 122
for the financial year ended 31 December 2016
BERHAD (709506-V)

38 FINANCIAL RISK MANAGEMENT

AFFIN ISLAMIC BANK

(ii) Market risk (continued)

Profit rate risk (continued)

Non-trading book
Up to 1 >1-3 >3-12 >1-5 Over 5 Non-profit Trading
The Bank month months months years years sensitive book Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Liabilities
Deposits from customers 5,082,450 1,758,085 2,986,641 109,941 - 64,578 - 10,001,695
Deposits and placements of banks and
other financial institutions 269,485 768,496 - - - 3,411 - 1,041,392
Investment accounts due to designated
financial institutions - - 197,210 270,321 845,628 18,159 - 1,331,318
Derivative financial liabilities - - - - - - 1,035 1,035
Other liabilities - - - - - 44,119 - 44,119

Total liabilities 5,351,935 2,526,581 3,183,851 380,262 845,628 130,267 1,035 12,419,559

Net profit sensitivity gap 1,185,683 (2,162,228) (2,201,601) 2,224,045 1,268,415

 ANNUAL REPORT 2016

123

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(iii) Liquidity risk

Liquidity risk is the risk of inability of a bank to fund increases in assets and meet obligations as they come due, without
incurring unacceptable losses. Liquidity risk includes the inability to manage sudden decreases or changes in funding
sources. Liquidity risk also arises from the failure to recognise changes in market conditions that affect the ability to
liquidate assets quickly and with minimal loss in value.

The Liquidity Risk Management Framework governs the liquidity risk management activities of the Bank. The objective
of liquidity risk management is to ensure that there are sufficient funds to meet contractual and regulatory obligations
without incurring unacceptable losses as well as to undertake new transactions. The Bank’s liquidity management process
involves establishing liquidity risk management policies and prudential thresholds, liquidity risk threshold monitoring, stress
testing and establishing contingency funding plans. These building blocks of liquidity risk management are subject to
regular reviews to ensure relevance in the context of prevailing market conditions.

The Bank’s short term liquidity risk management is premised on BNM’s Liquidity Coverage Ratio (‘LCR’) final standards.
The LCR is a quantitative requirement which seeks to ensure that the Bank holds sufficient high-quality liquid assets
(‘HQLA’) to withstand a significant liquidity stress scenario over a 30-day horizon.

Long term liquidity risk profile is assessed via the Net Stable Funding Ratio (‘NSFR’) which promotes resilience over
a longer time horizon for the Bank to fund its activities with more stable sources of funding on an ongoing basis.

The LCR and NSFR are tracked to assess the short term and long term liquidity risk profile of the Bank, in line with
BNM’s Liquidity Coverage Ratio (‘LCR’) final standards re-issued on 25th August 2016 as well as BNM’s revised
Basel III Observation Period reporting for Net Stable Funding Ratio (‘NSFR’) and Leverage Ratio (‘LR’) issued on
7th August 2015.

The Bank also employs a set of liquidity risk indicators as an early alert of any structural change for liquidity risk management.
The liquidity risk indicators include internal and external qualitative as well as quantitative indicators.

Liquidity stress tests are conducted periodically and on ad-hoc basis to gauge the Group’s resilience in the event of
a liquidity disruption.

The Contingency Funding Plan provides a systematic approach in handling liquidity disruption. The document encompasses
strategies, decision-making authorities, and courses of action to be taken in the event of liquidity crisis and emergencies,
enabling the Group to respond to an unexpected liquidity disruption in an effective and efficient manner.

The Board Risk Management Committee (‘BRMC’) is responsible for the Bank’s liquidity policy and the strategic
management of liquidity has been delegated to the Group Asset Liability Management Committee (‘GALCO’). The Liquidity
Management Committee (‘LMC’), which is a sub-committee of GALCO, augments the functions of GALCO by directing its
focus specifically to liquidity issues. The BRMC is informed regularly on the liquidity position of the Bank.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

124

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(iii) Liquidity risk (continued)

Liquidity risk disclosure table which is based on contractual undiscounted cash flow

The table below provides analysis of cash flow payables for financial liabilities based on remaining contractual maturities
on undiscounted basis. The balances in the table below do not agree directly to the balances reported in the statement of
financial position as the table incorporates all contractual cash flows, on an undiscounted basis, relating to both principal
and profit payments.

Economic Entity Up to 1 >1-3 >3-12 >1-5 Over 5

and The Bank month months months years years Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Deposits from customers 4,485,343 1,764,270 4,187,650 224,538 - 10,661,801

Deposits and placements of
banks and other financial
institutions 497,814 707,761 48,822 - - 1,254,397
Investment accounts due to
designated financial
institutions 7,894 710,596 177,741 620,081 933,805 2,450,117
Other liabilities 36,331 - - - - 36,331

5,027,382 3,182,627 4,414,213 844,619 933,805 14,402,646

Economic Entity Up to 1 >1-3 >3-12 >1-5 Over 5

and The Bank month months months years years Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Deposits from customers 5,097,116 1,794,130 3,092,531 117,444 - 10,101,221

Deposits and placements of
banks and other financial
institutions 272,394 775,954 11,283 - 213,148 1,272,779
Investment accounts due to
designated financial
institutions 5,352 10,356 245,945 452,664 999,900 1,714,217
Other liabilities 44,119 - - - - 44,119

5,418,981 2,580,440 3,349,759 570,108 1,213,048 13,132,336

# Net of individual impairment allowance.

(1) Others include other assets and amount due from joint ventures.
 ANNUAL REPORT 2016

125

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(iii) Liquidity risk (continued)

Derivative financial liabilities

Derivative financial liabilities based on contractual undiscounted cash flow:

Economic Entity Up to 1 >1-3 >3-12 >1-5 Over 5

and The Bank month months months years years Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Derivatives settled on
gross basis
Foreign exchange derivatives:
Outflow (110,626) - - - - (110,626)
Inflow 110,639 - - - - 110,639

13 - - - - 13

Economic Entity Up to 1 >1-3 >3-12 >1-5 Over 5

and The Bank month months months years years Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Derivatives settled on
gross basis
Foreign exchange derivatives:
Outflow (137,476) (1,067) (22,327) - - (160,870)
Inflow 137,416 1,067 22,327 - - 160,810

(60) - - - - (60)
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

126

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(iii) Liquidity risk (continued)

Liquidity risk for assets and liabilities based on remaining contractual maturities

The maturities of on-balance sheet assets and liabilities as well as other off-balance sheet assets and liabilities, commitments
and counter-guarantees are important factors in assessing the liquidity of the Bank. The table below provides analysis of
assets and liabilities into relevant maturity tenures based on remaining contractual maturities.

No
Up to 1 >1-3 >3-12 >1-5 Over 5 specific
Economic Entity month months months years years maturity Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Assets
Cash and short-term funds 1,057,844 - - - - - 1,057,844
Derivative financial assets 8,987 - - - - - 8,987
Financial investments
available-for-sale 13,559 11,790 86,091 563,516 1,158,452 - 1,833,408
Financial investments
held-to-maturity - - 6,062 40,190 25,870 - 72,122
Financing, advances and
other financing 623,096 1,003,458 127,584 2,321,247 7,839,558 - 11,914,943
Other assets 4,390 596 150 278 42 2,445 7,901
Amount due from joint ventures 46,725 - - - - - 46,725
Amount due from associate 500 - - - - - 500
Statutory deposits with
Bank Negara Malaysia 332,000 - - - - - 332,000
Other non-financial assets (1) - - - - - 11,153 11,153

2,087,101 1,015,844 219,887 2,925,231 9,023,922 13,598 15,285,583

Liabilities
Deposits from customers 4,483,987 1,752,202 4,104,454 188,055 - - 10,528,698
Deposits and placements of
banks and other financial
institutions 497,258 704,196 47,539 - - - 1,248,993
Investment accounts due to
designated financial institutions 7,870 697,210 130,000 439,946 835,023 - 2,110,049
Derivative financial liabilities 1,412 - - - - - 1,412
Other liabilities 36,331 - - - - - 36,331
Amount due to holding company 196,828 - - - - - 196,828
Provision for taxation - - - - - 6,015 6,015

5,223,686 3,153,608 4,281,993 628,001 835,023 6,015 14,128,326

Net liquidity gap (3,136,585) (2,137,764) (4,062,106) 2,297,230 8,188,899 7,583

(1) Other non-financial assets include deferred tax assets, property and equipment and intangible assets.
 ANNUAL REPORT 2016

127

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(iii) Liquidity risk (continued)

Liquidity risk for assets and liabilities based on remaining contractual maturities (continued)

No
Up to 1 >1-3 >3-12 >1-5 Over 5 specific
Economic Entity month months months years years maturity Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Assets
Cash and short-term funds 1,918,570 - - - - - 1,918,570
Deposits and placements
with banks and other financial
institutions - 35,034 - - - - 35,034
Derivative financial assets 21 - 111 - - - 132
Financial investments
available-for-sale 7,470 9,737 113,479 602,369 741,792 526 1,475,373
Financial investments
held-to-maturity - - 4,218 32,336 39,729 - 76,283
Financing, advances and
other financing 457,867 199,371 360,801 1,449,970 6,733,900 - 9,201,909
Other assets 2,244 499 315 278 28 395 3,759
Amount due from
holding company 367,172 - - - - - 367,172
Amount due from joint ventures 39,936 - - - - - 39,936
Statutory deposits with
Bank Negara Malaysia 259,600 - - - - - 259,600
Other non-financial assets (1) - - - - - 6,637 6,637

3,052,880 244,641 478,924 2,084,953 7,515,449 7,558 13,384,405

Liabilities
Deposits from customers 5,094,545 1,772,560 3,023,229 111,361 - - 10,001,695
Deposits and placements of
banks and other financial
institutions 270,503 770,889 - - - - 1,041,392
Investment accounts due to
designated financial institutions 1,130 722 202,665 269,947 856,854 - 1,331,318
Derivative financial liabilities 726 9 300 - - - 1,035
Other liabilities 44,119 - - - - - 44,119
Provision for taxation - - - - - 10,031 10,031

5,411,023 2,544,180 3,226,194 381,308 856,854 10,031 12,429,590

Net liquidity gap (2,358,143) (2,299,539) (2,747,270) 1,703,645 6,658,595 (2,473)

(1) Other non-financial assets include deferred tax assets, property and equipment and intangible assets.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

128

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(iii) Liquidity risk (continued)

Liquidity risk for assets and liabilities based on remaining contractual maturities (continued)

No
Up to 1 >1-3 >3-12 >1-5 Over 5 specific
The Bank month months months years years maturity Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Assets
Cash and short-term funds 1,057,844 - - - - - 1,057,844
Derivative financial assets 8,987 - - - - - 8,987
Financial investments
available-for-sale 13,559 11,790 86,091 563,516 1,158,452 - 1,833,408
Financial investments
held-to-maturity - - 6,062 40,190 25,870 - 72,122
Financing, advances and
other financing 623,096 1,003,458 127,584 2,321,247 7,839,558 - 11,914,943
Other assets 4,390 596 150 278 42 2,445 7,901
Amount due from joint ventures 46,725 - - - - - 46,725
Amount due from associate 500 - - - - - 500
Statutory deposits with
Bank Negara Malaysia 332,000 - - - - - 332,000
Other non-financial assets (1) - - - - - 11,803 11,803

2,087,101 1,015,844 219,887 2,925,231 9,023,922 14,248 15,286,233

Liabilities
Deposits from customers 4,483,987 1,752,202 4,104,454 188,055 - - 10,528,698
Deposits and placements of
banks and other financial
institutions 497,258 704,196 47,539 - - - 1,248,993
Investment accounts due to
designated financial institutions 7,870 697,210 130,000 439,946 835,023 - 2,110,049
Derivative financial liabilities 1,412 - - - - - 1,412
Other liabilities 36,331 - - - - - 36,331
Amount due to holding company 196,828 - - - - - 196,828
Provision for taxation - - - - - 6,015 6,015

5,223,686 3,153,608 4,281,993 628,001 835,023 6,015 14,128,326

Net liquidity gap (3,136,585) (2,137,764) (4,062,106) 2,297,230 8,188,899 8,233

(1) Other non-financial assets include deferred tax assets, investment in joint ventures, property and equipment and
intangible assets.
 ANNUAL REPORT 2016

129

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(iii) Liquidity risk (continued)

Liquidity risk for assets and liabilities based on remaining contractual maturities (continued)

No
Up to 1 >1-3 >3-12 >1-5 Over 5 specific
The Bank month months months years years maturity Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Assets
Cash and short-term funds 1,918,570 - - - - - 1,918,570
Deposits and placements
with banks and other financial
institutions - 35,034 - - - - 35,034
Derivative financial assets 21 - 111 - - - 132
Financial investments
available-for-sale 7,470 9,737 114,005 602,369 741,792 - 1,475,373
Financial investments
held-to-maturity - - 4,218 32,336 39,729 - 76,283
Financing, advances and
other financing 457,867 199,371 360,801 1,449,970 6,733,900 - 9,201,909
Other assets 2,244 499 315 278 28 395 3,759
Amount due from
holding company 367,172 - - - - - 367,172
Amount due from joint ventures 39,936 - - - - - 39,936
Statutory deposits with
Bank Negara Malaysia 259,600 - - - - - 259,600
Other non-financial assets (1) - - - - - 7,287 7,287

3,052,880 244,641 479,450 2,084,953 7,515,449 7,682 13,385,055

Liabilities
Deposits from customers 5,094,545 1,772,560 3,023,229 111,361 - - 10,001,695
Deposits and placements of
banks and other financial
institutions 640,829 877,670 242,611 111,600 500,000 - 2,372,710
Investment accounts due to
designated financial institutions 1,130 722 202,665 269,947 856,854 - 1,331,318
Derivative financial liabilities 726 9 300 - - - 1,035
Other liabilities 44,119 - - - - - 44,119
Provision for taxation - - - - - 10,031 10,031

5,781,349 2,650,961 3,468,805 492,908 1,356,854 10,031 13,760,908

Net liquidity gap (2,728,469) (2,406,320) (2,989,355) 1,592,045 6,158,595 (2,349)

(1) Other non-financial assets include deferred tax assets, investment in joint ventures, property and equipment and
intangible assets.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

130

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(iv) Operational risk management

Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people
and systems or external events. The definition includes legal risk, and exposure to litigation from all aspects of the Bank’s
activities, but excludes strategic business, reputational and systemic risks.

The Group Operational Risk Management Framework governs the management of operational risk across the Group.

BRMC approves all policies/policy changes relating to operational risk. Group Operational Risk Management Committee
(‘GORMC’) supports BRMC in the review and monitoring of operational risk and provides the forum to discuss and
manage all aspects of operational risk including control lapses.

The operational risk management (‘ORM’) function within GRM operates in independent capacity to manage the risks in
activities associated with the operational function of the Bank.

The Bank adopts the Basic Indicator Approach for the purpose of calculating the capital requirement for operational risk.
The capital requirement is calculated by taking 15% of the Bank’s average annual gross income over the previous three
years.

Operational risks are managed daily through established systems and processes to ensure compliance with policies,
guidelines and control procedures.

To identify and assess operational risk issues and exposure, the following tools are employed:

s 2ISK#ONTROL3ELF!SSESSMENT@2#3!
s +EY#ONTROL3TANDARDS@+#3
s +EY2ISK)NDICATOR@+2)
s ,OSS%VENT$ATABASE@,%$

Information Technology (‘IT’) and cyber risks are managed as part of the operational risk activities. The IT systems and
processes are assessed and tested regularly for resilience and continuity, and that they are secure from internal and
external threats.

Introduction of new products or services are evaluated to assess suitability, potential risks and operational readiness.

Operational Risk Coordinators (ORC) are appointed at business and support units as champions of ORM activities within
respective units. The ORC is responsible for the reporting of ORM activities and to liaise with Group Operational Risk
Management on all operational defects and results. As an internal requirement, all Operational Risk Coordinators must
satisfy an Internal Operational Risk (including business continuity management) Certification Program. These coordinators
will first go through an on-line self learning exercise before attempting on-line assessments to measure their skills and
knowledge level. This will enable Group Risk Management to prescribe appropriate training and development activities
for the coordinators.
 ANNUAL REPORT 2016

131

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(v) Shariah Non-Compliance Risk

Shariah non-compliance is the risk of failure to comply with the Shariah rules and principles as determined by Shariah
Committee (‘SC’) and/or any other relevant bodies, such as BNM Shariah Advisory Council.

The Shariah Governance Framework for Islamic Financial Institutions issued by BNM is the main reference for the Shariah
governance process and oversight within AiBB.

Shariah Committee (‘SC’) is established to deliberate on Shariah issues and provide resolution as well as guidance.
GORMC together with BRMC and GBRMC assist in the overall oversight of Shariah risk management of the Group.

Shariah Risk Management is part of an integrated risk management control function to identify all possible risks of Shariah
non-compliance and where appropriate, to provide mitigating measures that need to be taken to reduce the risk. The
scope covers overall business activities and operations, commencing from Islamic product origination until maturity.

Each business and support unit is responsible to identify and assess potential Shariah Non-Compliance Risk using the
RCSA process. Half yearly RCSA checklist is performed to gauge the level of Shariah compliance.

All Islamic products, services and strategies related matters must be approved by the SC.

Shariah Resolutions/Circulars are issued and training on Shariah Compliance is conducted on a regular basis.

Shariah non-compliance reports are regularly submitted for further deliberation, decision and remedial action.

(vi) Business Continuity Risk

Business continuity risk is the risk of losses in assets, revenue, reputation and stakeholder/customer confidence due to
the discontinuation of services in both business and technology operations.

The Business Continuity Management Framework governs the management of business continuity issues, in line with
BNM Guidelines on Business Continuity Management (‘BCM’).

BRMC approves all policies and its changes relating to business continuity management. It also reviews, monitors and
discusses business continuity management reports tabled at its meetings. GORMC supports BRMC in the review and
monitoring of Business Continuity Risk and provides the forum to discuss and manage all aspects of operational risk
including control lapses.

The BCM function is an independent body overseeing the management of the overall business continuity risk.

Annual Risk Assessment and Business Impact Analysis are made compulsory for each business and support unit in the
Bank to undertake. The outcome of this assessment will translate into a risks listing that require business and support units
to derive action plans to address the risks.

Risk control is established through adherence with established BCM guidelines and standards throughout the implementation
of BCM programs. Rigorous testing on business continuity and disaster recovery plans are diligently performed to ensure
effective and smooth execution of the plan for resumption and recovery of disrupted business.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

132

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(vii) Fair value financial assets and liabilities

Fair value is defined as the price that would be received to sell as an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.

The Bank measure fair values using the following fair value hierarchy that reflects the significance of the inputs used in
making the measurements:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in
which inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly.

Level 3: Valuations derived from valuation techniques in which one or more significant inputs are not based on observable
market data.

Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are valued
by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted prices is
readily available, and the price represents actual and regularly occurring market transactions. An active market is one in
which transactions occur with sufficient volume and frequency to provide pricing information on an on-going basis. These
would include actively traded listed equities and actively exchange-traded derivatives.

Where fair value is determined using unquoted market prices in less active markets or quoted prices for similar assets and
liabilities, such instruments are generally classified as Level 2. In cases where quoted prices are generally not available, the
Bank then determines fair value based upon valuation techniques that use as inputs, market parameters including but not
limited to yield curves, volatilities and foreign exchange rates. The majority of valuation techniques employ only observable
market data and so reliability of the fair value measurement is high.

Financial instruments are classified as Level 3 if their valuation incorporates significant inputs that are not based on
observable market data (unobservable inputs). Such inputs are generally determined based on observable inputs of
a similar nature, historical observations on the level of the input or other analytical techniques.

This category includes unquoted shares held for socio economic reasons. Fair values for shares held for socio economic
reasons are based on the net tangible assets of the affected companies. The Bank’s exposures to financial instruments
classified as Level 3 comprised a small number of financial instruments which constitute an insignificant component of the
Bank’s portfolio of financial instruments. Hence, changing one or more of the inputs to reasonable alternative assumptions
would not change the value significantly for the financial assets in Level 3 of the fair value hierarchy.

The Bank recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which
the transfer has occurred. Transfers between fair value hierarchy primarily due to change in the level of trading activity,
change in observable market activity related to an input, reassessment of available pricing information and change in the
significance of the unobservable input. There were no transfers between Level 1, 2 and 3 of the fair value hierarchy during
the financial year (2015: Nil).
 ANNUAL REPORT 2016

133

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(vii) Fair value financial assets and liabilities (continued)

The following table presents assets and liabilities measured at fair value and classified by level of the following fair value
measurement hierarchy:

Economic Entity and The Bank Level 1 Level 2 Level 3 Total

2016 RM’000 RM’000 RM’000 RM’000

Assets
Derivative financial assets - 8,987 - 8,987
Financial investments available for sale *
- Money market instruments - 931,503 - 931,503
- Corporate bonds/sukuk - 901,905 - 901,905

- 1,842,395 - 1,842,395

Liabilities
Derivative financial liabilities - 1,412 - 1,412

- 1,412 - 1,412

Economic Entity and The Bank Level 1 Level 2 Level 3 Total

2015 RM’000 RM’000 RM’000 RM’000

Assets
Derivative financial assets - 132 - 132
Financial investments available for sale *
- Money market instruments - 966,356 - 966,356
- Equity securities - - 525 525
- Corporate bonds/sukuk - 508,492 - 508,492

- 1,474,980 525 1,475,505

Liabilities
Derivative financial liabilities - 1,035 - 1,035

- 1,035 - 1,035

* Net of allowance for impairment.

The following table present the changes in Level 3 instruments for the financial year ended:

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

At beginning of the financial year 525 25

Purchases - 500
Sales (25) -
Reclassify to investment in associate (500) -
At end of the financial year - 525
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

134

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(vii) Fair value financial assets and liabilities (continued)

Effect of changes in significant unobservable assumptions to reasonably possible alternatives

As at reporting date, financial instruments measured with valuation techniques using significant unobservable inputs
(Level 3) mainly include unquoted shares held for socio economic purposes.

Qualitative information about the fair value measurements using significant unobservable inputs (Level 3):

Inter-relationship between
Economic Entity Fair value assets significant unobservable
and The Bank 2016 2015 Valuation Unobservable inputs and fair value
Description RM’000 RM’000 techniques inputs measurement

Financial
investments
available-for-sale Net tangible Net tangible Higher net tangible assets
Unquoted shares - 525 assets assets results in higher fair value

In estimating its significance, the Bank used an approach that is currently based on methodologies used for fair value
adjustments. These adjustments reflects the values that the Bank estimate is appropriate to adjust from the valuations
produced to reflect for uncertainties in the inputs used. The methodologies used can be a statistical or other relevant
approved techniques.

Carrying Fair value

Economic Entity and The Bank value Level 1 Level 2 Level 3 Total
2016 RM’000 RM’000 RM’000 RM’000 RM’000

Financial assets
Financial investments held-to-maturity 72,122 - 72,122 - 72,122
Financing, advances and other
financing 11,914,943 - 11,612,207 - 11,612,207

11,987,065 - 11,684,329 - 11,684,329

Financial liabilities
Deposits from customers 10,528,698 - 10,535,227 - 10,535,227
Deposits and placements of banks
and other financial institutions 1,248,993 - 1,248,993 - 1,248,993
Investment accounts due to
designated financial institutions 2,110,049 - 2,110,049 - 2,110,049

13,887,740 - 13,894,269 - 13,894,269

 ANNUAL REPORT 2016

135

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(vii) Fair value financial assets and liabilities (continued)

Effect of changes in significant unobservable assumptions to reasonably possible alternatives (continued)

Carrying Fair value

Economic Entity and The Bank value Level 1 Level 2 Level 3 Total
2015 RM’000 RM’000 RM’000 RM’000 RM’000

Financial assets
Financial investments held-to-maturity 76,283 - 76,283 - 76,283
Financing, advances and
other financing 9,201,909 - 9,162,987 - 9,162,987

9,278,192 - 9,239,270 - 9,239,270

Financial liabilities
Deposits from customers 10,001,695 - 10,006,995 - 10,006,995
Deposits and placements of banks
and other financial institutions 1,041,392 - 1,066,674 - 1,066,674
Investment accounts due to
designated financial institutions 1,331,318 - 1,331,318 - 1,331,318

12,374,405 - 12,404,987 - 12,404,987

Other than as disclosed above, the total fair value of each financial assets and liabilities presented on the statements
of financial position as at reporting date of the Bank approximates the total carrying amount.

The fair value estimates were determined by application of the methodologies and assumptions described below.

Short-term funds and placements with banks and other financial institutions

For short-term funds and placements with banks and other financial institutions with maturity of less than six months,
the carrying amount is a reasonable estimate of fair value.

For amounts with maturities of six months or more, fair values have been estimated by reference to current rates at which
similar deposits and placements would be made with similar credit ratings and maturities.

Financial investments held-to-maturity

The fair values of financial investments held-to-maturity are reasonable estimates based on quoted market prices. In the
absence of such quoted prices, the fair values are based on the expected cash flows of the instruments discounted by
indicative market yields for the similar instruments as at reporting date or the audited net tangible asset of the invested
company.

Financing, advances and other financing

Financing, advances and other financing of the Bank comprise of floating rate financing and fixed rate financing.
For performing floating rate financing, the carrying amount is a reasonable estimate of their fair values.

The fair values of performing fixed rate financing are arrived at using the discounted cash flows based on the prevailing
market rates of financing, advances and other financing with similar credit ratings and maturities.

The fair values of impaired financing, advances and other financing whether fixed or floating are represented by their
carrying values, net of individual and collective allowances, being the reasonable estimate of recoverable amount.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

136

Notes to the Financial Statements

for the financial year ended 31 December 2016

38 FINANCIAL RISK MANAGEMENT

(vii) Fair value financial assets and liabilities (continued)

Other assets and liabilities

The carrying value less any estimated allowance for financial assets and liabilities included in other assets and other liabilities
are assumed to approximate their fair values as these items are not materially sensitive to the shift in market profit rates.

Deposits from customers, banks and other financial institutions and bills and acceptances payable

The carrying values of deposits and liabilities with maturities of six months or less are assumed to be reasonable estimates
of their fair values. Where the remaining maturities of deposits and liabilities are above six months, their estimated fair values
are arrived at using the discounted cash flows based on prevailing market rates currently offered for similar remaining
maturities.

The estimated fair value of deposits with no stated maturity, which include non-profit bearing deposits, approximates
carrying amount which represents the amount payable on demand.

39 OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES

In accordance with MFRS 132 ‘Financial Instruments: Presentation’, the Bank reports financial assets and financial liabilities on
a net basis on the statements of financial position only if there is a legally enforceable right to set off the recognised amounts
and there is intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. The following table
shows the impact of netting arrangement on:

s !LLlNANCIALASSETSANDLIABILITIESTHATAREREPORTEDNETONSTATEMENTSOFlNANCIALPOSITIONAND

s !LL DERIVATIVE lNANCIAL INSTRUMENTS AND OTHER SIMILAR SECURED lNANCING AND FUNDING AGREEMENTS THAT ARE SUBJECT TO
enforceable master netting arrangements or similar agreements, but do not qualify for statements of financial position
netting.

The table identifies the amounts that have been offset in the statements of financial position and also those amounts that are
covered by enforeable netting arrangements (offsetting arrangements and financial collateral) but do not qualify for netting under
the requirements of MFRS 132 described above.

4HEh.ETAMOUNTSvPRESENTEDBELOWARENOTINTENDEDTOREPRESENTTHE"ANKSACTUALEXPOSURETOCREDITRISKASAVARIETYOFCREDIT
mitigation strategies are employed in addition to netting and collateral arrangements.

Related amount not offset

Derivative financial assets and liabilities

The ‘Financial instruments’ column identifies financial assets and liabilities that are subject to set off under netting agreements,
such as the ISDA Master Agreement or derivative exchange or clearing counterparty agreements, whereby all outstanding
transactions with the same counterparty can be offset and close-out netting applied across all outstanding transaction covered
by the agreements if an event of default or other predetermined events occur.

Financial collateral refers to cash and non-cash collateral obtained, typically daily or weekly, to cover the net exposure between
counterparties by enabling the collateral to be realised in an event of default or if other predetermined events occur.
 ANNUAL REPORT 2016

137

Notes to the Financial Statements

for the financial year ended 31 December 2016

39 OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES

Effects of offsetting on the statements

of financial position Related amounts not offset
Net amount
reported on
statement
Economic Entity Gross Amount of financial Financial Financial Net
and The Bank amount offset position instruments collateral amount
2016 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Financial assets
Derivative financial assets 8,987 - 8,987 (687) - 8,300

Total assets 8,987 - 8,987 (687) - 8,300

Financial liabilities
Derivative financial
liabilities 1,412 - 1,412 (687) - 725

Total liabilities 1,412 - 1,412 (687) - 725

Economic Entity
and The Bank
2015

Financial assets
Derivative financial assets 132 - 132 (126) - 6
Total assets 132 - 132 (126) - 6

Financial liabilities
Derivative financial
liabilities 1,035 - 1,035 (126) - 909

Total liabilities 1,035 - 1,035 (126) - 909

40 LEASE COMMITMENTS

The Bank has lease commitments in respect of rented premises and hired equipment, all of which are classified as operating
leases. A summary of the future minimum lease payments under non-cancelable operating leases commitments are as
follows:

Economic Entity
and The Bank
2016 2015
RM’000 RM’000

Within one year 691 689

One year to five year 682 249
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

138

Notes to the Financial Statements

for the financial year ended 31 December 2016

41 CAPITAL MANAGEMENT

With effect from 1 January 2013, the total capital and capital adequacy ratios of the Bank are computed in accordance with
Bank Negara Malaysia’s Capital Adequacy Framework for Islamic Banks (Capital Components) dated 28 November 2012.

The Bank is currently adopting Standardised Approach for Credit Risk and Market Risk, the Basic Indicator Approach for
Operational Risk. In line with the transitional arrangements under the Bank Negara Malaysia’s Capital Adequacy Framework
for Islamic Banks (Capital Components), the minimum capital adequacy requirement for Common Equity Tier 1 Capital Ratio
(‘CET 1’) and Tier 1 Capital Ratio are 5.125% (2015: 4.5%) and 6.625% (2015:6.0%) respectively for year 2016. The minimum
regulatory capital adequacy requirement has increased to 8.625% (2015 : 8.0%) for total capital ratio.

The Bank has adopted and to comply with the Guidelines and are subject to the transition arrangements as set out by BNM.

The Bank’s objectives when managing capital are:

s 4OCOMPLYWITHTHECAPITALREQUIREMENTSSETBYTHEREGULATORSOFTHEBANKINGMARKETSWHERETHEENTITIESWITHINTHE"ANK
operates;
s 4OSAFEGUARDTHE"ANKSABILITYTOCONTINUEASAGOINGCONCERNSOTHATITCANCONTINUETOPROVIDERETURNSFORSHAREHOLDERS
and benefits for other stakeholders; and
s 4OMAINTAINASTRONGCAPITALBASETOSUPPORTTHEDEVELOPMENTOFITSBUSINESS

The Bank maintains a ratio of total regulatory capital to its risk-weighted assets above a minimum level agreed with the
management which takes into account the risk profile of the Bank.

The table in Note 42 below summarises the composition of regulatory capital and the ratios of the Bank for the financial year
ended 31 December 2016.
 ANNUAL REPORT 2016

139

Notes to the Financial Statements

for the financial year ended 31 December 2016

42 CAPITAL ADEQUACY

The capital adequacy ratios are as follows:

Economic Entity The Bank

2016 2015 2016 2015
RM’000 RM’000 RM’000 RM’000

Paid-up share capital 560,000 460,000 560,000 460,000

Statutory reserves 305,016 248,717 305,016 248,717
Retained profits 237,127 195,606 237,777 196,256
Unrealised gains and losses on AFS (23,768) (10,405) (23,768) (10,405)
1,078,375 893,918 1,079,025 894,568
Less:
Goodwill and other intangibles - (426) - (426)
Deferred tax assets (8,056) (3,598) (8,056) (3,598)
Investment in associate/joint ventures (450) - (840) (260)

CET1 capital 1,069,869 889,894 1,070,129 890,284

Tier I capital 1,069,869 889,894 1,070,129 890,284

Collective impairment @ 28,541 23,750 28,541 23,750

Regulatory adjustments 73,178 58,400 73,178 58,400
Less:
Investment in associate/joint ventures (300) - (560) (390)

Tier II capital 101,419 82,150 101,159 81,760

Total capital 1,171,288 972,044 1,171,288 972,044

CET1 capital ratio 12.421% 13.197% 12.424% 13.203%

Tier 1 capital ratio 12.421% 13.197% 12.424% 13.203%
Total capital ratio 13.598% 14.415% 13.598% 14.415%

CET1 capital ratio (net of proposed dividends) 12.421% 13.197% 12.424% 13.203%
Tier 1 capital ratio (net of proposed dividends) 12.421% 13.197% 12.424% 13.203%
Total capital ratio (net of proposed dividends) 13.598% 14.415% 13.598% 14.415%

Risk-weighted assets for:

Credit risk 8,124,441 6,336,026 8,124,441 6,336,026
Market risk 37,254 3,650 37,254 3,650
Operational risk 451,894 403,377 451,894 403,377

Total risk-weighted assets 8,613,589 6,743,053 8,613,589 6,743,053

@ Qualifying collective impairment is restricted to allowances on unimpaired portion of the financing, advances and other
financing.
In accordance with BNM’s Guidelines on Investment Account, the credit and market risk weighted on the assets funded
by the RIA are excluded from calculation of capital adequacy. As at 31 December 2016, RIA assets excluded from Total
Capital Ratio calculation amounted to RM2,112,242,742 (2015: RM1,316,026,354).
 AFFIN ISLAMIC BANK
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140

Notes to the Financial Statements

for the financial year ended 31 December 2016

43 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The Bank makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom
equal the related actual results. To enhance the information content of the estimates, certain variables that are anticipated
to have material impact to the Bank’s results and financial position are tested for sensitivity to changes in the underlying
parameters. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount
of assets and liabilities within the next financial year are discussed below.

Allowance for impairment losses on financing, advances and other financing

The accounting estimates and judgments related to the impairment of financing and provision for off-balance sheet positions
is a critical accounting estimate because the underlying assumptions used for both the individually and collectively assessed
impairment can change from period to period and may significantly affect the Bank’s results of operations.

In assessing assets for impairment, management judgment is required. The determination of the impairment allowance required
for financing which are deemed to be individually significant often requires the use of considerable management judgment
concerning such matters as local economic conditions, the financial performance of the counterparty and the value of any
collateral held, for which there may not be a readily accessible market. The actual amount of the future cash flows and their
timing may differ from the estimates used by management and consequently may cause actual losses to differ from the
reported allowances.

The impairment allowance for portfolios of smaller balance homogenous financing, such as those to individuals and small
business customers of the private and retail business, and for those financing which are individually significant but for which no
objective evidence of impairment exists, is determined on a collective basis. The collective impairment allowance is calculated
on a portfolio basis using statistical models which incorporate numerous estimates and judgments, and therefore is subject
to estimation uncertainty. The Bank performs a regular review of the models and underlying data and assumptions as far as
possible to reflect the current economic circumstances. The probability of default, loss given defaults, and loss identification
period, amongst other things, are all taken into account during this review.

44 CREDIT EXPOSURES ARISING FROM TRANSACTIONS WITH CONNECTED PARTIES

The following credit exposures are based on Bank Negara Malaysia’s revised Guidelines on Credit Transaction and Exposures
with Connected Parties, which are effective 1 January 2008.

The Bank
2016 2015

(i) The aggregate value of outstanding credit exposures with connected parties
(RM’000) 777,489 415,939
(ii) The percentage of outstanding credit exposures to connected parties as a proportion
of total credit exposures 4% 3%
(iii) The percentage of outstanding credit exposures with connected parties which is
impaired or in default Nil Nil

45 APPROVAL OF FINANCIAL STATEMENTS

The financial statements have been approved for issue in accordance with resolution of the Board of Directors 21 March 2017.
 ANNUAL REPORT 2016

141

Statement by Directors
Pursuant to Section 169 (15) of the Companies Act, 1965

We, MOHD SUFFIAN BIN HAJI HARON and TAN SRI DATO’ SRI ABDUL AZIZ BIN ABDUL RAHMAN, two of the Directors of
AFFIN ISLAMIC BANK BERHAD, state that, in the opinion of the Directors, the accompanying financial statements set out on
pages 43 to 140 are drawn up so as to give a true and fair view of the state of affairs of the Economic Entity and the Bank as at
31 December 2016 and of the results and cash flows of the Economic Entity and the Bank for the financial year ended on the date
in accordance with Malaysian Financial Reporting Standards, International Financial Reporting Standards and the requirements of
the Companies Act 1965, in Malaysia.

Signed on behalf of the Board of Directors in accordance with their resolution dated 21 March 2017.

MOHD SUFFIAN BIN HAJI HARON

Director

TAN SRI DATO’ SRI ABDUL AZIZ BIN ABDUL RAHMAN

Director

Statutory Declaration
Pursuant to Section 169 (16) of the Companies Act, 1965

I, RAMANATHAN RAJOO, the officer of AFFIN ISLAMIC BANK BERHAD primarily responsible for the financial management of the
Economic Entity and the Bank, do solemnly and sincerely declare that in my opinion, the accompanying financial statements set out
on pages 43 to 140 are correct and I make this solemn declaration conscientiously believing the same to be true and by virtue of the
provisions of the Statutory Declarations Act, 1960.

RAMANATHAN RAJOO

Subscribed and solemnly declared by the abovenamed RAMANATHAN RAJOO at Kuala Lumpur in Malaysia on 21 March 2017,
before me.

Commissioner for Oaths

 AFFIN ISLAMIC BANK
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142

Shariah Committee’s Report

In the name of Allah, the Most Beneficent, the Most Merciful

Praise be to Allah, the Lord of the Worlds, and peace and blessings upon our Prophet Muhammad and on his scion and
companions

In compliance with the Shariah Governance Framework, Financial Reporting for Islamic Banking Institutions and other relevant
guidelines issued by Bank Negara Malaysia, we are required to submit the following report:

We have reviewed the principles and the contracts relating to the transactions and applications offered by AFFIN Islamic Bank
Berhad (‘the Bank’) during the period ended 31 December 2016. We have also conducted our review to form an opinion as to
whether the Bank has complied with the Shariah principles and with the Shariah rulings issued by the Shariah Advisory Council of
Bank Negara Malaysia, as well as Shariah decisions made by us.

The management of the Bank is responsible for ensuring that the financial institution conducts its business in accordance with
Shariah principles. It is our responsibility to form an independent opinion, based on the review work carried out by Shariah review
and Shariah audit of the Bank and to report to you.

We have assessed the work carried out by Shariah review and Shariah audit which included examining, on a test basis, each type
of transaction, the relevant documentation and procedures adopted by the Bank.

We planned and performed our review so as to obtain all the information and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance that the Bank has not violated the Shariah principles.

Interactive sessions and discussions has been conducted with senior management to enhance understanding on Islamic finance with
periodic training for staff in order to provide adequate knowledge and competence in undertaking tasks for the business of the Bank.

In our opinion:

1. the contracts, transactions and dealings entered into by the Bank during the year ended 31 December 2016 that we have
reviewed are in compliance with the Shariah principles;

2. the allocation of profit and incurrence of losses relating to investment accounts conform to the basis that we have approved in
accordance with Shariah principles;

3. no earning and purification has recorded from sources or by means prohibited by the Shariah principles for the financial year
end 31 December 2016.

4. the calculating of zakat is in compliance with Shariah principles. The zakat fund has been distributed through a various channels
i.e. States Zakat Collection Centre, non-government organization and individuals under asnaf categories of poor, needy, amil,
riqab, gharimin and fisablilillah.
 ANNUAL REPORT 2016

143

Shariah Committee’s Report

We, the members of the Shariah Committee of AFFIN Islamic Bank Berhad, do hereby confirm that the operations of the Bank for
the year ended 31 December 2016 have been conducted in conformity with the Shariah principles.

Chairman of the Shariah Committee:

Associate Professor Dr. Said Bouheraoua

Shariah Committee:
Associate Professor Dr. Ahmad Azam Bin Othman

Shariah Committee:
Associate Professor Dr. Zulkifli Bin Hasan

Shariah Committee:
Ustaz Mohammad Mahbubi Ali

Shariah Committee:
Dr. Nor Fahimah Binti Mohd Razif

Kuala Lumpur, Malaysia

21 March 2017
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

144

Independent Auditors’ Report

to the Member of AFFIN Islamic Bank Berhad (Incorporated in Malaysia)

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS

Our opinion

)NOUROPINIONTHElNANCIALSTATEMENTSOF!&&).)SLAMIC"ANK"ERHADhTHE"ANKv ANDTHE%CONOMIC%NTITYGIVEATRUEANDFAIRVIEW

of the financial position of the Economic Entity and of the Bank as at 31 December 2016, and of their financial performance and their
cash flows for the year then ended in accordance with Malaysian Financial Reporting Standards, International Financial Reporting
Standards and the requirements of the Companies Act, 1965 in Malaysia.

What we have audited

We have audited the financial statements of the Economic Entity and of the Bank, which comprise the statements of financial position
as at 31 December 2016 of the Economic Entity and of the Bank, and the income statements, statements of comprehensive income,
statements of changes in equity and statements of cash flows of the Economic Entity and of the Bank for the year then ended, and
notes to the financial statements, including a summary of significant accounting policies, as set out on pages 43 to 140.

Basis for opinion

We conducted our audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing. Our
RESPONSIBILITIESUNDERTHOSESTANDARDSAREFURTHERDESCRIBEDINTHEh!UDITORSRESPONSIBILITIESFORTHEAUDITOFTHElNANCIALSTATEMENTSv
section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence and other ethical responsibilities

We are independent of the Economic Entity and of the Bank in accordance with the By-Laws (on Professional Ethics, Conduct and
0RACTICE OFTHE-ALAYSIAN)NSTITUTEOF!CCOUNTANTSh"Y ,AWSv ANDTHE)NTERNATIONAL%THICS3TANDARDS"OARDFOR!CCOUNTANTS#ODE
OF%THICSFOR0ROFESSIONAL!CCOUNTANTSh)%3"!#ODEv ANDWEHAVEFULlLLEDOUROTHERETHICALRESPONSIBILITIESINACCORDANCEWITHTHE
By-Laws and the IESBA Code.

Information other than the financial statements and auditors’ report thereon

The directors of the Bank are responsible for the other information. The other information comprises
s -ANAGEMENT$ISCUSSIONAND!NALYSIS
s &INANCIAL(IGHLIGHTS
s 3TATEMENTON#ORPORATE'OVERNANCE
s 3TATEMENTON2ISK-ANAGEMENTAND)NTERNAL#ONTROL
s "OARD!UDIT#OMMITTEE2EPORT
s $IRECTORS2EPORT
s 3HARIAH#OMMITTEES2EPORT
s "ASEL))0ILLAR$ISCLOSURES

but does not include the financial statements of the Economic Entity and of the Bank and our auditors’ report thereon.

Our opinion on the financial statements of the Economic Entity and of the Bank does not cover the other information and we do not
express any form of assurance conclusion thereon.

In connection with our audit of the financial statements of the Economic Entity and of the Bank, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent with the financial statements of the
Economic Entity and of the Bank or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required
to report that fact. We have nothing to report in this regard.
 ANNUAL REPORT 2016

145

Independent Auditors’ Report

to the Member of AFFIN Islamic Bank Berhad (Incorporated in Malaysia)

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED)

Responsibilities of the directors for the financial statements

The directors of the Bank are responsible for the preparation of the financial statements of the Economic Entity and of the Bank that
give a true and fair view in accordance with Malaysian Financial Reporting Standards, International Financial Reporting Standards
and the requirements of the Companies Act, 1965 in Malaysia. The directors are also responsible for such internal control as the
directors determine is necessary to enable the preparation of financial statements of the Economic Entity and of the Bank that are
free from material misstatement, whether due to fraud or error.

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

Auditors’ responsibilities for the audit of the financial statements

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

As part of an audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing, we
exercise professional judgement and maintain professional scepticism throughout the audit. We also:

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

(b) Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Economic Entity’s and Bank’s
internal control.

(c) Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by the directors.

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

(e) Evaluate the overall presentation, structure and content of the financial statements of the Economic Entity and of the Bank,
including the disclosures, and whether the financial statements of the Economic Entity and of the Bank represent the underlying
transactions and events in a manner that achieves fair presentation.

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we identify during our audit.
 AFFIN ISLAMIC BANK
BERHAD (709506-V)

146

Independent Auditors’Report
to the Member of AFFIN Islamic Bank Berhad (Incorporated in Malaysia)

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS

In accordance with the requirements of the Companies Act, 1965 in Malaysia, we also report that, in our opinion, the accounting
and other records and the registers required by the Act to be kept by the Bank have been properly kept in accordance with the
provisions of the Act.

OTHER MATTERS

This report is made solely to the members of the Bank, as a body, in accordance with Section 174 of the Companies Act, 1965 in
Malaysia and for no other purpose. We do not assume responsibility to any other person for the content of this report.

PRICEWATERHOUSECOOPERS NG YEE LING

(No. AF: 1146) 03032/01/2019 J
Chartered Accountants Chartered Accountant

Kuala Lumpur
21 March 2017
 Basel II Pillar 3 Disclosures

148 1. Introduction 162 7. Liquidity Risk

148 1.1 Background 162 7.1 Liquidity Risk Management Objectives
148 1.2 Scope of Application and Policies
162 7.2 Liquidity Risk Measurement, Control and
148 2. Risk Governance Structure Monitoring
148 2.1 Overview
163 8. Operational Risk
149 2.2 Board Committees
163 8.1 Operational Risk Management
150 2.3 Management Committees
Objectives and Policies
151 2.4 Group Risk Management Function
163 8.2 Application of Basic Indicator Approach
151 2.5 Internal Audit and Internal Control for Operational Risk
Activities
163 8.3 Operational Risk Measurement, Control
151 3. Capital Management and Monitoring
151 3.1 Internal Capital Adequacy Assessment 163 8.4 Certification
Process (‘ICAAP’)
164 9. Shariah Non-Compliance Risk
151 3.2 Capital Structure
164 9.1 Shariah Non-Compliance Risk
153 3.3 Capital Adequacy Objectives and Policies
153 4. Risk Management Objectives and Policies 164 9.2 Shariah Non-Compliance Risk
Measurement, Control and Monitoring
153 5. Credit Risk
164 10. Business Continuity Risk
153 5.1 Credit Risk Management Objectives and
Policies 164 10.1 Business Continuity Risk Management
Objectives and Policies
154 5.2 Application of Standardised Approach
for Credit Risk 164 10.2 Business Continuity Risk Measurement,
Control and Monitoring
154 5.3 Credit Risk Measurement
154 5.4 Risk Limit Control and Mitigation Policies 165 Appendices
155 5.5 Credit Risk Monitoring
156 5.6 Impairment Provisioning

160 6. Market Risk

160 6.1 Market Risk Management Objectives
and Policies
161 6.2 Application of Standardised Approach
for Market Risk
161 6.3 Market Risk Measurement, Control and
Monitoring
161 6.4 Value-at-Risk (‘VaR’)
161 6.5 Foreign Exchange Risk
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Basel II Pillar 3 Disclosures

as at 31 December 2016

1 INTRODUCTION

1.1 Background

The Capital Adequacy Framework for Islamic Banks (Risk-Weighted Assets) issued by Bank Negara Malaysia (‘BNM’),
which is the equivalent of the Basel II issued by the Basel Committee of Banking Supervision and the Islamic Financial
Services Board is structured around three fundamental pillars:

- Pillar 1 defines the minimum capital requirement to ensure that financial institutions hold sufficient capital to cover
their exposure to credit, market and operational risks.
- Pillar 2 requires financial institutions to have a process for assessing their overall capital adequacy in relation to their
risk profile and a strategy for maintaining their capital levels.
- Pillar 3 requires financial institutions to establish and implement an appropriate disclosure policy that promotes
transparency regarding their risk management practices and capital adequacy positions.

Pillar 3 disclosure is required under the BNM Capital Adequacy Framework for Islamic Banks (CAFIB) - Disclosure
Requirements (Pillar 3).

Affin Islamic Bank Berhad (‘the Bank’) adopts the following approaches under Pillar 1 requirements:

- Standardised Approach for Credit Risk

- Basic Indicator Approach for Operational Risk
- Standardised Approach for Market Risk

1.2 Scope of Application

This document contains the disclosure requirements under Pillar 3 for the Bank for the year ended 31 December 2016.
The disclosures are made in line with the Pillar 3 disclosure requirements under the Basel II framework as laid out by BNM.

The disclosures should be read in conjunction with the Bank’s 2016 Annual Report for the year ended 31 December 2016.

2 RISK GOVERNANCE STRUCTURE

2.1 Overview

The Board of Directors of the Bank is ultimately responsible for the overall performance of the Bank. The Board’s
responsibilities are congruent with the framework of BNM Guidelines. The Board also exercises great care to ensure
that high ethical standards are upheld, and that the interests of stakeholders are not compromised. These include
responsibility for determining the Bank’s general policies and strategies for the short, medium and long term, approving
business plans, including targets and budgets, and approving major strategic decisions.

The Board has overall responsibility for maintaining the proper management and protection of the Bank’s interests by
ensuring effective implementation of the risk management policy and process, as well as adherence to a sound system
of internal control. The Board also recognises that risks cannot be eliminated completely. As such, the inherent system
of internal control is designed to provide a reasonable though not absolute assurance against the risk of material errors,
fraud or losses occurring. The system of internal controls encompasses controls relating to financial, operational, risk
management and compliance with applicable laws, regulations, policies and guidelines.

The terms of reference of the Board Committees as disclosed in the Annual Report provide an outline of respective roles
and functions. In carrying out its functions, the Board has delegated specific responsibilities to other Board Committees,
which operate under approved terms of reference, to assist the Board in discharging their duties. The Chairmen of the
various Committees report on the outcome of their Committee meetings to the Board and any further deliberation is made
at Board level, if required. These reports and deliberations are incorporated into the Minutes of the Board meetings. The
Board meets on a monthly basis.
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as at 31 December 2016

2 RISK GOVERNANCE STRUCTURE

2.2 Board Committees

Board Remuneration Committee (‘BRC’)

The BRC is responsible for providing a formal and transparent procedure for developing the remuneration policy for
Directors, Chief Executive Officer (CEO) and key senior management officers and ensuring that compensation is competitive
and consistent with the Bank’s culture, objectives and strategy.

The Committee obtains advice from experts in compensation and benefits, both internally and externally.

Board Nominating Committee (‘BNC’)

The BNC is responsible for providing a formal and transparent procedure for the appointment of Directors and CEO,
assessing the effectiveness of individual Directors, the Board as a whole and the performance of the CEO as well as key
senior management personnel.

Board Risk Management Committee (‘BRMC’)

BRMC is responsible for overseeing management activities in managing credit, market, liquidity, operational, legal,
reputational and other material risks as well as ensuring that the risk management process is in place and functioning
effectively.

It is responsible for setting the overall tone of the Bank’s strategy and ensuring effective communication and integration of
risk appetite within the business strategy, operations and culture.

The Committee also assists the Board in oversight responsibilities on internal controls, and risk management strategies,
policies, processes, frameworks and other risk related matters. It has the responsibility of reviewing and/or approving risk
management policies, guidelines and reports.

Board Loan Review and Recovery Committee (‘BLRRC’)

The BLRRC is responsible for providing critical review of financing and other credit facilities with high risk implications and
vetoing financing applications that have been approved by the Group Management Loan Committee as appropriate.

Board Audit Committee (‘BAC’)

The BAC is responsible for providing oversight and reviewing the adequacy and integrity of the internal control systems as
well as oversees the work of the internal and external auditors.

Reliance is placed on the results of independent audits performed primarily by internal auditors, the outcome of statutory
audits on financial statements conducted by external auditors and on representations by Management based on their
control self-assessment of all areas of their responsibility.

Minutes of Audit & Examination Committee meetings, which provide a summary of the proceedings, are circulated to
Board members for notation and discussion. The Bank has an established Group Internal Audit Division (‘GIA’) which
reports functionally to the Audit Committee and administratively to the MD/CEO of AFFIN Bank Berhad.
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Basel II Pillar 3 Disclosures

as at 31 December 2016

2 RISK GOVERNANCE STRUCTURE

2.2 Board Committees (continued)

Shariah Committee

The Shariah Committee is formed as legislated under the Islamic Financial Services Act 2013 and as per the Shariah
Governance Framework for Islamic Financial Institutions.

The roles and responsibilities of the Shariah Committee include advising the Board on Shariah matters to ensure that
the business operations of the Bank comply with Shariah principles at all times. SC is also responsible for endorsing and
validating relevant documentations of the Bank’s products to ensure that the products comply with Shariah principles, and
advising the Bank on matters to be referred to the Shariah Advisory Council.

2.3 Management Committees

Management Committee (‘MCM’)

MCM comprises the senior management team chaired by Group Managing Director/Chief Executive Officer (Group MD/
CEO). MCM is responsible for assisting the Board in managing the day-to-day operations, formulating tactical plans
and business strategies while monitoring the banking entities’ overall performance, and ensuring all business activities
conducted are in accordance with the Bank’s corporate objectives, strategies, policies as well as Annual Business Plan
and Budget.

Group Management Loan Committee (‘GMLC’)

GMLC is established within senior management to approve complex and large financing and workout/recovery proposals
beyond the delegated authority of the individual approvers.

Group Asset and Liability Management Committee (‘GALCO’)

GALCO comprising the senior management team chaired by the MD/CEO, manages the Bank’s asset and liability position
by identifying, managing and controlling balance sheet risks and capital management in the execution of the business
strategy, while implementing asset liability strategy and policy for the balance sheet of the respective subsidiary.

Liquidity Management Committee (‘LMC’)

The LMC is a sub-committee of the GALCO. The role of LMC is to augment the functions of GALCO by directing its focus
specifically to liquidity issues.

Group Operational Risk Management Committee (‘GORMC’)

GORMC is a senior management committee chaired by the Group Chief Risk Officer, established to oversee the management
of operational risks issues and control lapses while supporting BRMC in its review and monitoring of operational risk. It is
also responsible for reviewing and ensuring that the operational risk programme, process and framework are implemented
in accordance with regulatory requirement and manage loss incidents to an acceptable level.

Group Early Alert Committee (‘GEAC’)

GEAC is a senior management committee, established to monitor credit quality through monthly reviews of the Early Alert,
Watchlist and Exit Accounts as well as to review the actions taken to address the emerging risks and issues in these
accounts.
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as at 31 December 2016

2 RISK GOVERNANCE STRUCTURE

2.4 Group Risk Management Function

Group Risk Management (‘GRM’), headed by the Group Chief Risk Officer (‘GCRO’) is segregated from the lines of
business, with direct reporting line to BRMC to ensure independence of risk management function.

The independence of risk function is critical towards controlling and managing the Bank’s risk taking activities to achieve
an optimum return in line with the subsidiaries’ risk appetite, with consideration to variations required due to differences in
each subsidiary’s business model.

Committees namely BLRRC, SC, MCM, GMLC, GALCO, LMC, GORMC and GEAC assist BRMC in managing credit,
market, liquidity, operational and other material risks in the Bank. The responsibilities of these Committees include risk
identification, risk assessment and measurement, risk control and mitigation and risk monitoring and reporting.

2.5 Internal Audit and Internal Control Activities

In accordance with BNM’s Guidelines on Corporate Governance for Licensed Islamic Banks, GIA conducts continuous
reviews on auditable areas within the Bank. The reviews by GIA are focused on areas of significant risks and effectiveness
of internal control in accordance with the audit plan approved by the BAC.

Based on GIA’s review, identification and assessment of risk, testing and evaluation of controls, GIA will provide an opinion
on the effectiveness of internal controls maintained by each entity. The risks highlighted on the respective auditable areas as
well as recommendation made by the GIA are addressed at BAC and Management meetings on bi-monthly basis. The BAC
also conducts annual reviews on the adequacy of internal audit function, scope of work, resources and budget of GIA.

3 CAPITAL MANAGEMENT

3.1 Internal Capital Adequacy Assessment Process (‘ICAAP’)

In line with the BNM guideline on Risk-Weighted Capital Adequacy Framework - Internal Capital Adequacy Assessment
Process (Pillar 2), the Bank has put in place the ICAAP Framework to assess the capital adequacy to ensure that the level
of capital maintained by the Bank is adequate at all times, taking into consideration the Bank’s risk profile and business
strategies.

The Bank’s capital management approach is focused on maintaining an appropriate level of capital to meet its business
needs and regulatory requirements as capital adequacy and risk management are closely aligned. The Bank operates
within an agreed risk appetite whilst optimising the use of shareholders’ funds to deliver sustainable returns.

3.2 Capital Structure

The total capital and capital adequacy ratios of the Bank is computed in accordance with BNM’s CAFIB (Capital
Components).

The Bank is currently adopting the Standardised Approach for Credit Risk and Market Risk and the Basic Indicator
Approach for Operational Risk. In line with the transitional arrangements under the BNM CAFIB (Capital Components),
the minimum capital adequacy requirement for Common Equity Tier 1 Capital Ratio (‘CET 1’) and Tier 1 Capital Ratio are
5.125% (2015: 4.5%) and 6.625% (2015: 6.0%) respectively for year 2016. The minimum regulatory capital adequacy
requirement is 8.625% (2015: 8.0%) for total capital ratio.

The following table sets forth further details on the capital resources and capital adequacy ratios for the Bank as at
31 December 2016.
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Basel II Pillar 3 Disclosures

as at 31 December 2016

3 CAPITAL MANAGEMENT

3.2 Capital Structure (continued)

Economic Entity The Bank

2016 2015 2016 2015
RM’000 RM’000 RM’000 RM’000

Paid-up share capital 560,000 460,000 560,000 460,000

Statutory reserves 305,016 248,717 305,016 248,717
Retained profits 237,127 195,606 237,777 196,256
Unrealised gains and losses on AFS (23,768) (10,405) (23,768) (10,405)
1,078,375 893,918 1,079,025 894,568

Goodwill and other intangibles - (426) - (426)

Deferred tax assets (8,056) (3,598) (8,056) (3,598)
Investment in associate/joint ventures (450) - (840) (260)

CET1 capital 1,069,869 889,894 1,070,129 890,284

Tier I capital 1,069,869 889,894 1,070,129 890,284

Collective impairment 28,541 23,750 28,541 23,750

Regulatory adjustments 73,178 58,400 73,178 58,400
Less:
Investment in associate/joint ventures (300) - (560) (390)

Tier II capital 101,419 82,150 101,159 81,760

Total capital 1,171,288 972,044 1,171,288 972,044

CET1 capital ratio 12.421% 13.197% 12.424% 13.203%

Tier 1 capital ratio 12.421% 13.197% 12.424% 13.203%
Total capital ratio 13.598% 14.415% 13.598% 14.415%

CET1 capital ratio (net of proposed dividends) 12.421% 13.197% 12.424% 13.203%
Tier 1 capital ratio (net of proposed dividends) 12.421% 13.197% 12.424% 13.203%
Total capital ratio (net of proposed dividends) 13.598% 14.415% 13.598% 14.415%

Risk-weighted assets for:

Credit risk 8,124,441 6,336,026 8,124,441 6,336,026
Market risk 37,254 3,650 37,254 3,650
Operational risk 451,894 403,377 451,894 403,377

Total risk-weighted assets 8,613,589 6,743,053 8,613,589 6,743,053

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3 CAPITAL MANAGEMENT

3.3 Capital Adequacy

The Bank’s has in place an internal limit for its CET1 capital ratio, Tier I capital ratio and Total capital ratio, which is guided
by the need to maintain a prudent relationship between available capital and the risks of its underlying businesses.
The capital management process is monitored by senior management through periodic reviews.

Refer to Appendix I.

4 RISK MANAGEMENT OBJECTIVES AND POLICIES

The Bank is principally engaged in all aspects of Islamic banking and related financial services. There have been no significant
changes in these principal activities during the financial year.

The Bank’s business activities involve the analysis, measurement, acceptance, and management of risks and which operates
within well defined risk acceptance criteria covering customer segments, industries and products. The Bank does not enter
into risk it cannot administer, book, monitor or value, or deal with persons of questionable integrity.

The Bank’s risk management policies are established to identify, assess, measure, control and mitigate all key risks as well as
manage and monitor the risk positions.

The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and best practice
in risk management processes. The Bank’s aim is to achieve an appropriate balance between risk and return as well as
minimise any potential adverse effects.

5 CREDIT RISK

5.1 Credit Risk Management Objectives and Policies

Credit risk is the potential financial loss resulting from the failure of the customer to settle financial and contractual obligations
through financing, hedging, trading and investing activities. It includes both pre-settlement and settlement risks of trading
counterparties. Credit risk emanates mainly from financing, advances and other financing, financing commitments arising
from such financing activities, as well as through financial transaction with counterparties including interbank money
market activities as well as derivative instruments used for hedging and debt securities.

The management of credit risk in the Bank is governed by the Credit Risk Management Framework which is supported
by a set of approved credit policies, guidelines and procedures. Approval authorities are delegated to Senior Management
and GMLC to implement the credit policies and ensure sound credit granting standards. BLRRC has review/veto power.

An independent Group Credit Management function is headed by Group Chief Credit Officer (‘GCCO’) with direct reporting
line to MD/CEO to ensure sound credit appraisal and approval process. GRM with direct reporting line to BRMC has
functional responsibilities for the management of credit risk, to ensure adherence to risk standards and discipline.

Credit guidelines and procedures are incorporated within the Credit Policy. The Credit Authority Framework facilitates the
approval of all new, restructured and continuing credit facilities. New and existing businesses are governed by Credit Plan
which is developed as part of the annual business planning and budgeting process. The Credit Plan is reviewed at least
annually to ensure the guidelines and criteria reflect portfolio strategy and market environment.
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5 CREDIT RISK

5.2 Application of Standardised Approach for Credit Risk

The Bank uses the following External Credit Assessment Institutions (‘ECAIs’) to determine the risk weights for the rated
credit exposures:-

s 2!-2ATING3ERVICES"ERHAD
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s 3TANDARD0OORS2ATING3ERVICES
s -OODYS)NVESTORS3ERVICE
s &ITCH2ATINGS

The external ratings of the ECAIs are used to determine the risk weights of the following types of exposure: sovereigns,
banks, public sector entities and corporates.

The mapping of the rating categories of different ECAIs to the risk weights is in accordance with BNM guidelines. In cases
where there is no issuer or issue rating, the exposures are treated as unrated and accorded a risk weight appropriate for
unrated exposure in the respective category.

Refer to Appendix II and Appendices III (i) to III (ii).

5.3 Credit Risk Measurement

Financing, advances and other financing

Credit evaluation is the process of analysing the creditworthiness of the prospective customer against the Bank’s underwriting
criteria and the ability of the Bank to make a return commensurate with the level of risk undertaken. Assessment and
quantification of credit risk are supported by the use of internal rating models, scorecards and decision support tools.

The Bank adopts a credit risk grading methodology encompassing probability of default (‘PD’) driven scorecards for
business financing, advances and other financing. Separate scorecards have been developed for two categories of
business customers, Large Corporate (‘LC’) and Small Medium Enterprise (‘SME’).

For consumer mass market products, statistically developed application scorecards are used to assess the risks associated
with the credit application as a decision support tool at financing, advances and other financing origination.

Stress Testing supplements the overall assessment of credit risk across the Bank.

Over-the-Counter (‘OTC’) Derivatives

The OTC Derivatives credit exposure is computed using the Current Exposure Method. Under the Current Exposure
Method, computation of credit equivalent exposure for rate of return and exchange rate related contracts is derived from the
summation of the two elements; the replacement costs (obtained by marking-to-market) of all contracts and the potential
future exposure of outstanding contracts (Add On charges depending on the specific remaining tenor to maturity).

5.4 Risk Limit Control and Mitigation Policies

The Bank employs various policies and practices to control and mitigate credit risk.

Financing limits

The Bank establishes internal limits and related lending guidelines to manage large exposures and avoid undue concentration
of credit risk in its credit portfolio. The limits include single customer groupings, connected parties, geographical and
industry segments. These risks are monitored regularly and the limits reviewed annually or sooner depending on changing
market and economic conditions.
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5 CREDIT RISK

5.4 Risk Limit Control and Mitigation Policies (continued)

The credit risk exposure for derivative and financing, advances and other financing books is managed as part of the overall
lending limits with customers together with potential exposure from market movements.

Collateral

Credits are established against customer’s capacity to pay rather than rely solely on security. However, collateral may be
taken to mitigate credit risk. The main collateral types accepted and given value by the Bank are:

s -ORTGAGESOVERRESIDENTIALPROPERTIES
s #HARGESOVERCOMMERCIALREALESTATEORVEHICLESlNANCED
s #HARGESOVERBUSINESSASSETSSUCHASBUSINESSPREMISESINVENTORYANDACCOUNTRECEIVABLESAND
s #HARGESOVERlNANCIALINSTRUMENTSSUCHASMARKETABLESECURITIES

Credit related commitments

Commitment to extend credit represents unutilised portion of approved credit in the form of financing, advances and other
financing, guarantees or letters of credit. In terms of credit risk, the Bank is potentially exposed to loss in an amount equal
to the total unutilised commitments. However, the potential amount of loss is less than the total unutilised commitments,
as most commitments to extend credit are contingent upon customers maintaining specific minimum credit standards.

The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have
a greater degree of credit risk than short-term commitments.

Refer to Appendix IV (a) to (b).

5.5 Credit Risk Monitoring

Corporate credits and large individual accounts are reviewed by the Business Units at least once a year using updated
financial and other relevant information. This is to ensure that the credit grades remain appropriate and any signs of
weaknesses or deterioration in the credit quality are detected. Remedial action is taken where evidence of deterioration
emanates.

Retail credits are actively monitored and managed on a portfolio basis by product type. A collection management system
is in place to promptly identify, monitor and manage delinquent accounts at early stages of delinquency.

An Early Alert Process is adopted to pro-actively identify, report, and manage warning signs of potential credit deterioration.
Watchlist accounts are closely reviewed and monitored with corrective measures initiated to prevent them from turning
impaired. As a rule, watchlist accounts are either worked up or worked out within a period of twelve months.

Active portfolio monitoring as well as exceptions reporting is in place to manage the overall risk profile, identify, analyse and
mitigate adverse trends or specific areas of risk concerns.
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5 CREDIT RISK

5.6 Impairment Provisioning

Individual impairment provisioning

All significant financing, advances and other financing exposures, with or without past due status, are subject to individual
assessment for impairment when an evidence of impairment surfaces, or at the very least once annually during the Annual
Review process.

If impaired, the amount of the loss is measured as the difference between the asset’s carrying amount and the present
value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial
asset’s original effective rate of return (i.e. the effective rate of return computed at initial recognition). The level of impairment
allowance on financing, advances and other financing is to be reviewed at least quarterly, and more frequently when
individual circumstances require. The review covers the collateral held (including reconfirmation of its enforceability) and an
assessment of actual and expected receipts.

All significant financing, advances and other financing which are deemed not impaired after individual assessment and
all financing, advances and other financing which are deemed impaired but do not result in impairment allowance after
individual assessment are included in the collective impairment assessment.

Significant financing that are deemed not impaired after individual assessment are included in a group of financing with
similar characteristics and collectively assessed for impairment.

Collective impairment provisioning

All financing, advances and other financing are grouped in respective business segments according to similar credit risk
characteristics and is generally based on industry, asset or collateral type, credit grade and past due status.

Collective assessment for impairment allowance is conducted in accordance with the impairment methodologies approved
by the Board for all financing, advances and other financing not covered under the individual impairment assessment.

Impairment allowance will be determined for each segment based on its respective loss probabilities (history) and other
information relevant to estimation of the future cash flows.

The Bank is required to maintain, in aggregate, collective impairment allowances and regulatory reserves of no less than
1.2% of total outstanding financing (excluding financing with explicit guarantee from Government of Malaysia), net of
individual impairment.

Total financing, advances and other financing - credit quality

All financing, advances and other financing are categorised into ‘neither past due nor impaired’, ‘past due but not impaired’
and ‘impaired’.

Past due financing refers to financing, advances and other financing that are overdue by one day or more.

Financing, advances and other financing are classified impaired when they fulfill any of the following criteria:

i) the principal or profit or both is past due more than 90 days or 3 months from the first day of default
ii) where the account is in arrears for less than 90 days or 3 months, there is evidence of impairment to indicate that the
borrower/customer is ‘unlikely to repay’ its credit obligations
iii) the financing is classified as rescheduled and restructured in Central Credit Reference Information System (CCRIS)
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5 CREDIT RISK

5.6 Impairment Provisioning (continued)

Analysed by economic sectors

Economic Entity
and The Bank
2016 2015
Past due financing RM’000 RM’000

Primary agriculture 1,154 865

Mining and quarrying 132 220
Manufacturing 2,299 1,898
Electricity, gas and water supply 536 643
Construction 21,064 25,496
Real estate 20,643 1,015
Wholesale & retail trade and restaurants & hotels 10,858 6,309
Transport, storage and communication 3,012 2,409
Finance, takaful/insurance and business services 5,805 3,854
Education, health and others 8,560 18,405
Household 572,063 466,515

646,126 527,629

Economic Entity
and The Bank
2016 2015
Individual impairment RM’000 RM’000

Manufacturing 15 -
Construction 134 -
Real estate 17,413 34,988
Wholesale & retail trade and restaurants & hotels - 1,077
Household 441 2,451

18,003 38,516
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5 CREDIT RISK

5.6 Impairment Provisioning (continued)

Analysed by economic sectors (continued)

Economic Entity
and The Bank
2016 2015
Individual impairment charged RM’000 RM’000

Manufacturing 313 25
Construction 135 -
Real estate 17,116 -
Wholesale & retail trade and restaurants & hotels 469 1,162
Household 1,307 2,373

19,340 3,560

Economic Entity
and The Bank
2016 2015
Individual impairment written-off RM’000 RM’000

Manufacturing - 2,383
Wholesale & retail trade and restaurants & hotels 1,544 -
Household 2,605 -

4,149 2,383

Economic Entity
and The Bank
2016 2015
Collective impairment RM’000 RM’000

Primary agriculture 482 302

Mining and quarrying 54 39
Manufacturing 575 1,094
Electricity, gas and water supply 311 166
Construction 2,608 2,465
Real estate 2,394 1,641
Wholesale & retail trade and restaurants & hotels 1,529 887
Transport, storage and communication 1,177 850
Finance, takaful/insurance and business services 1,236 1,126
Education, health and others 2,884 2,437
Household 31,745 25,664

44,995 36,671
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5 CREDIT RISK

5.6 Impairment Provisioning (continued)

Analysed by geographical area

Economic Entity
and The Bank
2016 2015
Past due financing RM’000 RM’000

Perlis 1,607 844

Kedah 48,533 42,401
Pulau Pinang 21,394 14,685
Perak 58,896 56,804
Selangor 200,909 154,251
Wilayah Persekutuan 93,026 76,127
Negeri Sembilan 38,265 26,460
Melaka 19,181 12,874
Johor 51,172 32,084
Pahang 19,776 21,444
Terengganu 62,656 55,596
Kelantan 22,673 25,727
Sarawak 2,538 2,841
Sabah 5,403 5,491
Outside Malaysia 97 -

646,126 527,629

Economic Entity
and The Bank
2016 2015
Individual impairment RM’000 RM’000

Kedah 22 -
Selangor 456 2,423
Wilayah Persekutuan - 1,105
Sarawak 229 -
Outside Malaysia 17,296 34,988

18,003 38,516
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5 CREDIT RISK

5.6 Impairment Provisioning (continued)

Analysed by geographical area (continued)

Economic Entity
and The Bank
2016 2015
Collective impairment RM’000 RM’000

Perlis 385 409

Kedah 2,796 1,886
Pulau Pinang 1,366 948
Perak 4,011 3,709
Selangor 14,246 11,784
Wilayah Persekutuan 7,921 6,143
Negeri Sembilan 1,900 1,244
Melaka 783 501
Johor 2,462 1,759
Pahang 1,490 1,522
Terengganu 4,091 3,066
Kelantan 2,533 3,091
Sarawak 442 272
Sabah 302 277
Labuan 194 -
Outside Malaysia 73 60

44,995 36,671

6 MARKET RISK

6.1 Market Risk Management Objectives and Policies

Market risk is the risk of losses in on and off-balance-sheet positions arising from movements in market prices. The Bank’s
exposure to market risk results largely from profit rate and foreign exchange rate risks.

The Market Risk Management Framework governs the market risk activities of the Bank which is supported by a set of
approved market risk management policies, guidelines and procedures.

Risk control parameters are established based on risk appetite, market liquidity and business strategies as well as
macroeconomic conditions. These parameters are reviewed at least annually.

Market risk arising from the Trading Book is primarily controlled through the imposition of Stop-loss and Value-at-Risk
(‘VaR’) risk control parameters.

Profit rate risk is quantified by analysing the mismatches in timing repricing of the rate sensitive assets and rate sensitive
liabilities. Earnings-at-Risk (‘EaR’) or Net Profit Income simulation is conducted to assess the variation in short term
earnings under various rates scenarios. The potential long term effect of the overall exposure is tracked by assessing the
impact on Economic Value of Equity (‘EVE’), also known as Economic Value-at-Risk (‘EVaR’). Thresholds are set for EaR
and EVaR as management triggers.

Periodic stress tests are conducted to quantify market risk arising from probability of abnormal market movements.
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6 MARKET RISK

6.2 Application of Standardised Approach for Market Risk

The Bank adopts the Standardised Approach for the purpose of calculating the capital requirement for market risk.

Refer Appendix I.

6.3 Market Risk Measurement, Control and Monitoring

The Bank’s market risk management control parameters are established based on its risk appetite, market liquidity and
business strategies as well as macroeconomic conditions. These parameters are reviewed at least on an annual basis.

Market risk arising from the Trading Book is primarily controlled through the imposition of Stop-loss and Value-at-Risk
(‘VaR’) risk control parameters.

The Bank quantifies profit rate risk by analysing the mismatches in timing repricing of the rate sensitive assets and rate
sensitive liabilities. Earnings-at-Risk (‘EaR’) or Net Profit Income simulation is conducted to assess the variation in short
term earnings under various rates scenarios. The potential long term effect of the overall exposure is tracked by assessing
the impact on Economic Value of Equity (‘EVE’), also known as Economic Value-at-Risk (‘EVaR’). Thresholds are set for
EaR and EVaR as management triggers.

In addition, periodic stress tests are conducted to quantify market risk arising from probability of abnormal market
movements.

The GALCO and BRMC are regularly kept informed of the Bank’s risk profile and positions.

6.4 Value-at-Risk (‘VaR’)

Value-at-Risk (‘VaR’) is used to compute the maximum potential loss amount over a specified holding period of the Trading
portfolio.

It measures the risk of losses arising from potential adverse movements in profit rates and foreign exchange rates that
could affect values of financial instruments.

The Bank adopts Historical Pricing Simulation Method (‘HPS’) to compute potential loss or Value-at-Risk (‘VaR’) amount.
The HPS Method uses the relative change of historical prices to estimate future potential changes in the market value
of outstanding positions. The Bank currently adopts 250 simulated business days for its HPS VaR computation. After
applying these price changes to the outstanding portfolios, 250 simulated market values for the portfolio are generated
and the change in the day-to-day market value is taken as simulated Profit & Loss (‘P&L’) for the portfolio. As VaR
calculates the worst expected loss over a given day horizon and confidence level under normal market condition, the
250 values are sorted from the lowest to the highest simulated P&L. The VaR focuses on the tail of the distribution (i.e. the
loss figures) at the 99th percentile.

Backtesting of the VaR computation system is conducted regularly to gauge the accuracy of the risk measurement system.

Other risk measures include the following:

i) Mark-to-Market valuation tracks the current market value of the outstanding financial instruments.
ii) Stress tests are conducted to attempt to quantify market risk arising from abnormal market movements. Stress tests
measure the changes in values arising from extreme movements in profit rates and foreign exchange rates based on
past experiences and simulated stress scenarios.

6.5 Foreign Exchange Risk

The Bank is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position
and cash flows. The risk of fluctuations in foreign currency exchange rates is managed via setting of thresholds on the level
of exposure by currency and in aggregate for both overnight and intra-day positions, which are monitored daily.
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7 LIQUIDITY RISK

7.1 Liquidity Risk Management Objectives and Policies

Liquidity risk is the risk of inability of a bank to fund increases in assets and meet obligations as they come due, without
incurring unacceptable losses. Liquidity risk includes the inability to manage sudden decreases or changes in funding
sources. Liquidity risk also arises from the failure to recognise changes in market conditions that affect the ability to
liquidate assets quickly and with minimal loss in value.

The Liquidity Risk Management Framework governs the liquidity risk management activities of the Bank. The objective
of liquidity risk management is to ensure that there are sufficient funds to meet contractual and regulatory obligations
without incurring unacceptable losses as well as to undertake new transactions. The Bank’s liquidity management process
involves establishing liquidity risk management policies and prudential thresholds, liquidity risk threshold monitoring, stress
testing and establishing contingency funding plans. These building blocks of liquidity risk management are subject to
regular reviews to ensure relevance in the context of prevailing market conditions.

7.2 Liquidity Risk Measurement, Control and Monitoring

The Bank’s short term liquidity risk management is premised on BNM’s Liquidity Coverage Ratio (‘LCR’) final standards. The
LCR is a quantitative requirement which seeks to ensure that the Bank holds sufficient high-quality liquid assets (‘HQLA’)
to withstand a significant liquidity stress scenario over a 30-day horizon. Long term liquidity risk profile is assessed via the
Net Stable Funding Ratio (‘NSFR’) which promotes resilience over a longer time horizon for the Bank to fund its activities
with more stable sources of funding on an ongoing basis.

The LCR and NSFR are tracked to assess the short term and long term liquidity risk profile of the Bank, in line with
BNM’s Liquidity Coverage Ratio (‘LCR’) final standards re-issued on 25th August 2016 as well as BNM’s revised Basel
III Observation Period reporting for Net Stable Funding Ratio (‘NSFR’) and Leverage Ratio (‘LR’) issued on 7th August
2015.

The Bank also employs a set of liquidity risk indicators as an early alert of any structural change for liquidity risk management.
The liquidity risk indicators include internal and external qualitative as well as quantitative indicators.

Liquidity stress tests are conducted periodically and on ad-hoc basis to gauge the Group’s resilience in the event of
a liquidity disruption.

The Contingency Funding Plan provides a systematic approach in handling liquidity disruption. The document encompasses
strategies, decision-making authorities, and courses of action to be taken in the event of liquidity crisis and emergencies,
enabling the Group to respond to an unexpected liquidity disruption in an effective and efficient manner.

The Board Risk Management Committee (‘BRMC’) is responsible for the Bank’s liquidity policy and the strategic
management of liquidity has been delegated to the Group Asset Liability Management Committee (‘GALCO’). The Liquidity
Management Committee (‘LMC’), which is a sub-committee of GALCO, augments the functions of GALCO by directing its
focus specifically to liquidity issues. The BRMC is informed regularly on the liquidity position of the Bank.
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8 OPERATIONAL RISK

8.1 Operational Risk Management Objectives and Policies

Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people
and systems or external events. The definition includes legal risk, and exposure to litigation from all aspects of the Bank’s
activities, but excludes strategic business, reputational and systemic risks.

The Group Operational Risk Management Framework governs the management of operational risk across the Bank.

BRMC approves all policies/policy changes relating to operational risk. GORMC supports BRMC in the review and
monitoring of operational risk and provides the forum to discuss and manage all aspects of operational risk including
control lapses.

The operational risk management (‘ORM’) function within GRM operates in independent capacity to manage the risks in
activities associated with the operational function of the Bank.

8.2 Application of Basic Indicator Approach for Operational Risk

The Bank adopts the Basic Indicator Approach for the purpose of calculating the capital requirement for operational risk.
The capital requirement is calculated by taking 15% of the Bank’s average annual gross income over the previous three
years.

8.3 Operational Risk Measurement, Control and Monitoring

Operational risks are managed daily through established systems and processes to ensure compliance with policies,
guidelines and control procedures.

To identify and assess operational risk issues and exposure, the following tools are employed:

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Information Technology (‘IT’) and cyber risks are managed as part of the operational risk activities. The IT systems and
processes are assessed and tested regularly for resilience and continuity, and that they are secure from internal and
external threats.

Introduction of new products or services are evaluated to assess suitability, potential risks and operational readiness.

Operational Risk Coordinators (‘ORC’) are appointed at business and support units as champions of ORM activities within
respective units. The ORC is responsible for the reporting of ORM activities and to liaise with Group Operational Risk
Management on all operational defects and results.

8.4 Certification

As an internal requirement, all Operational Risk Coordinators must satisfy an Internal Operational Risk (including business
continuity management) Certification Program. These coordinators will first go through an on-line self learning exercise
before attempting on-line assessments to measure their skills and knowledge level. This will enable Group Risk Management
to prescribe appropriate training and development activities for the coordinators.
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9 SHARIAH NON-COMPLIANCE RISK

9.1 Shariah non-compliance risk objectives and policies

Shariah non-compliance is the risk of failure to comply with the Shariah rules and principles as determined by SC and/or
any other relevant bodies, such as BNM Shariah Advisory Council.

The Shariah Governance Framework for Islamic Financial Institutions issued by BNM is the main reference for the Shariah
governance process and oversight within the Bank.

Shariah Committee (‘SC’) is established to deliberate on Shariah issues and provide resolution as well as guidance.
GORMC together with BRMC assist in the overall oversight of Shariah risk management of the Bank.

Shariah Risk Management is part of an integrated risk management control function to identify all possible risks of
Shariah non-compliance and where appropriate, to provide mitigating measures that need to be taken to reduce the risk.
The scope covers overall business activities and operations, commencing from Islamic product origination until maturity.

9.2 Shariah non-compliance risk measurement, control and monitoring

Each business and support unit is responsible to identify and assess potential Shariah Non-Compliance Risk using the
RCSA process. Half yearly RCSA checklist is performed to gauge the level of Shariah compliance.

All Islamic products, services and strategies related matters must be approved by the SC.

Shariah Resolutions/Circulars are issued and training on Shariah Compliance is conducted on a regular basis.

Shariah non-compliance reports are regularly submitted for further deliberation, decision and remedial action.

10 BUSINESS CONTINUITY RISK

10.1 Business continuity risk management objectives and policies

Business continuity risk is the risk of losses in assets, revenue, reputation and stakeholder/customer confidence due to
the discontinuation of services in both business and technology operations.

The Business Continuity Management Framework governs the management of business continuity issues, in line with
BNM Guidelines on Business Continuity Management (‘BCM’).

BRMC approves all policies and its changes relating to business continuity management. It also reviews, monitors and
discusses business continuity management reports tabled at its meetings. GORMC supports BRMC in the review and
monitoring of Business Continuity Risk and provides the forum to discuss and manage all aspects of operational risk
including control lapses.

The BCM function is an independent body overseeing the management of the overall business continuity risk.

10.2 Business continuity risk measurement, control and monitoring

Annual Risk Assessment and Business Impact Analysis are made compulsory for each business and support unit in the
Bank to undertake. The outcome of this assessment will translate into a risks listing that require business and support units
to derive action plans to address the risks.

Risk control is established through adherence with established BCM guidelines and standards throughout the implementation
of BCM programs. Rigorous testing on business continuity and disaster recovery plans are diligently performed to ensure
effective and smooth execution of the plan for resumption and recovery of disrupted business.

Policies and processes are in place to support the monitoring and reporting of business continuity risks.
Basel II Pillar 3 Disclosures
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The Bank has adopted Basel II - Risk Weighted Assets computation under the BNM’s Risk-Weighted Capital Adequacy Framework with effect from 1 January 2008. The Bank has adopted
the Standardised Approach for credit risk and market risk, and Basic Indicator Approach for operation risk computation.
The following information concerning the Economic Entity and the Bank’s risk exposures are disclosed as accompanying information to the annual report, and does not form part of the audited accounts.

Disclosure on Capital Adequacy under the Standardised Approach (RM’000)

Economic Entity and The Bank
2016
Gross Net Total Risk Minimum
Exposures/ Exposures/ Risk Weighted Capital
Exposure Class
EAD before EAD after Weighted Assets after Requirements
CRM CRM Assets Effects of PSIA at 8%
1 CREDIT RISK
On Balance Sheet Exposures
Corporates 4,417,410 4,332,373 3,428,386 3,428,386 274,271
Regulatory Retail 3,441,735 3,425,420 2,569,159 2,569,159 205,533
Other Assets 471,858 471,858 76,783 76,783 6,143
Sovereigns/Central Banks 1,964,813 1,964,813 - - -
Public Sector Entities - - - - -
Banks, Development Financial Institutions & MDBs 29,582 29,582 1,968 1,968 157
Takaful/Insurance Companies, Securities Firms & Fund Managers 65 65 65 65 5
Residential Mortgages 2,741,411 2,730,951 1,280,061 1,280,061 102,405
Higher Risk Assets 23,002 22,546 24,767 24,767 1,981
Specialised Financing/Investment - - - - -
Equity Exposure - - - - -
Securitisation Exposure - - - - -
Defaulted Exposures 147,920 144,717 189,837 189,837 15,187
Total for On-Balance Sheet Exposures 13,237,796 13,122,325 7,571,026 7,571,026 605,682

Off Balance Sheet Exposures

Off Balance Sheet Exposures other than OTC derivatives or credit derivatives 693,127 683,193 531,291 531,291 42,503
Defaulted Exposures 14,937 14,769 22,124 22,124 1,770
Total for Off-Balance Sheet Exposures 708,064 697,962 553,415 553,415 44,273

Total for On and Off-Balance Sheet Exposures 13,945,860 13,820,287 8,124,441 8,124,441 649,955

2 MARKET RISK Long Position Short Position

Profit Rate Risk 1,051,537 1,043,829 7,708 8 - 1
Foreign Currency Risk 37,245 - 37,245 37,246 - 2,980
3 OPERATIONAL RISK
Operational Risk 451,894 36,152

Total RWA and Capital Requirements 8,613,589 8,124,441 689,088

ANNUAL REPORT 2016

/4#h/VER4HE#OUNTERv
03)!h0ROlT3HARING)NVESTMENT!CCOUNTv
165
Basel II Pillar 3 Disclosures 166
as at 31 December 2016 Appendix I
BERHAD (709506-V)

Disclosure on Capital Adequacy under the Standardised Approach (RM’000) (continued)

AFFIN ISLAMIC BANK

Economic Entity and The Bank

2015

Gross Net Total Risk Minimum

Exposure Class Exposures/ Exposures/ Risk Weighted Capital
EAD before EAD after Weighted Assets after Requirements
CRM CRM Assets Effects of PSIA at 8%
1 CREDIT RISK
On Balance Sheet Exposures
Corporates 3,670,640 3,400,665 2,656,194 2,656,194 212,496
Regulatory Retail 2,904,191 2,890,253 2,167,828 2,167,828 173,426
Other Assets 738,826 738,826 137,870 137,870 11,030
Sovereigns/Central Banks 2,736,934 2,736,934 - - -
Banks, Development Financial Institutions & MDBs 19,623 19,623 - - -
Residential Mortgages 1,974,206 1,963,672 799,774 799,774 63,982
Higher Risk Assets 6,345 6,345 9,518 9,518 761
Defaulted Exposures 78,261 78,261 102,619 102,619 8,209
Total for On-Balance Sheet Exposures 12,129,026 11,834,579 5,873,803 5,873,803 469,904

Off Balance Sheet Exposures

Off Balance Sheet Exposures other than OTC derivatives or credit
derivatives 599,980 582,972 447,760 447,760 35,821
Defaulted Exposures 9,666 9,666 14,463 14,463 1,157
Total for Off-Balance Sheet Exposures 609,646 592,638 462,223 462,223 36,978

Total for On and Off-Balance Sheet Exposures 12,738,672 12,427,217 6,336,026 6,336,026 506,882

2 MARKET RISK Long Position Short Position

Profit Rate Risk 50,690 50,894 (205) 323 - 26
Foreign Currency Risk 3,327 - 3,327 3,327 - 266
3 OPERATIONAL RISK
Operational Risk 403,377 32,270

Total RWA and Capital Requirements 6,743,053 6,336,026 539,444

/4#h/VER4HE#OUNTERv
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 ANNUAL REPORT 2016

167

Basel II Pillar 3 Disclosures

as at 31 December 2016

Appendix I

BASEL II Pillar 3 Disclosures (continued)

Disclosure on Capital Adequacy under the Standardised Approach (continued)

Market risk is defined as the risk of losses in on and off-balance sheet positions arising from movements in market prices.
The Bank’s Capital-at-Risk (‘CaR’) is defined as the amount of the Bank’s capital that is exposed to the risk of unexpected losses
arising particularly from movements in profit and foreign exchange rates. A CaR reference threshold is set as a management trigger
to ensure that the Bank’s capital adequacy is not impinged upon in the event of adverse market movements. The Bank currently
adopts BNM’s Standardised Approach for the computation of market risk capital charges. The market risk capital charge addresses
among others, capital requirement for market risk which includes the profit rate risk in the Bank’s Trading Book as well as foreign
exchange risk in the Trading and Banking Books.

The computation of market risk capital charge covers the following outstanding financial instruments:

a) Foreign Exchange (‘FX’)

b) Profit Rate Swap (‘IRS’)
c) Cross Currency Swap (‘CCS’)
d) Fixed Income Instruments (i.e. Corporate Sukuk and Government Securities)

The Bank’s Trading Book Policy Statement stipulates the policies and procedures for including or excluding exposures from the
Trading Book for the purpose of calculating regulatory market risk capital.

.
Basel II Pillar 3 Disclosures 168
as at 31 December 2016 Appendix II
BERHAD (709506-V)

Disclosure on Credit Risk: Disclosures on Risk Weights under the Standardised Approach (RM’000)
AFFIN ISLAMIC BANK

Economic Entity and The Bank

2016
Exposures after Netting and Credit Risk Mitigation
Insurance Total
Companies, Exposure
Securities after
Sovereigns Banks, Firms Higher Specialised Netting & Total Risk
Risk & Central MDBs and & Fund Regulatory Residential Risk Other Financing / Credit Risk Weighted
Weights Banks PSEs FDIs Managers Corporates Retail Mortgages Assets Assets Investment Securitisation Equity Mitigation Assets
0% 2,005,137 - 19,742 - 480,679 - - - 391,213 - - - 2,896,771 -
10% - - - - - - - - - - - -
20% 47,416 - 24,005 - 504,556 - - - 4,826 - - - 580,803 116,161
35% - - - - - - 1,977,746 - - - - - 1,977,746 692,211
50% - - - - 159,280 - 330,928 9,051 - - - - 499,259 249,629
70% - - - - - - - - - - - - - -
75% - - - - - 3,466,599 288 - - - - - 3,466,887 2,600,165
90% - - - - - - - - - - - - - -
100% - - - 65 3,739,703 5,266 443,062 - 75,818 - - - 4,263,914 4,263,914
115% - - - - - - - - - - - - - -
110% - - - - - - - - - - - - - -
125% - - - - - - - - - - - - - -
135% - - - - - - - - - - - - - -
150% - - - - 79,633 12,180 29,199 13,895 - - - - 134,907 202,361
270% - - - - - - - - - - - - - -
350% - - - - - - - - - - - - - -
400% - - - - - - - - - - - - - -
625% - - - - - - - - - - - - - -
937.5% - - - - - - - - - - - - - -
1250% - - - - - - - - - - - - - -
Average - - -
Risk
Weight
Deduction - - - - - - - - - - - - -
from
Capital
Base
03%h0UBLIC3ECTOR%NTITIESv
-$"h-ULTILATERAL$EVELOPMENT"ANKSv
&$)h&INANCIAL$EVELOPMENT)NSTITUTIONSv
Basel II Pillar 3 Disclosures
as at 31 December 2016 Appendix II

Disclosure on Credit Risk: Disclosures on Risk Weights under the Standardised Approach (RM’000)
Economic Entity and The Bank
2015
Exposures after Netting and Credit Risk Mitigation
Insurance Total
Companies, Exposure
Securities after
Sovereigns Banks, Firms Higher Specialised Netting & Total Risk
Risk & Central MDBs and & Fund Regulatory Residential Risk Other Financing / Credit Risk Weighted
Weights Banks PSEs FDIs Managers Corporates Retail Mortgages Assets Assets Investment Securitisation Equity Mitigation Assets

0% 2,794,890 - 19,623 - 270,254 - - - 301,056 - - - 3,385,823 -

10% - - - - - - - - - - - - - -
20% 59,684 - 5,386 - 600,245 - - - 374,873 - - - 1,040,188 208,038
35% - - - - - - 1,635,087 - - - - - 1,635,087 572,280
50% - - - - 25,760 608 202,409 - - - - - 228,777 114,388
70% - - - - - - - - - - - - - -
75% - - - - - 2,914,873 244 - - - - - 2,915,117 2,186,338
90% - - - - - - - - - - - - - -
100% - - - - 2,938,656 3,966 151,193 - 62,896 - - - 3,156,711 3,156,711
110% - - - - - - - - - - - - - -
115%
125% - - - - - - - - - - - - - -
135% - - - - - - - - - - - - - -
150% - - - - 17,953 14,249 26,451 6,861 - - - - 65,514 98,271
270% - - - - - - - - - - - - - -
350% - - - - - - - - - - - - - -
400% - - - - - - - - - - - - - -
625% - - - - - - - - - - - - - -
937.5% - - - - - - - - - - - - - -
1250% - - - - - - - - - - - - - -

Average - - -
Risk
Weight
Deduction - - - - - - - - - - - - -
from
Capital
Base
03%h0UBLIC3ECTOR%NTITIESv
ANNUAL REPORT 2016

-$"h-ULTILATERAL$EVELOPMENT"ANKSv
&$)h&INANCIAL$EVELOPMENT)NSTITUTIONSv
169
Basel II Pillar 3 Disclosures 170
as at 31 December 2016 Appendix III
BERHAD (709506-V)

(i) Disclosures on Rated Exposures according to Ratings by ECAIs (RM’000)

AFFIN ISLAMIC BANK

Economic Entity and The Bank

2016
Ratings of Corporate by Approved ECAIs
Moodys Aaa to Aa3 A1 to A3 Baa1 to Ba3 B1 to C Unrated
S&P AAA to AA- A+ to A- BBB+ to BB- B+ to D Unrated
Fitch AAA to AA- A+ to A- BBB+ to BB- B+ to D Unrated
Exposure Class
RAM AAA to AA3 A to A3 BBB1 to BB3 B to D Unrated
MARC AAA to AA- A+ to A- BBB+ to BB- B+ to D Unrated
Rating &
Investment Inc AAA to AA- A+ to A- BBB+ to BB- B+ to D Unrated
On and Off-Balance-Sheet Exposures

Credit Exposures (using Corporate Risk Weights)

Public Sector Entities (applicable for entities risk weighted
based on their external ratings as corporates) - - - - -
Takaful/Insurance Cos, Securities Firms & Fund Managers - - - - 65
Corporates 234,345 91,360 - - 4,878,163
Total 234,345 91,360 - - 4,878,228

Economic Entity and The Bank

2015
Ratings of Corporate by Approved ECAIs
Moodys Aaa to Aa3 A1 to A3 Baa1 to Ba3 B1 to C Unrated
S&P AAA to AA- A+ to A- BBB+ to BB- B+ to D Unrated
Fitch AAA to AA- A+ to A- BBB+ to BB- B+ to D Unrated
Exposure Class
RAM AAA to AA3 A to A3 BBB1 to BB3 B to D Unrated
MARC AAA to AA- A+ to A- BBB+ to BB- B+ to D Unrated
Rating &
Investment Inc AAA to AA- A+ to A- BBB+ to BB- B+ to D Unrated
On and Off-Balance-Sheet Exposures

Credit Exposures (using Corporate Risk Weights)

Public Sector Entities (applicable for entities risk weighted
based on their external ratings as corporates) - - - - -
Takaful/Insurance Cos, Securities Firms & Fund Managers - - - - -
Corporates 269,112 - - - 3,836,014
Total 269,112 - - - 3,836,014
Basel II Pillar 3 Disclosures
as at 31 December 2016 Appendix III

(i) Disclosures on Rated Exposures according to Ratings by ECAIs (RM’000) (continued)

Economic Entity and The Bank

2016
Ratings of Sovereigns and Central Banks by Approved ECAIs
Moodys Aaa to Aa3 A1 to A3 Baa1 to Ba3 Baa1 to Ba3 Caa1 to C Unrated
S&P AAA to AA- A+ to A- BBB+ to BB- BB+ to B- CCC+ to D Unrated
Exposure Class
Fitch AAA to AA- A+ to A- BBB+ to BB- BB+ to B- CCC+ to D Unrated
Rating &
Investment Inc AAA to AA- A+ to A- BBB+ to BB- BB+ to B- CCC+ to C Unrated
On and Off-Balance-Sheet Exposures
Sovereigns and Central Banks - 2,052,552 - - - -

Total - 2,052,552 - - - -

Ratings of Banking Institutions by Approved ECAIs

Moodys Aaa to Aa3 A1 to A3 Baa1 to Ba3 Ba1 to B3 Caa1 to C Unrated
S&P AAA to AA- A+ to A- BBB+ to BB- BB+ to B- CCC+ to D Unrated
Fitch AAA to AA- A+ to A- BBB+ to BB- BB+ to B- CCC+ to D Unrated
Exposure Class
RAM AAA to AA3 A to A3 BBB1 to BB3 BB1 to B3 C1 to D Unrated
MARC AAA to AA- A+ to A- BBB+ to BB- BB+ to B- C+ to D Unrated
Rating &
Investment Inc AAA to AA- A+ to A- BBB+ to BB- BB+ to B- CCC+ to C Unrated
On and Off-Balance-Sheet Exposures
Banks, MDBs and FDIs 12,414 - - - 31,333

Total 12,414 - - - 31,333

ANNUAL REPORT 2016

171
Basel II Pillar 3 Disclosures 172
as at 31 December 2016 Appendix III
BERHAD (709506-V)

(i) Disclosures on Rated Exposures according to Ratings by ECAIs (RM’000) (continued)

AFFIN ISLAMIC BANK

Economic Entity and The Bank

2015
Ratings of Sovereigns and Central Banks by Approved ECAIs
Moodys Aaa to Aa3 A1 to A3 Baa1 to Baa3 Ba1 to B3 Caa1 to C Unrated
S&P AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- CCC+ to D Unrated
Exposure Class
Fitch AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- CCC+ to D Unrated
Rating &
Investment Inc AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- CCC+ to C Unrated
On and Off-Balance-Sheet Exposures
Sovereigns and Central Banks - 2,854,574 - - - -

Total - 2,854,574 - - - -

Ratings of Banking Institutions by Approved ECAIs

Moodys Aaa to Aa3 A1 to A3 Baa1 to Baa3 Ba1 to B3 Caa1 to C Unrated
S&P AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- CCC+ to D Unrated
Fitch AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- CCC+ to D Unrated
Exposure Class
RAM AAA to AA3- A to A3 BBB1 to BBB3 BB1 to B3 C1 to D Unrated
MARC AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- C+ to D Unrated
Rating &
Investment Inc AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- CCC+ to C Unrated
On and Off-Balance-Sheet Exposures
Banks, MDBs and FDIs 5,310 - - - 19,699

Total 5,310 - - - 19,699

Basel II Pillar 3 Disclosures
as at 31 December 2016 Appendix IV

a) Disclosures on Credit Risk Mitigation (RM’000)

Economic Entity and The Bank

2016
Exposures Exposures
Covered by Covered Exposures
Exposure Class Guarantees/ by Eligible Covered by
Exposures Credit Financial Other Eligible
before CRM Derivatives Collateral Collateral
Credit Risk
On-Balance Sheet Exposures
Sovereigns/Central Banks 1,964,813 - - -
Banks, Development Financial Institutions & MDBs 29,582 - - -
Insurance Cos, Securities Firms & Fund Managers 65 - - -
Corporates 4,417,410 53,633 90,551 -
Regulatory Retail 3,441,735 - 20,735 -
Residential Mortgages 2,741,411 - 10,460 -
Higher Risk Assets 23,002 9,051 457 -
Other Assets 471,858 - - -
Defaulted Exposures 147,920 - 3,370 -
Total for On-Balance Sheet Exposures 13,237,796 62,684 125,573 -

Off-Balance Sheet Exposures

Off-Balance Sheet exposures other than OTC derivatives or credit derivatives 693,127 - - -
Defaulted Exposures 14,937 - - -
Total for Off-Balance Sheet Exposures 708,064 - - -
Total On and Off-Balance Sheet Exposures 13,945,860 62,684 125,573 -
ANNUAL REPORT 2016

173
Basel II Pillar 3 Disclosures 174
as at 31 December 2016 Appendix IV
BERHAD (709506-V)

a) Disclosures on Credit Risk Mitigation (RM’000)

AFFIN ISLAMIC BANK

Economic Entity and The Bank

2015
Exposures
Covered by Exposures Exposures
Exposure Class Guarantees/ Covered by Covered by
Exposures Credit Eligible Financial Other Eligible
before CRM Derivatives Collateral Collateral
Credit Risk
On-Balance Sheet Exposures
Sovereigns/Central Banks 2,736,934 - - -
Banks, Development Financial Institutions & MDBs 19,623 - - -
Corporates 3,670,640 28,960 279,259 -
Regulatory Retail 2,904,191 - 21,662 -
Residential Mortgages 1,974,206 - 10,535 -
Higher Risk Assets 6,345 - - -
Other Assets 738,826 - - -
Defaulted Exposures 78,261 - - -
Total for On-Balance Sheet Exposures 12,129,026 28,960 311,456 -

Off-Balance Sheet Exposures

Off-Balance Sheet exposures other than OTC derivatives or credit derivatives 599,980 - - -
Defaulted Exposures 9,666 - - -
Total for Off-Balance Sheet Exposures 609,646 - - -
Total On and Off-Balance Sheet Exposures 12,738,672 28,960 311,456 -
Basel II Pillar 3 Disclosures
as at 31 December 2016 Appendix IV

b) Disclosure on Off-Balance Sheet and Counterparty Credit Risk (RM’000)

Counterparty Credit Risk is the risk that the counterparty to a transaction could default before the final settlement of the transaction’s cashflows. An economic loss could occur if the
transactions with the counterparty has a positive economic value for the Bank at the time of default.
In contrast to the exposure to credit risk through a financing, where the exposure to credit risk is unilateral and only the financing bank faces the risk of loss, Counterparty Credit Risk
creates a bilateral risk of loss where the market value for many types of transactions can be positive or negative to either counterparty.
In respect of off-balance sheet items, the credit risk inherent in each off-balance sheet instrument is translated into an on-balance sheet exposure equivalent (credit equivalent) by
multiplying the nominal principal amount with a credit conversion factor (‘CCF’) as prescribed by the Standardised Approach under the Risk Weighted Capital Adequacy Framework. The
resulting amount is then weighted against the risk weight of the counterparty. In addition, counterparty risk weights for over-the-counter (‘OTC’) derivative transactions will be determined
based on the external rating of the counterparty and will not be subject to any specific ceiling.
Economic Entity and The Bank
2016
Positive Fair Total Credit
Description Total Value of Derivative Equivalent Total Risk
Principle Amount Contracts Amount Weighted Amount
Direct Credit Substitutes 33,386 33,386 25,476
Transaction related contingent Items 282,867 141,434 145,156
Short Term Self Liquidating trade related contingencies 312,550 62,510 17,534
Other commitments, such as formal standby facilities and credit lines, with
an original maturity of over one year 469,986 234,993 226,458
Other commitments, such as formal standby facilities and credit lines, with
an original maturity of up to one year 1,129,279 225,856 136,791
Any commitments that are unconditionally cancelled at any time by the bank without
prior notice or that effectively provide for automatic cancellation due to deterioration
in a customer’s creditworthiness 39,538 - -
Foreign exchange related contracts
- less than one year 1,049,862 8,987 9,885 1,979

Total 3,317,468 8,987 708,064 553,394

ANNUAL REPORT 2016

175
Basel II Pillar 3 Disclosures 176
as at 31 December 2016 Appendix IV
BERHAD (709506-V)

b) Disclosure on Off-Balance Sheet and Counterparty Credit Risk (RM’000)

AFFIN ISLAMIC BANK

Economic Entity and The Bank

2015
Positive Fair
Description Total Value of Derivative Total Credit Total Risk
Principle Amount Contracts Equivalent Amount Weighted Amount
Direct Credit Substitutes 9,383 9,383 9,383
Transaction related contingent Items 147,960 73,980 74,399
Other commitments, such as formal standby facilities and credit lines, with
an original maturity of over one year 348,409 174,205 171,299
Short Term Self Liquidating trade related contingencies 368,567 73,713 25,863
Other commitments, such as formal standby facilities and credit lines, with
an original maturity of over one year 1,387,337 277,467 180,823
Any commitments that are unconditionally cancelled at any time by the bank without
prior notice or that effectively provide for automatic cancellation due to deterioration
in a customer’s creditworthiness 15,321 - -
Foreign exchange related contracts
- less than one year 222,777 132 898 456

Total 2,499,754 132 609,646 462,223

Basel II Pillar 3 Disclosures
as at 31 December 2016 Appendix IV

c) Disclosures on Market Risk - Profit Rate Risk/Rate of Return Risk in the Banking Book

Profit rate risk is the risk to earnings and capital arising from exposure to adverse movements in profit rates mainly due to mismatches in timing repricing of assets and liabilities. These
mismatches are actively managed from an earnings and economic value perspective.

The objective of profit rate risk management is to achieve a stable and sustainable net profit income from the following perspectives:

(1) Next 12 months’ Earnings - Profit rate risk from the earnings perspective is the impact based on changes to the net profit income (‘NPI’) over the next 12 months. This risk is
measured through sensitivity analysis including the application of an instantaneous 100 basis point parallel shock in profit rates across the yield curve.

(2) Economic Value - Measuring the change in the economic value of equity (‘EVE’) is an assessment of the long term impact to the Bank’s capital. This is assessed through the
application of relevant duration factors to capture the net economic value impact over the long term or total life of all balance sheet assets and liabilities to adverse changes in profit
rates.

Profit rate risk thresholds are established in line with the Group’s strategy and risk appetite. These thresholds are reviewed regularly to ensure relevance in the context of prevailing market
conditions.
Economic Entity and The Bank Economic Entity and The Bank
2016 2016 2015 2015
Impact on Positions (100 basis points) Impact on Positions (100 basis points)
Type of Currency (RM million)
Parallel Shift Parallel Shift
Increase/(Decline) Increase/(Decline) Increase/(Decline) Increase/(Decline)
in Earnings in Economic Value in Earnings in Economic Value
Ringgit Malaysia (13.2) 91.9 (17.8) 73.0
US Dollar (0.8) - (0.6) -
Others (*) (3.6) - (0.1) -
Total (17.6) 91.9 (18.5) 73.0

* Others comprise of SGD, JPY, EUR, AUD and GBP currencies where the amount of each currency is relatively small.
ANNUAL REPORT 2016

177
w w w. a f f i n i s l a m i c . c o m . m y

AFFIN ISLAMIC BANK BERHAD (709506-V)

Tingkat 17, Menara AFFIN,
80, Jalan Raja Chulan,
50200 Kuala Lumpur

T +603 2055 9000

F +603 2026 1415