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Vision

An outstanding financial services organisation, highly competitive


and profitable, where people make the difference

Contents
CORPORATE FINANCIALS

02 Hong Leong Islamic Bank Story 62 Directors Report


04 The Business 66 Statement of Financial Position
06 Chairmans Statement 67 Statement of Income
09 Financial Highlights 68 Statement of Comprehensive Income
11 Chief Executive Officers Report 69 Statement of Changes in Equity
16 Management Discussion and Analysis 70 Statement of Cash Flow
24 Awards & Accolades 72 Notes to the Financial Statements
26 Sustainability Statement 145 Statement by Directors
36 Corporate Information 145 Statutory Declaration
38 Board of Directors Profile 146 Independent Auditors Report
40 Shariah Committees Profile 148 Basel II Pillar 3 Disclosures
43 Board Audit & Risk Management
Committee Report
46 Corporate Governance, Risk
Management & Internal Control
61 Shariah Committees Report
HONG LEONG ISLAMIC BANK BERHAD

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Hong Leong Islamic Bank Story


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Hong Leong Islamic Bank Story

Since its inception as a division within Hong Leong Bank


Berhad (HLB), Hong Leong Islamic Bank (HLISB) in turn
forms an integral part of the larger Hong Leong Financial Group.
Subsequent to its incorporation as a separate legal entity, it
was officially launched as a wholly-owned subsidiary of HLB
in July 2005 acting as a Shariah compliant business entity with
main involvement in Islamic Banking activities. HLISB continues
to benefit from HLBs shared services and strong distribution
network in offering Islamic banking products and services as a
Shariah compliant alternative to conventional banking.

In November 2011, HLISB completed finance, business and corporate wide-ranging approach has seen
its merger with EONCap Islamic Bank banking, personal financial services, the Bank growing from strength to
Berhad as part of a larger merger Islamic global markets and wealth strength as evidenced by its financial
between HLB and EON Bank Berhad. management. These offerings are performance, which, in turn, vital in
This milestone marked the first of such supported by continuous and deliberate growing and developing its Banking
mergers between two Islamic banks in efforts towards achieving excellence assets.
Malaysia and had provided HLISB with in service delivery, of which has
an improved scale and a deepened rewarded HLISB with strong financial The financial year ended 30 June 2017
foothold within the highly competitive results; a testament to the solid core marks yet another year of achievement
Islamic banking industry. competencies and fundamentals in its and growth for HLISB at the back
current form. of healthy financial results which
Strategically focused on the provision continues to be delivered as reflective
of holistic solutions based on the HLISB has since expanded on its scope of its solid core competencies and
tenets and principles of Shariah law, and breadth of banking solutions fundamentals. This solidifies further
HLISB offers its customers a wide to include the wider, non-Muslim HLISBs commitment and effort in
range of innovative solutions which customers fulfilling the needs of the contributing to the success of Islamic
amongst others include structured larger Malaysian populations. This finance agenda.
HONG LEONG ISLAMIC BANK BERHAD
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The Business

Hong Leong Islamic Bank Berhad (HLISB) is a wholly-owned


subsidiary of Hong Leong Bank Berhad. HLISB has a shareholders
fund of RM2,025 million as of 30 June 2017.
HLISB offers a comprehensive suite of Shariah compliant products and services in
areas such as:

Personal Financial Services


Business and Corporate Banking
Islamic Global Markets

HLISB operates through seven full-fledged Islamic branches, in addition to a


shared network with Hong Leong Bank (HLB) branches and self-service terminals
nationwide and a full serviced call centre.
HONG LEONG ISLAMIC BANK BERHAD
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HONG LEONG ISLAMIC BANK BERHAD

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Chairmans Statement

A Commitment
to Enhancing
Value for All
Dear valued shareholders and stakeholders,
HONG LEONG ISLAMIC BANK BERHAD

I begin this message with a sense of gratitude


and pride about Hong Leong Islamic Bank
ANNUAL REPORT 2017

Berhad (HLISB) that has only grown stronger


since its inception.

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Chairmans Statement

RM293 RM20.8
MILLION BILLION 18%
profit before gross Islamic of total assets
taxation financing

The financial year ended 30 June 2017 Throughout this period, HLISB remained steadfast in
(FY2017) was filled with economic
uncertainties and volatility in the our commitment to its stakeholders and shareholders
financial markets with moderate signs
of growth in the global and advanced
to deliver long-term sustainable growth.
economies. Nevertheless, the Malaysian
financial and fiscal systems remained
sound driven by proactive management DIGITAL TRANSFORMATION differentiated customer demands. We
by Bank Negara Malaysia (BNM) and also seek to empower our employees
pro-growth policies of the government Since the advent of our journey on our via the utilisation of technology
to support the economy. Islamic finance digital blueprint, we have achieved to stay connected, as well as
continues to be a key element in the significant milestones. During the year, collaborating and sharing knowledge
expansion of the Malaysian financial we have expanded our digital presence virtually. Additionally, we look to
sector. In 2016, the Islamic banking on government-based clients to include improve our online platforms to allow
industry achieved a rise of 8.3% in total state government agencies. We have us to have an integrated system for
assets to account for 28% of the overall also embarked on enhancements to our better operational efficiencies. All
banking system. online banking platform and launched these components are pivotal and
various e-products to address the interconnected towards transforming
Throughout this period, HLISB remained mass market and business community our product offerings.
steadfast in our commitment to its segments.
stakeholders and shareholders to deliver
long-term sustainable growth. Going forward, we continue our digital SMALL AND MEDIUM
transformation by staying agile and ENTERPRISES
For FY2017, HLISB recorded a Profit dynamic to integrate new technologies
before Tax (PBT) of RM293 million or into our traditional banking products Malaysia will progressively undergo
10% improvement over prior year. Gross while exploring new innovative Shariah- a transition towards a high-
Islamic financing assets grew by 12% to compliant Islamic banking structures. income economy that will require a
RM20.8 billion, comprising 18% of the We believe these initiatives will comprehensive and innovative suite
wider Hong Leong Bank Groups total differentiate our proposition and enable of financial services to support its
gross financing assets. Our asset quality us to be competitive in the market. economic expansion and evolution. A
remained prudent, with a gross impaired key segment that fosters the elevation
financing ratio of 0.87%. HLISBs cost HLISB recognises that financial of cross-borders industries is small
income ratio improved from 40.7% to technology is the catalyst to the future and medium enterprises (SME).
HONG LEONG ISLAMIC BANK BERHAD

37.2% reflecting efforts made on both of the banking industry. Acknowledging However, the growth by SME will need
income and operating efficiencies. that, our objective in the near future is to to be backed by dynamic and viable
offer end-to-end digital banking tailored funding frameworks and we believe
HLISB will continue its efforts towards to enrich customers engagement, Islamic finance can play an increased
ANNUAL REPORT 2017

the development of Islamic banking empower employees and optimise role in this area. As such, HLISB will
business by strengthening digital operational efficiency. The deepening be focusing on this area to design
capabilities, upholding high Shariah of our customers engagement will be our products and its architecture to
standards and encouraging diversified spearheaded by digital enablers such as address our SMEs requirements.
and innovative product offerings. comprehensive data analytics to address

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Chairmans Statement

UNLOCKING EMPLOYEES In empowering our workforce, the Bank is passionate in


POTENTIAL
nurturing talent, especially competency in Islamic finance
We believe our employees are our by developing learning tools and offering continuous
greatest asset. In empowering our
workforce, the Bank is passionate in training and awareness to our team members.
nurturing talent, especially competency
in Islamic finance by developing learning
tools and offering continuous training
and awareness to our team members.
Therefore, in order to achieve our aim,
we have structured several training
programs suited for all levels of staff.
In addition to technical capabilities, we
also look to inculcate our team members
with management and leadership skills
that will be key towards a successful
career progression.

APPRECIATION

I would like to use this opportunity to


thank all our customers and stakeholders
for your continuing support and trust
in our Bank. Special thanks are also
extended to all my colleagues at HLISB
and my fellow Board members who are
committed to drive HLISB forward. Last
but not least, I would like to express
my gratitude to our regulators and
authorities for their continued support
and guidance to the Bank.

DATUK DR MD HAMZAH
BIN MD KASSIM
Chairman

Date: 18 September 2017


HONG LEONG ISLAMIC BANK BERHAD
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Financial Highlights

FY 13 FY 14 FY 15 FY 16 FY 17
RM Million RM Million RM Million RM Million RM Million
Total Assets 21,729 21,798 23,281 25,620 28,456
Gross Financing 13,657 14,543 16,142 18,638 20,785
Customer Deposits 17,250 16,900 18,547 21,889 24,592
Profit Before Tax 301 308 255 267 293
Profit After Tax 227 231 200 197 223

Total Assets Gross Financing


(RMMillion) (RMMillion)
28,456
25,620

20,785
23,281
21,798
21,729

18,638
16,142
14,543
13,657

13 14 15 16 17 13 14 15 16 17

HONG LEONG ISLAMIC BANK BERHAD


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Financial Highlights

Customer Deposits Profit Before Tax


(RMMillion) (RMMillion)

308
301
24,592

293
21,889

255

267
18,547
17,250

16,900

13 14 15 16 17 13 14 15 16 17

Profit After Tax


(RMMillion)
231
227

223
200

197
HONG LEONG ISLAMIC BANK BERHAD

13 14 15 16 17
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Chief Executive Officers Report

The financial year ended 30 June 2017


(FY2017) was an eventful year for the
Bank, characterised by uncertainties in the
external economic environment.

The global economy grew at a moderate


pace, weighed down by various events in the
HONG LEONG ISLAMIC BANK BERHAD

financial landscape in light of the geopolitical


developments, exchange rate volatility and
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fluctuations in the prices of key commodities.

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Chief Executive Officers Report

OPERATING ENVIRONMENT during the financial year under review. to expand our wealth management
The Banks net profit after tax and products to complete the product suites
Against this backdrop, the Malaysian zakat for FY2017 maintained its growth for our retail customers.
economy remains stable to withstand momentum, up 13.2% to RM223 million
the impact of external shocks backed year-on-year, underpinned by the strong On the business banking segment,
by fiscal measures to safeguard the performance of our retail, corporate and the financing to small and medium
domestic economy. treasury business segments. The Banks enterprises (SME) registered a strong
gross financing expanded by 12% year- growth of 22.4% to RM2.6 billion. To
Amid a challenging economic on-year to RM20.8 billion, above the foster this growth, we are accelerating
environment, Islamic finance ecosystem industry growth rate, propelled by the our effort to facilitate our SME clients
has remained resilient, well supported expansion in the retail and business with full suite of products and services
by comprehensive market infrastructure, portfolio. Our asset quality remained to cater for their trade finance, working
robust regulatory framework and prudent, translated into gross impaired capital and foreign exchange facilities,
dynamic market participants. The market financing ratio at 0.87%, outperforming while exploring opportunities to grow
share of Islamic banks has expanded to the industrys average ratios. our fee-based income.
28% in 2016 achieving annual growth
rate of 8.2%. On the retail segment, our financing For the government relationship sector,
portfolio which consists of mortgage, the Bank has been establishing a
auto financing and personal financing healthy collaboration with various state
PERFORMANCE REVIEW expanded by 12.0% against last governments and government agencies
financial year. Retail segment remains to serve their various needs especially
The Bank saw the tangible impacts of as our main contributor to our business in the areas of payment and collection
remaining nimble and adaptive to market growth. As part of our effort to foster services. We will continue to raise our
volatility in delivering sustainable results this segment, we will focus our strategy presence in this segment by extending
HONG LEONG ISLAMIC BANK BERHAD
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Chief Executive Officers Report

The Bank maintains its tradition to uphold high In the area of Shariah thought leadership,
we have been actively involved in
standards of Shariah practices integrated in our contributing to Islamic banking and
financial industry as the Chairman
core values. of Shariah Governance Committee
(SGC) of Association of Islamic
more supports to our governmental- ourselves by industry recognition on our Banking Institutions Malaysia (AIBIM),
based clients, such as enhancing Shariah governance capabilities, backed Secretary and Deputy Secretary of
system integration, increasing cashless by our qualified team and experience Association of Shariah Advisors in
ATMs and widening the payment and Shariah scholars as our main pillars. Islamic Finance (ASAS) and member
collection channels. of Muamalat Specialist Panel under
The Bank is dedicated to raise our Department of Islamic Development
standards in Shariah governance Malaysia (JAKIM).
SHARIAH GOVERNANCE AND to safeguard the interest of our
HONG LEONG ISLAMIC BANK BERHAD

SHARIAH THOUGHT LEADERSHIP stakeholders. We also emphasise In addition, the Bank has been involved
on nurturing talents and enhancing as a member of BNM Panel of Authors
Our business practices revolve around competencies of our team members for Adoption of Shariah Standards into
the core tenets of Islamic principles in Islamic finance through our Academic Syllabus of Local Universities.
ANNUAL REPORT 2017

to deliver the intended outcomes of structured and comprehensive learning The panel is initiated by BNM in
Shariah (Maqasid Shariah). The Bank programmes. To further emphasis on collaboration with selected universities
maintains its tradition to uphold high this area, we also encourage our staffs to develop and publish educators
standards of Shariah practices integrated to enrol in recognised certifications in manual on Islamic finance to facilitate
in our core values. We benchmark Islamic finance. the adoption of Shariah standards into
the academic syllabus of the universities.
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Chief Executive Officers Report

DIGITAL ENABLER Personal Financing-i which has improved structured products. In nurturing the
efficiency and minimized operation entrepreneurial mindset amongst our
Technology has transformed the risks. HLISB has also initiated online SMEs clients, we have been active in the
financial services landscape and application for Personal Financing-i and facilitation of entrepreneurial activities
changed the relationship between our online CASA account opening process via through holistic offering which includes
clients. In response to the technologys HLISB website. not only financing facilities but also in
fast-paced development, the Bank has advisory, market knowledge, business
embarked on various initiatives to infuse Our digital transformation encompasses network and collaboration with SMEs
digital elements into our traditional not only the banking products and based governmental agencies.
banking products and explore new services, but also the back-office
digital platforms to expand our market support, internal processes as well
presence. as Shariah compliance and Shariah PRODUCTS AND SERVICES
knowledge sharing. We also plan to
We have introduced various e-products engage the public with sharing of The Bank has been serving our customers
during the year to complement the Shariah knowledge through digital needs and we continually strive to
existing product suites that covers intermediation. All these initiatives provide our clients with comprehensive
deposit and financing products. are targeted to enrich our customers Islamic product solutions for the retail,
Under deposits, we have launched experience in using our banking services. business, wealth management and
e-Current and Savings Accounts-i, treasury markets. To stay competitive,
e-Fixed Deposits-i and e-Remittances. we will focus on enhancing customers
On financing, we are in the midst of NURTURING GROWTH IN SME Islamic financial journey. With that in
developing e-Personal Financing-i and mind, we are embarking into research
e-Mortgages-i. To further foster the growth of our SME to develop new innovative products,
portfolio, we continue to provide our SME structured around the application of
On the process enhancement, we have clients with comprehensive facilities that underdeveloped Shariah contracts.
successfully digitalised our Commodity include trade products lines, working
Murabahah Trading platform for capital, foreign currency solutions and
HONG LEONG ISLAMIC BANK BERHAD
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Chief Executive Officers Report

FUTURE PROSPECT - VALUE-BASED INTERMEDIATION

In unlocking the full potential of Islamic finance, Bank Negara Malaysia (BNM) has announced Value-Based Intermediation
(VBI) initiative to drive the Islamic finance industry to the next level of growth. The objectives of the VBI are to deliver the
intended outcome of Maqasid Shariah through practices, conduct and offering and it aims to strengthen the roles and impacts
of Islamic banking institutions to the economy, community and environment, without compromising the financial returns to
shareholders.

Since our inception, some elements of VBI have been deeply rooted in our core values. To realize the full potential of VBI, the Bank
will adopt the four underpinning thrusts recommended by BNM that covers Entrepreneurial Mindset, Community Empowerment,
Good Self-governance and Best Conduct.

Value-based Intermediation
Entrepreneurial Mindset Community Empowerment Good Self-governance Best Conduct

The principles of VBI are in line with the Banks values and strategic direction. As such, the Bank is passionate to integrate the
thrusts and principles of VBI into our growth strategy.
HONG LEONG ISLAMIC BANK BERHAD

ACKNOWLEDGEMENT

I would like to express my deepest gratitude to all my colleagues and peers at HLISB as well as Hong Leong Bank for their
ANNUAL REPORT 2017

continual and tireless efforts and sacrifices to bring HLISB to where we are today. Special thanks to members of the Banks
Shariah Committee, Board Members, BNM and other regulatory authorities for their valued support during the year.

JASANI BIN ABDULLAH


Chief Executive Officer

Date: 18 September 2017 15


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Management Discussion & Analysis

FINANCIAL PERFORMANCE
HONG LEONG ISLAMIC BANK BERHAD
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Management Discussion & Analysis

The Bank has delivered another set of good results during the financial year Total Income
ended 30 June 2017 (FY2017). Net profit after tax and zakat recorded at RM223
million, registered a growth of 13.2% as compared to the previous financial year.
The commendable performance was underscored by total income of RM550 million, RM550 million
which increased by 18% from RM467 million in the previous year. RM467 million

Despite the declining margin environment, the Banks net profit incomes from fund 18%
based activities remained strong, improved by 19.2% to RM501 million year-on-year.
The growth was the result of our proactive management of the Banks cost of funds 2016 2017
supported by stable rise in gross financing and customer deposits base.

Other operating income continued to compliment the Banks earnings, increased


Profit Before Tax
by 3.8% to RM49 million mainly attributed to favourable performances of our
transactional banking and treasury operations.
RM293 million
We continue to pursue cost efficiency in our operations. The Banks operating RM267 million
expenses for FY2017 remained well contained at RM204 million with cost-to-income
ratio (CIR) improving from 40.7% to 37.2%. 10%

2016 2017
ASSET GROWTH

The Bank has demonstrated stable growth in balance sheet over the past 5 years.
Cost Income Ratio
Our Total Assets registered 11% growth to RM28.5 billion from RM25.6 billion against
the previous year.

Gross financing grew at a healthy pace of 11.5% year-on-year to RM20.8 billion,


spurred by the expansion in the retail and business and corporate banking portfolio. 40.7% 37.2%

2016 2017
Gross Financing

Total Assets
RM20.8 billion
(2017)
RM28.5 billion

RM25.6 billion

12% 11%

2016 2017
HONG LEONG ISLAMIC BANK BERHAD

RM18.6 billion
(2016)
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Management Discussion & Analysis

The Banks retail financing portfolio, which mainly comprised of financing of Gross Financing Composition
residential properties and vehicles, expanded by 12.0% as compared to last financial
year. The positive growth was driven by our core segment of residential mortgages,
which improved by 14.2% year-on-year. Retail banking segment remained as the key Mortgage
Personal Financing
(RM886 mil)
contributor to our growth represented 78% of the Banks total gross financing and (RM11,558 mil)

advances as at the FY2017. 4% Auto Financing


(RM3,571 mil)
17%
Business and corporate banking increased 10.0% year-on-year, driven by working
capital lines particularly from the commercial financing to the small and medium 56%
enterprises (SME). 23%

Corporate
(RM4,771 mil)

DEPOSITS & LIQUIDITY

The Banks key sources of funding are mainly consist of retail and wholesale deposits
which contributed 44% and 56% respectively to the Banks total customer deposit
base. Our funding composition remains stable and diversified to support the liquidity
and growth strategy of the Bank.
Total Deposits
Customer deposits increased by 12.3% year-on-year to RM24.6 billion, backed by
healthy growth from our core deposits. The expansion of our core deposits was
primarily driven by steady inflows of term deposits followed by the current and RM24.6 bil
(2017)
saving accounts (CASA).

Retail deposits expanded 31.4% year-on-year to RM10.8 billion, reflective of the


Banks commitments to maintain the strong and stable retail deposit franchise.
12%
Our liquidity position remains ample to support the strategic business growth of the
Bank where the Financing to Deposits ratio closed at 84.5%. The Banks maintains a
high quality and well diversified liquid assets to meet the liquidity needs. Liquidity
Coverage Ratio was healthy at 106.3% above the BNMs minimum requirement of
80% for 2017. RM21.9 bil
(2016)

ASSET QUALITY AND CAPITAL

The Banks key sources of funding are mainly consist of retail and wholesale deposits
which contributed 44% and 56% respectively to the Banks total customer deposit
base. Our funding composition remains stable and diversified to support the liquidity
and growth strategy of the Bank.

Deposit Base Deposit Mix Retail & Corporate Mix


HONG LEONG ISLAMIC BANK BERHAD

Term Deposit
(RM15,369 mil) Savings
(RM2,794 mil)
Individual
(RM9.3 bil) Retail
11% Demand
(RM2,869 mil)
44%
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38%
12% 62% 56%
63% Corporate
14% Non-Individual
(RM15.3 bil)

Market Deposit
(RM3,561 mil)

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Management Discussion & Analysis

DIGITAL TRANSFORMATION

Our journey in digitalisation has made significant progress throughout the FY2017.

We have been putting our strategic focus on digital transformation. Among our ongoing initiatives include migration of existing
traditional products into digitalised platform to enhance our customers experience. We have introduced various e-products
during the year to complement the existing product suites that covers deposit, financing and wealth management segments.
Under deposits, we have launched e-Current and Savings Accounts-i, e-Fixed Deposits-i and e-Remittances. On financing, we are
HONG LEONG ISLAMIC BANK BERHAD

in the midst of developing e-Personal Financing-i and e-Mortgages-i.

Our digitalisation journey also covers banking operations and process enhancement. During the financial year, we have successfully
launched automation on our Commodity Murabahah Trading platform for Personal Financing-i which has improved efficiency,
ANNUAL REPORT 2017

minimized operation risks and enhance customer experience. HLISB has also initiated online application for Personal Financing-i
and online CASA account opening process via HLISB website.

Digitalisation has reinforced our adherence to Shariah compliance. During the financial year, we have started projects to embed
digital elements into our Shariah governance framework which will be implemented in phases, such as e-Shariah compliance
review certificate, e-Shariah review and e-Shariah learning.
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Management Discussion & Analysis

SUPPORTING GROWTH IN SME BUSINESS

SME sector is undergoing a rapid expansion phase and this advancement is further fuelled by Malaysia Government in the 2016
Budget, which allocated an additional RM1 billion into Shariah-Compliance SME Financing Scheme. SME financing outstanding in
Malaysia grew 9.2% to RM270.4 billion, accounting for 36.3% of the total financing to businesses as at end-July 2016. The Bank
continues to concentrate on this particular sector which we have achieved a steady double-digit growth of 22.4% to RM2.6 billion
as compared to last financial year. As part of our effort to support the SME, HLISB has been steering our focus to expand our
product offerings to SME.
HONG LEONG ISLAMIC BANK BERHAD

The Bank also contributes to the government initiatives on the public infrastructure by providing financing programmes to
government infrastructure projects and Bumi SME. During the financial year, we have participated in various financing programmes
involving the development of public facilities such as MRT project.
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Management Discussion & Analysis

SHARIAH GOVERNANCE FRAMEWORK

Similar to the years before, HLISB remains steadfast in upgrading its Shariah compliance functions by adopting robust Shariah risk
management framework to facilitate our strategic growth.

Our Shariah governance framework, overseen by five prominent scholars, covers five main functions: Shariah Review, Shariah
Risk, Shariah Audit, Shariah Advisory and Shariah Research.
HONG LEONG ISLAMIC BANK BERHAD

The importance of Shariah governance is not only being emphasised at all staff and management levels but also our external
business partners. We have devised our plan through the following approaches to better position ourselves in the area of Shariah
governance:
ANNUAL REPORT 2017

Continuous review of policies and procedures of the Banks operations and products to ensure we comply with the Shariah
governance practice at all times.
Upgrading our Shariah review and research framework to ensure we are ahead of the latest development and best market
practice.
Continuous training and awareness to our stakeholders to improve awareness and compliance.
Capacity building on Shariah knowledge and competencies for our staff and stakeholders.
Initiatives on Shariah awareness to community via publications and participation in public forums and projects. 21
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Management Discussion & Analysis

HUMAN CAPITAL DEVELOPMENT

The Bank is fully aware of the increasing demand in specialised skills and talents to drive us forward. This leads us to invest in
one of our main drivers, our employees. To ensure the Bank remains competitive in the challenging operating environment, we
need to ensure that our human capital is fully equipped with proper skillsets and possesses critical thinking skill that is open to
innovation and change to deliver value to our stakeholders and customers.

The Bank is also committed in the development of adequate capacity building for all staffs to facilitate continuous learning
HONG LEONG ISLAMIC BANK BERHAD

opportunities and career progression for them. Our training programmes would take into account different levels of competency
and technicalities, supported by post training feedback. During the year, the Bank has launched the Shariah Graduate Trainee
Programme (SGTP) tailored for young graduates. We also continue to participate in external training scheme initiated by the
industry and government such as Skim Latihan 1 Malaysia (SL1M) and internship programme.
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Management Discussion & Analysis

AWARDS & ACCOLADES

During the year, the Bank is honoured to have been awarded the Asia Best Employer Brand Awards by Employer Branding
Institute for two consecutive years. This achievement is made possible due to our excellence in building the employer brand as
an employer of choice.

The Bank has also been awarded The Best Islamic Bank at the 7th Asia Islamic Banking and Takaful Conference 2017. The
award recognises the top Islamic Financial Institutions based on their performance, financial stability, governance and social
responsibility metrics.

FUTURE PROSPECT / OUTLOOK

As the Islamic finance industry grows, more challenges keep emerging in our journey towards becoming the top leading Islamic
HONG LEONG ISLAMIC BANK BERHAD

bank in the industry. In our effort to keep pace with the dynamic business environment, we strive to reinforce our compliance
framework, promote perpetual learning culture and maintain high standard of integrity.

We are optimistic in our capabilities and we remain focus in offering Islamic retail products, business & corporate banking and
ANNUAL REPORT 2017

wealth management, as well as our own business niche in digital and transactional banking. We have absolute certainty in the
underlying growth of digital market and we are well-positioned to broaden our presence in the market.

We believe HLISB is fundamentally strong to drive organic growth, which will fuel the growth in Islamic banking. Our target
areas remain in the mass Malay market segment, small & medium sized enterprises, the government and government-linked
companies. HLISB is also well-positioned in delivering simplified and enhanced customer service experience which will ultimately
distinguishes HLISB among other players. 23
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Awards & Accolades

The Asset Triple A Digital


Awards 2016 (The Asset)
Category: Most Innovative ATM Project,
Malaysia

HR Excellence in CSR Strategy


(Human Resource Magazine)
Category: Excellence in CSR Strategy
Business Outlook
Global Business Outlook
Awards 2016 (Global Business
Outlook)
Category: Best Islamic Bank Malaysia
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

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Awards & Accolades

Global Brands Magazine


Awards 2016 (Global Brands
Magazine)
Category: Best CSR Islamic Bank,
Malaysia

12th Employer Branding Awards


(CHRO Asia)
Category: 8th Edition Asia Best
Employer Brand Awards

HONG LEONG ISLAMIC BANK BERHAD


ANNUAL REPORT 2017

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Sustainability Statement

KEY HIGHLIGHTS

COMMUNITY INVESTMENT
OUR APPROACH TO SUSTAINABILITY
Employees from Hong Leong Islamic Bank Berhad
participated in a group-wide employee engagement
Our approach to sustainability focuses initiative involving Hong Leong Foundation and the
Group Operating Companies. A total of RM57,738 was
on the three dimensions of value raised and donated to 17 charitable organizations.
creation: economic, environmental,
and social. It aims to set the direction
for a future-orientated business Total disbursement of scholarships for
diploma/undergraduate and masters
strategy that balances economic studies, ROAR and GDVT programs:
success with environmental and
social responsibility, all in line with
the expectations of stakeholders. We
seek to promote sustainable business, Approx.
increase transparency and ensure
that our risk management processes RM37 MILLION
help to avoid negative environmental (Since inception)

and social impacts arising from our


core businesses. In addition, we try
to manage our business operations
sustainably and embrace our
responsibilities as a corporate citizen. TOTAL TAXES PAID OPERATING
for FY2017 EXPENSES

RM391 RM2,008
MILLION MILLION
HONG LEONG ISLAMIC BANK BERHAD

QUANTITY of recycled
paper used:
ANNUAL REPORT 2017

46,502kg
26
CORPORATE

Sustainability Statement

HOW SUSTAINABILITY IS GOVERNED

Sustainability at Hong Leong Islamic Bank is driven by


the highest level within the organization: our Board. Our
FEMALE REPRESENTATION
Directors, especially those in the Board Risk Management
IN EXECUTIVE MANAGEMENT:
Committee, oversee our sustainability and climate change-
related actions and policies, ensuring these are in line with
our corporate values and ultimately support our business
goals and vision.
FY2017
Percentage of women Percentage of women The Sustainability Steering Committee and Working
Committee meet once a quarter to discuss matters related
in senior management in top management
to sustainability.
(C-Suite)

42% 25% Hong Leong Islamic Bank Sustainability Governance


Chart FY2017

EMPLOYEE
DEVELOPMENT:
Board
BOARD
Guidance and
OF DIRECTORS
Oversight
FY2017

Classroom E-Learning

Average training hours Average training hours


per employee per employee
Board

34 7
BOARD
Committee
RISK MANAGEMENT
(Shariah COMMITTEE
Committee)

RESULTS FROM CUSTOMER SATISFACTION SURVEYS

SUSTAINABILITY PROJECT
Positive Feedback Areas for improvement Senior
STEERING COMMITTEE
Everyone, regardless of Long wait times Management
social class, is treated Unresolved issues after (Chaired by GMD/CEO HLB)
with respect
HONG LEONG ISLAMIC BANK BERHAD

consultations
Patient in dealing with
No Mandarin language
customers
Good service provided option on website
Making customer feel Malfunction of ATM
prioritised by providing machines
excellent service Limited automated
ANNUAL REPORT 2017

Operates even on public teller machine (ATM)


holidays presence in shopping
Cash Deposit Machine SUSTAINABILITY
malls
(CDM) is faster
Little privacy available at
Working WORKING COMMITTEE
than other banks in (Chaired by a member of
calculating notes ATM machines Level
the Steering Committee)

27
CORPORATE

Sustainability Statement

HOW WE ENGAGE WITH OUR STAKEHOLDERS

Engagement Channel Issues Actions

Employees Bank-wide Townhalls Ensure the organization is fully Sharing sessions with employees on business updates and
Social media and career aligned to achieve business overall direction to achieve vision and annual deliverables
results Make known the Banks employee value proposition at
fairs
Build HLB and HLISB brand key career fairs and events throughout the year such as
Performance appraisal equity within the financial Graduan, and through social media platforms such as
process industry; and garner the LinkedIn
Learning & development attention of talent by Launched a development planning process in conjunction
showcasing our heritage as well with the performance appraisal process
discussions
as the best we have to offer as Ensure managerial readiness to handle Performance and
Employee survey an employer Development discussions by developing managers on
Scholarship program Drive high performance these topics (incorporating SMART principle, GROW model,
Graduate Training leadership to consistently Coaching, Agile Learning Framework, talent retention
Program deliver our business priorities conversations/tracker and stay interviews)
and goals Launched the 70:20:10 learning framework to ensure
Continue to invest in our learning interventions like classroom, e-learning and micro
employees through different learning platforms are made available to employees for
learning interventions for their their development and long-term progress
personal and professional Launched My Thoughts, Our Future employee survey to
success gather insights from all employees on how management
Create a conducive work can draw up action plans to create a conducive work
environment that genuinely environment
takes into account the needs of Offer scholarships and career opportunities to top scholars
our employees Enrol fresh graduates in an 18-month development
Build a pipeline of homegrown program
young banking talents to take
on future leadership positions

Suppliers Supplier engagement To ensure suppliers meet Bank Various internal stakeholders conduct assessments to
rating process requirements for technical and evaluate supplier capabilities
functional capabilities E-bidding process allows for transparent sourcing and
E-Bidding (live auction)
Maintain a transparent supply selection of most competitive suppliers through a live
Tender process value chain while optimising auction online system
Proof of Concept costs through E-Bidding An independent Tender Review Committee comprising
engagements Ensure comprehensive due senior managers access and approve proposals above a
diligence conducted on certain threshold
Annual supplier due
potential suppliers Engage in a rigorous and robust process to identify and
diligence review Zero tolerance towards select potential suppliers based on their experience level,
corruption and unfair practices financial strength, years in business and industry reputation
Ensuring approach and Due diligence reviews include past performance, disaster
concept are both feasible and recovery and business continuity plans, financial strength
measurable and performance
Compliance with BNMs Suppliers are able to raise any concerns through the
guidelines on credit whistleblowing channel - a copy of our whistleblowing
transactions and exposure with policy, including contact details, is published on our HLB
connected parties website
Conduct limited scope pilot tests to ensure viability of
proposals and implementation plans
HONG LEONG ISLAMIC BANK BERHAD

Signed declarations by Procurement employees confirming


that they have no connection with existing suppliers

Customers At our branches Reduce waiting times at Digital (online) initiatives that reduce queueing time
ANNUAL REPORT 2017

Internet and mobile branches and while making Plan to survey cash recycling terminals and relationship
applications managers, thus enhancing service
banking Reduce number of complaints Term financing with multilevel matrix of financing rates to
Customer surveys Provide assistance to ease suit: incomes from RM2k/month; tenures of 2-5 years; and
Telephone and via email financing burden financing amounts from RM5k
Protect customer data Anti-persistent threat mitigation applied to cyber threats
Social media e.g.: Hong
Engagement of experts in the Security Operations Center to
Leong Facebook, Twitter, help protect data security
28 LinkedIn, YouTube Enforce Personal Data Protection and secrecy policy by
imposing severe fines and penalties for non-compliance by
employees
CORPORATE

Sustainability Statement

Constructive engagement with stakeholders within and outside Hong Leong is fundamental to our approach to Sustainability. It helps us to decide which issues
to prioritize as material throughout the year, understand our impact more broadly, and challenge ourselves as we strive to become a more sustainable bank. Our
goal is to be responsive to the expectations of our stakeholders and to safeguard our business from potential future shocks such as economic or cyber security.
The results of this dialog feed into our materiality analysis, environmental and social risk management and annual reporting.

Engagement Channel Issues Actions

Investors Annual General Transparency Compliance officers and representatives support


Meetings (AGMs) Information leaks, loss, theft comprehensive assurance and review program
Investor roadshows Constant tightening of our compliance and cyber security
policy to ensure zero customer information leak/theft/loss
Meetings with investors Maintaining an independent Group compliance function
Meetings with analysts Group internal audit to conduct independent reviews

Community SME segment Provision of financial aid to Deployment of 150 community banking managers at
engagement programs empower SMEs branches nationwide to better serve the SME segment, and
Hong Leong Uplifting marginalised increase the Banks coverage by approximately 5 times
communities through Support the Shariah-compliant SME Financing Scheme
Foundations programs development programs (SSFS) by SME Corporation Berhad
Increase financial literacy of Support BNM schemes e.g. Fund for Small and Medium
school children Industries 2 (FSMI2) and New Entrepreneurs Fund 2
Enhancement of educational (NEF2)
attainment of marginalised Support CGC schemes e.g. BizJamin and the Green
groups Technology Financing Scheme (GTFS)
Educational initiatives such as scholarship program, after
school program, and German Dual Vocational Training
Community initiatives such as food for the homeless, youth
skills training, donations and other forms of aid
Initiating financial planning and education workshop
targeting teenagers and school children

Regulators Bank Negara Malaysia Compliance with financial BNMs dedicated supervisory team has oversight of the
(BNM) services legislation, including Bank. BNM conducts an annual composite risk review of
Bursa Malaysia the Financial Services Act the Bank, in addition to ad-hoc surveys and reviews to
2013 and the Islamic Financial ensure continuing compliance with its requirements
Perbadanan Insurans Services Act 2013. Compliance The Bank operates a three-line defence model
Deposit Malaysia with requirements published by encompassing control embedded in the business through
(PIDM) BNM. Business Unit Compliance Representatives (BUCRs),
Securities Commission Compliance with Bursa listing Group Compliance and Group Risk and internal audit.
(SC) requirements The Group Company Secretariat ensures the Bank meets
Compliance with PIDM Bursa Malaysias Listing Requirements
Federation of
requirements Compliance officers and representatives embedded in the
Investment Managers Compliance with SC business support and advise on compliance with regulatory
Malaysia (FIMM) requirements requirements
PDPA Commissioner Compliance with FIMM The Group Compliance function is responsible for ensuring
Ombudsman for requirements that controls to manage compliance risk are adequate and
Financial Services Compliance with Personal Data operating as intended, as well as to assess and monitor
Protection Act compliance risk within the Bank
HONG LEONG ISLAMIC BANK BERHAD

(OFS)
Compliance with OFS The Bank is committed to embedding a strong compliance
requirements culture within the organization, through a wide range
of initiatives including targeted compliance training
for employees thus ensuring they hold appropriate
accreditation and licences for the roles they perform
ANNUAL REPORT 2017

The Bank has established a robust Shariah Governance


framework to ensure our Islamic Banking business and
operations comply with Shariah at all times
The Bank keeps abreast of changes in relevant legal
and regulatory requirements through monitoring the
publication of new requirements by regulators, responding
to consultations on new requirements, and attending
training and seminars conducted by regulators
29
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Sustainability Statement

In order to present a report that is meaningful to our stakeholders, we conducted


a materiality assessment to determine those issues that are important to both the
Bank itself as well as our stakeholders. The assessment comprises four steps:

1. IDENTIFICATION

We collated preliminary issues


which we believed could be
material to the Bank and our
stakeholders through internal
management discussion, an Identification 1 2 Prioritisation
analysis of issues that have been
reported by other banks and
companies in Malaysia, as well 3 4
as by looking into industry best
practice. We then conducted
interviews with members of the
Sustainability Steering Committee
and three Executive and Non- Validation Review
Executive Directors to identify
those issues and concerns that are
material to Hong Leong Islamic
Bank in particular. Through these
interviews, we were able to
finalise key issues, opportunities
and challenges facing the Bank.

2. PRIORITISATION

From the list of issues that had


been identified as being material,
we prioritized them (i.e. provided
a measure of weightage to each).
This was accomplished via three
employee focus group sessions
and a materiality assessment
workshop with the Sustainability
Working Committee. We involved
a good cross-section of internal
stakeholders in the focus group
sessions from managers to heads
HONG LEONG ISLAMIC BANK BERHAD

of department and members of


the C-Suite as well as Directors
and obtain inputs from their 3. VALIDATION 4. REVIEW
engagement with external
ANNUAL REPORT 2017

stakeholders. At the end of this The materiality matrix was then This final step encompasses
step, we were able to plot a presented to the Sustainability feedback from our stakeholders.
materiality matrix, indicating the Steering Committee, Group From your feedback, we will be able
relative importance of each issue Managing Director/Chief Executive to further refine our sustainability
to the Bank and our stakeholders. Officer and Board, all of whom approach so as to present even
validated the findings. more meaningful reports in the
30 future.
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Sustainability Statement

OUR MATERIALITY MATRIX

Material issues identified

Digital Innovation Fair Banking Legend:


Compliance Customer Experience
Most Important
Employee Experience Cyber Security and Data Privacy Very Important
Ethics and Integrity Responsible Financing Important

Community Banking Managing Our Environmental Footprint Material Issues

Supplier Assessment
Most Important

Digital
Innovation
Cyber Security and Data Privacy
Customer
Community Banking Experience

Ethics and Integrity


Compliance
Concern to Stakeholders

Fair Banking
Very Important

Employee
Experience

Responsible Financing

Managing Our
Environmental
Footprint
Important

HONG LEONG ISLAMIC BANK BERHAD

Supplier Assessment
ANNUAL REPORT 2017

Important Very Important Most Important

Significance To Business

31
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Sustainability Statement

ABOUT OUR MATERIAL ISSUES

HLB Mission Material Issue GRI Aspect Description

Digital Innovation - We strive to innovate with digital products and services for
greater customer accessibility and convenience.
Customer Product and Service We make every effort to enhance our product and service
Experience Labeling delivery to create a positive customer experience. This includes
meeting our customers preferences and needs.
Helping Customers Cyber Security Customer Privacy We protect our organization and customer data from
Succeed and unauthorised access or attacks aimed to exploit such
Data Privacy information. This involves implementing processes and
measures that prevent, identify and address vulnerabilities
and threats to personal and confidential customer data.
Fair Banking Product and Service We aim to provide goods and services that meet our customers
Labeling expectations and take into consideration the interests of both
parties in terms of fairness in all aspects.

Employee Employment, We aim for a high-performance culture, honed from the


Experience Labour/Management way we attract, develop and retain the next generation of
Relations, Training leaders to ensure we are fit for the future. Our employees are
and Education, empowered to deliver and take ownership of results. We also
Diversity and Equal provide relevant learning and development opportunities,
Providing Our Opportunity, Labour competitive rewards and recognition programs and more
People with the Practices Grievance importantly, a conducive work environment, in order to
Best Opportunities Mechanisms ensure our people are able to serve the community better
continuously and uncompromisingly

Compliance Compliance We are committed to meeting all local regulations and core
operational regulations (e.g. CCM and BNM regulations, Data
Protection Acts, AMLA, etc) as a measure of managements
ability to ensure our operations conform to certain
performance parameters and long-term viability.
Ethics and Anti-corruption We expect our employees to adhere to our values, principles,
Integrity standards and norms of behaviour, as outlined in our Code of
Conduct and Ethics. This is supported by a Whistleblowing policy.
Community Local Communities, We seek to help local communities develop via programs
Banking Market Presence that have been designed to meet their specific needs. This
includes providing employment opportunities to members of
these communities.
Creating Responsible Product Portfolio We have policies, principles and codes of conduct to ensure the
Financing interests of HLB are aligned with the interests of existing and
Stakeholder
potential customers. These include audits to assess and screen
Value
for environmental and social risks, financial health assessments
of existing and potential customers, and the provision of basic
HONG LEONG ISLAMIC BANK BERHAD

banking products to those who cannot afford to pay for fees so


that they can participate in the financial system.
Managing Our Materials, Energy, We endeavour to reduce waste (such as paper and water),
Environmental Emissions and to use energy efficiently thus reduce our greenhouse gas
Footprint (GHG) emissions and our carbon footprint.
ANNUAL REPORT 2017

Supplier Procurement We have an independent Tender Review Committee to assess


Assessment Practices and approve proposals above a certain threshold. This is
supported by due diligence reviews of suppliers financial
strength and performance as well as disaster recovery and
business continuity plans. Suppliers have to satisfy our zero
tolerance for corruption and unfair practices.
32
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Sustainability Statement

HOW OUR MATERIAL ISSUES RELATE TO THE UNITED NATIONS SUSTAINABILITY DEVELOPMENT GOALS (SDGS)

We are pleased to be able to map our sustainability performance against the SDGs in areas that are relevant to our operations.
Of the 17 SDGs, we believe we are in a position to make a positive impact on the following eight, and have mapped our
performance to the relevant SDGs to Malaysia and the financial services sector:

Goal 4: Quality Education


Goal 5: Gender Equality Goal 10: Reduced Inequalities
Goal 8: Decent Work and Economic Growth Goal 12: Responsible Consumption and Production
Goal 9: Industry Innovation and Economic Growth Goal 13: Climate Action
Goal 16: Peace, Justice and Strong Institutions
We recognise it is important to engage regularly with our stakeholders in order to understand their needs as well as their
expectations of us, creating an environment of openness and trust.

SDGs relevant to SDGs relevant to


Malaysia and the Financial Services sector1 our material issues

Economic

Environmental

Social
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

1
Source: PwC SDG selector tool (dm.pwc.com/SDGSelector/)
33
CORPORATE

Sustainability Statement

THE CSR PHILOSOPHY OF HONG LEONG ISLAMIC BANK

As a leading Islamic Bank in Malaysia, we strongly believe in the core principle


of Maqasid Shariah and to be exemplary in our brand name and level of services
provided to all our customers and future prospects. Our messages are focused on
Islamic ethics and values, to reiterate our seriousness in promoting Islamic Banking
and Lifestyle that one should adopt.

We lead by example and hope to encourage others by doing the same. Islamic
Finances objective is all about achieving comprehensive communal prosperity,
which is why our CSR activities support and go beyond the one off activities that
leave very little imprint in the community we live in and those people who need real
help, regardless of their race, nationalities and business alignment.

Before we embark in any activity, the thought process must always begin with
proper due diligence, starting with how many lives we touch and the impact we
would leave. More importantly, it cannot and shall never be a PR exercise where
publicity is often the focus and the end-objective of each activity. To ensure that our
intentions remain pure, all our CSR activities are never promoted in the daily papers
but and no press releases are issued out for promotional purposes.

However, we regularly use hashtags such as #bankingbeyondprofit and


#bankingontheunbanked for all the programmes that we conduct so that our
stakeholders are aware of the reason behind each activity and that the general
masses know that we are serious about being Islamic at the core.

Amongst the communities that we have touched on the Malaysian soil include:

1) Refugees from Somalia, Syria, Yemen, Palestine, Pakistan, Rohingyans, etc


2) Orphans
3) Low-income families
4) Single Mothers
5) Homeless
6) Muslims who strive in the way of Allah
7) Physically-challenged
8) The Sickly
9) Old Folks
10) Social Entreprises

Our CSR based activities will continue on a greater momentum next year, albeit the
busiest month being the month of Ramadhan where the rewards come in multifold.

In summary, for the financial year of 2016/17, we have touched more than 25,945
lives and we hope to affect more lives in the years to come, as our existence as an
HONG LEONG ISLAMIC BANK BERHAD

Islamic Bank should only be as good as the value we bring into the community we
operate.
ANNUAL REPORT 2017

34
35
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017
CORPORATE

Sustainability Statement
HONG LEONG ISLAMIC BANK BERHAD

36
ANNUAL REPORT 2017
CORPORATE

Corporate Information
CORPORATE

Corporate Information

DIRECTORS
YBhg Datuk Dr Md Hamzah bin
Md Kassim Mr Kwek Leng Hai
(Chairman)

Encik Alan Hamzah Sendut Mr Domenic Fuda

CHIEF EXECUTIVE OFFICER


Encik Jasani bin Abdullah

COMPANY
SECRETARIES
Ms Christine Moh Suat Moi
MAICSA 7005095

Ms Liew Sook Yen


MAICSA 7025428

AUDITORS REGISTERED OFFICE


Messrs PricewaterhouseCoopers Level 8, Wisma Hong Leong
Chartered Accountants 18 Jalan Perak
Level 10, 1 Sentral, Jalan Rakyat 50450 Kuala Lumpur
Kuala Lumpur Sentral Tel: 03-2164 8228
50706 Kuala Lumpur Fax: 03-2164 2503
Tel: 03-2173 1188
HONG LEONG ISLAMIC BANK BERHAD

Fax:03-2173 1288
ANNUAL REPORT 2017

WEBSITE
www.hlisb.com.my

37
CORPORATE

Board of Directors

YBHG DATUK DR MD MR KWEK LENG HAI


HAMZAH BIN MD KASSIM Non-Executive Director/
Chairman/Non-Executive Director/ Non-Independent
Independent
Age 64, Male, Singaporean
Age 68, Male, Malaysian

YBhg Datuk Dr Md Hamzah bin Md in the Institute of Strategic and Mr Kwek Leng Hai qualified as a
Kassim holds a PhD in Business from International Studies and subsequently Chartered Accountant and has extensive
Aston University, United Kingdom and took up the position as Director of experience in financial services,
a Master in Business Administration. He Science and Technology, Ministry of manufacturing and property investment.
was inducted in 2012 into the Alumni Science, Technology and Environment
Hall of Achievement of Monmouth to spearhead the implementation of the Mr Kwek was appointed to the Board of
College in Illinois. plan as part of the national strategies Directors of HLISB on 23 June 2005. He is
to accelerate growth and technology also a Director of HLB, a company listed
YBhg Datuk Dr Md Hamzah specializes development. on the Main Market of Bursa Securities
in large scale institutional and and Hong Leong Company (Malaysia)
business transformation, working In 2006, YBhg Datuk Dr Md Hamzah was Berhad, a public company.
across several sectors with established appointed as the consulting advisor
organizations ranging from banks to to the National Implementation Task Mr Kwek is the Executive Chairman of
telecommunication companies, public Force to oversee the 9th Malaysia Guoco Group Limited (GGL). He was
institutions and foreign governments. Development Plan and in 2009 he was appointed as a director of GGL in 1990
He is the Co-founder/Group Managing appointed as member of the National and assumed the position of President,
Director of iA Group established in Economic Advisory Council. YBhg Datuk Chief Executive Officer from 1995 to 1
2002, specializing in business and public Dr Md Hamzah was a member of the September 2016. He is also the Chairman
sector transformation, technology and Review and Operational Panel to the of Lam Soon (Hong Kong) Limited
human capital with offices in Malaysia Malaysian Anti-Corruption Commission (LSHK). Both GGL and LSHK are listed
and Jakarta. from 2013 to February 2015. In 2015, he in Hong Kong. Mr Kwek is also a director
was appointed as member of the Anti- of GGLs key subsidiaries, including
Prior to the iA Group, he was the Executive Corruption Advisory Board. his positions as the Non-Executive
Director/Partner of international firm Chairman of GL Limited and a director
of Ernst & Young, Vice President and YBhg Datuk Dr Md Hamzah is currently a of GuocoLand Limited, both public listed
Country Head of the global consulting board member of University Kebangsaan companies in Singapore. He is also a
firm of Cap Gemini and member of the Malaysia and Chairman of Heriot Watt director of Bank of Chengdu Co., Ltd.
global management team and Country University Malaysia.
Head of PA Consulting Group.
YBhg Datuk Dr Md Hamzah was
Prior to joining the consulting industry appointed to the Board of Directors
in 1995, YBhg Datuk Dr Md Hamzah of Hong Leong Islamic Bank Berhad
held various senior positions in (HLISB) on 15 December 2015 and is
the government. For over 18 years a member of the Board Audit and Risk
HONG LEONG ISLAMIC BANK BERHAD

he served in the field of industrial Management Committee (BARMC),


R&D management and public policy Remuneration Committee (RC) and
on technology development and Nomination Committee (NC) of HLISB.
innovation. He also served as a member
ANNUAL REPORT 2017

of expert/advisory groups in various YBhg Datuk Dr Md Hamzah is also a


national and international organizations Director of Hong Leong Bank Berhad
such as United Nations Conference on (HLB), a company listed on the Main
Trade and Development and Islamic Market of Bursa Malaysia Securities
Development Bank, Jeddah. He was Berhad (Bursa Securities).
the Project Director for the Industrial
38 Technology Master Plan for Malaysia
CORPORATE

Board of Directors

ENCIK ALAN HAMZAH SENDUT MR DOMENIC FUDA


Non-Executive Director/Independent Executive Director/Non-Independent

Age 57, Male, Malaysian Age 50, Male, Australian

Encik Alan Hamzah Sendut graduated From 2009 to 2010, Encik Alan Hamzah Mr Domenic Fuda holds a Bachelor of
with a Bachelor of Science (Hons) degree Sendut joined BHP Billiton as the Global Economics from Macquarie University,
in Accountancy and Computer Science Head of Shared Services. He later Sydney, as well as a Master of Business
from the University of Wales, United returned to the Sime Darby Group as (Banking & Finance) and a Master of
Kingdom. He is a Chartered Accountant the Executive Vice President for Group Business Administration (M.B.A.), both
(Institute of Chartered Accountants in Strategy and Business Development. He from University of Technology, Sydney.
England and Wales) by profession and became the Managing Director of Sime
a member of the Malaysian Institute of Darby Energy and Utilities Division (Non Mr Domenic Fuda is currently the
Accountants. China) from April 2015 to June 2016. Group Managing Director/Chief
Encik Alan Hamzah Sendut has also Executive Officer of HLB. He was the
Encik Alan Hamzah Sendut began his served on the boards of several Sime Managing Director and Deputy Group
career in 1982 as an auditor with Price Darby joint venture companies in the Head, Consumer Banking & Wealth
Waterhouse, London, United Kingdom. healthcare, motor, financial services, Management of DBS Bank Ltd (DBS),
He returned to Malaysia in 1986 where insurance broking, food, plantation and Singapore. He joined DBS in March
he served with several multinational China operations. 2010 as Chief Financial Officer of
companies such as the Shell Malaysia Regional Consumer Banking & Wealth
Group and CarnauldMetalBox Malaysia. Encik Alan Hamzah Sendut is currently a Management. During his tenure with
Director of Hengyuan Refining Company DBS, Mr Domenic Fuda was responsible
Encik Alan Hamzah Sendut joined the Berhad, a company listed on the Main for the formulation and execution of
Sime Darby Group in 1996 as Group Market of Bursa Securities. a multi-year growth strategy for the 6
Finance Director of Tractors Malaysia Asian markets in which DBS operates
Holdings Berhad, a company listed on Encik Alan Hamzah Sendut was its consumer and wealth management
the KLSE Main Board. Thereafter, he appointed to the Board of Directors of businesses.
served in other senior roles such as HLISB on 26 September 2016 and is the
the Group Finance Director for Sime Chairman of the BARMC, RC and NC of Prior to his position in DBS, he spent
Plantations, Project Director for the HLISB. 16 years at Citigroup where he served
Northern Corridor Project and Senior in various senior management roles
Vice-President for Sime Darby Shared across Asia, the latest being Chief
Services during his first 12+ years with Operating Officer for South East Asia
Sime Darby Group. Pacific, Australia and New Zealand,
where he helped to drive execution
of Citis strategy across 10 countries,
launched Citis Consumer Banking
business in Vietnam and helped to
HONG LEONG ISLAMIC BANK BERHAD

manage the banking operations during


the 2008/2009 financial crises.

Mr Domenic Fuda was appointed to


ANNUAL REPORT 2017

the Board of Directors of HLISB on 27


October 2016 and is a member of the NC
of HLISB.

39
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Shariah Committees Profile

DR. AB. MUMIN BIN Dr. Ab. Mumin bin Ab. Ghani graduated At Academy of Islamic Studies UM,
AB. GHANI from Universiti Kebangsaan Malaysia he was previously the Deputy Dean,
Chairman (UKM) in 1979, with Bachelor of Faculty of Shariah; Head, Department
Economics (Honours). He later obtained of Shariah and Management; and
Diploma in Education (UKM) in 1979, Deputy Director of the Academy. He,
Diploma in Public Administration at present, is the Chairman of SC for
(INTAN) in 1983 and MBA (UKM) in 1987. Hong Leong MSIG Takaful Berhad
He finished his PhD (Islamic Studies) in and contributes as an academic
1998 at University of Malaya (UM). panel for several institutions of
higher education. Besides, he
Previously he served as an Administrative involved in establishing the Ummah
Diplomatic Officers (PTD). During that Development Index, IKIM. He has
period, he was attached to several written various books and articles
units in Department of Prime Minister, related to Islamic transactions (Fiqh
among others are Economic Planning al-Muamalat), Islamic economics,
Unit and Islamic Economic Resources Islamic management, Islamic
Development Committee. banking and finance, Zakat, Dinar and
Dakwah.

DR. NURUL AINI BINTI Dr Nurul Aini binti Muhamed is a senior and Head Program of Bachelor
MUHAMED lecturer at the Faculty of Economics Degree of Muamalat Administration.
and Muamalat, Universiti Sains Islam She has teaching several subjects
Malaysia (USIM). She obtained a Bachelor including Fiqh Mualamat and
Degree in Shariah (Management) Management of Islamic Banking and
from University of Malaya (2001) and Takaful Institutions. Her research
an MBA from Universiti Kebangsaan areas include the Islamic Transaction
Malaysia (2003). She was awarded with Law, Islamic Banking and Finance,
PhD (Business and Management) from Halal Compliance and Corporate
University of South Australia (2009). Governance.
She also serves as a Research Fellow
of Institute of Halal Research and She is also a Shariah Committee
Management (IHRAM) and currently as member of Hong Leong MSIG Takaful
a Visiting Academic at Universiti Brunei Berhad since 2013.
Darussalam (UBD). Previously, she was a
Deputy Dean (Academic and Research)
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

40
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Shariah Committees Profile

MR. IMRAN BIN Mr. Imran bin Mohammad Khayat Law of Transactions), Usul al-fiqh,
MOHAMMAD KHAYAT is currently the General Manager of and Islamic legal maxims. Prior to
Shariah Division of Lembaga Tabung his current position, he has eight (8)
Haji. He graduated from Universiti of years of experience working with
Yarmouk, Jordan in 2004, with a Bachelor the Middle Eastern based Islamic
of Syariah (Islamic Jurisprudence and Its bank in Kuala Lumpur covering
Foundation). Besides, he is a Certified Shariah matters relating to product
Shariah Advisor and Auditor (CSAA), development, treasury, wholesale
Accounting and Auditing Organization banking, retail banking, capital
for Islamic Financial Institution (AAOIFI), market, fund management, private
Bahrain and completed a Global Islamic equity and direct investment.
Banking Leaders (GIBL) Programme of
KFH Malaysia. Prior to joining the Islamic Finance
industry, he was a lecturer at a private
He has the essential qualifications in college in east coast of Malaysia.
the field of Fiqh al-Muamalat (Islamic

PROF. DR. MOHAMAD @ Prof. Dr. Mohamad @ Md Som bin Murshid al-Hayran ila Marifat
MD. SOM BIN SUJIMON Sujimon, graduated from University of Ahwal al-Insan Karya Kadri Pasha
Al-Azhar, Cairo with a B.A Hons from [The Forgotten Hanafite Manual of
the Faculty of Islamic Jurisprudence and Murshid al-Hayran ila Marifat Ahwal
Law in 1979. He obtained his Master al-Insan by Kadri Pasha; Pertukaran
of Arts in Teaching from Mississippi dan Perdagangan Matawang Dalam
State University (MSU), USA in 1982 Islam: Satu Sorotan Awal [Exchange
and completed his Ph.D in 1997 in and Money Transaction in Islam: A
Islamic and Middle Eastern Studies, the Preliminary Survey] and other notable
Faculty of Arts, University of Edinburgh, intellectual writings in Shariah and
Scotland, United Kingdom. Islamic Transaction.

He was an Assoc. Prof. at the Faculty of Before this, he was a Senior Researcher
Shariah and Law, Universiti Islam Sultan at the International Shariah Research
Sharif Ali (UNISSA), Brunei Darussalam. Academy (ISRA). At present, he is a
He published many papers including registered of Shariah Advisors with
Fikah Kekeluargaan; The Problems of the Securities Commission Malaysia.
the Illegitimate Child (walad zina) and He is a member of the Association of
Foundling (laqit) in the Sunni School Shariah Advisors in Islamic Finance
of Law; Kes-Kes Kehakiman Berkaitan Malaysia (ASAS). In Johore, he is a
Jenayah Hudud, Qisas dan Kekeluargaan Shariah Committee of REIT and REIT
HONG LEONG ISLAMIC BANK BERHAD

Di zaman Khulafa al-Rashidin; Konsep Al-Salam. He is currently a Shariah


dan Pelaksanaan Muamalat pada Committee of HSBC Amanah Takaful
Zaman Khulafa al-Rashidin [Concept and Malaysia since 2011 and also a Shariah
Implemention of Islamic Finance During Committee for Hong Leong Islamic
ANNUAL REPORT 2017

the Caliphate of Islam] Translated from since October 2016. He is currently


Arabic work by Dr. Subhi Mahmasani; the Chief Executive Officer (Rector) of
Modelling Retail Sukuk in Indonesia and Johor Islamic College, Johor Bahru.
Manual Mazhab Hanafi Yang Dilupakan

41
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Shariah Committees Profile

PROF. DR. RUSNI BINTI Prof. Dr. Rusni binti Hassan is a Professor (ICIFE) where she is the Secretary
HASSAN and Deputy Dean at the IIUM Institute and the Assistant Secretary for both
of Islamic Banking and Finance, IIUM. associations respectively. She has
She graduated with LLB (Honours), spoken extensively in seminars,
LLB (Shariah) (First Class), Master of workshops, conferences and trainings
Comparative Laws (MCL) and Ph.D in on various Islamic Finance issues. Her
Law. publication includes books on Islamic
Banking and Takaful, Islamic Banking
She was a member of Shariah Advisory under Malaysian Law, Corporate
Council Bank Negara Malaysia, the Governance of Islamic Financial
highest legal body that ascertained the Institutions and many articles in
Islamic law for the purposes of Islamic local and international journals. She
financial business in the country from 2010 has received awards as a Promising
to 2016. She is the Shariah Committee Researcher at IIUM in 2012.
member for a number of institutions
in Malaysia including Association of Her works and contribution to Islamic
Islamic Banking Institutions Malaysia Finance has also been recognized
(AIBIM). Internationally, she is the internationally when she was
Shariah Committee member for Housing listed among the Top 10 Women in
Development Finance Corporation and Islamic Finance by CPI Financial in
Housing Development Corporation, 2013 and been awarded as Most
Maldives. She is a registered Shariah Talented Women Professional
Advisor with the Securities Commission in Islamic Banking, Asia Islamic
Malaysia. Banking Excellence Awards, CMO
Asia, 2014; and Women of Distinction
She is also active in the Association in her contribution in the field of
of Shariah Advisors in Islamic Finance Islamic Finance and law by Venus
Malaysia (ASAS) and the International International Women Awards (VIWA
Council of Islamic Finance Educators 2016).
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

42
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Board Audit & Risk Management Committee


Report
CONSTITUTION MEETINGS

The Board Audit & Risk Management Committee (BARMC) of The BARMC meets at least six (6) times a year and additional
Hong Leong Islamic Bank Berhad (HLISB or the Bank) was meetings may be called at any time as and when necessary.
established on 29 September 2005. All meetings to review the quarterly reports and annual
financial statements are held prior to such quarterly reports
The BARMC is established to support the Board in discharging and annual financial statements being presented to the Board
the following responsibilities: for approval.
1. Oversee managements implementation of the Banks
governance framework and internal control framework/ The Group Managing Director of Hong Leong Bank Berhad
policies. (HLB), Managing Director (MD)/Chief Executive Officer
(CEO) of HLISB, Chief Internal Auditor, Chief Risk Officer,
2. Oversee that management meets the expectations on risk Chief Financial Officer, Chief Compliance Officer, Chief Shariah
management as set out in the policy document on Risk Officer, other senior management and external auditors may
Governance. be invited to attend the BARMC meetings, whenever required.

3. Oversee that management has a reliable and transparent At least twice a year, the BARMC will have separate sessions
financial reporting process within the Bank by providing with the external auditors without the presence of Executive
independent oversight of internal and external audit Directors and management.
functions.
The BARMC will also engage privately with the Chief Internal
4. Oversee managements implementation of compliance Auditor on a regular basis to provide the opportunity for the
risk management. Chief Internal Auditor to discuss issues faced by the internal
audit function
COMPOSITION
Issues raised, discussions, deliberations, decisions and
Encik Alan Hamzah Sendut conclusions made at the BARMC meetings are recorded in
(Chairman, Independent Non-Executive Director) the minutes of the BARMC meetings. Where the BARMC
(Appointed as BARMC member with effect from 26 September is considering a matter in which a BARMC member has an
2016 and as BARMC Chairman with effect from 29 June 2017) interest, such member shall abstain from reviewing and
deliberating on the subject matter.
YBhg Datuk Dr Md Hamzah bin Md Kassim
(Independent Non-Executive Director) Two (2) members of the BARMC, who shall be independent
and non-executive, shall constitute a quorum.

SECRETARY After each BARMC meeting, the BARMC shall report and
update the Board on significant issues and concerns discussed
The Secretary(ies) to the BARMC are the Company Secretary(ies) during the BARMC meetings and where appropriate, make the
of the Bank. necessary recommendations to the Board.

TERMS OF REFERENCE ACTIVITIES


The terms of reference of the BARMC are published on the The BARMC carried out its duties in accordance with its Terms
Banks website (www.hlisb.com.my) of Reference.
HONG LEONG ISLAMIC BANK BERHAD

AUTHORITY During the financial year ended 30 June 2017, seven (7)
BARMC meetings were held and the attendance of the BARMC
The BARMC is authorised by the Board to review any activities members was as follows:-
of the Bank within its Terms of Reference. It is authorised to
Member Attendance
ANNUAL REPORT 2017

seek any information it requires from any Director or member


Encik Alan Hamzah Sendut (1) 6/6
of management and all employees are directed to co-operate
with any request made by the BARMC. YBhg Datuk Dr Md Hamzah bin Md Kassim 7/7
YBhg Dato Abdul Majit bin Ahmad Khan (2) 6/7
The BARMC is authorised by the Board to obtain independent
legal or other professional advice if it considers necessary. Notes:
(1)
Six (6) BARMC meetings were held since his appointment to
the BARMC on 26 September 2016. 43
(2)
Resigned as Board and BARMC member with effect from 29
June 2017.
CORPORATE

Board Audit & Risk Management Committee


Report
HOW THE BARMC DISCHARGE ITS RESPONSIBILITIES The BARMC assessed the objectivity and independence of the
external auditors prior to the appointment of the external
Financial Reporting auditors for ad-hoc non-audit services.

The BARMC reviewed the quarterly reports and financial The BARMC also evaluated the performance of PwC in the
statements of the Bank focusing particularly on: following areas in relation to its re-appointment as auditors
for the financial year ended 30 June 2017 and considered PwC
(i) any changes in accounting policies and practices; to be independent:
(ii) significant adjustments arising from the audit; (i) level of knowledge, capabilities, experience and quality
(iii) the going concern assumptions; and of previous work;
(iv) compliance with accounting standards and other legal (ii) level of engagement with BARMC;
requirements. (iii) ability to provide constructive observations, implications
and recommendations in areas which require
In preparation for MFRS 9 implementation, BARMC also improvements;
reviewed with Management the progress update reports and (iv) adequacy in audit coverage, effectiveness in planning
replies to the surveys conducted by Bank Negara Malaysia. and conduct of audit;
(v) ability to perform the audit work within the agreed
The legal and regulatory environment was monitored and timeframe;
consideration given to changes in law, regulation, accounting (vi) non-audit services rendered by PwC does not impede
policies and practices including the new Auditor Reporting independence;
Standards ISA 701 on key audit matters, and the additional (vii) ability to demonstrate unbiased stance when interpreting
disclosure requirements under the amended Main Market the standards/policies adopted by HLISB; and
Listing Requirements of Bursa Malaysia Securities Berhad. (viii) Group assessment of risk of familiarity in respect of PwCs
appointment as external auditors.
External Audit
PwC, in accordance with professional ethical standards, have
The external auditors of the Bank for the financial year ended provided the BARMC with confirmation of their independence
30 June 2017 is Messrs PricewaterhouseCoopers (PwC). The for the duration of the financial year ended 30 June 2017 and
BARMC discussed and reviewed with the external auditors, the measures used to control the quality of their work.
before the audit commences for the financial year:
(i) the audit plan and timetable for the financial audit of The BARMC has therefore recommended to the Board that PwC
the Bank including the focus areas and approach to the be re-appointed as the auditors. Resolution concerning the re-
current financial years audit and any significant issues appointment of PwC will be proposed to shareholders at the
that can be foreseen, either as a result of the past years 2017 Annual General Meeting.
experience or due to new accounting standards or other
changes in statutory requirements; and Related Parties Transactions
(ii) the methodology and timetable of the Statement on
Internal Control and Risk Management. The BARMC conducted quarterly review of the recurrent related
party transactions (RRPT) entered into by the Bank to ensure
The BARMC reviewed the report and audit findings of the that such transactions are undertaken on commercial terms
external auditors and considered managements response and on terms not more favourable to the related parties than
to the external auditors audit findings and investigations. those generally available to and/or from the public.
The BARMC also had two (2) separate sessions with the
external auditors without the presence of Executive Directors The Bank had put in place the procedures and processes to
HONG LEONG ISLAMIC BANK BERHAD

and management whereby matters discussed include key monitor, track and identify the RRPT as well as to ensure that
reservations noted by the external auditors during the course the RRPT are conducted on commercial terms consistent with
of their audit; whilst the BARMC Chairman maintained regular the Banks usual business practices and policies and on terms
contact with the audit partner throughout the year. not more favourable to the related parties than those generally
ANNUAL REPORT 2017

available to and/or from the public, where applicable.


The BARMC reviewed the external auditors audit fees and
their scope of services. The approved and incurred fees for the The BARMC reviewed the said procedures and processes on an
financial year ended 30 June 2017 amounted to RM595,135 of annual basis and as and when required, to ensure that the said
which RM101,623 was payable in respect of non-audit services. procedures are adequate to monitor, track and identify RRPT in
Non-audit services accounted for 55% of the total fees payable. a timely and orderly manner, and are sufficient to ensure that

44
CORPORATE

Board Audit & Risk Management Committee


Report
the RRPT will be carried out on commercial terms consistent Risk Management
with the Banks usual business practices and policies and on
terms not more favourable to the related parties than those The BARMC also reviewed major risk management strategies,
generally available to and/or from the public. policies and risk tolerance levels for Boards approval.

Credit transactions and exposure with connected parties In addition, the BARMC has reviewed periodic risk management
reports, i.e. Risk Management Dashboards covering among
The Bank is guided by the Guidelines on Credit Transactions others Credit Risk, Market Risk, Liquidity Risk, Operational
and Exposures with Connected Parties to ensure that credit Risk, Shariah Compliance Risk, and IT Risk. The BARMC also
transactions with connected parties are carried out on an arms reviewed periodic group compliance reports, i.e. Regulatory
length basis on terms and conditions not more favourable Compliance Highlights and New Regulations Update.
than those entered into with other counterparties with
similar circumstances and creditworthiness. The BARMC had The BARMC continuously provides oversight of the Banks
conducted quarterly review of credit transactions of the Bank compliance activities to ensure that the Bank is in compliance
with connected parties to ensure compliance with the said to all established policies, guidelines and external regulations.
Guidelines.

Internal Audit GROUP INTERNAL AUDIT DIVISION (GIAD)

The BARMC reviewed the adequacy of internal audit scope, The GIAD of HLB assists the BARMC in the discharge of its duties
internal audit plan and resources of the various internal audit and responsibilities. GIAD employs a risk-based assessment
functions within Group Internal Audit Division (GIAD). approach in auditing the Banks business and operational
activities. The high risk activities are given due attention and
During the financial year, BARMC noted that GIAD had audited on a more regular basis while the rest are prioritised
effectively carried out internal audits to all business entities accordingly to the potential risk exposure and impact.
of the Bank, and reviewed the GIADs reports on the audits
performed on the Bank as set out in the Internal Audit Function During the financial year ended 30 June 2017, the GIAD carried
section below. out its duties covering audit on operations, information
technology system, credit, head office, branches, business
The BARMC has reviewed the audit findings and centre, mortgage sales centre, loan centre, investigation,
recommendations of the GIAD, including any findings of Shariah compliance, and other assignments as directed. These
internal investigations, and has ensured that weaknesses, non- audits are performed in line with the BNM Guidelines on
compliance with laws, regulatory requirements and policies. Internal Audit Function.

The managements responses to GIADs findings were also GIAD participated in advisory or consulting role in a number
presented for the BARMCs consideration. The BARMC also of products and projects reviews, which included FRS 139
reviewed at every BARMC meetings the status update of and Basel II/III. The division also worked closely with HLISB
managements corrective action plans for the resolution Shariah Division, Group Risk Management (GRM) and Group
of internal audits findings and recommendations. Compliance (GC) Division to review, evaluate and improve
Recommendations were made by BARMC to ensure that the risk management framework, its effective deployment
the root causes raised by GIAD in their audit reports were and Shariah compliance review.
effectively resolved and that any outstanding audit findings
be tracked for timely resolution. The BARMC report is made in accordance with the resolution of
the Board of Directors.
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

45
CORPORATE

Corporate Governance,
Risk Management & Internal Control

Corporate Governance is the process and structure used to direct


and manage the business and affairs of the Company towards
enhancing business prosperity and corporate accountability with
the ultimate objective of realising long term shareholder value,
whilst taking into account the interest of other stakeholders.

~ Finance Committee on Corporate Governance

The Board of Directors (Board) has reviewed the manner in which the Malaysian
Code on Corporate Governance 2012 (the Code) is applied in the Bank as set out
below. The Board is pleased to report compliance of the Bank with the principles and
recommendations as set out in the Code except where otherwise stated.

The Board took cognisance of the new Malaysian Code on Corporate Governance
published in April 2017 (MCCG 2017) which is applicable to annual reports published
from 2018 onwards.

The Board also reviewed the manner in which the Bank Negara Malaysias (BNM)
policy document on Corporate Governance (BNM CG) is applied in the Bank, where
applicable, as set out below.

A. ROLES AND RESPONSIBILITIES OF THE BOARD

The Board assumes responsibility for effective stewardship and control of the
Bank and has established terms of reference (TOR) to assist in the discharge
of this responsibility.

In discharging its responsibilities, the Board established functions which are


reserved for the Board and those which are delegated to management. The key
roles and responsibilities of the Board are set out in the Board Charter, which is
reviewed periodically by the Board and published on the Banks website at www.
HONG LEONG ISLAMIC BANK BERHAD

hlisb.com.my. The last review of the Board Charter was carried out in September
2017. The key roles and responsibilities of the Board broadly cover formulation of
corporate policies and strategies; overseeing and evaluating the conduct of the
Banks businesses; identifying principal risks and ensuring the implementation
ANNUAL REPORT 2017

of appropriate systems to manage those risks; and reviewing and approving key
matters such as financial results, investments and divestments, acquisitions and
disposals, and major capital expenditure and such other responsibilities that are
required of them by BNM as specified in guidelines and circulars issued by BNM
from time to time.

46
CORPORATE

Corporate Governance,
Risk Management & Internal Control
A. ROLES AND RESPONSIBILITIES OF THE BOARD of INEDs independent judgment or their ability to act in
(CONTINUED) the best interest of the Bank and its shareholder.

The day-to-day business of the Bank is managed by the The Bank continues to operate in a sustainable manner
Chief Executive Officer (CEO) who is assisted by the and seeks to contribute positively to the well-being of
management team. The CEO and his management team stakeholders. The Bank takes a progressive approach in
are accountable to the Board for the performance of integrating sustainability into its businesses as set out in
the Bank. In addition, the Board has established Board Hong Leong Bank Berhads Sustainability Report which
Committees which operate within clearly defined TOR forms part of its Annual Report.
primarily to support the Board in the execution of its
duties and responsibilities. The Board observes the Code of Ethics for Company
Directors established by the Companies Commission of
To discharge its oversight roles and responsibilities more Malaysia (CCM) which is available at CCMs website at
effectively, the Board has delegated the independent www.ssm.com.my. In addition, the Bank also has a Code
oversight over, inter alia, internal and external audit of Conduct and Ethics that sets out sound principles and
function and internal controls; and risk management standards of good practice which are to be observed by
to the Board Audit and Risk Management Committee the employees. A Whistleblowing Policy has also been
(BARMC). The Nomination Committee (NC) is established by the Bank and it provides a structured
delegated the authority to, inter alia, assess and review channel for all employees of the Bank and any other
Board, Board Committees and CEO appointments and persons providing services to, or having a business
re-appointments and oversee management succession relationship with the Bank, to report any concerns about
planning. Although the Board has granted such authority any improper conducts, wrongful acts or malpractice
to Board Committees, the ultimate responsibility and the committed within the Bank.
final decision rest with the Board. The chairmen of Board
Committees report to the Board on matters dealt with B. BOARD COMPOSITION
at their respective Board Committee meetings. Minutes
of Board Committee meetings are also tabled at Board The Board comprises four (4) directors, three (3) of whom
meetings. are non-executive. Of the non-executive directors, two
(2) are independent. The profiles of the members of the
There is a clear division of responsibilities between Board are provided in the Annual Report.
the Chairman of the Board and the CEO. This division
of responsibilities between the Chairman and the CEO The Bank is guided by BNM CG in determining its board
ensures an appropriate balance of roles, responsibilities composition. The Board shall determine the appropriate
and accountability. size of the Board to enable an efficient and effective
conduct of Board deliberation. The Board shall have a
The Chairman leads the Board and ensures its smooth and balance of skills and experience commensurate with
effective functioning. the complexity, size, scope and operations of the Bank.
Board members should have the ability to commit time
The CEO is responsible for formulating the vision and and effort to carry out their duties and responsibilities
recommending policies and the strategic direction of effectively.
the Bank for approval by the Board, implementing the
decisions of the Board, initiating business ideas and The Board recognises the merits of Board diversity in
corporate strategies to create competitive edge and adding value to collective skills, perspectives and strengths
enhancing shareholder wealth, providing management to the Board. The Board will consider appropriate targets
HONG LEONG ISLAMIC BANK BERHAD

of the day-to-day operations of the Bank and tracking in Board diversity including gender balance on the Board
compliance and business progress. and will take the necessary measures to meet these
targets from time to time as appropriate.
Independent Non-Executive Directors (INEDs) are
ANNUAL REPORT 2017

responsible for providing insights, unbiased and Based on the review of the Board composition in July
independent views, advice and judgment to the Board 2017, the Board is of the view that the current size and
and bring impartiality to Board deliberations and decision- composition of the Board are appropriate and effective
making. They also ensure effective checks and balances for the control and direction of the Banks strategy and
on the Board. There are no relationships or circumstances business.
that could interfere with or are likely to affect the exercise
47
CORPORATE

Corporate Governance,
Risk Management & Internal Control
C. BOARD COMMITTEES

Board Committees have been established by the Board to assist in the discharge of its duties.

(a) BARMC

The composition of the BARMC and a summary of its activities in the discharge of its functions and duties for the
financial year and explanation on how the BARMC had met its responsibilities are set out in the BARMC Report in this
Annual Report.

The BARMCs functions and responsibilities are set out in the TOR which is published on the Banks website (www.hlisb.
com.my).

(b) NC

The NC was established on 29 September 2005. The composition of the NC is as follows:

Encik Alan Hamzah Sendut


(Chairman, Independent Non-Executive Director)
(Appointed as NC member with effect from 22 November 2016 and as NC Chairman with effect from 29 June 2017)

YBhg Datuk Dr Md Hamzah bin Md Kassim


(Independent Non-Executive Director)

Mr Domenic Fuda
(Non-Independent Executive Director)
(Appointed as NC member with effect from 22 November 2016)

The NCs functions and responsibilities are set out in the TOR which is published on the Banks website (www.hlisb.com.
my).

The Bank has in place Fit and Proper (F&P) Policy as a guide for the following process and procedure for assessment of
(i) new appointment, re-appointment, re-election and retention of directors, (ii) the appointment of Board Committee
members, and (iii) the appointment and re-appointment of CEO, and the criteria used for such assessments. Upon the
approval of the Board, an application on the prescribed forms will be submitted to BNM for approval in respect of new
appointments and re-appointments.

(i) New Appointments

The nomination, assessment and approval process for new appointments is as follows:

Assessment against Assessment


Criteria and BNM Guidelines
HONG LEONG ISLAMIC BANK BERHAD

Identification Meeting with Deliberation


of candidates candidates F&P Declaration by candidates by the Board
Relevant Credit Bureau Checks and decision
CTOS (Bankruptcy) search thereof
Recommendation by the NC
ANNUAL REPORT 2017

48
CORPORATE

Corporate Governance,
Risk Management & Internal Control
C. BOARD COMMITTEES (CONTINUED)

(b) NC (continued)

(i) New Appointments (continued)

In assessing the candidates for Board appointments, the NC will take into account, inter alia, the strategic and
effective fit of the candidates for the Board, the overall desired composition and the mix of expertise and
experience of the Board as a whole and having regard to the candidates attributes, qualifications, management,
leadership, business experience and their F&P Declarations in respect of their probity, competence, qualifications,
skills, experience and financial integrity in line with the standards required under the BNM Guidelines. The Bank
has taken steps to build and maintain a pool of potential Board candidates from internal and external introductions,
recommendations and director databases in its search for suitable Board candidates.

In the case of CEO, the NC will take into account the candidates knowledge and experience in the industry, market
and segment. The NC will also consider the candidates F&P Declaration in line with the standards required under
the relevant BNM Guidelines.

(ii) Re-Appointments

The assessment and approval process for re-appointments is as follows:

CTOS Assessment against Assessment Criteria and BNM Deliberation by


(Bankruptcy) Guidelines the Board and
search F&P Declaration decision thereof
Recommendation by the NC

For re-appointments, the Directors/CEOs will be evaluated on their performance in the discharge of duties and
responsibilities effectively, including, inter alia, contribution to Board deliberations, time commitment as well as the
Annual Board Assessment (as defined below) results, contributions during the term of office, attendance at Board
meetings, F&P Declarations and for independent directors, their continued independence.

(iii) Board Committee Appointments

The nomination, assessment and approval process for appointments to Board Committees (Board Committee
Appointments) is as follows:

Identification Assessment against Assessment Criteria and BNM Deliberation


HONG LEONG ISLAMIC BANK BERHAD

of Directors for Guidelines by the Board


Board Committees Recommendation by the NC and decision
membership thereof
ANNUAL REPORT 2017

The assessment for Board Committee Appointments will be based on the Directors potential contributions and
value-add to the Board Committees with regard to Board Committees roles and responsibilities.

49
CORPORATE

Corporate Governance,
Risk Management & Internal Control
C. BOARD COMMITTEES (CONTINUED) Member Attendance
Encik Alan Hamzah Sendut (1) 2/2
(b) NC (continued)
YBhg Datuk Dr Md Hamzah bin Md 4/4
Kassim
In addition, a formal evaluation process has been put
in place to assess the effectiveness of the Board as a Mr Domenic Fuda (1) 2/2
whole, the Board Committees and the contribution and YBhg Dato Abdul Majit bin Ahmad 4/4
performance of each individual director on an annual Khan (2)
basis (Annual Board Assessment) in conjunction Mr Kwek Leng Hai (3) 2/2
with the annual F&P assessment of Directors and CEO YM Raja Teh Maimunah binti Raja 1/1
per BNM Guidelines. The NC will deliberate on the Abdul Aziz (4)
results of the Annual Board Assessment and submit
its recommendation to the Board for consideration Notes:
and approval. For newly appointed director/CEO, (1)
Appointed as NC member with effect from 22
the Annual Board Assessment will be conducted at November 2016. Attended all the NC meetings
the next annual assessment exercise following the held after his appointment.
completion of one year of service. (2)
Resigned as Board and NC member with effect
from 29 June 2017.
Assessment criteria for Board as a whole include, (3)
Resigned as NC member with effect from 22
inter alia, the effectiveness of the Board composition November 2016.
in terms of size and structure vis--vis the complexity, (4)
Resigned as Board and NC member with effect
size, scope and operations of the Bank; the core skills, from 27 October 2016.
competencies and experience of the Directors; and
the Boards integrity, competency, responsibilities The NC carried out the following activities in the
and performance. The assessment criteria for discharge of its duties in accordance with its TOR
Board Committees include the effectiveness of the during the FYE 2017:
respective Board Committees composition in terms
of mix of skills, knowledge and experience to carry Reviewed and recommended to the Board
out their respective roles and responsibilities per for consideration and approval new Board
the Board Committees TOR and the contribution of appointments and Board Committees positions;
Board Committees members. Each individual director
is assessed on, inter alia, the effectiveness of his/ Reviewed and recommended to the Board for
her competency, expertise and contributions. The consideration and approval the appointment of
skills, experience, soundness of judgment as well as CEO and Joint Secretary;
contributions towards the development of business
strategies and direction of the Bank and analytical Carried out the Annual Board Assessment and
skills to the decision-making process are also taken was satisfied that the Board as a whole, Board
into consideration. Committees and individual directors have
continued to effectively discharged their duties
For management succession planning, it has been and responsibilities in accordance with their
embedded in the Groups process over the years to respective TORs, and that the current Board
continuously identify, groom and develop key talents composition in terms of Board balance, size and
from within the Group. The Group also has a talent mix of skills is appropriate and effective for the
development programme to identify, retain and discharge of its functions. The NC took cognisance
HONG LEONG ISLAMIC BANK BERHAD

develop young high potential talents. of the merits of Board diversity including women
participation on the Board, in adding value to
The NC meets at least once in each financial year and the Bank. The NC will work towards increasing
additional meetings may be called at any time as and women participation on the Board in line with
ANNUAL REPORT 2017

when necessary. the MCCG 2017;


During the financial year ended 30 June 2017 (FYE Considered the annual assessment of the CEO,
2017), four (4) NC meetings were held and the Shariah Committee members and Joint Secretary;
attendance of the NC members was as follows:

50
CORPORATE

Corporate Governance,
Risk Management & Internal Control
C. BOARD COMMITTEES (CONTINUED) Notes:
(1)
Resigned as Board and RC member with effect
(b) NC (continued) from 29 June 2017.
(2)
Resigned as RC member with effect from 22
Considered and assessed the position of November 2016.
independent directors of the Bank and was
satisfied that the independent directors met Encik Alan Hamzah Sendut was appointed to the RC
the regulatory requirements for independent after the RC meeting.
directors;
The Banks remuneration scheme for executive
Reviewed the F&P Declarations by directors directors is linked to performance, service seniority,
in line with the BNM Policy Document on F&P experience and scope of responsibility and is
Criteria and was satisfied that the Directors periodically benchmarked to market/industry
met the requirements as set out in BNM Policy surveys conducted by human resource consultants.
Document on F&P Criteria. Performance is measured against profits and targets
set in the Banks annual plan and budget.
Reviewed and recommended to the Board for
adoption the revisions to the F&P Policy on new The level of remuneration of non-executive directors
appointments and re-appointments of directors reflects the scope of responsibilities and commitment
and CEO; Board Committees appointments and undertaken by them.
Annual Board Assessment;
The RC, in assessing and reviewing the remuneration
Refined the assessment process for new Board packages of executive directors, ensures that a
appointments in the assessment process strong link is maintained between their rewards
to include a credit bureau check to improve and individual performance, based on the provisions
the effectiveness of the evaluation of Board in the Groups Human Resources Manual, which
candidates on financial probity. are reviewed from time to time to align with
market/industry practices. The fees of directors
(c) Remuneration Committee (RC) are recommended and endorsed by the Board for
approval by the shareholder of the Bank at its Annual
The RC was established on 29 September 2005. The General Meeting (AGM).
composition of the RC is as follows:
The aggregate remuneration of directors (including
Encik Alan Hamzah Sendut the directors who had resigned during the FYE 2017)
(Chairman, Independent Non-Executive Director) for the FYE 2017 is as follows:
(Appointed as RC member with effect from 22
November 2016 and as RC Chairman with effect from Salaries
29 June 2017) & Other
Fees Emoluments Total
YBhg Datuk Dr Md Hamzah bin Md Kassim (RM) (RM) (RM)
(Independent Non-Executive Director) Executive 686,850 686,850
Director
The RCs functions and responsibilities are set out in Non-Executive 381,540 381,540
the TOR which is published on the Banks website Directors
HONG LEONG ISLAMIC BANK BERHAD

(www.hlisb.com.my).
Remuneration
During the FYE 2017, one (1) RC meeting was held and
the attendance of the RC members was as follows: The Banks rewards strategy is in alignment with
ANNUAL REPORT 2017

the Hong Leong Groups total compensation


Member Attendance philosophy which supports and promotes a high
YBhg Datuk Dr Md Hamzah bin Md 1/1 performing culture to deliver the Banks Vision to be
Kassim a highly digital & innovative ASEAN financial services
YBhg Dato Abdul Majit bin Ahmad 1/1 company. The rewards strategy focuses on providing
Khan (1) a competitive remuneration and benefits package, as
Mr Kwek Leng Hai (2) 1/1 well as ample career progression opportunities for
employees.
51
CORPORATE

Corporate Governance,
Risk Management & Internal Control
C. BOARD COMMITTEES (CONTINUED)
(c) Remuneration Committee (RC) (continued)

Remuneration (continued)

The Banks rewards framework focuses on a balanced and right pay mix to achieve the desired long term business
performance. The framework includes base pay, fixed cash allowances, performance-based variable pay, sales incentive,
long term incentives, benefits and other employee programs.

The rewards framework ensures that employees are paid competitively against the industry and talent market the Bank
is operating in; delivered via a combination of cash and non-cash elements such as shares or share-linked instruments.

The Bank also adopts a rigorous and robust key performance indicators (KPIs) setting process that incorporates risk
management (to fulfill risk control objectives) as part of the scorecards for each division (in particular each Head of
Division). This is to ensure excessive risk taking behaviour of staff is minimised and sufficient control mechanisms are
in place.

KPIs and key results areas of employees are measured and tracked diligently to ensure strong alignment of employee
output to the overall business strategy and direction of the Bank.

Remuneration Process

The remuneration of senior management and material risk takers are presented and approved by the Board annually.
The Bank is enhancing the process of annual review of management scorecards to include formal review by Risk and
Compliance to ensure adequate weightages are placed on risk and compliance related KPIs. Risk control objectives that
are not met and any non-compliance will have significant consequence to remuneration decisions.

Role of BARMC in remuneration matters

BARMC is tasked to review managements implementation of the remuneration system on whether incentives provided
by the remuneration system take into consideration risks, capital, liquidity and the likelihood and timing of earnings,
without prejudice to the tasks of the Board RC.

Deferred Compensation and Clawbacks

The deferred compensation is applicable to some of the incentive schemes introduced in the Bank. These are mostly
for sales-type roles with built-in clawback mechanism. The clawback mechanism is introduced to ensure excessive risk
taking behavior of staff is minimised and that the system does not induce excessive risk taking and sufficient control
is in place. Periodic reviews as well as post-implementation reporting to the BARMC are carried out to examine the
effectiveness of the schemes in driving the right behaviours in achieving business goals and that there are no adverse
risk elements in the approved schemes. The clawbacks mechanism is triggered when there are non-compliances to
regulations and policies.

The remuneration of the CEO, Senior Management and other Material Risk Takers for FYE 2017 is shown in the table
below:
Senior Management and other
CEO
HONG LEONG ISLAMIC BANK BERHAD

Material Risk Takers


Total value of remuneration awards for Unrestricted Deferred Unrestricted Deferred
FYE 2017 (RM) (RM) (RM) (RM)
Fixed Remuneration 574,725 3,960,690
ANNUAL REPORT 2017

Cash-based 574,725 3,960,690


Shares and share-linked instruments
Other
Variable Remuneration 279,310 1,100,694
Cash-based 279,310 1,100,694
Shares and share-linked instruments
52 Other
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Corporate Governance,
Risk Management & Internal Control
D. INDEPENDENCE All Board members are supplied with information in a
timely manner. The Bank has moved towards electronic
The tenure of all the independent directors on the Board Board reports. Board reports are circulated electronically
of the Bank does not exceed 9 years. The independent prior to Board and Board Committee meetings and the
directors have declared their independence, and the NC reports provide, amongst others, financial and corporate
and the Board have determined, at the annual assessment information, significant operational, financial and
carried out, that the independent directors have continued corporate issues, updates on the performance of the Bank
to bring independent and objective judgment to Board and managements proposals which require the approval
deliberations and decision making. of the Board.
The Bank has in place a policy in relation to the tenure for All directors have access to the advice and services
independent directors of the Bank (Tenure Policy) under of qualified and competent Company Secretaries to
the F&P Policy of the Bank. Pursuant to the Tenure Policy, facilitate the discharge of their duties effectively. The
an independent director who has served on the Board Company Secretaries are qualified to act under Section
of any company under the Hong Leong Financial Group 235 of the Companies Act 2016. They support the effective
for a period of 9 years continuously or more shall submit functioning of the Board, provide advice and guidance
a Letter of Intent to the NC informing of his intention to the Board on policies and procedures, relevant rules,
to continue in office or to retire from the Board as an regulations and laws in relation to corporate secretarial
independent director, upon: and governance functions and facilitate effective
(a) the expiry of his term of office approved by BNM; or information flow amongst the Board, Board Committees
and senior management. All directors also have access
(b) the due date for his retirement by rotation pursuant to the advice and services of the internal auditors and
to the Constitution of the Bank. in addition, to independent professional advice, where
necessary, at the Banks expense, in consultation with the
If the intention is to continue in office, the NC shall Chairman or the CEO of the Bank or the Group Managing
consider based on the assessment criteria and guidelines Director/CEO of Hong Leong Bank Berhad, the immediate
set out in the F&P Policy and make the appropriate holding company of the Bank.
recommendation to the Board. If the intention is to retire
from office, an application shall be made to BNM to seek At Board meetings, active deliberations of issues by
clearance in accordance with BNM Guidelines. Board members are encouraged and such deliberations,
decisions and conclusions are recorded by the Company
The Board seeks to strike an appropriate balance between Secretary accordingly. Any director who has an interest in
tenure of service, continuity of experience and refreshment the subject matter to be deliberated shall abstain from
of the Board. Although a longer tenure of directorship deliberating and voting on the same during the meetings.
may be perceived as relevant to the determination of a
directors independence, the Board recognises that an The Board met seven (7) times for the FYE 2017 with timely
individuals independence should not be determined notices of issues to be discussed. Details of attendance of
solely based on tenure of service. Further, the continued each director are as follows:
tenure of directorship brings considerable stability to the
Director Attendance
Board, and the Bank benefits from directors who have,
YBhg Datuk Dr Md Hamzah bin Md 7/7
over time, gained valuable insight into the Bank, its
Kassim
market and the industry.
Mr Kwek Leng Hai 7/7
E. COMMITMENT Encik Alan Hamzah Sendut (1) 6/6
Mr Domenic Fuda (2) 5/5
The directors are aware of their responsibilities and
YBhg Dato Abdul Majit bin Ahmad Khan (3) 7/7
HONG LEONG ISLAMIC BANK BERHAD

devote sufficient time to carry out such responsibilities.


YM Raja Teh Maimunah binti Raja Abdul 2/2
Directors provide notifications to the Board for acceptance
Aziz (4)
of any new Board appointments. This ensures that their
commitment, resources and time are focused on the Notes:
ANNUAL REPORT 2017

affairs of the Bank to enable them to discharge their (1)


Six (6) Board meetings were held since his
duties effectively. Board meetings are scheduled a appointment to the Board on 26 September 2016.
year ahead in order to enable full attendance at Board (2)
Five (5) Board meetings were held since his
meetings. Additional meetings may be convened on an appointment to the Board on 27 October 2016.
adhoc basis as and when necessary. Where appropriate, (3)
Resigned with effect from 29 June 2017.
decisions are also taken by way of Directors Circular (4)
Resigned with effect from 27 October 2016.
Resolutions. Directors are required to attend at least 75%
of Board meetings held in each financial year pursuant to The Bank recognises the importance of continuous
53
the BNM CG. professional development and training for its directors.
CORPORATE

Corporate Governance,
Risk Management & Internal Control
E. COMMITMENT (CONTINUED) During the FYE 2017, the directors of the Bank, collectively
or on their own, attended various training programmes,
The Bank is guided by a Directors Training Policy, seminars, briefings and/or workshops including:
which covers an Induction Programme and Continuing
Professional Development (CPD) for directors of the Advocacy Sessions on Management Discussion
Bank. The Induction Programme is organised for newly & Analysis for Chief Executive Officers and Chief
appointed directors to assist them to familiarise and to Financial Officers of Listed Issuers
get acquainted with the Banks business, governance An Overview of Latest Development of Shariah
process, roles and responsibilities as director of the Bank. Standards issued by BNM Investment Account &
The CPD encompasses areas related to the industry or Investment Account Platform
business of the Bank, governance, risk management BNM Compliance Conference 2017
and regulations through a combination of courses and BNM Financial Institutions Directors Education
conferences. A training budget is allocated for Directors (FIDE) Core Programme: Module A and Module B
training programmes. BNM & World Bank Global Symposium on Innovative
Financial Inclusion
The Bank regularly organises in-house programmes, Clarification of Audit Rating Methodology
briefings and updates by its in-house professionals. The Companies Act 2016 Update
directors are also encouraged to attend seminars and FIDE Forum - 2nd Distinguished Board Leadership
briefings in order to keep themselves abreast with the Series & 6th Annual General Meeting
latest developments in the business environment and to Malaysian Institute of Corporate Governance (MICG)
enhance their skills and knowledge. Directors are kept Assessment of the Board, Board Committees and
informed of available training programmes on a regular Individual Directors Taking Stock of Performance
basis. MICG Boards and C-Level Executives: Balancing Trust
and Tension
The Bank has prepared for the use of its directors, a MICG The New Malaysian Code on Corporate
Director Manual which highlights, amongst others, the Governance - How To Walk The Talk?
major duties and responsibilities of a director vis-a-vis Sustainability Reporting: Awareness Session
various laws, regulations and guidelines governing the The Institute of Internal Auditors Malaysia & MICG
same. The Evolving Role of Audit Committee in Governance,
Risk & Control Forum
In assessing the training needs of directors, the Board 4th Industrial Revolution: Impact and Opportunities
has determined that appropriate training programmes for Manufacturing and Financial Services
covering matters on corporate governance, finance,
legal, risk management, information technology, internal F. ACCOUNTABILITY AND AUDIT
control and/or statutory/regulatory compliance, be
recommended and arranged for the directors to enhance The Bank has put in place a framework of processes
their contributions to the Board. whereby Board committees provide oversight on critical
processes of the Banks reporting of financial statements,
During the FYE 2017, the directors received regular briefings in order to ensure that accountability and audit are integral
and updates on the Banks businesses, operations, risk components of the said processes.
management, internal controls, corporate governance,
I. Financial Reporting
finance and any changes to relevant legislation, rules and
regulations from in-house professionals. The Bank also The Board has a fiduciary responsibility to ensure
organised an in-house programme for its directors and the proper maintenance of accounting records of
HONG LEONG ISLAMIC BANK BERHAD

senior management. the Bank. The Board receives the recommendation


to adopt the financial statements from the BARMC,
The directors of the Bank have also attended various which assesses the integrity of financial statements
programmes and forums facilitated by external with the assistance of the external auditors.
ANNUAL REPORT 2017

professionals in accordance with their respective needs in


discharging their duties as directors.

54
CORPORATE

Corporate Governance,
Risk Management & Internal Control
F. ACCOUNTABILITY AND AUDIT (CONTINUED) G. INVESTOR RELATIONS

II. Risk Management and Internal Control The Bank has a website at www.hlisb.com.my in which
investors can access for information which includes
The Board has overall responsibility for maintaining corporate information, announcements/press releases/
a system of internal controls which covers financial briefings, financial information, products information and
and operational controls and risk management. investor relations.
This system provides reasonable but not absolute
assurance against material misstatements, losses In addition, investors can have a channel of communication
and fraud. with the following persons to direct queries and provide
feedback to the Bank:
The BARMC is delegated with the responsibility to
provide oversight on the Banks management of GENERAL MANAGER, GROUP CORPORATE AFFAIRS &
critical risks that the Bank faces and to review the PUBLIC RELATIONS
effectiveness of internal controls implemented in the Tel No : 03-2081 8888 ext 61916
Bank. Fax No : 03-2081 8932
e-mail address : capr@hongleong.com.my
The Statement on Risk Management and Internal
Control as detailed under Section H of this Statement HEAD, CORPORATE FINANCE & INVESTOR RELATIONS
provides an overview of the system of internal Tel No : 03-2081 2972
controls and risk management framework of the Fax No : 03-2081 8924
Bank. e-mail address : IR@hlbb.hongleong.com.my

III. Relationship with Auditors H. STATEMENT ON RISK MANAGEMENT AND INTERNAL


CONTROL
The appointment of external auditors is recommended
by the BARMC, which determines the remuneration I. Introduction
of the external auditors. The BARMC reviews the
suitability and independence of the external auditors The Board recognises that practice of good governance
annually. In this regard, an annual assessment is is an important process and has established the Board
conducted by the BARMC to evaluate the performance, Audit & Risk Management Committee (BARMC) to
independence and objectivity of the external auditors ensure maintenance of a sound system of internal
prior to making any recommendation to the Board on controls and good risk management practices.
the re-appointment of the external auditors. The processes for risks and controls assessment
and improvement are on-going and are regularly
The Bank also has a Policy on the Use of External reviewed in accordance with the guidelines on the
Auditors for Non-Audit Services to govern the Statement on Risk Management and Internal Control:
professional relationship with the external auditors Guidelines for Directors of Listed Issuers.
in relation to non-audit services. Assessment will
be conducted by the BARMC for non-audit services
to ensure that the provision of non-audit services
does not interfere with the exercise of independent
judgment of the external auditors.

During the financial year under review, the external


HONG LEONG ISLAMIC BANK BERHAD

auditors met with the BARMC to:

present the scope of the audit before the


commencement of audit; and
review the results of the audit as well as the
ANNUAL REPORT 2017

management letter after the conclusion of the


audit.

The external auditors meet with the BARMC members


at once a year without the presence of Executive
Directors and management.
55
CORPORATE

Corporate Governance,
Risk Management & Internal Control
H. STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL (CONTINUED)

II. Board Responsibilities

The Board acknowledges its overall responsibility for the risk management and internal control environment and its
effectiveness in safeguarding shareholders interests and the Banks assets. The risk management and internal control
framework is designed to manage rather than eliminate the risk of failure in the achievement of goals and objectives of
the Bank, and therefore only provide reasonable assurance and not absolute assurance, against material misstatement
or loss.

The system of risk management and internal control instituted throughout the Bank is updated from time to time to
align with the dynamic changes in the business environment as well as any process improvement initiatives undertaken.
The Board confirms that its Management team responsibly implements the Board policies, procedures and guidelines on
risk management and internal control.

III. Risk Management and Internal Control Framework

The organisational structure of the Bank clearly defines the lines of accountability and responsibility. Risk assessment
and evaluation is an integral part of the Banks strategic planning cycle and are responsive to business environment
and opportunities. Management committees are appropriately set up to ensure proper utilisation and investment
of the Banks assets for effective risk return rewards or to limit losses. The Group Risk Management (GRM) and
Group Compliance (GC) Divisions have implemented an enterprise-wide integrated risk management framework to
inculcate continuous risk, regulatory compliance and Shariah compliance awareness, understanding of procedures and
controls and thus, improve the overall control environment. In addition, GC is responsible for assessing and monitoring
compliance risks of the Bank.

Operationally, the Bank operates multiple lines of defence to effect a robust control framework. At the first level,
the operating business and support units are responsible for the day-to-day management of risks inherent in the
various business activities. Regulatory and operational compliance units are set up in the various lines of business and
support departments. They oversee the day-to-day compliance to all regulatory requirements, business and process
controls. At the second level, GRM is responsible for setting the risk management framework and developing tools and
methodologies for the identification, measurement, monitoring, control and pricing of risks whereas GC is responsible
for ensuring that controls to manage compliance risks are adequate and operating as intended. Thirdly, the Internal
Audit function complements GRM and GC by its activity of monitoring and evaluating significant exposures to risk
and contributing to the improvement of the risk management and control systems. It also provides an independent
perspective and assessment on the adequacy and effectiveness of the risk management framework and governance
systems and processes, including those instituted by the compliance function.

The above is depicted in the following diagram:

FIRST LINE OF DEFENCE SECOND LINE OF DEFENCE THIRD LINE OF DEFENCE

Business and Support Units Group Risk Management


HONG LEONG ISLAMIC BANK BERHAD

Group Internal Audit


Regulatory and Operational Group Compliance
Compliance Units
ANNUAL REPORT 2017

Sets policies, reviews portfolio risks and Independent assessment of effectiveness and
Day-to-day risk management and compliance provides oversights of the management of enforcement of frameworks and policies
risk and compliance.

56
CORPORATE

Corporate Governance,
Risk Management & Internal Control
H. STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL

III. Risk Management and Internal Control Framework (continued)

a) Risk Management

Managing risks is an integral part of the Banks overall business strategy. It involves a process for identifying,
assessing and managing risks and uncertainties that could inhibit the Banks ability to achieve its strategy and
strategic objectives. The Board sets the risk appetite and tolerance level and allocates the Banks capital that is
consistent with the Banks overall business objectives and desired risk profile. Recognising the need to be proactive
in the management of risks, the Bank has implemented an Integrated Risk Management (IRM) framework where
the Banks risks are managed at various levels.

Integrated Risk Management Framework

Top Down Board of Directors

Effective stewardship and control Monitoring and


Set Risk Appetite Reporting
Board Risk Management Committee
& Tolerance Limit
Present single view of risks and to ensure adequate
policies and control within the Bank Bottom Up
Set Policies and
Capital Allocation Group Risk Management & Group Compliance

Operational & Regulatory Compliance


Credit Risk Market & Liquidity
Information Technology & Shariah Compliance
Management Risk Management
Risk Management Risk Management

Daily management of risk, limits, policies, procedures and reports


Consumer Business Islamic Global Branches Business/ Payments Human Information
Banking Banking Banking Markets Consumer Resources Technology
Credit

At the apex of the IRM framework, the Board has the overall responsibility to ensure there is proper oversight of the
management of risks in the Bank. GRM monitors and reports the Banks Credit, Market, Liquidity, Operational, IT and
Shariah Compliance Risks. GC monitors regulatory compliance issues and reports the non-compliance incidences
including Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) matters. These risks are
presented in a single, consolidated view to the BARMC regularly.

The BARMC deliberates and evaluates the reports prepared by GRM and GC on the adequacy and effectiveness
of the controls to mitigate the Banks risks and provides updates to the Board, and where appropriate, make the
necessary recommendations to the Board.
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

57
CORPORATE

Corporate Governance,
Risk Management & Internal Control
H. STATEMENT ON RISK MANAGEMENT AND INTERNAL CONTROL

III. Risk Management and Internal Control Framework (continued)

a) Risk Management (continued)

HONG LEONG ISLAMIC BANKS KEY RISKS

Credit Risk OPERATIONAL RISK


Credit Risk is the risk of loss if Operational Risk is the risk of loss
a transaction fails to meet its REGULATORY resulting from inadequate of failed
obligations. COMPLIANCE AND SHARIAH internal processes, people and
COMPLIANCE RISKS systems or from external events
which also includes IT and Legal
Regulatory Compliance and
risk.
Shariah Compliance Risks are
the risk of legal or regulatory
MARKET RISK sanctions, material financial LIQUIDITY RISK
loss or loss to reputation as
Market Risk is the risk of loss in a result of failure to comply Liquidity Risk is the risk of loss
financial instruments or the balance with laws and regulations resulting from the unavailability
sheet due to adverse movements including Shariah rules and of sufficient funds to fulfill financial
in market factors such as benchmark regulations. commitments, including customer
and exchange rates, prices, spreads, liquidity needs, as they fall due. Liquidity
volatilities and/or correlations. Risk also includes the risk of not being able to
liquidate assets in a timely manner.

b) Basel II and III

The Bank places great importance to Basel II and III and views Basel II and III as a bank-wide initiative that will
ensure that the Bank continues to meet international best practices for the Banks credit, market, operational and
liquidity risk management practices. By adopting Basel II and III, the Bank is able and will continue to enhance
and embed sound risk management practices within the Bank and be equipped with the right risk management
discipline, practices, processes and systems.

For Basel II Pillar 1, the Bank is currently in compliant with the regulatory standards and is progressively employing
advance risk measurement in the respective businesses. For Basel II Pillar 2, the Bank has established an Internal
Capital Adequacy Assessment Process (ICAAP) framework that forms an integrated approach to manage the
Banks risk, capital and business strategy. For Basel II Pillar 3, which is related to market discipline and disclosure
requirements, the Bank has provided the disclosures under a separate Pillar 3 section in this Annual Report.

For Basel III, the Bank has put in place plans to continuously strengthen its capital and liquidity positions well ahead
HONG LEONG ISLAMIC BANK BERHAD

of the Basel Committees time schedule.


ANNUAL REPORT 2017

58
CORPORATE

Corporate Governance,
Risk Management & Internal Control
H. STATEMENT ON RISK MANAGEMENT AND INTERNAL Policies on delegation and authority limits
CONTROL are strictly implemented to ensure a culture
that respects integrity and honesty, and
III. Risk Management and Internal Control Framework thereby reinforce internal controls.
(continued)
Policies and procedures are set out in
c) Internal Audit operation manuals and disseminated
throughout the organisation in support
The Group Internal Audit Division (GIAD) of a learning culture, so as to reinforce an
performs the internal auditing function for the environment of internal controls discipline.
various entities in the financial services group.
The GIAD regularly reviews the critical operations Policies for recruitment, promotion and
(as defined in BNM Guideline on Internal Audit termination of staff are in place to ensure
Function) and critical controls in the Information the human resources comply to internal
Technology environment (as outlined in BNM controls requirements.
GPIS) of the Group to ensure that the internal
controls are in place and working effectively. IV. Assessment of Risk Management and Internal
Control System
The results of the audits conducted by GIAD are
reported to the BARMC. Follow-up action and The Board has received assurance from the Managing
the review of the status of action taken as per Director/ Chief Executive Officer, Chief Financial Officer,
the auditors recommendations are carried out Chief Risk Officer, Chief Compliance Officer and Chief
by Management via the Management Audit Internal Auditor that the Banks risk management and
Committee (chaired by the Chief Risk Officer) internal control system is operating adequately and
whose members comprise senior management. effectively.
The minutes of meetings of the Management
Audit Committee is tabled to the BARMC for Based on the assurance it has received from
notation. Management, the Board is of the view that the Banks
risk management and internal control system is
Implementation of audit recommendations is operating adequately and effectively for the financial
followed up on a monthly basis and reported to year under review and up to the date of approval of
the BARMC. Highlights of the BARMC meetings this report.
are submitted to the Board for review and further
deliberation. I. DIRECTORS RESPONSIBILITY IN FINANCIAL
REPORTING
In addition, internal controls are also effected
through the following processes: The directors are satisfied that in preparing the financial
statements of the Bank for the FYE 2017, the Bank has
The Board receives and reviews regular used the appropriate accounting policies and applied
reports from the Management on the key them consistently. The directors are also of the view
operating statistics, business dynamics, that relevant approved accounting standards have been
legal matters and regulatory issues that followed in the preparation of these financial statements.
would have implications on internal control
measures. J. DISCLOSURE OF SHARIAH COMMITTEE
HONG LEONG ISLAMIC BANK BERHAD

The BARMC regularly reviews and holds To ensure that the Banks operations are consistently
discussions with Management on the conducted in accordance with Shariah principles, HLISB
actions taken on internal control issues has established the Shariah Committee (SC) which
ANNUAL REPORT 2017

identified in reports prepared by the GIAD, comprise of five Shariah scholars.


external auditors and regulatory authorities.

59
CORPORATE

Corporate Governance,
Risk Management & Internal Control
J. DISCLOSURE OF SHARIAH COMMITTEE (CONTINUED) In order to ensure that the Banks business operations
and activities are in compliance with Shariah rules and
The members of SC appointed by HLISB are as follows:- principles, the SC had undertaken various roles such as
a) Dr. Ab. Mumin bin Ab. Ghani (Chairman) the following:-
b) Dr. Nurul Aini binti Muhamed
c) Mr. Imran bin Mohammad Khayat a) Oversight role on Shariah matters related to the
d) Dr. Muhammad Aunurrochim bin Masad Saleh Banks operations and activities;
(Resigned as SC member with effect from 31 March b) Advise the Board and provide input to the Bank on
2017) Shariah matters in order for the Bank to comply with
e) Dr. Ahmad Basri bin Ibrahim Shariah principles at all times;
(Resigned as SC member with effect from 30 c) Review principles and contracts relating to the
September 2016) products introduced by the Bank, transactions
f) Prof. Dr. Mohamad @ Md. Som bin Sujimon and application of Shariah principles to the Banks
(Appointed as SC member with effect from 1 October operations, that being disclosed to the SC. In the
2016) review process, SC is guided by the resolutions and
g) Prof. Dr. Rusni binti Hassan decisions made by the Shariah Advisory Council
(Appointed as SC member with effect from on 1 (SAC) of Bank Negara Malaysia and Securities
February 2017) Commission where applicable;
d) Endorse Shariah policies and procedures, product
The SC met fourteen (14) times during the financial year documentations and relevant disclosures that being
and attendance of the members at the meetings is as presented to SC;
follows:- e) Render opinion whether the Banks operations are
in compliance with the Shariah principles, based on
Member Attendance representation made by the management and review
Dr. Ab. Mumin bin Ab. Ghani 14/14 of the financial reports;
Dr. Muhammad Aunurrochim bin Masad 11/11 f) Ensure that the calculation and payment of zakat are
Saleh (1) in compliance with Shariah principles; and
g) Ensure rectification of any Shariah non-compliant
Dr. Nurul Aini binti Muhamed 14/14
events, preventive actions to avoid the recurrence
Mr. Imran bin Mohammad Khayat 10/14 of such events and disposal of the tainted income
Prof. Dr. Mohamad @ Md. Som bin 11/11 received from such events to the charitable bodies
Sujimon (2) or Baitulmal have been undertaken by the Bank
Dr. Ahmad Basri bin Ibrahim (3) 3/3 accordingly.
Prof. Dr. Rusni binti Hassan (4) 6/6
The profiles of the Banks SC members are set out in pages
Notes: 25 to 26 of this Annual Report.

(1)
Resigned as SC member with effect from 31 March 2017. This Statement on Corporate Governance, Risk Management
(2)
Appointed as SC member with effect from 1 October and Internal Control is made in accordance with the resolution
2016. of the Board.
(3)
Resigned as SC member with effect from 30 September
2016.
(4)
Appointed as SC member with effect from 1 February
2017.
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

60
CORPORATE

Shariah Committees Report

In the name of Allah, The Beneficent, The Merciful. b) the main sources and investments of the Bank disclosed
to us conform to the basis that had been approved by us
To the Shareholders of Hong Leong Islamic Bank Berhad, in accordance with Shariah rules and principles;

In carrying out the roles and responsibilities of the Banks c) the distribution of profit relating to Mudharabah deposits
Shariah Committee as prescribed in the Shariah Governance conform to the basis that had been approved by us;
Framework for Islamic Financial Institutions issued by
Bank Negara Malaysia and in compliance with the letter of d) the calculation and payment of zakat are in compliance
appointment, we are required to submit the following report: with Shariah rules and principles. In this financial year,
the Bank has fulfilled its obligation to pay zakat for its
We, the members of the Shariah Committee (SC) of the Bank business on behalf of its shareholders to state zakat
are responsible to perform an oversight role on Shariah matters authorities and it is computed based on net asset method;
related to the Banks business operations and activities.
e) the Shariah non-compliance event occurred was rectified
We have conducted fourteen (14) meetings including special accordingly and the Bank has taken preventive actions
meetings to discuss, elaborate and review various products to avoid the recurrence of the event. During the financial
structures and documentations, transactions, services and year, one (1) Shariah non-compliance event was identified.
operations of the Bank during the financial year ended 30th The Shariah non-compliance event occurred due to
June 2017. inadvertent breaches of procedure and process factor.
The Bank has taken preventive actions such as tightening
We also have reviewed the principles and the contracts the process flow and enhancing the procedures to avoid
relating to the transactions and applications introduced by similar breaches from recurring in the future;
the Bank during the period ended 30th June 2017. We have
provided the Shariah opinion on various aspects to the Bank f) All earnings that have been realised from sources or by
and conducted our review to form an opinion as to whether means prohibited by the Shariah rules and principles
the Bank has complied with the Shariah rulings, resolutions including all profits associated with the Shariah non-
and guidelines issued by us, the Shariah Advisory Council (SAC) compliance events for the financial year ended 30th June
of Bank Negara Malaysia and SAC of Securities Commission 2017 of RM25,845.89 (2016 : RM61,461.63) have been
(for capital market related matters). considered for disposal to charitable causes.

The Banks management is responsible for ensuring that the During the year, the amount of RM24,990.00 (2016 :
Bank conducts its business in accordance with Shariah rules RM47,012.19) has been channeled to the list of eligible
and principles. It is our responsibility to form an independent beneficiaries as endorsed by the Shariah Committee.
opinion, based on our review of the operations of the Bank
and to report to you. To the best of our knowledge based on the information
provided and disclosed to us during discussions and meetings,
We have assessed the work carried out by Shariah review and we, the members of the SC of the Bank, do hereby confirm
Shariah audit, as presented to us, which included examining that the operations of the Bank for the year ended 30th June
the relevant transaction documents and procedures adopted 2017 have been conducted in conformity with the Shariah rules
by the Bank. and principles.

We planned and performed our review so as to obtain all the We beg Allah the Almighty to grant us all the success and
information and explanations which we considered necessary straight-forwardness. Allah Knows Best.
in order to provide us with sufficient evidence to give
HONG LEONG ISLAMIC BANK BERHAD

reasonable assurance that the Bank has not violated Shariah Chairman of the Shariah Committee:
principles. Dr. Ab. Mumin bin Ab. Ghani

In our opinion: Shariah Committee Members:


ANNUAL REPORT 2017

Prof. Dr. Mohamad @ Md.Som bin Sujimon


a) the contracts, transactions and dealings entered into by
the Bank during the period ended 30th June 2017, that Prof. Dr. Rusni binti Hassan
we have reviewed are to the best of our knowledge in
compliance with the Shariah rules and principles; Dr. Nurul Aini binti Muhamed

Mr. Imran bin Mohammad Khayat


61
FINANCIALS

Directors Report
for the financial year ended 30 June 2017

The Directors of Hong Leong Islamic Bank Berhad (the Bank or HLISB) have pleasure in presenting their report together with
the audited financial statements of the Bank for the financial year ended 30 June 2017.

PRINCIPAL ACTIVITIES

The Bank was incorporated under the Companies Act, 1965, on 28 March 2005 for the purpose of undertaking the Islamic Banking
Business pursuant to Subsection 3(4) of the Islamic Banking Act, 1983, which is now superseded by the Islamic Financial Services
Act, 2013. The Bank operates through its head office located at Level 23, Menara Hong Leong, Damansara City, No. 6, Jalan
Damanlela, Bukit Damansara, 50490 Kuala Lumpur.

The Bank is principally engaged in the Islamic banking business and related financial services. There have been no significant
changes in the principal activities of the Bank during the financial year.

FINANCIAL RESULTS

RM000

Profit after zakat before taxation 292,805


Taxation (69,856)
Net profit for the financial year 222,949

OUTLOOK FOR NEW FINANCIAL YEAR

The Bank maintains a positive outlook for the Islamic Banking industry and is therefore optimistic of continued growth in its
Shariah compliant banking business. It continues to focus on existing businesses, the development of non-financing income
streams, as well as the development of its digital and transactional banking initiatives.

DIVIDENDS

The Directors do not recommend the payment of any final dividend in respect of the financial year ended 30 June 2017.

ISSUE OF SHARES AND DEBENTURES

There was no new ordinary shares or debentures issued during the financial year.

RESERVES AND PROVISIONS

There were no material transfers to or from reserves or provisions during the financial year other than those disclosed in the
HONG LEONG ISLAMIC BANK BERHAD

financial statements.
ANNUAL REPORT 2017

62
FINANCIALS

Directors Report
for the financial year ended 30 June 2017

DIRECTORS

The Directors of the Bank in office during the financial year and during the period from the end of the financial year to the date
of this report are:

YBhg Datuk Dr Md Hamzah bin Md Kassim Chairman, Independent Non-Executive Director


Mr Kwek Leng Hai Non-Independent Non-Executive Director
Encik Alan Hamzah Sendut Independent Non-Executive Director
(appointed w.e.f. 26 September 2016)
Mr Domenico Fuda Non-Independent Executive Director
(appointed w.e.f. 27 October 2016)
YBhg Dato Abdul Majit bin Ahmad Khan Chairman, Independent Non-Executive Director
(resigned w.e.f. 29 June 2017)
YM Raja Teh Maimunah binti Raja Abdul Aziz Managing Director/Chief Executive Officer, Non-Independent
(resigned w.e.f. 27 October 2016)

DIRECTORS REMUNERATION

Details of Directors remuneration are set out in Note 26 to the financial statements.

DIRECTORS INTERESTS

According to the Register of Directors Shareholdings kept by the Bank under Section 59 of the Companies Act, 2016, no Director
holding office at the end of the financial year had any beneficial interest in the ordinary shares and/or preference shares and/or
unsecured loan stocks and/or options over ordinary shares of the Bank and/or its related corporations during the financial year
ended 30 June 2017 except for Mr Domenico Fuda whose beneficial interest is as follows and Mr Kwek Leng Hai, whose beneficial
interests are disclosed in the Directors Report of the holding company, Hong Leong Bank Berhad, as provided for under Section
59 of the Companies Act, 2016:

Shareholdings in which a Director has direct interests


Number of ordinary shares issued or to be issued or acquired arising
from the exercise of options
Nominal
value per As at As at
share (RM) 01.07.2016 Acquired Sold 30.06.2017

Interest of Domenico Fuda


Hong Leong Bank Berhad (1)
146,358 146,358

Note: (1) Concept of par value was abolished with effect from 31 January 2017 pursuant to the Companies Act 2016

DIRECTORS BENEFITS
HONG LEONG ISLAMIC BANK BERHAD

Since the end of the previous financial year, no Director of the Bank received or became entitled to receive a benefit (other than
the benefits shown under Directors Remuneration in Note 26 to the financial statements) by reason of a contract made by the
Bank or its related corporations with the Director or with a firm of which the Director is a member, or with a company in which
ANNUAL REPORT 2017

the Director has a substantial financial interest.

Other than as disclosed above, neither at the end of the financial year, nor at any time during the financial year, did there subsist
any other arrangements to which the Bank is a party, with the object or objects of enabling the Directors of the Bank to acquire
benefits by means of the acquisition of shares in, or debentures of, the Bank or any other body corporate.

63
FINANCIALS

Directors Report
for the financial year ended 30 June 2017

CORPORATE GOVERNANCE

The corporate governance disclosure are set out in the Corporate Governance, Risk Management and Internal Control Statement
as disclosed in the annual report.

PERFORMANCE REVIEW AND MANAGEMENT REPORTS

The Board receives and reviews regular reports from the Management on key financial and operating statistics as well as legal
and regulatory matters. The performance of each business unit is assessed against the approved budgets and business objectives
whilst explanation is provided for significant variances.

STATUTORY INFORMATION REGARDING THE BANK

(I) As at the end of the financial year

(a) Before the financial statements of the Bank were prepared, the Directors took reasonable steps:

(i) to ascertain that proper action had been taken in relation to the writing off of bad debts and financing and the
making of allowance for doubtful debts and financing and had satisfied themselves that all known bad debts and
financing had been written off and that adequate allowance had been made for doubtful debts and financing; and

(ii) to ensure that any current assets which were unlikely to be realised in the ordinary course of business including the
value of current assets as shown in the accounting records of the Bank had been written down to an amount which
the current assets might be expected so to realize.

(b) In the opinion of the Directors, the results of the operations of the Bank during the financial year had not been
substantially affected by any item, transaction or event of a material and unusual nature.

(II) From the end of the financial year to the date of this report

(a) The Directors are not aware of any circumstances:

(i) which would render the amount written off for bad debts and financing or the amount of the allowance for doubtful
debts and financing in the financial statements of the Bank, inadequate to any substantial extent;

(ii) which had arisen which would render adherence to the existing method of valuation of assets or liabilities of the
Bank misleading or inappropriate, and

(iii) which would render the values attributed to current assets in the financial statements of the Bank misleading.

(b) In the opinion of the Directors:


HONG LEONG ISLAMIC BANK BERHAD

(i) the results of the operations of the Bank for the financial year ended 30 June 2017 are not likely to be substantially
affected by any item, transaction or event of a material and unusual nature which had arisen in the interval
between the end of the financial year and the date of this report; and
ANNUAL REPORT 2017

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

64
FINANCIALS

Directors Report
for the financial year ended 30 June 2017

STATUTORY INFORMATION REGARDING THE BANK (CONTINUED)

(III) As at the date of this report

(a) There are no charges on the assets of the Bank which had arisen since the end of the financial year to secure the
liabilities of any other person.

(b) There are no contingent liabilities which had arisen since the end of the financial year.

(c) The Directors are not aware of any circumstances not otherwise dealt with in the report or financial statements of the
Bank which would render any amount stated in the financial statements misleading.

DISCLOSURE OF SHARIAH COMMITTEE

The Banks business activities are subject to the Shariah compliance and confirmation by the Shariah Committee consisting of 5
members, appointed by the Board of Directors of the Bank for a 2 year term.

The primary role of the Shariah Committee is mainly advising on matters relating to the business operation and products of the
Bank and providing support by attending regular Shariah Committee meetings to ensure that the Banks business operations are
in conformity with Shariah rules and principles.

HOLDING AND ULTIMATE HOLDING COMPANIES

The holding and ultimate holding companies are Hong Leong Financial Group Berhad and Hong Leong Company (Malaysia)
Berhad, respectively. Both companies are incorporated in Malaysia.

AUDITORS REMUNERATION

Details of auditors remuneration are set out in Note 25 to the financial statements.

AUDITORS

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

Signed on behalf of the Board in accordance with their resolution dated 18 September 2017.

HONG LEONG ISLAMIC BANK BERHAD

DATUK DR MD HAMZAH BIN MD KASSIM


ANNUAL REPORT 2017

DOMENICO FUDA
Kuala Lumpur
65
FINANCIALS

Statement of Financial Position


as at 30 June 2017

2017 2016
Note RM000 RM000

Assets
Cash and short term funds 3 848,662 1,635,422
Deposits and placements with banks and other financial institutions 4 200,953
Financial assets held-for-trading 5 782,773 194,953
Financial investments available-for-sale 6 2,677,534 1,952,809
Financial investments held-to-maturity 7 2,557,813 2,170,651
Financing and advances 8 20,613,731 18,492,167
Islamic derivative financial instruments 16 13,382 32,595
Other assets 9 146,233 541,675
Statutory deposits with Bank Negara Malaysia 10 594,386 581,181
Property and equipment 11 18,325 15,480
Intangible assets 12 2,041 2,956
Total assets 28,455,833 25,619,889

Liabilities
Deposits from customers 14 24,592,451 21,889,229
Deposits and placements of banks and other financial institutions 15 720,127 825,664
Bills and acceptances payable 13,713 15,288
Islamic derivative financial instruments 16 49,978 37,489
Other liabilities 17 631,824 613,256
Provision for taxation 21,272 19,084
Deferred tax liabilities 13 1,063 5,574
Tier 2 subordinated Sukuk Ijarah 18 400,503 400,482
Total liabilities 26,430,931 23,806,066

Equity
Share capital 19 700,000 700,000
Reserves 20 1,324,902 1,113,823
Total equity 2,024,902 1,813,823

Total Equity and Liabilities 28,455,833 25,619,889

Commitments and contingencies 32 8,878,006 10,530,247


HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

66 The accompanying notes form an integral part of these financial statements


FINANCIALS

Statement of Income
for the financial year ended 30 June 2017

2017 2016
Note RM000 RM000

Income derived from investment of depositors funds and others 21 1,108,101 986,299
Income derived from investment of shareholders funds 22 128,043 124,306
Allowance for impairment on financing and advances 23 (53,582) (10,232)
Write-back of impairment losses 1,116
Total distributable income 1,183,678 1,100,373
Income attributable to the depositors 24 (686,045) (643,139)
Total net income 497,633 457,234
Overheads and other expenditures 25 (204,478) (190,135)
Profit before zakat and taxation 293,155 267,099
Zakat (350) (350)
Profit after zakat before taxation 292,805 266,749
Taxation 27 (69,856) (69,763)
Net profit for the financial year 222,949 196,986

Earnings per share - basic (sen) 28 31.85 28.14

HONG LEONG ISLAMIC BANK BERHAD


ANNUAL REPORT 2017

The accompanying notes form an integral part of these financial statements 67


FINANCIALS

Statement of Comprehensive Income


for the financial year ended 30 June 2017

2017 2016
Note RM000 RM000

Net profit for the financial year 222,949 196,986


Other comprehensive income/(loss):
Items that may be reclassified subsequently to profit or loss
Net fair value changes on financial investments available-for-sale 31 (15,618) 11,604
Income tax relating to the components of other comprehensive income 31 3,748 (2,742)
Other comprehensive income/(loss) for the financial year, net of tax (11,870) 8,862

Total comprehensive income for the financial year 211,079 205,848


HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

68 The accompanying notes form an integral part of these financial statements


FINANCIALS

Statement of Changes in Equity


for the financial year ended 30 June 2017

Non Distributable Distributable


Share Statutory Fair value Regulatory Retained
Note capital reserve reserve reserve profits Total
RM000 RM000 RM000 RM000 RM000 RM000

At 1 July 2016 700,000 540,112 9,679 86,505 477,527 1,813,823


Comprehensive income
Net profit for the financial year 222,949 222,949

Net fair value changes on


financial investments
available-for-sale, net of tax (11,870) (11,870)
Total comprehensive income (11,870) 222,949 211,079

Transactions with owner


Transfer to retained profit 20 (540,112) 540,112
Transfer to regulatory reserve 4,928 (4,928)
Total transactions with owner (540,112) 4,928 535,184
At 30 June 2017 700,000 (2,191) 91,433 1,235,660 2,024,902

At 1 July 2015 700,000 490,865 817 50,183 407,550 1,649,415


Comprehensive income
Net profit for the financial year 196,986 196,986

Net fair value changes on


financial investments
available-for-sale, net of tax 8,862 8,862
Total comprehensive income 8,862 196,986 205,848

Transactions with owner


Transfer to statutory reserves 49,247 (49,247)
Transfer to regulatory reserve 36,322 (36,322)
Dividend paid:
- Final dividend for the financial
year ended 30 June 2015 30 (9,940) (9,940)
- Interim dividend for the
financial year ended 30 June
2016 30 (31,500) (31,500)
Total transactions with owner 49,247 36,322 (127,009) (41,440)
HONG LEONG ISLAMIC BANK BERHAD

At 30 June 2016 700,000 540,112 9,679 86,505 477,527 1,813,823


ANNUAL REPORT 2017

The accompanying notes form an integral part of these financial statements 69


FINANCIALS

Statement of Cash Flow


for the financial year ended 30 June 2017

2017 2016
RM000 RM000
Cash flows from operating activities

Profit after zakat before taxation 292,805 266,749


Adjustment for:
Zakat 350 350
Depreciation of property and equipment 2,500 2,227
Amortisation of intangible assets 883 893
Net loss/(gain) on disposal of property and equipment 1 (1)
Property and equipment written off 220
Intangible assets written off 34
Gain from sale of financial investment available-for-sale (1,884) (4,562)
Gain from sale of financial assets held-for-trading (4,427) (3,623)
Profit expense on Subordinated Sukuk Ijarah 19,326 19,430
Allowance made for impairment losses on financing and advances 73,538 30,195
Impaired financing written off 3,293 2,293
Write-back of impairment losses (1,116)
Net unrealised loss on revaluation of financial assets held-for-trading and derivative financial
instruments 2,124 4,300
Amortisation of fair value changes arising from terminated fair value hedges (771) (1,928)
Net realised gain from derivative financial instruments (3,115) (2,806)
Accretion of discounts less amortisation of premium (31,570) (39,211)
Finance income from financial investments available-for-sale (91,454) (75,762)
Finance income from financial investments held-to-maturity (89,285) (73,890)
Operating profit before working capital changes 171,452 124,654

(Increase)/decrease in operating assets


Financing and advances (2,198,395) (2,540,438)
Statutory deposits with Bank Negara Malaysia (13,205) (17,570)
Other assets 395,439 (526,095)
Islamic derivatives financial instruments 13,260 8,774
Deposits and placement with banks and other financial institutions (200,953)
Financial assets held-for-trading (547,936) 604,895

Increase/(decrease) in operating liabilities


Deposits from customers 2,703,222 3,342,320
Deposits and placements of banks and other financial institutions (105,537) (1,145,988)
Bills and acceptances payable (1,575) (7,084)
Other liabilities 18,568 (38,242)
Islamic derivatives financial instruments 18,674 (20,617)
Cash flows generated from operations 253,014 (215,391)
Zakat paid (350) (350)
HONG LEONG ISLAMIC BANK BERHAD

Income taxes paid (68,430) (57,500)


Net cash flows generated from/(used in) operating activities 184,234 (273,241)

Cash flows from investing activities


ANNUAL REPORT 2017

Net (purchase of)/proceed from financial investment available-for-sale (648,146) 795,948


Net purchase of financial investment held-to-maturity (297,976) (476,652)
Proceeds from disposal of property and equipment 313 47
Purchase of property and equipment (5,878) (5,767)
Purchase of intangible assets (2) (44)
70 Net cash flows (used in)/generated from investing activities (951,689) 313,532
The accompanying notes form an integral part of these financial statements
FINANCIALS

Statement of Cash Flow


for the financial year ended 30 June 2017

2017 2016
Note RM000 RM000

Cash flows from financing activities

Dividend paid (41,440)


Profit paid on Tier 2 Subordinated Sukuk (19,305) (19,253)
Net cash flows used in financing activities (19,305) (60,693)

Net decrease in cash and cash equivalents (786,760) (20,402)


Cash and cash equivalents at beginning of the financial year 1,635,422 1,655,824

Cash and cash equivalents at end of the financial year 3 848,662 1,635,422

Cash and cash equivalents comprise the following:


Cash and short-term fund 3 848,662 1,635,422
Deposits and placements with banks and other financial institution 4 200,953
1,049,615 1,635,422
Less :
Cash and short-term funds and deposist and placements with banks and other financial
institutions with original maturity of more than three months (200,953)
848,662 1,635,422

HONG LEONG ISLAMIC BANK BERHAD


ANNUAL REPORT 2017

The accompanying notes form an integral part of these financial statements 71


FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

The following accounting policies have been used consistently in dealing with items that are considered material in relation to
the financial statements.

1 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

The financial statements of the Bank have been prepared in accordance with the Malaysian Financial Reporting Standards
(MFRS), International Financial Reporting Standards (IFRS) and the requirements of the Companies Act 2016 in Malaysia.

The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial
investments available-for-sale and financial assets/financial liabilities at fair value through profit or loss (including derivative
financial instruments).

The financial statements incorporate the activities relating to Islamic Banking which have been undertaken by the Bank in
compliance with Shariah principles. Islamic Banking business refers generally to the acceptance of deposits and granting of
financing under the Shariah principles.

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 financial year.
It also requires Directors to exercise their judgment in the process of applying the Banks 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 41.

A Standards, amendments to published standards and interpretations that are effective and applicable to the
Bank

The Bank has applied the following amendments for the first time for the financial year beginning on 1 July 2016:
Amendments to MFRS 11 Joint arrangements - Accounting for acquisition of interests in joint operations
Amendments to MFRS 101 Presentation of financial statements - Disclosure initiative
Amendments to MFRS 127 Equity method in separate financial statements
Amendments to MFRS 10, 12 & 128 Investment entities Applying the consolidation exception
Annual Improvements to MFRSs 2012 2014 Cycle

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.

B 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 annual periods beginning
after 1 July 2017. The Bank will apply these standards, amendments to published standards and interpretations from:
HONG LEONG ISLAMIC BANK BERHAD

(i) Financial year beginning on/after 1 July 2017

Amendments to MFRS 107 Statement of Cash Flows Disclosure Initiative (effective from 1 January 2017)
introduce an additional disclosure on changes in liabilities arising from financing activities.
ANNUAL REPORT 2017

72
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

1 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (CONTINUED)

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

(i) Financial year beginning on/after 1 July 2017 (continued)

Amendments to MFRS 112 Income Taxes - Recognition of Deferred Tax Assets for Unrealised Losses (effective
from 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.

In addition, in evaluating whether an entity will have sufficient taxable profits in future periods against which
deductible 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.

(ii) Financial year beginning on/after 1 July 2018

IC Interpretation 22 Foreign Currency Transactions and Advance Consideration (effective from 1 January 2018)
applies when an entity recognises a non-monetary asset or non-monetary liability arising from the payment
or receipt of advance consideration. MFRS 121 requires an entity to use the exchange rate at the date of the
transaction to record foreign currency transactions.

IC Interpretation 22 provides guidance how to determine the date of transaction when a single payment/
receipt is made, as well as for situations where multiple payments/receipts are made.

The date of transaction is the date when the payment or receipt of advance consideration gives rise to the
non-monetary asset or non-monetary liability when the entity is no longer exposed to foreign exchange risk.

If there are multiple payments or receipts in advance, the entity should determine the date of the transaction
for each payment or receipt.

An entity has the option to apply IC Interpretation 22 retrospectively or prospectively.

(iii) Financial year beginning on/after 1 July 2018

MFRS 9 Financial Instruments (effective from 1 January 2018) will replace MFRS 139 Financial Instruments:
Recognition and Measurement.

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 entitys business
model and the contractual 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
HONG LEONG ISLAMIC BANK BERHAD

at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent
principal and interest.

For liabilities, the standard retains most of the MFRS 139 requirements. These include amortised cost accounting
ANNUAL REPORT 2017

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 entitys own credit
risk is recorded in other comprehensive income rather than the statements of income, unless this creates an
accounting mismatch.

MFRS 9 introduces an expected credit loss model on impairment for all financial assets 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.
73
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

1 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (CONTINUED)

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

(iii) Financial year beginning on/after 1 July 2018 (continued)

MFRS 15 Revenue from contracts with customers (effective from 1 January 2018 ) replaces MFRS 118 Revenue
and 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.

(iv) Financial year beginning on/after 1 July 2019

MFRS 16 Leases (effective from 1 January 2019) supersedes MFRS 117 Leases and the related interpretations.

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.

MFRS 16 eliminates the classification of leases by the lessee as either finance leases (on balance sheet) or
operating leases (off balance sheet). MFRS 16 requires a lessee to recognise a right-of-use of the underlying
asset and a lease liability reflecting future lease payments for most leases.

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 interest 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.

None of the standards, amendments and interpretations that are effective for the respective financial years is
expected to have a significant effect on the financial statements of the the Bank, except for MFRS 9.

The Bank is in the midst of reviewing the requirements of MFRS 9 as it introduces significant changes in the way
the Bank accounts for financial instruments. Due to the complexity of this standard and its proposed changes, the
financial effects of its adoption are still being assessed by the Bank.

C Significant change in regulatory requirements

Bank Negara Malaysia (BNM) has issued the policy document on Capital Funds which came into effect on 3 May 2017.
The policy document has been updated to remove the requirement for Islamic Banking to maintain a reserve fund.
HONG LEONG ISLAMIC BANK BERHAD

BNM expects Islamic Banking to exercise prudence before submitting an application to distribute the reserves as
dividends. BNM in considering the dividend application, shall consider, among others, the Islamic Bankings ability to
comply with the fully phased-in capital conservation buffer requirement and any other buffers that BNM may specify.

During the financial year, the Bank has transferred RM540,112,000 from its statutory reserve to retained profits in
ANNUAL REPORT 2017

accordance with BNMs requirement.

74
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

1 BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (CONTINUED)

D Companies Act 2016

The Companies Act 2016 (New Act) was enacted to replace the Companies Act 1965 with the objectives to create a
legal and regulatory structure that will facilitate business, and promote accountability as well as protection of corporate
directors and shareholders, taking into consideration the interest of other stakeholders. The New Act was passed on 4
April 2016 by the Dewan Rakyat (House of Representative) and gazetted on 15 September 2016. On 26 January 2017, the
Minister of Domestic Trade, Co-operatives and Consumerism announced that the date on which the New Act comes into
operation while section 241 and Division 8 of Part III of the New Act come into operation on 31 January 2017.

Amongst the key changes introduced in the New Act which will affect the financial statements of the Bank upon the
commencement of the New Act on 31 January 2017 are:

(i) removal of the authorised share capital;


(ii) shares of the Bank will cease to have par or nominal value; and
(iii) the Banks share premium account will become part of the Banks share capital.

Notwithstanding this provision, the Bank may within 24 months from the commencement of the New Act, use the
amount standing to the credit of its share premium account for purposes as set out in Section 618 (3) of the New Act.
There is no impact on the numbers of ordinary shares in issue or the relative entitlement of any of the members as a
result of this transition.

The adoption of the New Act does not have any financial impact on the Bank for the current financial year as any
accounting implications will only be applied prospectively, if applicable, and the effect of adoption mainly will be on
disclosures to the annual report and financial statements for the financial year ending 30 June 2017.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A Recognition of profit income and profit expense

Profit income and expense for all profit-bearing financial instruments are recognised within profit income and profit
expense in the statement of income 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 profit income or profit 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.

Profit 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,
HONG LEONG ISLAMIC BANK BERHAD

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.
ANNUAL REPORT 2017

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.

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for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A Recognition of profit income and profit expense (continued)

Ijarah Muntahia Bittamlik/Al-Ijarah Thumma Al-Bai (AITAB)

A contract of lease ending either with gift or sale transaction to transfer ownership of the asset from the lessor to the
lessee. The lessee enjoys the usufruct of the assets at an agreed rental during an agreed period while the ownership
remains with the lessor. The transfer of the ownership of the assets may takes place at the end of the Ijarah tenure or at
any point of time during the tenure subject to the agreed terms and conditions between the contracting parties. Income
is recognised on contracted profit rate basis over the lease term.

Bai Bithaman Ajil

A contract of sale of an asset in which 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.

Tawarruq/Commodity Murabahah

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.

Wadiah

Safe keeping contract in which a party entrusted his assets to another party for safe keeping and to be returned upon
request.

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 advances are recognised using the original
effective profit rate.

Income is recognised on an accrual basis in accordance with the principles of Shariah.

B Recognition of fees and other income

Financing arrangement fees and commissions are recognised as income when all conditions precedent are fulfilled.
Guarantee fees which are material are recognised as income based on time apportionment. Services charges and other
fee income are recognised as income when the services are rendered.

Dividends from financial assets held at fair value through profit or loss and financial investments available-for-sale are
recognised when the right to receive payment is established. This applies even if they are paid out of pre-acquisition
HONG LEONG ISLAMIC BANK BERHAD

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 investments available-for-sale are
recognised upon disposal of the securities, as the difference between net disposal proceeds and the carrying amount of
ANNUAL REPORT 2017

the securities.

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Notes to the Financial Statements


for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

C Financial assets

(i) Classification

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

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

Financial assets at fair value through profit or loss comprise of financial assets held for trading and other
financial assets designated by the Bank as fair value through profit or loss upon initial recognition.

A financial asset 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.

(b) 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 Bai Bithaman Ajil contracts. These contracts
are initially recognised at fair value, including direct and incremental transactions costs, and subsequently
measured at amortised cost using the effective profit method. These contracts are stated net of unearned
income and any amounts written off and/or impaired.

(c) Financial investments held-to-maturity

Financial investments held-to-maturity are non-derivative instruments with fixed or determinable payments
and fixed maturities that the Banks management has the positive intention and ability to hold to maturity. If
the Bank sells other than an insignificant amount of financial investments held-to-maturity, the entire category
will be tainted and reclassified as financial investments available-for-sale.

(d) Financial investments available-for-sale

Financial investments available-for-sale are those intended to be held for an indefinite period of time, which
may be sold in response to needs for liquidity or changes in profit rates, exchange rates or equity prices or that
are not classified as financial assets at fair value through profit or loss, financing and receivables and financial
HONG LEONG ISLAMIC BANK BERHAD

investments held-to-maturity.

(ii) Recognition and initial measurement


ANNUAL REPORT 2017

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. Transaction
costs for securities carried at fair value through profit or loss are taken directly to the statement of income.

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Notes to the Financial Statements


for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

C Financial assets (continued)

(iii) Subsequent measurement

Financial assets at fair value through profit or loss and financial investments available-for-sale are subsequently
carried at fair value, except for investments in equity instruments that do not have a quoted market price in an
active market and whose fair value cannot be reliably measured in which case the investments are stated at cost.
Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are
included in the statement of income in the period which they arise. Gains and losses arising from changes in fair
value of financial investments available-for-sale are recognised directly in other comprehensive income, until the
securities are derecognised or impaired at which time the cumulative gains or loss previously recognised in other
comprehensive income are recognised in the statement of income. Foreign exchange gains or losses of financial
investments available-for-sale are recognised in the statement of income in the period it arises.

Financial investments held-to-maturity are subsequently measured at amortised cost using the effective profit
method. Gains or losses arising from the de-recognition or impairment of the securities are recognised in the
statement of income.

Profit from financial assets held at fair value through profit or loss, financial investments available-for-sale and
financial investments held-to-maturity is calculated using the effective profit method and is recognised in the
statement of income. Dividends from available-for-sale equity instruments are recognised in the statement of
income when the entitys right to receive payment is established.

Financing and receivables are initially recognised at fair value which is the cash consideration to originate or
purchase the financing including the transaction costs, and measured subsequently at amortised cost using the
effective profit rate method. Profit on financing is included in the statement of income. In the case of impairment,
the impairment loss is reported as a deduction from the carrying value of the financing and recognised in the
statement of income.

(iv) Reclassification of financial assets

The Bank may choose to reclassify a non-derivative financial assets held-for-trading out of the held-for-trading
category if the financial asset is no longer held for the purposes of selling in the near term. Financial assets other
than financing 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 financing 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 the fair value at the date of the reclassification. The fair values of the securities
becomes the new cost or amortised cost as applicable, and no reversals of fair value gains or losses recorded before
the reclassification date are subsequently made. The effective profit rates for the securities reclassified to held-to-
HONG LEONG ISLAMIC BANK BERHAD

maturity category are determined at the reclassification date. Further changes in estimates of future cash flows are
recognised as an adjustment to the effective profit rates.

D Financial liabilities
ANNUAL REPORT 2017

Financial liabilities are measured at amortised cost, except for trading liabilities and liabilities designated at fair value,
which are held at fair value through profit or loss. 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 are initially recognised at fair value, and transaction costs are expensed in statement of income.

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for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

D Financial liabilities (continued)

(i) 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 at fair value through profit or loss upon initial recognition.

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.

The Bank has also designated structured deposits at fair value through profit or loss as permitted under MFRS 139
Financial Instruments: Recognition and Measurement as it significantly reduces accounting mismatch that would
otherwise arise from measuring that corresponding assets and liabilities of different basis.

(ii) Financial liabilities 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.

E Property and equipment and depreciation

Property and equipment are initially recorded at cost net of the amount of goods and service 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. 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 includes borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset.

Subsequent costs are included in the assets carrying amount or recognised as a separate asset, 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 replaced part is derecognised. All other repairs and maintenance
are charged to the statement of income during the financial period in which they are incurred.

Freehold land is not depreciated as it has an infinite life. Other property and equipment are depreciated on a straight line
basis to write off the cost of the assets to their residual values over their estimated useful lives, summarised as follows:


Office furniture, fittings, equipment and renovations and computer equipment 10% - 33%
Motor vehicles 25%
HONG LEONG ISLAMIC BANK BERHAD

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

Depreciation on assets under construction commences when the assets are ready for their intended use.
ANNUAL REPORT 2017

Property and equipment are reviewed for indication of impairment at each statement of financial position date and
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Where the
carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable
amount.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in
statement of income.
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Notes to the Financial Statements


for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

F Intangible assets

Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the
specific software. These costs are amortised over their estimated useful lives of 8 years.

G Leases

(i) Finance lease

Assets purchased under lease which in substance transfers the risks and rewards of ownership of the assets to
the Bank are capitalised under property and equipment. The assets and the corresponding lease obligations are
recorded at the lower of the present value of the minimum lease payments or the fair value of the leased assets at
the beginning of the lease term. Such leased assets are subject to depreciation on the same basis as other property
and equipment.

Leases which do not meet such criteria are classified as operating lease and the related rentals are charged to
statement of income.

(ii) Operating lease

Leases of assets under which all the risks and rewards of ownership are retained by the lessor are classified as
operating leases. Payments made under operating leases are charged to the statement of income on a straight line
basis over the period of the lease.

When an operating lease is terminated before the lease period has expired, any payment required to be made to
the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

H Impairment of 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 carrying
amount of the assets exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less
cost of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for
which separately identifiable cash flows which are largely independent of the cash inflows from other assets or groups
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 statement of income unless it reverses a previous revaluation in which case it is
charged to the revaluation surplus. Any subsequent increase in recoverable amount of non-financial assets (other than
goodwill) is recognised in the statements of income unless it reverses an impairment loss on an revalued asset in which
case it is taken to revaluation surplus.
HONG LEONG ISLAMIC BANK BERHAD

I Current and deferred income taxes

The tax expense for the period comprises current and deferred tax. The income tax expense or credit for the period is
ANNUAL REPORT 2017

the tax payable on the current periods 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 unused tax losses.
Tax is recognised in statement of income, except to the extent that it relates to items recognised in other comprehensive
income or directly in equity. In this case, the tax is recognised in other comprehensive income or directly in equity,
respectively. The liability in relation to tax penalties is included within the provision for taxation on the statement of
financial position and any accociated change within the tax expense in the statement of income as under provision of
80 prior year tax.
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

I Current and deferred income taxes (continued)

Current income tax expense is determined according to the tax laws of Malaysia enacted or substantially enacted at the
end of the reporting period and includes all taxes based upon the taxable profits.

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 income tax is recognised in full, using the liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the financial statements. However, tax liabilities are not
recognised if they arise from initial recognition of goodwill. Deferred income tax is 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 future taxable profits will be available against
which the temporary differences of unused tax losses or unused tax credits can be utilised.

Deferred income tax related to fair value re-measurement of financial instruments available-for-sale, which are charged
or credited directly to equity, is also credited or charged directly to equity and is subsequently recognised in the statement
of income together with the deferred gain or loss.

Deferred income tax is determined using tax rates (and tax laws) that have been enacted or substantially enacted by
the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the deferred
tax liability is settled.

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 a net basis.

J Derivative financial instruments and hedging

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are
subsequently remeasured at their fair value 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 value is
positive and as liabilities when fair value is negative. Changes in the fair value of any derivatives that do not qualify for
hedge accounting are recognised immediately in the statements of income. Cash collateral held in relation to derivative
transactions are carried at amortised cost.

The best evidence of fair value of a derivative at initial recognition is the transaction price (i.e. the fair value of the
HONG LEONG ISLAMIC BANK BERHAD

consideration given or received) unless the 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. When such evidence exists, the Bank recognises
profits immediately.
ANNUAL REPORT 2017

The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a
hedging instrument, and if so, the nature of the item being hedged. The Bank designated certain derivatives as either:
(1) hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedge) or (2) hedges of
highly probable future cash flows attributable to a recognised asset or liability, or a forecasted transaction (cash flow
hedge) or (3) hedges of a net investment in a foreign operation (net investment hedge). Hedge accounting is used for
derivatives designated in this way provided certain criteria are met.
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Notes to the Financial Statements


for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

J Derivative financial instruments and hedging (continued)

At the inception of the transaction, the Bank documents the relationship between hedging instruments and hedged
items, as well as their risk management objective and strategy for undertaking various hedge transactions. The Bank
also document its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are
used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or
cash flows of hedged items.

(i) Fair value hedge

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the
statements of income, together with any changes in the fair value of the hedged assets or liabilities that are
attributable to the hedged risk.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged
item for which the effective interest method is used is amortised to statements of income over the period to
maturity using a recalculated effective profit rate.

(ii) Cash flow hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow
hedges are recognised in equity. The gain and loss relating to the ineffective portion is recognised immediately in
the statement of income. Amounts accumulated in equity are recycled to the statement of income in the financial
periods in which the hedged item will affect statement of income.

When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for
hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised
when the forecast transaction is ultimately recognised in the statement of income. When a forecast transaction is
no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to
the statement of income.

(iii) Net investment hedge

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss
on the hedging instrument relating to the effective portion of the hedge is recognised in equity. The gain or loss
relating to the ineffective portion is recognised immediately in the statement of income.

Gains and losses accumulated in the equity are included in the statement of income when the foreign operation is
partially disposed or sold.

(iv) Derivatives that do not qualify for hedge accounting


HONG LEONG ISLAMIC BANK BERHAD

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

K Currency translations
ANNUAL REPORT 2017

(i) Functional and presentation currency

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

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for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

K Currency translations (continued)

(ii) Foreign currency transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates 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 financial year-end exchange rates of monetary
assets and liabilities denominated in foreign currencies are recognised in the statements of income, except when
deferred in equity as qualifying cash flow hedges and qualifying net investment hedges 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 financial instruments
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 the statements of income, 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 is 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 such as
equities held at fair value through profit or loss are recognised in income as part of the financial instruments fair
value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available-
for-sale are included in the fair value reserve in other comprehensive income.

L Employee benefits

(i) 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 services
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.

The Bank recognises a liability and an expense for bonuses. The Bank recognises a provision where contractually
obliged or where there is a past practice that has created a constructive obligation.

(ii) Defined contribution plan

A defined contribution plan is a pension plan under which the Bank pay fixed contributions into a separate entity (a
fund) on a mandatory, contractual or voluntary basis and the Bank has no legal or constructive obligations to pay
further contributions if the fund does not hold sufficient assets to pay all employees benefits relating to employee
service in the current and prior financial periods.
HONG LEONG ISLAMIC BANK BERHAD

The Bank contributes to a national defined contribution plan (the Employee Provident Fund) on a mandatory basis
and the amounts contributed to the plan are charged to the statements of income in the financial period to which
they relate. Once the contributions have been paid, the Bank have no further payment obligations.
ANNUAL REPORT 2017

Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future
payments is available.

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for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

M Impairment of financial assets

(i) Assets carried at amortised cost

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.

The criteria the Bank uses to determine that there is objective evidence of impairment loss include indications
that the customers or a group of customers is experiencing significant financial difficulty, the probability that they
will enter bankruptcy or other financial reorganisation, default of delinquency in profit or payments and where
observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes
in arrears or economic conditions that correlate with defaults.

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

The amount of the loss is measured as the difference between the assets carrying amount and the present value
of estimated future cash flows discounted at the financial assets original effective profit rate. The carrying amount
of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in
the statement of income. If a financing or financial investments held-to-maturity have a variable profit rate, the
discount rate for measuring any impairment loss is the current effective profit rate determined under the contract.

Financial assets that have not been individually assessed are grouped together for portfolio impairment assessment.
These financial assets are grouped according to their credit risk characteristics for the purposes of calculating an
estimated collective loss. These characteristics are relevant to the estimation of future cash flows for groups of such
assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the
assets being assessed. Future cash flows on a group of financial assets that are collectively assessed for impairment
are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in
the group.

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.

When a financing is uncollectible, it is written off against the related allowance for financing impairment and any
shortfall will be recognised to statement of income. Such financing are written off after taking into consideration
the realisable value of collateral, if any, when in the judgement of the management, there is no prospect of
recovery.
HONG LEONG ISLAMIC BANK BERHAD

If in a subsequent period, the amount of impairment losses decreases and the decrease can be related objectively
to an event occurring after the impairment was recognised (such as an improvement in the debtors credit rating),
the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the
ANNUAL REPORT 2017

reversal is recognised in the statement of income.

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2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

M Impairment of financial assets (continued)

(i) Assets carried at amortised cost (continued)

On 6 April 2015, BNM issued a revised Policy Document on Classification and Impairment Provisions for Loans/
Financing. The issuance of this revised policy document has superseded two guidelines issued by BNM previously,
namely Classification and Impairment Provisions for Loans/Financing dated 9 November 2011 and Classification and
Impairment Provisions for Loans/Financing Maintenance of Regulatory Reserves dated 4 February 2014. Some
of the key changes introduced in the revised BNM Policy Document include classification of a loan/financing as
impaired in BNMs Central Credit Reference Information System (CCRIS) when the loan/financing is classified as
rescheduled and restructured (R&R) and reclassification of a R&R loan/financing from impaired to non-impaired
when repayments based on revised and restructured terms have been observed continuously for a period of at least
6 months.

The requirements in this revised Policy Document are effective on 1 January 2015, except for the following:

(a) the requirement to classify loans/financing as rescheduled and restructured in the Central Credit Reference
Information System (CCRIS) will be effective on or after 1 April 2015; and

(b) the requirement for a banking institution to maintain, in aggregate, collective impairment allowance and
regulatory reserves of no less than 1.2% of total outstanding loans/financing, net of individual impairment
allowance will be effective beginning 31 December 2015.

The Bank has complied to the requirements to classify rescheduled and restructured loans/financing as impaired in
CCRIS. The regulatory reserve is maintained in addition to the collective impairment allowance required under the
MFRS 139 Financial Instruments: Recognition and Measurement, and it will be set aside from the retained profits
to a separate reserve within equity as an additional credit risk absorbent. The regulatory reserve is not qualified as
Common Equity Tier 1 capital under BNMs Capital Adequacy Framework (Capital Components).

(ii) Assets classified as available-for-sale

The Bank assesses at each date of the statement of financial position whether there is objective evidence that
financial asset or a group of financial assets is impaired.

For debt securities, the Bank uses criteria and measurement of impairment loss applicable for assets carried at
amortised cost above. 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 profit or loss, the impairment loss is reversed through the profit or loss.

In the case of equity securities classified as available-for-sale, in addition to the criteria for assets carried at
amortised cost 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
HONG LEONG ISLAMIC BANK BERHAD

assets, the cumulative loss that had been recognised directly in equity is removed from equity and recognised in
profit or loss. 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 profit or
loss. Impairment losses recognised in profit or loss on equity instruments classified as available-for-sale are not
ANNUAL REPORT 2017

reversed through profit or loss in subsequent periods.

N Derecognition of financial assets and financial liabilities

Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased
to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are
also transferred. Financial liabilities are derecognised when they have been redeemed or otherwise extinguished.
85
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

N Derecognition of financial assets and financial liabilities (continued)

Collateral furnished by the Bank under standard repurchase agreements transactions is not derecognised because the
Bank retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria
for derecognition are therefore not met.

O Offsetting financial instruments

Financial assets and liabilities are offset and the net amount is presented in the statement of financial position where
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 asset 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.

P Financial guarantee contracts

Financial guarantee contracts are contracts that require the issuer 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
financing instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of
customers to secure financing and other banking facilities.

Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was
given. The financial guarantees are agreed on arms length terms and the value of the premium agreed corresponds
to the value of the guarantee obligation. No receivable for the future premiums is recognised. Subsequent to initial
recognition, the Banks liabilities under such guarantees are measured at the higher of the initial amount, less
amortisation of fees recognised in accordance with MFRS 137 Provision, Contingent Liabilities and Contingent Assets,
and the best estimate of the amount required to settle the guarantee. These estimates are determined based on
experience of similar transactions and history of past losses, supplemented by the judgement of management. The fee
income earned is recognised on a straight line basis over the life of the guarantee. Any increase in the liability relating
to guarantees is reported in the statement of income.

Q Bills and acceptances payable

Bills and acceptances payable represent the Banks own bills and acceptances rediscounted and outstanding in the
market.

R Tier 2 subordinated Sukuk Ijarah

Tier 2 subordinated Sukuk Ijarah is recognised initially at fair value, net of transaction costs incurred. Tier 2 subordinated
Sukuk Ijarah is subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs)
and the redemption value is recognised in the statement of income over the period of the financing using the effective
profit method.
HONG LEONG ISLAMIC BANK BERHAD

All other Tier 2 subordinated Sukuk Ijarah costs are recognised in the statement of income in the period in which they
incurred.

S Provisions
ANNUAL REPORT 2017

Provisions are recognised by the Bank when all of the following conditions have been met:
(i) the Bank has a present legal or constructive obligation as a result of past events;
(ii) it is probable that an outflow of resources to settle the obligation will be required; and
(iii) a reliable estimate of the amount of obligation can be made.

86
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

S Provisions (continued)

Where the Bank expects a provision to be reimbursed by another party, 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 values of managements 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 risks specific to the obligation. The increase in the provision due to passage of time is recognised as profit
expense.

T Cash and cash equivalents

Cash and short-term funds in the statement of financial position comprise cash balances and deposits with financial
institutions and money at call with a maturity of one month or less, which are subject to an insignificant risk of changes
in value.

For the purpose of the statements of cash flows, cash and cash equivalents comprise cash and short-term funds and
deposits and placements with financial institutions, with original maturity of three months or less.

U Zakat

The calculation and payment of zakat are in compliance with Shariah rules and principles. The Bank has fulfilled its
obligation to pay zakat for its business on behalf of its shareholders to the state zakat authorities and the minimum
amount payable is computed based on net asset method.

V Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating
decision maker. The chief operating decision maker is the person or group that allocates resources and assesses the
performance of the operating segments of an entity. The Bank has determined the Board of Directors as the collective
body of chief operating decision makers.

Segment revenue, expense, assets and liabilities are those amount resulting from the operating activities of a segment
that are directly attributable to the segment and the relevant portion that can be allocated on a reasonable basis to the
segment.

W Share capital
HONG LEONG ISLAMIC BANK BERHAD

(i) Classification

Ordinary shares are classified as equity. Other shares are classified as equity and/or liability according to the
substance of the particular instrument.
ANNUAL REPORT 2017

(ii) Share issue costs

Incremental external costs directly attributable to the issue of new shares or options are shown in equity as a
deduction, net of tax, from the proceeds.

87
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

W Share capital (continued)

(iii) Dividends

Dividends to shareholders are recognised directly in equity. 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.

X Contingent assets and contingent liabilities

The Bank does not recognise contingent assets and liabilities, but discloses its existence in the financial statements.
A contingent liability is a 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
contingent assets but discloses its existence where inflows of economic benefits are probable, but not virtually certain.

Y Earnings per share

(i) Basic earnings per share

Basic earnings per share is calculated by dividing:


the profit attributable to owners of the Bank excluding any costs of servicing equity other than ordinary shares
by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus
elements in ordinary shares issued during the year and excluding treasury shares.

(ii) Diluted earnings per share

Diluted earnings per share adjusts the figures in the determination of basic earnings per share to take into account:
the after income tax effect of interest and other financing costs associated with dilutive potential ordinary
shares, and
the weighted average number of additional ordinary shares that would have been outstanding assuming the
conversion of all dilutive potential ordinary shares.

3 CASH AND SHORT TERM FUNDS

2017 2016
RM000 RM000
Cash and balances with banks and other financial institutions 49,597 64,809
HONG LEONG ISLAMIC BANK BERHAD

Money at call and deposit placements maturing within one month 799,065 1,570,613
848,662 1,635,422
ANNUAL REPORT 2017

88
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

4 DEPOSITS AND PLACEMENTS WITH BANKS AND OTHER FINANCIAL INSTITUTIONS

2017 2016
RM000 RM000
Licensed Islamic banks 100,587
Other financial institutions 100,366
200,953

5 FINANCIAL ASSETS HELD-FOR-TRADING

2017 2016
RM000 RM000
Money market instruments
Malaysian Government investment certificates 172,894 145,073
Negotiable Islamic debt certificates 418,485 49,880
Malaysian Government Sukuk 191,394
782,773 194,953

6 FINANCIAL INVESTMENTS AVAILABLE-FOR-SALE

2017 2016
RM000 RM000
Money market instruments
Cagamas bonds 140,940 212,243
Malaysian Government investment certificates 1,298,941 926,645
1,439,881 1,138,888
Quoted securities
Foreign currency bonds 12,267 92,773
Shares in Malaysia 1,116
12,267 93,889
Unquoted securities
Malaysian Government Sukuk 191,614 30,806
Corporate bonds and Sukuk 1,033,772 690,342
2,677,534 1,953,925
Allowance for impairment loss (1,116)
2,677,534 1,952,809
HONG LEONG ISLAMIC BANK BERHAD

The table below shows the movements in allowance of impairment loss during the financial year for the Bank:

2017 2016
RM000 RM000
ANNUAL REPORT 2017

As at 1 July 1,116
Transferred from individual assessment impairment 1,116
Amount written back in respect of recoveries (1,116)
As at 30 June 1,116

89
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

7 FINANCIAL INVESTMENTS HELD-TO-MATURITY

2017 2016
RM000 RM000
Money market instruments
Cagamas bonds 10,228
Malaysian Government investment certificates 2,302,888 2,150,242
2,302,888 2,160,470
Unquoted securities:
Malaysian Government Sukuk 254,925 10,181
2,557,813 2,170,651

8 FINANCING AND ADVANCES

(i) By type and Shariah contract

Ijarah
Bai Muntahia
Bithaman Bittamlik/ Other
Ajil Ijarah AITAB Murabahah Principles Total
2017 RM000 RM000 RM000 RM000 RM000 RM000
Cash line 259,029 8,787 267,816
Term financing
- House financing 5,971,225 5,607,942 11,579,167
- Hire purchase receivables 3,570,769 3,570,769
- Other term financing 674,113 59,134 2,765,644 3,498,891
Bills receivable 50,388 50,388
Islamic trust receipt 8,703 8,703
Claims on customers under
acceptance credits 483,542 483,542
Revolving credits 36 1,322,621 1,322,657
Staff financing 3,114 210 3,324
Others 4 4
Gross financing and advances 6,648,492 59,134 3,570,769 10,498,079 8,787 20,785,261

Unamortised fair value changes


arising from terminated fair value
hedges (40)
20,785,221
Less : Allowance for impairment
losses on financing and advances
HONG LEONG ISLAMIC BANK BERHAD

- Collective assessment allowance (157,826)


- Individual assessment allowance (13,664)
(171,490)
ANNUAL REPORT 2017

Total net financing and advances 20,613,731

90
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

8 FINANCING AND ADVANCES (CONTINUED)

(i) By type and Shariah contract (continued)

Ijarah
Bai Muntahia
Bithaman Bittamlik / Other
Ajil Ijarah AITAB Murabahah Principles Total
2016 RM000 RM000 RM000 RM000 RM000 RM000

Cash line 195,681 7,339 203,020


Term financing
- House financing 6,514,922 3,596,670 10,111,592
- Hire purchase receivables 3,519,043 3,519,043
- Other term financing 954,639 64,013 1,994,900 3,013,552
Bills receivable 23,055 23,055
Islamic trust receipt 13,020 13,020
Claims on customers under acceptance
credits 476,210 476,210
Revolving credits 49 1,270,729 1,270,778
Staff financing 4,373 2,862 7,235
Others 6 6
Gross financing and advances 7,473,989 64,013 3,519,043 7,573,127 7,339 18,637,511

Unamortised fair value changes arising


from terminated fair value hedges (811)
18,636,700
Less : Allowance for impairment losses
on financing and advances
- Collective assessment allowance (137,055)
- Individual assessment allowance (7,478)
(144,533)

Total net financing and advances 18,492,167

Fair value hedges previously undertaken on the profit rate risk of financing and advances are now terminated.

(ii) The maturity structure of financing and advances are as follows:

2017 2016
RM000 RM000
HONG LEONG ISLAMIC BANK BERHAD

Maturing within:
- One year 2,631,964 2,127,329
- One year to three years 814,462 950,411
ANNUAL REPORT 2017

- Three years to five years 2,035,172 1,733,210


- Over five years 15,303,663 13,826,561
20,785,261 18,637,511

91
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

8 FINANCING AND ADVANCES (CONTINUED)

(iii) The financing and advances are disbursed to the following type of customers:

2017 2016
RM000 RM000

Domestic non-bank financial institutions 425,048 514,425


Domestic business enterprises:
- small medium enterprises 2,591,975 2,117,106
- others 2,502,863 2,379,902
Government and statutory bodies 11,580 11,775
Individuals 15,041,095 13,313,114
Other domestic entities 14,503 19,819
Foreign entities 198,197 281,370
Gross financing and advances 20,785,261 18,637,511

(iv) Financing and advances analysed by profit rate sensitivity are as follows:

2017 2016
RM000 RM000

Fixed rate:
- Housing financing 1,382,890 866,709
- Hire purchase receivables 3,570,769 3,519,043
- Other fixed rate financing 1,110,049 898,809
Variable rate:
- Base rate/Islamic financing rate plus 12,906,650 11,592,941
- Cost plus 1,814,903 1,760,009
Gross financing and advances 20,785,261 18,637,511

(v) Financing and advances analysed by economic purposes are as follows:

2017 2016
RM000 RM000

Purchase of securities 3,370 6,453


Purchase of transport vehicles 3,574,724 3,522,924
Purchase of landed property:
- residential 10,443,173 9,059,990
HONG LEONG ISLAMIC BANK BERHAD

- non-residential 1,702,693 1,503,105


Purchase of fixed assets (excluding landed properties) 34,356 24,828
Personal use 943,726 724,487
Construction 249,026 162,449
ANNUAL REPORT 2017

Working capital 3,581,909 3,420,108


Other purposes 252,284 213,167
Gross financing and advances 20,785,261 18,637,511

92
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

8 FINANCING AND ADVANCES (CONTINUED)

(vi) Financing and advances analysed by geographical distribution are as follows:

2017 2016
RM000 RM000

In Malaysia 20,785,261 18,637,511


Gross financing and advances 20,785,261 18,637,511

(vii) Movements in the impaired financing and advances are as follows:

2017 2016
RM000 RM000

As at beginning of the financial year 162,558 112,435


Classified as impaired during the financial year 293,278 299,346
Reclassified as non-impaired during the financial year (181,454) (159,202)
Amount written back in respect of recoveries (45,973) (49,005)
Amount written off (48,565) (41,016)
As at end of the financial year 179,844 162,558

Gross impaired financing and advances as a % of gross financing and advances 0.87% 0.87%

(viii) Impaired financing and advances analysed by economic purposes are as follows:

2017 2016
RM000 RM000

Purchase of transport vehicles 33,844 32,537


Purchase of landed property:
- residential 77,408 62,167
- non-residential 1,888 2,708
Purchase of fixed assets (excluding landed properties) 1,231 1,249
Personal use 9,980 5,032
Construction 1,810 1,744
Working capital 53,533 56,971
Other purposes 150 150
Gross impaired financing and advances 179,844 162,558
HONG LEONG ISLAMIC BANK BERHAD

(ix) Impaired financing and advances analysed by geographical distribution are as follows:

2017 2016
In Malaysia RM000 RM000
ANNUAL REPORT 2017

Gross impaired financing and advances 179,844 162,558

93
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

8 FINANCING AND ADVANCES (CONTINUED)

(x) Movements in the allowance for impaired financing and advances are as follows:

2017 2016
RM000 RM000

Collective assessment allowance


As at beginning of the financial year 137,055 143,357
Net allowance made during the financial year 64,653 34,491
Amount written off (42,061) (38,717)
Unwinding income (1,821) (2,076)
As at end of the financial year 157,826 137,055

Collective assessment allowance (inclusive of regulatory reserve) as % of gross


fianncing and advances less individual assessment allowance 1.20% 1.20%

2017 2016
RM000 RM000

Individual assessment allowance


As at beginning of the financial year 7,478 13,150
Net allowance made during the financial year 8,885 (4,296)
Amount written off (2,670) (59)
Amount transferred to allowances for impairment losses on securities (1,116)
Unwinding income (29) (201)
As at end of the financial year 13,664 7,478

9 OTHER ASSETS

2017 2016
RM000 RM000

Sundry debtors and other prepayments 6,422 3,167


Amount due from holding company 57,820 288,107
Treasury related receivables 64,410 161,137
Treasury and cheque clearing 14,571 85,117
Other receivables 3,010 4,147
146,233 541,675
HONG LEONG ISLAMIC BANK BERHAD

Amount due from holding company is unsecured, non-profit bearing and repayable on demand.

10 STATUTORY DEPOSITS WITH BANK NEGARA MALAYSIA


ANNUAL REPORT 2017

2017 2016
RM000 RM000

Statutory deposits with Bank Negara Malaysia (BNM) 594,386 581,181

The non-profit bearing statutory deposits are maintained with BNM in compliance with Section 26(2)(c) of the Central Bank
94 of Malaysia Act, 2009, the amount of which is determined at set percentages of total eligible liabilities.
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

11 PROPERTY AND EQUIPMENT

Office
furniture,
fittings,
equipment Capital
and Computer Motor work in
2017 renovations equipment vehicles progress Total
Cost RM000 RM000 RM000 RM000 RM000

As at beginning of the financial year 9,977 17,373 21 1,330 28,701


Additions/transfer 34 3,932 332 1,580 5,878
Disposals/Write off (26) (593) (332) (951)
As at end of the financial year 9,985 20,712 21 2,910 33,628

Accumulated depreciation
As at beginning of the financial year 6,567 6,634 20 13,221
Charge for the financial year 681 1,777 42 2,500
Disposals/Write off (19) (357) (42) (418)
As at end of the financial year 7,229 8,054 20 15,303

Net book value as at 30 June 2017 2,756 12,658 1 2,910 18,325

2016
As at beginning of the financial year 9,883 11,762 248 5,198 27,091
Additions 113 5,654 (3,868) 1,899
Disposals/Write off (19) (43) (227) (289)
As at end of the financial year 9,977 17,373 21 1,330 28,701

Accumulated depreciation
As at beginning of the financial year 5,893 5,143 202 11,238
Charge for the financial year 693 1,510 24 2,227
Disposals/Write off (19) (19) (206) (244)
As at end of the financial year 6,567 6,634 20 13,221

Net book value as at 30 June 2016 3,410 10,739 1 1,330 15,480


HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

95
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

12 INTANGIBLE ASSETS

2017 2016
RM000 RM000

Computer Software
Cost
As at beginning of the financial year 9,055 9,014
Additions 2 44
Write off (42) (3)
As at end of the financial year 9,015 9,055

Accumulated amortisation
As at beginning of the financial year 6,099 5,208
Amortisation during the financial year 883 893
Write off (8) (2)
As at end of the financial year 6,974 6,099

Net book value as at end of financial year 2,041 2,956

13 DEFERRED TAXATION

Deferred income 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 authority.

Deferred tax assets and liabilities prior to offsetting are summarised as below:

2017 2016
RM000 RM000

Deferred tax assets 2,005 1,690


Deferred tax liabilities (3,068) (7,264)
Deferred tax liabilities (net) (1,063) (5,574)

The analysis of deferred tax assets and deferred tax liabilities after the appropriate set off is as follows:

2017 2016
RM000 RM000

Deferred tax assets/(liabilities)


HONG LEONG ISLAMIC BANK BERHAD

-To be recovered within 12 months 1,924 1,618


-To be recovered after more than 12 months (2,987) (7,192)
(1,063) (5,574)
ANNUAL REPORT 2017

96
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

13 DEFERRED TAXATION (CONTINUED)

The movements in deferred tax assets and liabilities during the financial year are as follows:

Financial
Property investments Provision
and Available- and
Deferred tax assets/(liabilities) Note equipment -for-sale advances Total
RM000 RM000 RM000 RM000
2017
As at beginning of the financial year (3,440) (3,824) 1,690 (5,574)
Credited to statement of income 27 448 315 763
Transferred from equity 31 3,748 3,748
As at end of the financial year (2,992) (76) 2,005 (1,063)

2016
As at beginning of the financial year (1,732) (1,082) 1,396 (1,418)
(Charged)/credited to statement of income 27 (1,708) 294 (1,414)
Transferred from equity 31 (2,742) (2,742)
As at end of the financial year (3,440) (3,824) 1,690 (5,574)

14 DEPOSITS FROM CUSTOMERS

(i) By type of deposit and Shariah contract

2017 2016
RM000 RM000
Amortised cost
Savings Deposit
Wadiah 196 179
Tawarruq 2,794,302 2,578,974
2,794,498 2,579,153
Demand Deposit
Wadiah 428,695 430,141
Tawarruq 2,439,883 2,418,124
2,868,578 2,848,265
Term Deposit
Tawarruq (Commodity Murabahah) 15,282,516 11,025,294
General investment deposits
Mudarabah 86,061 95,680
Negotiable islamic debt certificate
Bai Bithaman Ajil 1,299,138 1,879,744
HONG LEONG ISLAMIC BANK BERHAD

Short-term corporate deposits


Wadiah 1,293,694 2,985,575
Others
Wadiah 115,725 64,383
ANNUAL REPORT 2017

18,077,134 16,050,676
23,740,210 21,478,094
At fair value through profit and loss
Callable range accrual notes, at cost 889,110 417,332
Fair value changes arising from designation at fair value through profit and loss* (36,869) (6,197)
Bai Bithaman Ajil 852,241 411,135 97
24,592,451 21,889,229
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

14 DEPOSITS FROM CUSTOMERS (CONTINUE)

The Bank has issued structured deposits (Callable Range Accrual Notes) and designated them at fair value through profit or
loss. This designation is permitted under MFRS 139 Financial Instruments: Recognition and Measurement as it significantly
reduces accounting mismatch. These instruments are managed by the Bank on the basis of its fair value and includes terms
that have substantive derivative characteristic.

The fair value changes of the structured deposits that are attributable to the changes in own credit risk are not significant.

The carrying amount of the structured deposits of the Bank is RM32,759,000 (2016: RM3,865,000) lower than the contractual
amount of maturity.

(ii) The maturity structure of negotiable islamic debt certificate, general investment deposits, Commodity Murabahah term
deposits and short-term corporate deposits are as follows:

2017 2016
RM000 RM000

Due within:
- six months 14,794,561 13,986,261
- six months to one year 3,129,184 1,984,911
- one year to three years 34,901 13,013
- three years to five years 2,763 2,108
17,961,409 15,986,293

(iii) The deposits are sourced from the following customers:

2017 2016
RM000 RM000

Government and statutory bodies 1,062,097 715,662


Business enterprises 13,872,481 13,799,723
Individuals 9,349,921 7,117,916
Others 307,952 255,928
24,592,451 21,889,229

15 DEPOSITS AND PLACEMENTS OF BANKS AND OTHER FINANCIAL INSTITUTIONS

2017 2016
RM000 RM000

Wadiah
HONG LEONG ISLAMIC BANK BERHAD

Licensed banks 677,016 519,077


Licensed Islamic banks 43,111 306,587
720,127 825,664
ANNUAL REPORT 2017

The maturity structure of deposits and placement of banks and other financial institutions
- Less than one year 720,127 825,664

98
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

16 ISLAMIC DERIVATIVE FINANCIAL INSTRUMENTS

2017 2016
RM000 RM000

Islamic derivatives at fair value through profit or loss


- Islamic profit rate swaps 8,096 16,410
- Foreign exchange related contracts 5,286 10,469
- Cross currency swaps 5,716
Islamic derivative financial instruments assets 13,382 32,595

Islamic derivatives at fair value through profit or loss


- Islamic profit rate swaps (22,709) (11,880)
- Foreign exchange related contracts (4,037) (8,729)
- Swaption (23,232) (11,164)
- Cross currency swaps (5,716)
Islamic derivative financial instruments liabilities (49,978) (37,489)

17 OTHER LIABILITIES

2017 2016
RM000 RM000

Amount due to holding company 13,235 13,214


Amount due to related company 377
Financing advance payment 571,194 500,799
Provision for zakat 350 350
Provision for bonus and staff related expenses 4,603 3,328
Sundry creditors and accruals 35,417 84,516
Treasury related payables 1,143
Other accruals and payables 7,025 9,529
631,824 613,256

18 TIER 2 SUBORDINATED SUKUK IJARAH

2017 2016
RM000 RM000

RM400 million Tier 2 subordinated sukuk, at par 400,000 400,000


Add: Profit payable 631 736
HONG LEONG ISLAMIC BANK BERHAD

400,631 400,736
Less: Unamortised discounts (128) (254)
400,503 400,482
ANNUAL REPORT 2017

Securities Commission Malaysia had on 6 May 2014 approved and authorised HLISB proposed Subordinated Sukuk Ijarah
Programme of up to RM1.0 billion in nominal value.

The proceeds from the Subordinated Sukuk Ijarah Programme is for working capital, general banking and other corporate
purpose and/or if required, the refinancing of any existing financing obligations of the issuer and/or any existing Subordinated
Sukuk Ijarah issued under the Subordinated Sukuk Ijarah Programme. For the avoidance of doubt, the utilisation of proceeds
99
shall be for Shariah-compliant purpose only.
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

18 TIER 2 SUBORDINATED SUKUK IJARAH (CONTINUED)

On 17 June 2014, the Bank had completed the first issuance of RM400 million nominal value of Tier 2 Subordinated Sukuk
Ijarah (Subordinated Sukuk Ijarah) out of its RM1.0 billion Tier 2 Subordinated Sukuk Ijarah Programme. The RM400 million
Subordinated Sukuk Ijarah will mature in 2024 and is callable at end of year 5 and on each subsequent coupon payment dates
thereafter subject to approval of BNM. The Subordinated Sukuk Ijarah which bears profit of 4.80% per annum is payable
semi-annually in arrears.

The Subordinated Sukuk Ijarah constitute direct, unconditional, subordinated and unsecured obligations of HLISB and
subordinated in right and priority of payment, to the extend and in the manner provided in the Subordinated Sukuk Ijarah,
ranking pari passu among themselves. The Subordinated Sukuk Ijarah is subordinated in right of payment to all deposit
liabilities and other liabilities of HLISB, except in each case to those liabilities which by their terms rank equally in right of
payment with or are subordinated to the Subordinated Sukuk Ijarah. The Subordinated Sukuk Ijarah may be written-off,
either fully or partially at the discretion of BNM and the Malaysia Deposit Insurance Corporation (PIDM) at the point of
non-viability as determined by BNM and PIDM. The Subordinated Sukuk Ijarah qualify as Tier 2 capital for the purpose of
determining the capital adequacy ratio of HLISB.

19 SHARE CAPITAL

2017 2016
RM000 RM000

Authorised share capital:*


Ordinary shares of RM1.00 each 1,000,000

Ordinary shares issued and fully paid of RM1.00 each:


As at beginning/end of the financial year 700,000 700,000

* The new Companies Act 2016 (New Act), which came into operation on 31 January 2017, abolished the concept of
authorised share capital and par value of share capital.

20 RESERVES

2017 2016
Note RM000 RM000

Distributable
Retained profits (a) 1,235,660 477,527

Non-distributable
Statutory reserve (b) 540,112
Regulatory reserve (c) 91,433 86,505
Fair value reserve (d) (2,191) 9,679
HONG LEONG ISLAMIC BANK BERHAD

89,242 636,296
1,324,902 1,113,823
ANNUAL REPORT 2017

(a) The Bank can distribute dividends out of its entire retained earnings under the single-tier system.

(b) The requirement to maintain a statutory reserve fund has been removed pursuant to BNMs Capital Fund Policy with
effect from 3 May 2017.

100
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

20 RESERVES (CONTINUED)

(c) The Bank is required to maintain in aggregate collective impairment allowances of no less than 1.2% of the total
outstanding financing and advances, net of individual impairment allowances, in accordance with BNM circular dated 6
April 2015 titled Classification and Impairment Provisions for Loans/Financing.

During the financial year, an additional amount of RM4.9 million (2016: RM36.3 million) has been transferred from
retained profits to regulatory reserves. This reserve is not distributable as cash dividends.

(d) Movement of the fair value reserve is as follows:

2017 2016
Note RM000 RM000
As at beginning of the financial year 9,679 817
Net gain from change in fair value (15,518) 11,881
Reclassification adjustment to net profit on disposal and impairment (100) (277)
Deferred taxation 13 3,748 (2,742)
Net change in fair value reserve (11,870) 8,862
As at end of the financial year (2,191) 9,679

21 INCOME DERIVED FROM INVESTMENT OF DEPOSITORS FUNDS AND OTHERS

2017 2016
RM000 RM000
Income derived from investment of:
(i) Term deposits/General investment deposits 726,819 568,194
(ii) Other deposits 381,282 418,105
1,108,101 986,299

(i) Income derived from investment of term deposits/general investment deposits

2017 2016
RM000 RM000
Finance income and hibah
Financing and advances 578,923 445,958
Financial assets held-for-trading 2,594 3,390
Financial investments available-for-sale 55,787 40,154
Financial investments held-to-maturity 54,464 39,162
Money at call and deposit with financial institutions 12,911 13,977
704,679 542,641
Accretion of discounts less amortisation of premium 19,258 20,782
Total finance income and hibah 723,937 563,423
HONG LEONG ISLAMIC BANK BERHAD

Other operating income


Net gain from financial assets held-for-trading
- Realised 2,700 1,920
- Unrealised (967) 433
ANNUAL REPORT 2017

Net realised gain from sale of financial investments available-for-sale 1,149 2,418
2,882 4,771
726,819 568,194

Of which:
Financing income earned on impaired financing and advances 4,620 4,237 101
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

21 INCOME DERIVED FROM INVESTMENT OF DEPOSITORS FUNDS AND OTHERS (CONTINUED)

(ii) Income derived from investment of other deposits

2017 2016
RM000 RM000

Finance income and hibah


Financing and advances 303,697 328,158
Financial assets held-for-trading 1,361 2,495
Financial investments available-for-sale 29,265 29,547
Financial investments held-to-maturity 28,571 28,817
Money at call and deposit with financial institutions 6,773 10,285
369,667 399,302
Accretion of discounts less amortisation of premium 10,102 15,292
Total finance income and hibah 379,769 414,594

Other operating income


Net gain arising from financial assets held-for-trading
- Realised 1,417 1,413
- Unrealised (507) 319
Net realised gain from sale of financial investments available-for-sale 603 1,779
1,513 3,511

381,282 418,105

Of which:
Financing income earned on impaired financing and advances 2,424 3,118
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

102
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

22 INCOME DERIVED FROM INVESTMENT OF SHAREHOLDERS FUNDS

2017 2016
RM000 RM000
Finance income and hibah
Financing and advances 66,434 67,314
Financial assets held-for-trading 298 512
Financial investments available-for-sale 6,402 6,061
Financial investments held-to-maturity 6,250 5,911
Money at call and deposit with financial institutions 1,482 2,110
80,866 81,908
Accretion of discounts less amortisation of premium 2,210 3,137
Total finance income and hibah 83,076 85,045

Other operating income


Fee and commission:
- Commission 8,591 7,226
- Service charges and fees 7,817 6,773
- Guarantee fees 1,648 574
- Other fees income 9,612 8,100
Net gain arising from financial assets held-for-trading
- Realised 310 290
- Unrealised (111) 65
Net realised gain from sale of financial investments available-for-sale 132 365
Net gain from foreign exchange transactions 12,819 15,740
Amortisation of fair value changes arising from terminated fair value hedges 771 1,928
Net gain/(loss) arising from Islamic derivative financial instruments
- Realised 3,115 2,806
- Unrealised (539) (5,117)
Other income 802 511
44,967 39,261
128,043 124,306

Of which:
Financing income earned on impaired financing and advances 530 640

23 ALLOWANCE FOR IMPAIRMENT ON FINANCING AND ADVANCES

2017 2016
HONG LEONG ISLAMIC BANK BERHAD

RM000 RM000
Allowance made for impairment losses on financing and advances
- Collective assessment allowance 64,653 34,491
ANNUAL REPORT 2017

- Individual assessment allowance 8,885 (4,296)


Impaired financing and advances:
- Recovered from bad debt written off (23,249) (22,256)
- Written off 3,293 2,293
53,582 10,232
103
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

24 INCOME ATTRIBUTABLE TO DEPOSITORS

2017 2016
RM000 RM000
Deposits from customers:
- Mudarabah 2,777 3,257
- Wadiah 124,255 134,844
- Tawarruq 528,254 450,349
Deposits and placements of banks and other financial institutions:
- Wadiah 11,433 35,259
Tier 2 subordinated Sukuk Ijarah 19,326 19,430
686,045 643,139

25 OVERHEADS AND OTHER EXPENDITURES

2017 2016
Note RM000 RM000
Personnel costs (i) 31,507 34,845
Establishment costs (ii) 11,946 9,349
Marketing expenses (iii) 3,024 3,169
Administration and general expenses (iv) 158,001 142,772
204,478 190,135

(i) Personnel costs comprise the followings:

2017 2016
RM000 RM000
Salaries, bonus and allowances 27,984 26,996
Medical expenses 1,300 720
Mutual Separation Scheme 4,904
Training and convention expenses 1,200 1,175
Staff welfare 289 216
Other employees benefits 734 834
31,507 34,845

(ii) Establishment costs comprise the followings:

2017 2016
HONG LEONG ISLAMIC BANK BERHAD

RM000 RM000
Depreciation of property and equipment 2,500 2,227
Amortisation of intangible assets 883 893
Electricity, water and sewerage 465 462
ANNUAL REPORT 2017

Rental of premises 1,963 2,245


Hire of plant and machinery 624 414
Information technology expenses 3,946 1,860
Security services 821 902
Others 744 346
104 11,946 9,349
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

25 OVERHEADS AND OTHER EXPENDITURES (CONTINUED)

(iii) Marketing expenses comprise the followings:

2017 2016
RM000 RM000

Advertisement and publicity 2,534 2,671


Others 490 498
3,024 3,169

(iv) Administration and general expenses comprise the followings:

2017 2016
RM000 RM000

Teletransmission expenses 151 168


Stationery and printing expenses 406 440
Professional fees 2,519 2,291
Insurance fees 4,344 3,565
Stamp, postage and courier 264 260
Travelling and transport expenses 98 113
Registration and license fees 288 326
Brokerage and commission 1,825 2,197
Shared service cost 146,082 130,133
Others 2,024 3,279
158,001 142,772

The above expenditure includes the following statutory disclosures:

2017 2016
Note RM000 RM000

Directors remuneration 26 1,068 2,536


Auditors remuneration
- statutory audit 181 187
- regulatory related fees 286 235
- tax compliance 24 23
- other services 102

There is no indemnity given to or insurance effected for the auditors of the Bank.
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

105
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

26 CHIEF EXECUTIVE OFFICER (CEO), DIRECTORS AND SHARIAH COMMITTEE MEMBERS REMUNERATION

Forms of remuneration in aggregate for Chief Executive Officer (CEO), all Directors and Shariah Committee members for the
financial year are as follows:

Salaries
and bonuses
and defined
contribution Estimated
retirement benefits-in-
plan Director fees kind Total
2017 RM000 RM000 RM000 RM000

CEO and Executive Director


YM Raja Teh Maimunah binti Raja Abdul Aziz ^^ 680 7 687
680 7 687
Non-executive Directors
YBhg Datuk Dr Md Hamzah bin Md Kassim 138 138
Mr Kwek Leng Hai
Encik Alan Hamzah Sendut 96 96
Mr Domenico Fuda
YBhg Dato Abdul Majit bin Ahmad Khan ^ 147 147

Total Directors remuneration 680 381 7 1,068


Shariah Committee members remuneration:
- fees 254
680 381 7 1,322

The movement and details of the Directors of the Bank in office and interests in shares and share options are reported in the
Directors report.
^ Resigned as with effect from 29 June 2017
^^ Resigned with effect from 27 October 2016
Note: The Directors Remuneration in the current financial year represents remuneration for the Bank to comply with the
requirements of the Companies Act 2016.
During the financial year, Directors and Officers of the Bank are covered under the Directors & Officers Liability
Insurance in respect of liabilities arising from acts committed in their capacity as, inter alia, Directors or Officers of the
Bank subject to the terms of the policy. The Banks annual gross premium was paid by Hong Leong Bank Berhad, the
holding company. The total premium paid is set out in the Hong Leong Bank Berhads statutory accounts and the said
information is deemed incorporated herein by such reference and made a part hereof.
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

106
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

26 CHIEF EXECUTIVE OFFICER (CEO), DIRECTORS AND SHARIAH COMMITTEE MEMBERS REMUNERATION (CONTINUED)

Forms of remuneration in aggregate for Chief Executive Officer (CEO), all Directors and Shariah Committee members for the
financial year are as follows:

Salaries
and bonuses Estimated
and defined money
contribution value for
retirement Director benefits-in-
plan fees kind Total
2016 RM000 RM000 RM000 RM000

CEO and Executive Director


YM Raja Teh Maimunah binti Raja Abdul Aziz 2,112 31 2,143
2,112 31 2,143
Non-executive Directors
YBhg Dato Abdul Majit bin Ahmad Khan 130 130
YM Tunku Dato Mahmood Fawzy bin Tunku Muhiyiddin^ 77 77
YBhg Datuk Dr Md Hamzah bin Md Kassim 69 69
YBhg Tan Sri A. Razak bin Ramli ^^ 117 117
Mr Kwek Leng Hai

Total Directors remuneration 2,112 393 31 2,536


Shariah Committee members remuneration:
- fees 213
2,112 393 31 2,749

The movement and details of the Directors of the Bank in office and interests in shares and share options are reported in the
Directors report.
^ Resigned as with effect from 28 January 2016
^^ Resigned with effect from 6 May 2016
Note: The Directors Remuneration in the current financial year represents remuneration for the Bank to comply with the
requirements of Companies Act 2016.

27 TAXATION

2017 2016
Note RM000 RM000

Malaysian income tax:


HONG LEONG ISLAMIC BANK BERHAD

- current year 71,120 62,427


- (over)/under accrual in prior years (501) 5,922
Deferred taxation 13 (763) 1,414
ANNUAL REPORT 2017

69,856 69,763

107
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

27 TAXATION (CONTINUED)

The effective tax rate for the Bank differs from the statutory rate of taxation due to:

2017 2016
RM000 RM000

Profit after zakat before taxation 292,805 266,749

Tax calculated at a rate of 24% 70,273 64,020


Tax effects of:
- income not subject to tax (706) (2,057)
- expenses not deductible for tax purposes 790 1,878
- (over)/under accrual in prior years (501) 5,922
Taxation 69,856 69,763

28 EARNINGS PER SHARE

Basic earnings per share

Basic earnings per share is calculated by dividing the profit after taxation by the weighted average number of ordinary shares
in issue during the financial year.

2017 2016
RM000 RM000

Net profit for the financial year 222,949 196,986

Weighted average number of ordinary shares in issue (000) 700,000 700,000

Basic earnings per share (sen) 31.85 28.14


HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

108
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

29 SIGNIFICANT RELATED PARTY TRANSACTIONS AND BALANCES

(a) Related parties and relationships

The related parties of and their relationships with the Bank are as follows:

Related parties Relationship

Hong Leong Company (Malaysia) Berhad Ultimate holding company

Hong Leong Share Registration Services Sdn Bhd, Subsidiary companies of ultimate holding company
HLCM Capital Sdn Bhd, Hong Leong Fund
Management Sdn Bhd and HL Management Co Sdn Bhd

Hong Leong Financial Group Berhad Penultimate holding company

Subsidiary companies of Hong Leong Financial Group Subsidiary companies of penultimate holding company
Berhad as disclosed in its financial statements

Hong Leong Bank Berhad (HLB) Holding company

Subsidiary and associated companies of Hong Leong Bank Subsidiary and associated companies of holding company
Berhad or disclosed in its financial statements

Hong Leong Industries Berhad and its subsidiary and Subsidiary and associated companies of penultimate
associated companies as disclosed in its financial holding company
statements

Hume Industries (Malaysia) Berhad and its subsidiary Subsidiary and associated companies of ultimate holding
and associated companies as disclosed in its financial company
statements

Guoco Group Limited and its subsidiary and associated Subsidiary and associated companies of ultimate holding
companies as disclosed in its financial statements company

GuocoLand (Malaysia) Berhad and its subsidiary and Subsidiary and associated companies of ultimate holding
associated companies as disclosed in its financial company
statements

Key management personnel The key management personnel of the Bank consists of
all Directors of the Bank.

Related parties of key management personnel (deemed as (i) Close family members and dependents of key
related to the Bank) management

(ii) Entities that are controlled, jointly controlled or


significantly influenced by, or for which significant
voting power in such entity resides with, directly or
indirectly by key management personnel or its close
HONG LEONG ISLAMIC BANK BERHAD

family members
ANNUAL REPORT 2017

109
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

29 SIGNIFICANT RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

(b) Related party transactions and balances

Other Key
Holding related Management
company companies Personnel
RM000 RM000 RM000

2017
Income
Commission on Group product/services sold 3,426
Profit on financing
3,426

Expenditure
Rental and maintenance 947
Insurance 84
Profit paid on deposits
- current accounts and term deposits
- Special/General investment account 208
Profit paid on placements 4,154
Profit paid on negotiable Islamic debt certificate 6,756
Shared service costs 141,290
Management fee 10
Others 5 572
152,205 1,821

Amounts due from:


Holding company 57,820
57,820

Amounts due to:


Current account 7,203 28
Special investment account 3,092
Interbank placement 677,016
Negotiable Islamic debt certificate 499,877
1,176,893 10,295 28
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

110
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

29 SIGNIFICANT RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

(b) Related party transactions and balances (continued)

Other Key
Holding related Management
company companies Personnel
RM000 RM000 RM000

2016
Income
Commission on Group product/services sold 3,843
Profit on financing 66
3,843 66

Expenditure
Rental and maintenance 1,082
Insurance 33
Profit paid on deposits
- current accounts and term deposits 2
- Special/General investment account 281
Profit paid on placements 6,967
Profit paid on negotiable Islamic debt certificate 48,404
Shared service costs 130,133
Management fee 12
Dividend paid 41,440
Others 6 276
226,950 1,684 2

Amounts due from:


Cash line 20,341
Financing and advances 2,783
Holding company 288,107
Derivative asset 15,126
303,233 20,341 2,783

Amounts due to:


Current account 66
HONG LEONG ISLAMIC BANK BERHAD

Special investment account 10,630


Interbank placement 357,777
Negotiable Islamic debt certificate 500,000
Derivative liabilities 21,648
ANNUAL REPORT 2017

Intercompany 13,214 377


892,639 11,007 66

Commitments and Contingencies


Derivative related contracts 2,368,129
111
Included in the above is the Directors compensation which is disclosed in Note 26.
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

29 SIGNIFICANT RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)

(c) Credit transactions and exposures with connected parties

Credit exposures with connected parties as per BNMs revised Guidelines on Credit Transactions and Exposures with
Connected Parties which became effective on 1 January 2008 are as follows:

2017 2016
RM000 RM000

Aggregate value of outstanding credit exposures with connected parties 170,653 62,863
Percentage of outstanding credit exposures to connected parties as a proportion of
total credit exposures 0.74% 0.30%
Percentage of outstanding credit exposures with connected parties which is
non-performing or in default 0.00% 0.00%

30 DIVIDENDS

2017 2016
Gross Amount of Gross Amount of
Dividend dividends dividend dividends
per share net of tax per share net of tax
sen RM000 sen RM000

Interim dividend paid


- for the financial year ended 30 June 2016 4.50 31,500
Final dividend paid
- for the financial year ended 30 June 2015 1.42 9,940
5.92 41,440

No final dividend will be declared in respect of the financial year ended 30 June 2017.

31 INCOME TAX RELATING TO COMPONENTS OF OTHER COMPREHENSIVE INCOME

Before tax Tax benefits/ Net of tax


expense amount
RM000 RM000 RM000

2017
Financial investments available-for-sale:
- net fair value gain/(loss) (15,618) 3,748 (11,870)
HONG LEONG ISLAMIC BANK BERHAD

2016
Financial investments available-for-sale:
- net fair value gain/(loss) 11,604 (2,742) 8,862
ANNUAL REPORT 2017

32 COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities with legal
recourse to its customers. No material losses are anticipated as a result of these transactions. These commitments and
contingencies are also not secured over the assets of the Bank.

112
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

32 COMMITMENTS AND CONTINGENCIES (CONTINUED)

The notional amounts of the commitments and contingencies constitute the following:

2017 2016
RM000 RM000

Direct credit substitutes * 50,000 65


Certain transaction-related contingent items 98,326 96,643
Short-term self-liquidating trade-related contingencies 26,119 21,314
Irrecoverable commitments to extend credit
- Maturity less than one year 1,481,333 1,748,304
- Maturity more than one year 3,645,992 3,499,393
Foreign exchange related contract ^
- Less than one year 541,236 1,179,528
Profit rate related contracts ^
- Less than one year 350,000 1,720,000
- One year to less than five years 1,985,000 2,265,000
- Five years and above 700,000
8,878,006 10,530,247

* Included in direct credit substitutes above are financial guarantee contracts of RM50,000,000 (2016: RM65,000), of which
fair value at the time of issuance is zero.
^ These derivatives are revalued at gross position basis and the unrealised gains or losses have been reflected in Note 16 to
the financial statements as derivatives assets or derivatives liabilities.

33 CAPITAL COMMITMENTS

Capital expenditure approved by Directors but not provided for in the financial statements are as follows:

2017 2016
RM000 RM000

Authorised and contracted for 258 2,368


Authorised but not contracted for 1,632 1,346
1,890 3,714

The capital commitments are in respect of property and equipment and intangible assets.

34 LEASE COMMITMENTS
HONG LEONG ISLAMIC BANK BERHAD

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-cancellable operating lease commitment are as
follows:
ANNUAL REPORT 2017

2017 2016
RM000 RM000

Not later than one year 11 37


Later than one year and not later than five years 11

113
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

35 HOLDING AND ULTIMATE HOLDING COMPANIES

The holding and ultimate holding companies are Hong Leong Bank Berhad and Hong Leong Company (Malaysia) Berhad,
respectively. Both companies are incorporated in Malaysia.

36 FINANCIAL INSTRUMENTS

(a) Financial risk management objectives and policies

Overview and organisation

Risk Management

The Bank has implemented risk management framework with the objective to ensure the overall financial soundness
and stability of the Banks business operations. The Banks risk management framework outlines the overall governance
structure, aspiration, values and risk management strategies that balances between risk profiles and returns objectives.
Appropriate methodologies and measurements have been developed to manage uncertainties such that deviations
from intended strategic objectives are closely monitored and kept within tolerable levels.

From a governance perspective, the Board has the overall responsibility to define the Banks risk appetite and
ensure that a robust risk management and compliance culture prevails. The Board is assisted by the Board Audit Risk
Management Committee (BARMC) in approving the Banks risk management framework as well as the attendant
capital management framework, risk appetite statement, risk management strategies and risk policies.

Dedicated management level committees are established to oversee the development and the assessment of
effectiveness of risk management policies, to review risk exposures and portfolio composition as well as to ensure
appropriate infrastructures, resources and systems are put in place for effective risk management activities.

The BARMC is assisted by the Group Risk Management (GRM) and Group Compliance (GC) functions, which have
been established to provide independent oversight on the adequacy, effectiveness and integrity of risk management
and compliance practices at all levels within the Bank. The core functions of the GRM are to identify all key risks for
the Group, measure these risks, manage the risk positions and determine the optimum capital allocations. The Bank
regularly reviews its risk management framework to reflect changes in markets, products, regulatory and emerging best
market practice.

Credit Risk Management

Credit risk is the risk of financial loss due to a customer or counterparty being unable or unwilling to deliver on its
payment obligations to the Bank, which leads to a loss of revenue and the principal sum. It arises principally from
financing, trade finance and treasury activities. The Bank has established a credit risk management framework to
ensure that exposure to credit risk is kept within the Banks financial capacity to withstand potential future losses.
Financing activities are guided by the internal credit policies and guidelines that are reviewed and concurred by the
Management Credit Committee (MCC), endorsed by the BARMC and the Credit Supervisory Committee (CSC), and
approved by the Board. These policies are subject to review and enhancements, at least on an annual basis.
HONG LEONG ISLAMIC BANK BERHAD

Credit portfolio strategies and significant exposures are reviewed by both the BARMC and the Board. These portfolio
strategies are designed to achieve a desired portfolio risk tolerance level and sector distribution.
ANNUAL REPORT 2017

The Banks credit approving process encompasses pre-approval evaluation, approval and post-approval evaluation.
While the business units are responsible for credit origination, the credit approving function rests mainly with the Credit
Evaluation Departments, the MCC and the CSC. The Board delegates approving and discretionary authority to the MCC
and the various personnel of the Bank based on job function and designation.

For any new products, credit risk assessment also forms part of the new product sign-off processes to ensure that the
114 new product complies with the appropriate policies and guidelines, prior to the introduction of the product.
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(a) Financial risk management objectives and policies (continued)

Credit Risk Management (continued)

The Banks exposure to credit risk is mainly from its retail, small and medium enterprise (SME), commercial and
corporate customers. The credit assessment for retail customers is managed on a portfolio basis and the risk scoring
models and financing templates are designed to assess the credit worthiness and the likelihood of the obligors to repay
their debts. The SME, commercial and corporate customers are individually assessed and assigned with a credit rating,
which is based on the assessment of relevant factors such as the customers financial position, industry outlook, types
of facilities and collaterals offered.

In addition, the Bank also conducts periodic stress testing of its credit portfolios to ascertain credit risk impact to capital
under the relevant stress scenarios.

Internal Audit conducts independent post approval reviews on sampling basis to ensure that quality of credit appraisals
and approval standards are in accordance with the credit standards and the lending policies and directives established
and approved by the Groups management.

Market Risk Management

Market risk is the risk of financial loss arising from exposure to adverse changes in values of financial instruments
caused by changes in market prices or rates, which include changes to profit rates.

The Bank adopts a systematic approach in managing such risks by types of instruments and nature of exposure. Market
risk is primarily controlled via a series of cut-loss limits and potential loss limits, i.e. Value at Risk (VaR), set in
accordance with the size of positions and risk tolerance appetites.

Portfolios held under the Banks trading books are tracked using daily mark-to-market positions, which are compared
against preset limits. The daily tracking of positions is supplemented by sensitivity analysis and stress tests, using VaR
and other measurements.

Foreign exchange risks arising from adverse exchange rate movements, is managed by the setting of preset limits,
matching of open positions against these preset limits and imposition of cut-loss mechanisms.

Profit rate risk exposure is also identified, measured and controlled through limits and procedures, which includes
regularly reviewing the profit rate outlook and developing strategies to protect total net profit income from changes in
market rates. This applies to both profit rate risk exposure in the trading book and in the banking book. In managing the
profit rate risk exposure in the banking book, the Bank adopts methodologies that measure exposure in both earnings
at risk perspective and economic value or capital at risk perspective.

In addition, the Bank also conducts periodic stress testing of its respective portfolios to ascertain market risk under
abnormal market conditions.
HONG LEONG ISLAMIC BANK BERHAD

Liquidity Risk Management

Liquidity risk is the risk of financial loss arising from the inability to fund increases in assets and/or meet obligations as
ANNUAL REPORT 2017

they fall due. Financial obligations arise from the withdrawal of deposits, funding of financing committed and payment of
funds. It is the Banks policy to ensure there is adequate liquidity across all business units to sustain ongoing operations,
as well as sufficient liquidity to fund asset growth and strategic opportunities.

115
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(a) Financial risk management objectives and policies (continued)

Liquidity Risk Management (continued)

Besides adhering to the Regulatory Liquidity Requirement, the Bank has put in place a robust and comprehensive liquidity
risk management framework consisting of risk appetite, policies, triggers, limits and controls which are reviewed and
concurred by the ALCO, endorsed by the BARMC and approved by the Board. The key elements of the framework cover
proactive monitoring and management of cashflow, maintenance of high quality long-term and short-term marketable
securities, diversification of funding base as well as maintains a liquidity compliance buffer to meet any unexpected
cash outflows.

The Bank has in place liquidity contingency funding plans and stress test programs to minimise the liquidity risk that
may arise due to unforeseen adverse changes in the marketplace. Contingency funding plans set out the crisis escalation
process and the various strategies to be employed to preserve liquidity including an orderly communication channel
during liquidity crisis scenarios. Liquidity stress tests are conducted regularly to ensure there is adequate liquidity
contingency fund to meet the shortfalls during liquidity crisis scenarios.

(b) Market risk

Market risk sensitivity assessment is based on the changes in key variables, such as profit rates and foreign currency
rates, while all other variables remain unchanged. The sensitivity factors used are assumptions based on parallel shifts
in the key variables to project the impact on the assets and liabilities position of the Bank.

The scenarios used are simplified whereby it is assumed that all key variables for all maturities move at the same time
and by the same magnitude and do not incorporate actions that would be otherwise taken by the business units and risk
management to mitigate the effect of this movement in key variables. In reality, the Bank proactively seek to ensure
that the profit rate risk profile is managed to minimise losses and optimise net revenues.

(i) Profit rate risk sensitivity analysis

The profit rate sensitivity results below shows the impact on profit after tax and equity of financial assets and
financial liabilities bearing variable profit rates and fixed rate financial assets and financial liabilities.

Increase/(Decrease)
Impact on
profit after Impact on
tax equity
2017 RM000 RM000

+100 basis points (bps) (4,786) (63,295)

-100 bps 4,786 63,295


HONG LEONG ISLAMIC BANK BERHAD

2016
+100 basis points (bps) (448) (48,982)
ANNUAL REPORT 2017

-100 bps 448 48,982

116
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(b) Market risk (continued)

(ii) Foreign currency risk sensitivity analysis

The Bank take on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on their
financial position and cash flows.

The table below sets out the principal structure of foreign exchange exposures of the Bank:

2017 2016
RM000 RM000

United States Dollar (USD) 12,224 9,183


Euro (EUR) 6,046 1,365
Great Britain Pound (GBP) 1,692 3,712
Singapore Dollar (SGD) 1,406 679
Australian Dollar (AUD) 1,330 288
Chinese Yuan Renminbi (CNY) 147 213
Hong Kong Dollar (HKD) 672 566
Others (321) 934
23,196 16,940

An analysis of the exposures to assess the impact of a one per cent change in the foreign currency exchange rates
to the profit after tax are as follows:

2017 2016
RM000 RM000

-1%
United States Dollar (USD) (93) (70)
Euro (EUR) (46) (10)
Great Britain Pound (GBP) (13) (28)
Singapore Dollar (SGD) (11) (5)
Australian Dollar (AUD) (10) (2)
Chinese Yuan Renminbi (CNY) (1) (2)
Hong Kong Dollar (HKD) (5) (4)
Others 2 (7)
(177) (128)
HONG LEONG ISLAMIC BANK BERHAD

+1%
United States Dollar (USD) 93 70
Euro (EUR) 46 10
Great Britain Pound (GBP) 13 28
ANNUAL REPORT 2017

Singapore Dollar (SGD) 11 5


Australian Dollar (AUD) 10 2
Chinese Yuan Renminbi (CNY) 1 2
Hong Kong Dollar (HKD) 5 4
Others (2) 7
177 128 117
HONG LEONG ISLAMIC BANK BERHAD

118
ANNUAL REPORT 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(b) Market risk (continued)


FINANCIALS

Profit rate risk

The tables below summarise the Banks exposure to profit rate risks. Included in the tables are the Banks financial assets and financial liabilities at
their carrying amounts, categorised by the earlier of contractual repricing or maturity dates. The net profit sensitivity gap for items not recognised in the
statement of financial position represents the net notional amounts of all profit rate sensitive derivative financial instruments. As profit rates and yield
curves change over time, the Bank may be exposed to loss in earnings due to the effects of profit rates on the structure of the statement of financial
position. Sensitivity to profit rates arises from mismatches in the repricing dates, cash flows and other characteristics of the financial assets and their
corresponding financial liabilities funding.

Non trading book


for the financial year ended 30 June 2017

Non-
profit
Up to 1 13 3 12 15 Over 5 rate Trading
2017 month months months years years sensitive book Total
Financial assets RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000

Cash and short-term funds 799,065 49,597 848,662


Deposits and placements with banks and other
financial institutions 100,000 100,000 953 200,953
Financial assets held-for-trading 782,773 782,773
Financial investments available-for-sale 15,004 200,218 2,001,199 432,490 28,623 2,677,534
Financial investments held-to-maturity 119,986 1,968,400 440,912 28,515 2,557,813
Financing and advances 15,566,745 44,143 49,158 1,861,084 3,092,601 20,613,731
- non impaired 15,562,217 2,591 47,603 1,849,572 3,030,411 20,492,394
- impaired ^ 4,528 41,552 1,555 11,512 62,190 121,337
Islamic derivative financial instruments 13,382 13,382
Statutory deposits with Bank Negara Malaysia 594,386 594,386
Other assets 141,239 141,239
Notes to the Financial Statements

Total financial assets 16,365,810 279,133 349,376 5,830,683 3,966,003 843,313 796,155 28,430,473

^ This represents outstanding impaired financing after deducting individual assessment impairment allowance and collective assessment impairment
allowance.
36 FINANCIAL INSTRUMENTS (CONTINUED)

(b) Market risk (continued)

Profit rate risk (continued)

Non trading book


Up to 1 13 3 12 15 Over 5 Non-profit Trading
2017 month months months years years sensitive book Total
Financial liabilities RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000

Deposits from customers 10,193,295 4,910,731 5,665,216 217,669 668,074 2,937,466 24,592,451
Deposits and placements of banks and other
financial institutions 712,049 7,795 283 720,127
for the financial year ended 30 June 2017

Bills and acceptances payable 213 1,241 996 11,263 13,713


Islamic derivative financial instruments 49,978 49,978
Tier 2 subordinated Sukuk Ijarah 399,872 631 400,503
Other liabilities 612,235 612,235

Total financial liabilities 10,905,557 4,919,767 5,666,212 617,541 668,074 3,561,878 49,978 26,389,007

Net profit sensitivity gap 5,460,253 (4,640,634) (5,316,836) 5,213,142 3,297,929

Financial guarantees 75,471


Credit related commitment and
contingencies 5,127,325
Net profit sensitivity gap 5,202,796
Notes to the Financial Statements
FINANCIALS

ANNUAL REPORT 2017


HONG LEONG ISLAMIC BANK BERHAD

119
HONG LEONG ISLAMIC BANK BERHAD

120
ANNUAL REPORT 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(b) Market risk (continued)


FINANCIALS

Profit rate risk (continued)

Non trading book


Non-
Up to 1 13 3 12 15 Over 5 profit rate Trading
2016 month months months years years sensitive book Total
Financial assets RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000

Cash and short-term funds 1,570,613 64,809 1,635,422


Financial assets held-for-trading 194,953 194,953
for the financial year ended 30 June 2017

Financial investments available-for-sale 20,009 75,087 1,633,886 205,820 18,007 1,952,809


Financial investments held-to-maturity 10,005 436,381 1,460,107 245,051 19,107 2,170,651
Financing and advances 14,020,550 53,888 47,888 1,578,597 2,791,244 18,492,167
- non impaired 14,017,464 2,574 46,141 1,572,098 2,747,478 18,385,755
- impaired ^ 3,086 51,314 1,747 6,499 43,766 106,412
Islamic derivative financial instruments 32,595 32,595
Statutory deposits with Bank Negara
Malaysia 581,181 581,181
Other assets 539,343 539,343

Total financial assets 15,621,177 53,888 559,356 4,672,590 3,242,115 1,222,447 227,548 25,599,121

^ This represents outstanding impaired financing after deducting individual assessment impairment allowance and collective assessment impairment
allowance.
Notes to the Financial Statements
36 FINANCIAL INSTRUMENTS (CONTINUED)

(b) Market risk (continued)

Profit rate risk (continued)

Non trading book


Non-
Up to 1 13 3 12 15 Over 5 profit Trading
2016 month months months years years sensitive book Total
Financial liabilities RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000

Deposits from customers 9,391,916 4,559,852 4,614,829 423,888 2,898,744 21,889,229


Deposits and placements of banks and other
for the financial year ended 30 June 2017

financial institutions 512,480 312,830 354 825,664


Bills and acceptances payable 728 1,861 1,319 11,380 15,288
Islamic derivative financial instruments 37,489 37,489
Tier 2 subordinated Sukuk Ijarah 399,746 736 400,482
Other liabilities 607,313 607,313

Total financial liabilities 9,905,124 4,874,543 4,616,148 823,634 3,518,527 37,489 23,775,465

Net profit sensitivity gap 5,716,053 (4,820,655) (4,056,792) 3,848,956 3,242,115

Financial guarantees 21,372


Credit related commitment and contingencies 5,247,697
Net profit sensitivity gap 5,269,069
Notes to the Financial Statements
FINANCIALS

ANNUAL REPORT 2017


HONG LEONG ISLAMIC BANK BERHAD

121
HONG LEONG ISLAMIC BANK BERHAD

122
ANNUAL REPORT 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(c) Liquidity risk


FINANCIALS

Liquidity risk is defined as the current and prospective risk arising from the inability of the Bank to meet its contractual or regulatory obligations when they
become due without incurring substantial losses. The liquidity risk is identified based on concentration, volatility of source of fund and funding maturity
structure and it is measured primarily using Bank Negara Malaysias New Liquidity Framework and depositors concentration ratios. The Bank seek to
project, monitor and manage its liquidity needs under normal as well as adverse circumstances.

i) The table below analyses the carrying amount of assets and liabilities (include non-financial instruments) based on the remaining contractual
maturity:

No
Up to 1 1 week to 1 to 3 3 to 6 6 to 12 Over 1 specific
for the financial year ended 30 June 2017

2017 week 1 month months months months year maturity Total


Assets RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000

Cash and short-term funds 848,662 848,662


Deposits and placements with
banks and other financial
institutions 100,587 100,366 200,953
Financial assets held-for-trading 149,939 99,821 168,726 364,287 782,773
Financial investments
available-for-sale 15,150 145,993 55,650 2,460,741 2,677,534
Financial investments
held-to-maturity 121,321 2,436,492 2,557,813
Financing and advances 1,245,811 633,145 543,729 123,149 58,656 18,009,241 20,613,731
Islamic derivative financial
instruments 488 1,728 2,937 133 440 7,656 13,382
Other assets 136,802 119 200 276 6 2,296 6,534 146,233
Statutory deposits with Bank
Negara Malaysia 594,386 594,386
Property and equipment 18,325 18,325
Notes to the Financial Statements

Intangible assets 2,041 2,041


Total assets 2,381,702 734,813 952,650 369,917 114,752 23,280,713 621,286 28,455,833
36 FINANCIAL INSTRUMENTS (CONTINUED)

(c) Liquidity risk (continued)

i) The table below analyses the carrying amount of assets and liabilities (include non-financial instruments) based on the remaining contractual
maturity (continued):

No
Up to 1 week to 1 to 3 3 to 6 6 to 12 Over 1 specific
2017 1 week 1 month months months months year maturity Total
Liabilities RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000

Deposits from customers 9,122,529 3,968,857 4,930,832 2,551,144 3,129,184 889,905 24,592,451
Deposits and placements of
for the financial year ended 30 June 2017

banks and other financial


institutions 438,093 274,233 7,800 720,126
Bills and acceptances payable 24 189 1,241 996 11,263 13,713
Other liabilities 621,012 4,579 6,233 631,824
Islamic derivative financial
instruments 2 1,718 2,309 8 522 45,419 49,978
Provision for taxation 21,272 21,272
Deferred tax liabilities 1,063 1,063
Tier 2 Subordinated Sukuk Ijarah 400,503 400,503
Total financial liabilities 10,181,660 4,244,997 4,942,182 2,552,148 3,134,285 1,335,827 39,831 26,430,930

Total equity 2,024,902 2,024,902


Total liabilities and equity 10,181,660 4,244,997 4,942,182 2,552,148 3,134,285 1,335,827 2,064,733 28,455,832

Net liquidity gap (7,799,958) (3,510,184) (3,989,532) (2,182,231) (3,019,533) 21,944,886


Notes to the Financial Statements
FINANCIALS

ANNUAL REPORT 2017


HONG LEONG ISLAMIC BANK BERHAD

123
HONG LEONG ISLAMIC BANK BERHAD

124
ANNUAL REPORT 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(c) Liquidity risk (continued)


FINANCIALS

i) The table below analyses the carrying amount of assets and liabilities (include non-financial instruments) based on the remaining contractual
maturity (continued):

No
Up to 1 1 week to 1 to 3 3 to 6 6 to 12 Over 1 specific
2016 week 1 month months months months year maturity Total
Assets RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000

Cash and short-term funds 1,535,347 100,075 1,635,422


Financial assets held-for-trading 49,881 145,072 194,953
for the financial year ended 30 June 2017

Financial investments
available-for-sale 20,512 55,363 20,345 1,856,589 1,952,809
Financial investments held-to-maturity 10,228 226,377 211,464 1,722,582 2,170,651
Financing and advances 1,427,686 243,448 269,992 111,493 51,835 16,387,713 18,492,167
Islamic derivative financial
instruments 81 1,885 7,329 6,921 892 15,487 32,595
Other assets 509,804 77 129 171 79 1,847 29,568 541,675
Statutory deposits with Bank Negara
Malaysia 581,181 581,181
Property and equipment 15,480 15,480
Intangible assets 2,956 2,956
Deferred tax assets
Total assets 3,472,918 426,106 277,450 400,325 284,615 20,129,290 629,185 25,619,889
Notes to the Financial Statements
36 FINANCIAL INSTRUMENTS (CONTINUED)

(c) Liquidity risk (continued)

i) The table below analyses the carrying amount of assets and liabilities (include non-financial instruments) based on the remaining contractual
maturity (continued):

No
Up to 1 1 week to 1 to 3 3 to 6 6 to 12 Over 1 specific
2016 week 1 month months months months year maturity Total
Liabilities RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000
Deposits from customers 8,714,444 3,541,633 4,571,089 2,650,895 1,984,911 426,257 21,889,229
Deposits and placements of banks
for the financial year ended 30 June 2017

and other financial institutions 290,461 222,273 312,930 825,664


Bills and acceptances payable 12 716 1,861 1,319 11,380 15,288
Other liabilities 599,062 3,246 10,948 613,256
Islamic derivative financial
instruments 106 521 7,044 6,775 857 22,186 37,489
Provision for taxation 19,084 19,084
Deferred tax liabilities 5,574 5,574
Tier 2 Subordinated Sukuk Ijarah 400,482 400,482
Total financial liabilities 9,604,085 3,765,143 4,892,924 2,658,989 1,989,014 848,925 46,986 23,806,066

Total equity 1,813,823 1,813,823


Total liabilities and equity 9,604,085 3,765,143 4,892,924 2,658,989 1,989,014 848,925 1,860,809 25,619,889

Net liquidity gap (6,131,167) (3,339,037) (4,615,474) (2,258,664) (1,704,399) 19,280,365


Notes to the Financial Statements
FINANCIALS

ANNUAL REPORT 2017


HONG LEONG ISLAMIC BANK BERHAD

125
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(c) Liquidity risk (continued)

ii) The following table show the contractual undiscounted cash flows payable for financial liabilities by remaining
contractual maturities. The balances in the table below will not agree to the balances reported in the statements
of financial position as the table incorporates all contractual cash flows, on an undiscounted basis, relating to both
principal and profit payments. The contractual maturity profile does not necessarily reflect the behavioural cash
flows.

2017 Up to 1 1 to 3 3 to 12 1 to 5 Over 5
month months months years years Total
Liabilities RM000 RM000 RM000 RM000 RM000 RM000

Deposits from customers 13,169,619 4,987,735 5,788,993 362,178 742,134 25,050,659


Deposits and placements of
banks and other financial
institutions 712,598 7,812 720,410
Bills and acceptances payable 11,263 11,263
Other liabilities 612,235 612,235
Islamic derivative financial
instruments
- Gross settled derivatives
- Inflow (126,244) (114,643) (438) (241,325)
- Outflow 127,914 116,582 449 244,945
- Net settled derivatives 1,202 (3,829) (4,347) 19,167 27,298 39,491
Tier 2 Subordinated Sukuk
Ijarah 19,147 419,147 438,294
Total financial liabilities 14,508,587 4,993,657 5,803,804 800,492 769,432 26,875,972

2016

Liabilities
Deposits from customers 12,343,515 4,615,742 4,699,231 492,745 22,151,233
Deposits and placements of
banks and other financial
institutions 512,810 313,164 825,974
Bills and acceptances payable 11,891 345 282 12,518
Other liabilities 607,313 607,313
Islamic derivative financial
instruments
HONG LEONG ISLAMIC BANK BERHAD

- Gross settled derivatives


- Inflow (148,725) (230,615) (60,394) (439,734)
- Outflow 149,318 238,713 61,456 449,487
- Net settled derivatives 137 643 4,091 18,817 23,688
ANNUAL REPORT 2017

Tier 2 Subordinated Sukuk


Ijarah 19,305 438,295 457,600
Total financial liabilities 13,476,259 4,937,992 4,723,971 949,857 24,088,079

126
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(c) Liquidity risk (continued)

The following table presents the contractual expiry by maturity of the Banks commitments and contingencies:

2017
Less than 1 Over
year 1 year Total
RM000 RM000 RM000
Direct credit substitutes 50,000 50,000
Short term self liquidating trade related contingencies 25,471 25,471
Irrevocable commitments to extend credit 1,481,333 3,645,992 5,127,325
Total commitments and contingencies 1,506,804 3,695,992 5,202,796

2016
Less than 1 Over
year 1 year Total
RM000 RM000 RM000
Direct credit substitutes 65 65
Short term self liquidating trade related contingencies 12,368 8,939 21,307
Irrevocable commitments to extend credit 1,748,304 3,499,393 5,247,697
Total commitments and contingencies 1,760,737 3,508,332 5,269,069

Undrawn financing commitments are recognised at activation stage and include commitments which are unconditionally
cancellable by the Bank. The Bank expects that not all of the contingent liabilities and undrawn financing commitments
will be drawn before expiry.

(d) Credit risk

(i) Maximum exposure to credit risk

The maximum exposure to credit risk for financial assets recognised in the statement of financial position is their
carrying amounts. For contingent liabilities, the maximum exposure to credit risk is the maximum amount that the
Bank would have to pay if the obligations of the instruments issued are called upon. For credit commitments, the
maximum exposure to credit risk is the full amount of the undrawn credit facilities granted to customers. The table
below shows the maximum exposure to credit risk for the Bank:

2017 2016
RM000 RM000
Credit risk exposure relating to on-balance sheet assets:

Short-term funds and placements with banks and other financial institutions 1,047,385 1,635,017
HONG LEONG ISLAMIC BANK BERHAD

Financial assets and investments portfolios (exclude shares)


- Financial assets held for trading 782,773 194,953
- Financial investments available-for-sale 2,677,534 1,952,809
- Financial investments held-to-maturity 2,557,813 2,170,651
ANNUAL REPORT 2017

Financing and advances 20,613,731 18,492,167


Other assets 141,239 539,343
Islamic derivative financial instruments 13,382 32,595
27,833,857 25,017,535
Credit risk exposure relating to off-balance sheet items:
Credit related commitments and contingencies
Total maximum credit risk exposure
5,202,796
33,036,653
5,269,069
30,286,604
127
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(d) Credit risk (continued)

(ii) Collaterals

The main type of collaterals obtained by the Bank are as follows:

a. Commodity Murabahah term deposits, Mudarabah general investment account, negotiable instrument of
deposits, foreign currency deposits and cash deposits/margins
b. Land and buildings
c. Aircrafts, vessels and automobiles
d. Quoted shares, unit trust, Malaysian Governments Bonds and securities and private debt securities
e. Endowment life policies with cash surrender value
f. Other tangible business assets, such as inventory and equipment

The Bank also accepts intangible securities such as support, guarantees from individuals, corporates and institutions,
bank guarantees, debentures, assignment of contract payments, which are subject to internal guidelines on
eligibility.

The financial effect of collateral (quantification to the extent to which collateral and other credit enhancements
mitigate credit risk) held for financing and advances for the Bank is 85.97% (2016: 85.61%). The financial effects of
collateral held for the remaining financial assets are insignificant.

(iii) Credit Quality

The Bank assesses credit quality of financing and advances using internal rating techniques tailored to the various
categories of products and counterparties. These techniques have been developed internally and combine statistical
analysis with credit officers judgment.

The credit quality of financial assets other than financing and advances are determined based on the ratings of
counterparties as defined by Moodys or equivalent ratings of other internationals rating agencies as defined below:

- AAA to AA3
- A1 to A3
- Baa1 to Baa3
- P1 to P3

(a) Financing and advances

Financing and advances are summarised as follows:

2017 2016
RM000 RM000
HONG LEONG ISLAMIC BANK BERHAD

Neither past due nor impaired 18,913,896 17,000,929


Past due but not impaired 1,691,521 1,474,024
Individually impaired 179,844 162,558
ANNUAL REPORT 2017

Gross financing and advances 20,785,261 18,637,511


Unamortised fair value changes arising from terminated fair value hedges (40) (811)
Less : Allowance for impairment losses on financing and advances
- Collective assessment allowance (157,826) (137,055)
- Individual assessment allowance (13,664) (7,478)
128 Net financing and advance 20,613,731 18,492,167
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(d) Credit risk (continued)

(iii) Credit Quality (continued)

(a) Financing and advances (continued)

(i) Financing and advances neither past due nor impaired


Analysis of financing and advances that are neither past due nor impaired analysed based on the Banks
credit grading system is as follows:

2017 2016
RM000 RM000

Consumer financing

Risk Grade
Good 14,214,305 12,720,547
Weakest 12,202 7,454
14,226,507 12,728,001

Corporate financing

Risk Grade Credit Quality


A Exceptional 356,702 533,781
B+ Superior 1,178,972 617,054
B Excellent 681,023 618,880
B- Strong 775,342 745,101
C+ Good 584,993 421,591
C Satisfactory 782,464 1,070,671
C- Fair 259,050 219,709
D+ Adequate 44,205 23,802
D Marginal 5,499 3,465
Un-graded 19,139 18,874
4,687,389 4,272,928

Total neither past due nor impaired 18,913,896 17,000,929 HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

129
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(d) Credit risk (continued)

(iii) Credit Quality (continued)

(a) Financing and advances (continued)

(ii) Financing and advances past due but not impaired

A financial asset is defined as past due when the counterparty has failed to make a principal or profit
payment when contractually due.

Financing and advances less than 90 days past due are not considered impaired, unless other information
is available to indicate the contrary. Gross amount of financing and advances by class to customers that
were past due but not impaired were as follows:
2017 2016
RM000 RM000
Past due less than 30 days 1,117,226 989,994
Past due 30 to less than 60 days 401,231 366,635
Past due 60 to less than 90 days 173,064 117,395
Past due but not impaired 1,691,521 1,474,024

(iii) Financing and advances that are determined to be impaired are as follows:
2017 2016
RM000 RM000
Gross amount of impaired financing 179,844 162,558
Less: Collective assessment impairment allowance (44,843) (48,668)
Less: Individual assessment impairment allowance (13,664) (7,478)
Total net amount impaired financing 121,337 106,412

(b) Other financial assets

Analysis of other financial assets by rating agency designation (where applicable), based on Moodys ratings or
its equivalent are as follows:
Short term
funds and
placements
with banks Financial Financial Islamic
and other Financial investments investments derivative
financial assets held- available held-to financial
institutions for- trading for-sale maturity Other assets instruments
2017 RM000 RM000 RM000 RM000 RM000 RM000
HONG LEONG ISLAMIC BANK BERHAD

Neither past due


nor impaired
AAA to AA3 101,673 418,485 886,530
ANNUAL REPORT 2017

A1 to A3 99,079 12,267 9,849


Baa1 to Baa3 1,561
P1 to P3
Non-rated 845,072 364,288 1,778,737 2,557,813 141,239 3,533
1,047,385 782,773 2,677,534 2,557,813 141,239 13,382
Individually
130 impaired
1,047,385 782,773 2,677,534 2,557,813 141,239 13,382
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(d) Credit risk (continued)

(iii) Credit Quality (continued)

(b) Other financial assets (continued)

Analysis of other financial assets by rating agency designation (where applicable), based on Moodys ratings or
its equivalent are as follows:

Short term
funds and
placements
with banks Financial Financial Islamic
and other Financial investments investments derivative
financial assets held- available held-to Other financial
institutions for- trading for-sale maturity assets instruments
2016 RM000 RM000 RM000 RM000 RM000 RM000

Neither past due


nor impaired
AAA to AA3 250,622 846,221 10,228
A1 to A3 336,595 88,729 23,611
Baa1 to Baa3 16,288 4,045
P1 to P3
Non-rated 1,031,512 194,953 1,013,814 2,160,423 539,343 8,984
1,635,017 194,953 1,952,809 2,170,651 539,343 32,595
Individually
impaired
1,635,017 194,953 1,952,809 2,170,651 539,343 32,595

The amount of short term funds, financial assets and investment portfolios, other assets and Islamic derivative
financial instruments that are past due but not impaired is not material.

(iv) Repossessed collaterals

2017 2016
RM000 RM000

Industrial and residential properties, lands and automobiles 16,800 10,584

Repossessed properties are made available for sale in an orderly fashion, with the proceeds used to reduce or repay
HONG LEONG ISLAMIC BANK BERHAD

the outstanding indebtedness. The Bank generally does not occupy the premises repossessed for its business use.
ANNUAL REPORT 2017

131
HONG LEONG ISLAMIC BANK BERHAD

132
ANNUAL REPORT 2017

36 FINANCIAL INSTRUMENTS (CONTINUED)

(d) Credit risk (continued)


FINANCIALS

(v) Credit risk exposure analysed by industry in respect of the Banks financial assets are set out below:

2017 Short term


funds and
placements
with banks Financial Financial Financial Islamic Undrawn loan Guarantees,
and other assets investments investments Financing derivative Total commitments endorsements
financial held-for available held-to and Other financial credit risk and other and other
institutions trading for-sale maturity advances assets instruments exposures facilities contingent items
RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000
for the financial year ended 30 June 2017

Agriculture 803,641 803,641 457,835


Mining and
quarrying 51,860 51,860 1,321
Manufacturing 730,143 730,143 899,589 3,455
Electricity, gas and
water 364,284 53,451 417,735 13,442
Construction 80,842 307,640 388,482 351,705 1,743
Wholesale and
retail 806,865 806,865 421,133 12,569
Transport,
storage and
communications 148,790 442,179 590,969 56,565
Finance, insurance,
real estate
and business
services 317,866 418,487 507,176 1,494,869 141,230 13,382 2,893,010 587,992 57,704
Government and
government
agencies 729,519 364,286 1,576,442 2,557,813 9 5,228,069
Education, health
Notes to the Financial Statements

and others 820,689 820,689 57,182


Household 15,095,953 15,095,953 2,280,561
Others 6,441 6,441
1,047,385 782,773 2,677,534 2,557,813 20,613,731 141,239 13,382 27,833,857 5,127,325 75,471
36 FINANCIAL INSTRUMENTS (CONTINUED)

(d) Credit risk (continued)

(v) Credit risk exposure analysed by industry in respect of the Banks financial assets are set out below (continued):

2016 Short term


fundsand
placements
with banks Financial Financial Financial Islamic Undrawn loan Guarantees,
and other assets investments investments Financing derivative Total commitments endorsements
financial held-for available held-to and Other financial credit risk and other and other
institutions trading for-sale maturity advances assets instruments exposures facilities contingent items
RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000
for the financial year ended 30 June 2017

Agriculture 696,837 696,837 209,323


Mining and quarrying 8,067 8,067 2,780
Manufacturing 682,651 682,651 779,313 424
Electricity, gas and
water 215,717 61,745 277,462 60,500
Construction 121,606 292,027 413,633 285,639 1,726
Wholesale and retail 620,727 620,727 361,927 10,283
Transport,
storage and
communications 35,901 450,188 486,089 19,657
Finance, insurance,
real estate and
business services 832,792 49,880 501,516 10,228 1,486,392 539,242 32,595 3,452,645 760,300 8,939
Government and
government
agencies 802,225 145,073 1,063,936 2,160,423 101 4,171,758
Education, health and
others 619,030 619,030 243,118
Household 13,543,390 13,543,390 2,481,744
Others 14,133 31,113 45,246 43,396
1,635,017 194,953 1,952,809 2,170,651 18,492,167 539,343 32,595 25,017,535 5,247,697 21,372
Notes to the Financial Statements
FINANCIALS

ANNUAL REPORT 2017


HONG LEONG ISLAMIC BANK BERHAD

133
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

37 FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments comprise financial assets and financial liabilities. Fair value is price that would be received to sell an
asset or paid to transfer a liability in an ordinary transaction between market participant at the measurement date. The
information presented herein represents the estimates of fair values as at the statement of financial position date.

Where available, quoted and observable market prices are used as the measure of fair values. Where such quoted and
observable market prices are not available, fair values are estimated based on a range of methodologies and assumptions
regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows and other factors.
Changes in the uncertainties and assumptions could materially affect these estimates and the resulting fair value estimates.

(a) Determination of fair value and fair value hierarchy

The Bank measures fair value 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 on 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.
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

134
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

37 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

(a) Determination of fair value and fair value hierarchy (continued)

The table below analyses financial instruments carried at fair value analysed by level within the fair value is hierarchy:

Fair Value
2017 Level 1 Level 2 Level 3 Total
RM000 RM000 RM000 RM000

Financial assets:
Financial assets held-for-trading
- Money market instrument 782,773 782,773
Financial investments available-for-sale
- Money market instrument 1,439,881 1,439,881
- Quoted securities 12,267 12,267
- Unquoted securities 1,225,386 1,225,386
Islamic derivative financial instruments 13,382 13,382
12,267 3,461,422 3,473,689

Financial liabilities:
Derivative financial instruments 49,978 49,978
Financial liabilities designated at fair value
- Callable range accrual notes 852,241 852,241
902,219 902,219

2016

Financial assets:
Financial assets held-for-trading
- Money market instrument 194,953 194,953
Financial investments available-for-sale
- Money market instrument 1,138,888 1,138,888
- Quoted securities 92,773 92,773
- Unquoted securities 721,148 721,148
Islamic derivative financial instruments 32,595 32,595
92,773 2,087,584 2,180,357
HONG LEONG ISLAMIC BANK BERHAD

Financial liabilities:
Derivative financial instruments 37,489 37,489
Financial liabilities designated at fair value
- Callable range accrual notes 411,135 411,135
ANNUAL REPORT 2017

448,624 448,624

The Bank recognises transfer between levels of the fair value hierarchy at the end of the reporting period during which
the transfer has occured. The fair value of an asset to be transferred between levels is determined as of the date of the
event or change in circumstances that caused the transfer. There were no transfer between Level 1 and Level 2 of the
fair value hierarchy during the financial year (2016: RM Nil). 135
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

37 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

(a) Determination of fair value and fair value hierarchy (continued)

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy, as below:

2017 2016
RM000 RM000

Financial investments available-for-sale


As at beginning of the year
Fair value changes recognised in statement of income
Redemption of unquoted security
As at end of the financial year

(b) Fair values of financial instruments not carried at fair value

Set out below is the comparison of the carrying amounts and fair values of the financial instruments of the Bank which
are not carried at fair value in the financial instruments, but for which fair value is disclosed. It does not include those
short term/on demand financial assets and financial liabilities where the carrying amounts are reasonable approximation
of their fair values:

Carrying Fair
Amount Value
2017 RM000 RM000

Financial assets
Financial investments held-to-maturity
- Money market instruments 2,302,888 2,293,832
- Unquoted securities 254,925 247,702
Financing and advances 20,613,731 20,740,615
23,171,544 23,282,149
Financial liabilities
Deposits from customers
- At amortised cost 23,740,210 23,785,770
Tier 2 subordinated Sukuk Ijarah 400,503 400,960
24,140,713 24,186,730

2016
Financial assets
HONG LEONG ISLAMIC BANK BERHAD

Financial investments held-to-maturity


- Money market instruments 2,160,470 2,172,159
- Unquoted securities 10,181 10,207
Financing and advances 18,492,167 18,553,437
ANNUAL REPORT 2017

20,662,818 20,735,803
Financial liabilities
Deposits from customers
- At amortised cost 21,478,094 21,625,128
Tier 2 subordinated Sukuk Ijarah 400,482 401,280
136 21,878,576 22,026,408
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

37 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

(b) Fair values of financial instruments not carried at fair value (continued)

The following table analyses within the fair value hierarchy of the Banks assets and liabilities not measured at fair value
but for which fair value is disclosed:

Carrying Fair Value


Amount Level 1 Level 2 Level 3
RM000 RM000 RM000 RM000

2017
Financial assets
Financial investments held-to-maturity
- Money market instruments 2,302,888 2,293,832
- Unquoted securities 254,925 247,702
Financing and advances 20,613,731 20,740,615
23,171,544 23,282,149
Financial liabilities
Deposits from customers
- At amortised cost 23,740,210 23,785,770
Tier 2 subordinated Sukuk Ijarah 400,503 400,960
24,140,713 24,186,730

2016
Financial assets
Financial investments held-to-maturity
- Money market instruments 2,160,470 2,172,159
- Unquoted securities 10,181 10,207
Financing and advances 18,492,167 18,553,437
20,662,818 20,735,803
Financial liabilities
Deposits from customers
- At amortised cost 21,478,094 21,625,128
Tier 2 subordinated Sukuk Ijarah 400,482 401,280
21,878,576 22,026,408 HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

137
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

37 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

(b) Financial instruments not measured at fair value (continued)

Short-term funds and placements with financial institutions

For short-term funds and placements with financial institutions with maturities of less than six months, the carrying value
is a reasonable estimate of fair value. For deposits and placements with maturities six months and above, estimated
fair value is based on discounted cash flows using prevailing money market profit rates at which similar deposits and
placements would be made with financial institutions of similar credit risk and remaining period to maturity.

Financial instruments held at fair value through profit or loss, available-for-sale and held-to-maturity

The estimated fair value is generally based on quoted and observable market prices. Where there is no ready market in
certain securities, the Bank establish the fair value by using valuation techniques.

Financing, advances and other financing

For variable rate financing, the carrying value is generally a reasonable estimate of fair value. For fixed rate financing,
the fair value is estimated by discounting the estimated future cash flows using the prevailing market rates of financing
with similar credit risks and maturities.

Deposits from customers

For deposits from customers with maturities of less than six months, the carrying amounts are reasonable estimates of
their fair values. For deposit with maturities of six months and above, fair values are estimated using discounted cash
flows based on prevailing market rates for similar deposits from customers.

Deposits and placements of banks and other financial institutions and bills and acceptances payable

The estimated fair values of deposits and placements of banks and other financial institutions, bills and acceptances
payable with maturities of less than six months approximate the carrying values. For the items with maturities six
months and above, the fair values are estimated based on discounted cash flows using prevailing money market profit
rates with similar remaining period to maturities.

Subordinated obligation, senior bonds, stapled securities and capital securities

The fair of subordinated obligations, senior bonds, stapled securities and capital securities are on quoted market prices
where available.

Other financial assets and liabilities

The carrying value less any estimated allowance for financial assets and liabilities included in other assets and liabilities
are assumed to approximate their fair values as these items are not materially sensitive to the shift in market profit
HONG LEONG ISLAMIC BANK BERHAD

rates.

Financing related commitment and contingencies


ANNUAL REPORT 2017

The net fair value of these items was not calculated as estimated fair values are not readily ascertainable. These financial
instruments generally relate to credit risks and attract fees in line with market prices for similar arrangements. They are
not presently sold nor traded. The fair value may be represented by the present value of fees expected to be received,
less associated costs.

138
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

37 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

(b) Financial instruments not measured at fair value (continued)

Foreign exchange and profit rate related contracts

The fair values of foreign exchange and profit rate related contracts are the estimated amounts the Bank would receive
to sell or pay to transfer the contracts at the date of statements of financial position.

38 OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

Financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements
are as follows:

Related amounts not set


off in the statement of
financial position
Gross amount
of recognised
financial assets Gross amount Net amount
or liabilities in set off in the presented in
the statement statement the statement
of financial of financial of financial Financial Financial
position position position instruments collateral Net amount
RM000 RM000 RM000 RM000 RM000 RM000

2017
Financial assets
Derivatives 13,382 13,382 (2,138) 11,244

Financial liabilities
Derivatives 49,978 49,978 (2,138) 47,840

2016
Financial assets
Derivatives 32,595 32,595 (17,177) 15,418

Financial liabilities
Derivatives 37,489 37,489 (17,177) 20,312
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

139
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

39 CAPITAL ADEQUACY

The Banks regulatory capital is governed by BNM Capital Adequacy Framework for Islamic Banks (CAFIB) guidelines.
The capital adequacy ratios of the Bank are computed in accordance with BNMs Capital Adequacy Framework (Capital
Components) for Islamic Banks issued on 28 November 2012 and its revised version on 13 October 2015 (the Framework).
The Framework sets out the approach for computing the regulatory capital adequacy ratios, the minimum levels of the ratios
at which banking institutions are required to operate as well as requirement on Capital Conservation Buffer (CCB) and
Counter Cyclical Buffer (CCyB). The minimum capital adequacy requirements for Common Equity Tier I (CET I) capital ratio,
Tier I capital ratio and Total capital ratio are 4.50%, 6.00% and 8.00% respectively. The Bank are also required to maintain
CCB of up to 2.500% of total risk weighted assets (RWA), which is phased in starting with 0.625% in year 2016, 1.250% in
year 2017, 1.875% in year 2018 and 2.500% in year 2019. The CCyB which ranges from 0% up to 2.500% is determined as the
weighted average of prevailing CcyB rates applied in the jurisdictions in which a financial institution has credit exposures.
There is no BNM announcement on the CcyB rates yet.

The Bank has adopted the Standardised Approach for Credit Risk and Market Risk, and the Basic Indicator Approach for
Operational Risk computation in deriving the RWA.

2017 2016

(a) The capital adequacy ratios of the Bank are as follows:

Before deducting proposed dividends


CET I capital ratio 10.622% 10.383%
Tier I capital ratio 10.622% 10.383%
Total capital ratio 13.946% 13.855%

After deducting proposed dividends


CET I capital ratio 10.622% 10.383%
Tier I capital ratio 10.622% 10.383%
Total capital ratio 13.946% 13.855%

(b) The components of CET 1, Tier I and Tier II capital under the revised Capital Components 2017 2016
Framework are as follows: RM000 RM000

CET I capital
Paid-up share capital 700,000 700,000
Retained profit 1,235,660 477,527
Other reserves (2,191) 544,468
Less: Other intangible assets (2,041) (2,956)
Total CET I capital 1,931,428 1,719,039

Total Tier 1 Capital 1,931,428 1,719,039


HONG LEONG ISLAMIC BANK BERHAD

Collective assessment allowance ^


and regulatory reserve # 204,417 174,893
ANNUAL REPORT 2017

Tier 2 subordinated Sukuk Ijarah 400,000 400,000


Total Tier II capital 604,417 574,893

Total Capital 2,535,845 2,293,932

140
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

39 CAPITAL ADEQUACY (CONTINUED)

2017 2016
RM000 RM000

(c) Breakdown of gross risk-weighted assets in the various risk weights:

Risk-weighted assets for credit risk 16,636,964 15,440,278


Risk-weighted assets for market risk 647,073 291,085
Risk-weighted assets for operational risk 899,062 825,670
Total risk-weighted assets 18,183,099 16,557,033

^ Excludes collective assessment allowance attributable to financing and advances classified as impaired but not individually
assessed for impairment.

# Includes the qualifying regulatory reserve for non-impaired financing and advances of the Bank of RM91,432,859 (2016:
RM86,505,224)

40 SEGMENT REPORTING

Business segment reporting

The business segment results are prepared based on the Banks internal management reporting reflective of the organisations
management reporting structure.

The various business segments are described below:


- Personal Financial Services focuses mainly on servicing individual customers and small businesses. Products and services
that are extended to customers include Islamic house financing, Islamic hire purchase and others.
- Business & Corporate Banking focuses mainly on corporate and small medium enterprises. Products offered include
trade financing, working capital facilities, other term financing and corporate advisory services.
- Global Markets refers to the Banks treasury and capital market operations and includes foreign exchange, money
market operations as well as capital market securities trading and investments.
- Other operations refers to head office.

HONG LEONG ISLAMIC BANK BERHAD


ANNUAL REPORT 2017

141
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

40 SEGMENT REPORTING (CONTINUED)

Business segment reporting (continued)

Personal Business &


Financial Corporate Global Other
Services Banking Markets Operations Total
RM000 RM000 RM000 RM000 RM000

2017
Revenue
- external 537,710 (87,265) 124,592 (24,938) 550,099
- inter-segment (197,325) 194,720 (65,371) 67,976
340,385 107,455 59,221 43,038 550,099

Overhead expenses (151,877) (39,407) (13,032) (162) (204,478)


Allowance for impairment losses on financing
and advances (45,746) (7,836) (53,582)
Impairment Loss 1,116 1,116
(197,623) (46,127) (13,032) (162) (256,944)

Segment results 142,762 61,328 46,189 42,876 293,155

Zakat (350)
Taxation (69,856)
Net profit for the financial year 222,949

Segment assets 15,871,696 4,742,035 7,018,597 27,632,328


Unallocated assets 823,505
Total assets 28,455,833

Segment liabilities 10,794,340 10,291,126 4,165,200 61,912 25,312,578


Unallocated liabilities 1,118,353
Total liabilities 26,430,931

Capital expenditure 2,865 312 2,703 5,880

Inter-segment transfer is based on internally computed cost of funds


HONG LEONG ISLAMIC BANK BERHAD

Note:
1. Total segment revenue comprises of net profit income and non-financing income.
2. Unallocated assets and liabilities are not directly attributed to the business segments and cannot be allocated on a
reasonable basis.
ANNUAL REPORT 2017

3. Effective this financial year, certain product revenue i.e. foreign exchange income which was previously recognised under
Global Markets, is now being shared among Personal Financial Services and Business & Corporate Banking segments.

142
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

40 SEGMENT REPORTING (CONTINUED)

Business segment reporting (continued)

Personal Business &


Financial Corporate Global Other
Services Banking Markets Operations Total
RM000 RM000 RM000 RM000 RM000
2016
Revenue
- external 506,363 (97,013) 105,891 (47,775) 467,466
- inter-segment (204,529) 203,279 (46,766) 48,016
301,834 106,266 59,125 241 467,466

Overhead expenses (138,784) (34,322) (12,078) (4,951) (190,135)


Write-back of allowance for impairment losses
on financing and advances (9,708) (524) (10,232)
(148,492) (34,846) (12,078) (4,951) (200,367)

Segment results 153,342 71,420 47,047 (4,710) 267,099


Zakat (350)
Taxation (69,763)
Net profit for the financial year 196,986

Segment assets 14,177,510 4,314,657 5,890,935 24,383,102


Unallocated assets 1,236,787
Total assets 25,619,889

Segment liabilities 8,213,031 8,301,170 6,102,118 98,574 22,714,893


Unallocated liabilities 1,091,173
Total liabilities 23,806,066

Capital expenditure 221 1,119 603 1,943

Inter-segment transfer is based on internally computed cost of funds

Note:
1. Total segment revenue comprises of net profit income and non-financing income.
HONG LEONG ISLAMIC BANK BERHAD

2. Unallocated assets and liabilities are not directly attributed to the business segments and cannot be allocated on a
reasonable basis.
ANNUAL REPORT 2017

143
FINANCIALS

Notes to the Financial Statements


for the financial year ended 30 June 2017

41 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES

The Bank makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition,
rarely equal the related actual results. To enhance the information content of the estimates, certain key variables that are
anticipated to have material impact to the Banks 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 outlined below:

Allowance for impairment losses on financing and advances

It is the policy of the Bank to review their financing portfolios and establish, through charges against profit, individual and
collective assessment impairment allowances in respect of estimated and inherent credit losses in its portfolio.

In determining individual assessment impairment allowances for financing above the set threshold, management
considers objective evidence of impairment and exercises judgement in estimating cash flows and collateral value. Whilst,
managements judgement is guided by the relevant BNM guidelines, judgement is made in estimation of the amount and
timing of future cash flows in assessing allowance for impairment of financial assets. Among the factors considered are the
net realisable value of the underlying collateral value, the viability of the customers business module and the capacity to
generate sufficient cash flow to service its debt obligations.

42 DISCLOSURE OF SHARIAH COMMITTEE

The Bank has appointed a Shariah Committee that consists of 5 Shariah scholars.

The primary role of the Shariah Committee is mainly advising on matters relating to the operation of the Banks existing
products and providing support by attending regular meetings with the Bank to ensure that its products are in conformity
with Shariah.

43 GENERAL INFORMATION

The Bank is a public limited liability company that is incorporated and domiciled in Malaysia. The registered office is at Level
8, Wisma Hong Leong, 18 Jalan Perak, 50450, Kuala Lumpur, Malaysia.

The financial statements were authorised for issue by the Board of Directors in accordance with a resolution of the Directors
on 18 September 2017.
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

144
FINANCIALS

Statement by Directors
pursuant to Section 251(2) of the Companies Act 2016

We, Datuk Dr Md Hamzah bin Md Kassim and Domenico Fuda, being two of the Directors of Hong Leong Islamic Bank Berhad, do
hereby state that, in the opinion of the Directors, the financial statements set out on pages 7 to 110 are drawn up so as to give
a true and fair view of the state of affairs of the Bank as at 30 June 2017 and of the results and cash flows of the Bank for the
financial year then ended on that date in accordance with the Malaysian Financial Reporting Standards, International Financial
Reporting Standards and the requirements of the Companies Act 2016 in Malaysia.

On behalf of the Board,

DATUK DR MD HAMZAH BIN MD KASSIM

DOMENICO FUDA

Kuala Lumpur

18 September 2017

Statutory Declaration
pursuant to Section 251(1) of the Companies Act 2016

I, Foong Pik Yee, being the Officer primarily responsible for the financial management of Hong Leong Islamic Bank Berhad, do
solemnly and sincerely declare that the financial statements set out on pages 7 to 110 are to the best of my knowledge and
belief, 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

Subscribed and solemnly declared by )


the abovenamed at Kuala ) FOONG PIK YEE
Lumpur in Wilayah Persekutuan on )
)
HONG LEONG ISLAMIC BANK BERHAD

18 September 2017

Before me,
ANNUAL REPORT 2017

Commissioner for Oaths

145
FINANCIALS

Independent Auditors Report


to the member of Hong Leong Islamic Bank Berhad
(Incorporated in Malaysia)
(Company no. 686191-W)

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS

Our opinion
In our opinion, the financial statements of Hong Leong Islamic Bank Berhad (the Bank) give a true and fair view of the
financial position of the Bank as at 30 June 2017, and of its financial performance and its 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 2016 in Malaysia.

What we have audited

We have audited the financial statements of the Bank, which comprise the statement of financial position as at 30 June 2017, and
the statement of income, statement of comprehensive income, statement of changes in equity and statement of cash flows for
the year then ended, and notes to the financial statements, including a summary of significant accounting policies, as set out on
pages 7 to 110.

Basis for opinion

We conducted our audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing.
Our responsibilities under those standards are further described in the Auditors responsibilities for the audit of the financial
statements 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 Bank in accordance with the By-Laws (on Professional Ethics, Conduct and Practice) of the Malaysian
Institute of Accountants (By-Laws) and the International Ethics Standards Board for Accountants Code of Ethics for Professional
Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the 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:
Chairmans Statement
Financial Highlights
Chief Executive Officers Review
Management Discussion & Analysis
Sustainability Statement
Board Audit & Risk Management Committee Report
Corporate Governance, Risk Management & Internal Control
Shariah Committees Report
Basel II Pillar 3 Disclosures

Other information does not include the financial statements of the Bank and our auditors report thereon.

Our opinion on the financial statements 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 Bank, our responsibility is to read the other information and,
HONG LEONG ISLAMIC BANK BERHAD

in doing so, consider whether the other information is materially inconsistent with the financial statements 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 2017

Responsibilities of the directors for the financial statements

The directors of the Bank are responsible for the preparation of the financial statements 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 2016 in Malaysia. The Directors are also responsible for such internal control as the directors determine is
146 necessary to enable the preparation of financial statements of the Bank that are free from material misstatement, whether due
to fraud or error.
FINANCIALS

Independent Auditors Report


to the member of Hong Leong Islamic Bank Berhad
(Incorporated in Malaysia)
(Company no. 686191-W)

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS (CONTINUED)

Responsibilities of the directors for the financial statements (continued)

In preparing the financial statements of the Bank, the Directors are responsible for assessing the Banks 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 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 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 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 Banks 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 Banks 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 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 Bank to cease to continue as a going concern.

(e) Evaluate the overall presentation, structure and content of the financial statements of the Bank, including the disclosures,
and whether the financial statements 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.

OTHER MATTERS

This report is made solely to the member of the Bank, as a body, in accordance with Section 266 of the Companies Act 2016 in
HONG LEONG ISLAMIC BANK BERHAD

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


ANNUAL REPORT 2017

(No. AF: 1146) 03032/01/2019 J


Chartered Accountants Chartered Accountant
Kuala Lumpur

18 September 2017

147
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

1 INTRODUCTION

This document discloses Hong Leong Islamic Bank Berhad (HLISB or the Bank) risk profile, risk management practices in
accordance with the disclosure requirement as outline in the Risk -Weighted Capital Adequacy Framework (RWCF) (Basel
II-Disclosure requirements-Pillar 3) issued by BNM.

The Banks regulatory capital is governed by BNM Capital Adequacy Framework guidelines for Islamic Banks (CAFIB).
The capital adequacy ratios of the Bank are computed in accordance with BNMs Capital Adequacy Framework (Capital
Components) for Islamic Banks issued on 28 November 2012 and its revised version on 13 October 2015 (the Framework).
The Framework sets out the approach for computing the regulatory capital adequacy ratios, the minimum levels of the ratios
at which banking institutions are required to operate as well as requirement on Capital Conservation Buffer (CCB) and
Counter Cyclical Buffer (CCyB). The minimum capital adequacy requirements for Common Equity Tier I (CET I) capital ratio,
Tier I capital ratio and Total capital ratio are 4.50%, 6.00% and 8.00% respectively. The Bank are also required to maintain
CCB of up to 2.50% of total risk weighted assets (RWA), which is phased in starting with 0.625% in year 2016, 1.250% in
year 2017, 1.875% in year 2018 and 2.500% in year 2019. The CCyB which ranges from 0% up to 2.50% is determined as the
weighted average of prevailing CcyB rates applied in the jurisdictions in which a financial institution has credit exposures.
There is no BNM announcement on the CcyB rates yet.

The risk-weighted assets (RWA) of the Bank have adopted the Standardised Approach for Credit Risk and Market Risk, and
the Basic Indicator Approach for Operational Risk computation.

The following information concerning the Banks risk exposures, risk management practices and capital adequacy is disclosed
as accompanying information to the annual report and does not form part of the audited financial statements.

2 SCOPE OF APPLICATION

The capital adequacy ratios of the Bank are computed in accordance with BNMs revised RWCAF Basel II. The Bank have
adopted the Standardised Approach for Credit Risk and Market Risk, and the Basic Indicator Approach for Operational Risk
Computation.

During the course of the year, the Bank did not experience any restrictions or other major impediments on transfer of funds
or regulatory capital within the Bank.

3 CAPITAL STRUCTURE AND ADEQUACY

The Bank monitors the capital adequacy position of the Bank to ensure compliance with the requirements of BNM and
to take prompt actions to address projected capital deficiency. The capital position is reviewed on a monthly basis by
undertaking stress tests and taking into account the levels and trend of material risks. The sufficiency of capital is assessed
against the various risks in the balance sheet as well as future capital requirements based on the Banks expansion plans.

The Bank has also formalised an overall capital management framework, which seeks to ensure that it is in line with Basel
III Capital Standards.

The following table sets forth details on the capital resources, capital adequacy ratios and risk-weighted assets for the
HONG LEONG ISLAMIC BANK BERHAD

Bank as at 30 June 2017. BNMs revised CAFIB/RWCAF-Basel II sets out the minimum capital adequacy ratios for the banking
institutions and the methodology for calculating these ratios. As at 30 June 2017, the Banks CET1, Tier I capital ratio and total
capital ratio were higher than BNMs minimum requirements.
ANNUAL REPORT 2017

The constituents of total eligible capital for the Bank as at 30 June 2017 are set out in BNMs Capital Adequacy Framework
(Capital Components)-Basel III. These include shareholders funds after regulatory-related adjustments and eligible capital
instruments issued by the Bank. Refer to Note 18 to the financial statements for the terms and conditions of the main
features of these capital instruments.

148
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

3 CAPITAL STRUCTURE AND ADEQUACY (CONTINUED)

(a) The capital adequacy ratios of the Bank are as follows:

30 June 2017 30 June 2016


RM000 RM000
Before deducting proposed dividends
CET I capital ratio 10.622% 10.383%
Tier I capital ratio 10.622% 10.383%
Total capital ratio 13.946% 13.855%

After deducting proposed dividends


CET I capital ratio 10.622% 10.383%
Tier I capital ratio 10.622% 10.383%
Total capital ratio 13.946% 13.855%

(b) The components of CET 1, Tier I and Tier II capital under the revised Capital Components Framework are as follows:

30 June 2017 30 June 2016


RM000 RM000
CET I capital
Paid-up share capital 700,000 700,000
Retained profit 1,235,660 477,527
Other reserves (2,191) 544,468

Less: Other intangible assets (2,041) (2,956)


Total CET I capital 1,931,428 1,719,039

Total Tier 1 capital 1,931,428 1,719,039

Collective assessment allowance ^


and regulatory reserves # 204,417 174,893
Tier II subordinated Sukuk Ijarah 400,000 400,000
Total Tier II capital 604,417 574,893
Total capital 2,535,845 2,293,932

(c) The breakdown of risk-weighted assets (RWA) by each major risk category is as follows:

30 June 2017 30 June 2016


RM000 RM000
HONG LEONG ISLAMIC BANK BERHAD

Credit risk 16,636,964 15,440,278


Market risk 647,073 291,085
Operational risk 899,062 825,670
ANNUAL REPORT 2017

Total RWA 18,183,099 16,557,033

^ Excludes collective assessment allowance attributable to financing and advances classified as impaired but not
individually assessed for impairment.

# Includes the qualifying regulatory reserve for non-impaired financing and advances of the Bank of RM91,432,859
(2016: RM86,505,224)
149
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

3 CAPITAL STRUCTURE AND ADEQUACY (CONTINUED)

(d) The breakdown of risk-weighted assets (RWA) by exposure is as follows:

30 June 2017 Gross Net Risk Minimum


exposures exposures weighted capital
Exposure class before CRM after CRM assets requirements
RM000 RM000 RM000 RM000

Credit Risk
On-balance sheet exposures
Sovereigns / central Banks 5,721,777 5,721,777
Public sector entities
Banks, Development Financial Institutions(DFIs)
and Multilateral Development Bank (MDBs) 795,525 795,525 178,722 14,298
Insurance Cos, Securities Firms (SF) and Fund
Managers (FM)
Corporates 5,065,288 4,667,787 4,104,214 328,337
Regulatory retail 10,192,664 10,171,868 7,694,805 615,584
Residential mortgages 5,710,308 5,707,737 2,367,789 189,423
Higher risk assets 2,703 2,702 4,052 324
Other assets 180,172 180,172 180,200 14,416
Specialised financing / investment
Equity exposure
Securitisation exposures
Defaulted exposures 115,567 115,520 127,247 10,180
Total on -balance sheet exposures 27,784,004 27,363,088 14,657,029 1,172,562

Off-Balance Sheet Exposures


Over-the-counter(OTC) derivatives 144,053 144,053 82,613 6,609
Credit derivatives
Off balance sheet exposures other than OTC
derivatives or credit derivatives 2,221,539 2,215,787 1,894,157 151,533
Defaulted exposures 2,110 2,110 3,165 253
Total off-balance sheet exposures 2,367,702 2,361,950 1,979,935 158,395

Total on and off- balance sheet exposures 30,151,706 29,725,038 16,636,964 1,330,957
Long Position Short Position
Market Risk
Profit rate risk 3,686,262 2,903,490 623,088 49,847
HONG LEONG ISLAMIC BANK BERHAD

Foreign currency risk 23,985 790 23,985 1,919


Total 3,710,247 2,904,280 647,073 51,766
Operational risk 899,062 71,926
ANNUAL REPORT 2017

Total RWA and capital requirements 18,183,099 1,454,649

Note:
CRM - Credit risk mitigation
^ The gross exposures before CRM of off-balance sheet exposures refer to the credit equivalent of off-balance sheet
items on page 24 and 25.
150
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

3 CAPITAL STRUCTURE AND ADEQUACY (CONTINUED)

(d) The breakdown of risk-weighted assets (RWA) by exposure is as follows: (continued)

30 June 2016 Gross Risk Minimum


exposures Net exposures weighted capital
Exposure Class before CRM after CRM assets requirements
RM000 RM000 RM000 RM000
Credit Risk
On-balance sheet exposures
Sovereigns / central Banks 4,557,644 4,557,644
Public sector entities
Banks, Development Financial Institutions(DFIs)
and Multilateral Development Bank (MDBs) 1,252,617 1,252,617 256,633 20,531
Insurance Cos, Securities Firms (SF) and Fund
Managers (FM)
Corporates 4,921,779 4,541,663 3,878,981 310,318
Regulatory retail 8,322,782 8,303,841 6,300,641 504,051
Residential mortgages 5,747,187 5,744,220 2,457,663 196,613
Higher risk assets 3,443 3,441 5,162 413
Other assets 590,133 590,133 539,006 43,120
Specialised financing / investment
Equity exposure
Securitisation exposures
Defaulted exposures 114,761 114,732 140,841 11,267
Total on-balance sheet exposures 25,510,346 25,108,291 13,578,927 1,086,313

Off-balance sheet exposures


Over-the-counter (OTC) derivatives 114,046 114,046 64,066 5,125
Credit derivatives
Off balance sheet exposures other than
OTC derivatives or credit derivatives 2,150,072 2,145,087 1,794,383 143,551
Defaulted Exposures 1,935 1,935 2,902 232
Total off-balance sheet exposures 2,266,053 2,261,068 1,861,351 148,908
Total on and off- balance sheet exposures 27,776,399 27,369,359 15,440,278 1,235,221
Large exposures risk requirement
Long Position Short Position
Market risk
Profit rate risk 4,465,578 4,270,624 274,145 21,932
Foreign currency risk 16,940 16,940 1,355
Equity risk
HONG LEONG ISLAMIC BANK BERHAD

Commodity risk
Option risk
Total 4,482,518 4,270,624 291,085 23,287
ANNUAL REPORT 2017

Operational risk 825,670 66,055


Total RWA and capital requirements 16,557,033 1,324,563

Note:
CRM - Credit risk mitigation
^ The gross exposures before CRM of off-balance sheet exposures refer to the credit equivalent of off-balance sheet
items on page 24 and 25.
151
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT

The Bank has implemented the risk management and internal control framework with the objective to ensure the overall
financial soundness and stability of the Banks business operations. The Banks risk management outlines the overall
governance structure, aspiration, values and risk management strategies that balances between risk profiles and returns
objectives. Appropriate methodologies and measurements have been developed to manage uncertainties such that
deviations from intended strategic objectives are closely monitored and kept within tolerable levels.

As part of the integrated risk management and internal control framework, the Bank has formulated and implemented an
Internal Capital Adequacy Assessment Process (ICAAP) and a capital management framework to ensure that it maintains
the appropriate level of capital, the appropriate quality and structure of capital and the appropriate risk profile to support its
strategic objectives. This also includes determining the Banks minimum capital threshold and target capital levels.

From a governance perspective, the Board has the overall responsibility to define the Banks risk appetite and ensure that
a robust risk management and compliance culture prevails. The Board is assisted by the Board Audit Risk Management
Committee (BARMC) in approving the Banks risk management and internal control framework as well as the attendant
capital management framework, risk appetite statement, risk management and compliance strategies and risk policies.

Dedicated management level committees are established by the Bank to oversee the development and the assessment
of effectiveness of risk management policies, to review risk exposures and portfolio composition as well as to ensure
appropriate infrastructures, resources and systems are put in place for effective risk management activities.

Operationally, the Bank operates multiple lines of defences to effect a robust control framework. The business units being
the first line of defence are responsible for identifying, mitigating and managing risks within their lines of business. The
Group Risk Management (GRM) function being the second line of defence, is responsible for setting the risk management
framework and developing tools and methodologies for the identification, measurement, monitoring, control and mitigation
of risks. In addition, GRM undertakes compliance validation to ensure that the business and operating units are in compliance
to the Banks risk appetite thresholds and to the regulatory requirements. The GRMs functions cover the oversight of the
following areas:- Market risk, Liquidity Risk, Credit Portfolio Risk, Technology and Operations Risk, ICAAP and Integrated
Stress Testing, Regulatory Compliance and Islamic Banking Risk.

The Group Internal Audit function, being the third line of defence, is responsible to provide independent assurance on the
effective functioning of the risk management and internal controls framework for the Bank.

The risk management process for each key risk area of the Bank and the various risk exposures are described in the following
sections of the Pillar 3 disclosures.

A Credit Risk

Credit risk arises as a result of customers or counterparties not being able to or willing to fulfil their financial and
contractual obligations as and when they fall due. These obligations arise from financing, trade finance and other
activities undertaken by the Bank.

The Bank has established a credit risk management framework to ensure that exposure to credit risk is kept within
HONG LEONG ISLAMIC BANK BERHAD

the Banks financial capacity to withstand potential future losses. Financing activities are guided by the internal credit
policies and guidelines that are reviewed and concurred by the Management Credit Committee (MCC), endorsed by the
BARMC and the Credit Supervisory Committee (CSC), and approved by the Board. These policies are subject to review
and enhancements, at least on an annual basis.
ANNUAL REPORT 2017

Credit portfolio strategies and significant exposures are reviewed by both the BARMC and the Board. These portfolio
strategies are designed to achieve a desired portfolio risk tolerance level and sector distribution.

152
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit Risk (continued)

The Banks credit approving process encompasses pre-approval evaluation, approval and post-approval evaluation.
While the business units are responsible for credit origination, the credit approving function rests mainly with the Credit
Evaluation Departments, the MCC and the CSC. The Board delegates approving and discretionary authority to the MCC
and the various personnel of the Bank based on job function and designation.

For any new products, credit risk assessment also forms part of the new product sign-off processes to ensure that the
new product complies with the appropriate policies and guidelines, prior to the introduction of the product.

The Banks exposure to credit risk is mainly from its retail customers, small and medium enterprise (SME), commercial
and corporate customers. The credit assessment for retail customers is managed on a portfolio basis and the risk scoring
models and financing templates are designed to assess the credit worthiness and the likelihood of the obligors to pay
their financing.

The SME, commercial and corporate customers are individually assessed and assigned with a credit rating, which is
based on the assessment of relevant factors such as the customers financial position, industry outlook, types of facilities
and collaterals offered.

Under the Basel II Standardised Approach, the Bank makes use of credit ratings assigned by credit rating agencies in
its calculation of credit risk weighted assets. This is applicable for exposures to sovereigns, central banks, public sector
entities, banking institutions, corporates as well as certain other specific portfolios.

The approved External Credit Assessment Institutions (ECAI) ratings and the prescribed risk weights on the above
stated asset classes are used in the computation of regulatory capital. An exposure would be deemed to have an
external rating if the issuer or the issue has a rating provided by an ECAI. In cases where an exposure does not have an
issuer or issue rating, the exposure shall be deemed unrated and shall be accorded a risk weight appropriate for unrated
exposures in their respective exposure category.

The ECAI used by the Bank are Fitch Ratings, Moodys Investors Service and Standard & Poors, Rating and Investment
Inc (R&I), Malaysia Rating Corporation Berhad (MARC) and Rating Agency Malaysia (RAM). ECAI ratings are mapped to a
common credit quality grade as prescribed by BNM.

In addition, the Bank also conducts periodic stress testing of its credit portfolios to ascertain credit risk impact to capital
under the relevant stress scenarios.

HONG LEONG ISLAMIC BANK BERHAD


ANNUAL REPORT 2017

153
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Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit Risk (continued)

Gross credit exposure

(i) The table below sets out the breakdown of gross credit exposures by geographical distribution as follows:

Malaysia 30 June 2017 30 June 2016


RM000 RM000

On-balance sheet exposures


Financial assets held-for-trading* 782,773 194,953
Financial investments available-for-sale * 2,677,534 1,952,809
Financial investments held-to-maturity 2,557,813 2,170,651
Financing and advances 20,613,731 18,492,167
Islamic derivative financial instruments 13,382 32,595
Total on-balance sheet exposures 26,645,233 22,843,175

Off-balance sheet exposures ^


OTC derivatives 144,053 114,046
Off-balance sheet exposures other than OTC derivatives or credit derivatives 2,223,649 2,152,007
Total off-balance sheet exposures 2,367,702 2,266,053

Total on and off-balance sheet exposures 29,012,935 25,109,228

Note:
(1) For this table, the Bank have allocated the financings and advances to geographical areas based on the country
where the financings and advances were provided.
* Excludes equity securities.
^ Off balance sheet exposures refer to the credit equivalent of off-balance sheet items on page 24 and 25.
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

154
4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

Gross credit exposure (continued)

(ii) The table below sets out the breakdown of gross credit exposures by sector as follows:

Off-balance
sheet
exposures Total
Total on- other Total off- on and
Financial Financial Financial Islamic balance than OTC balance off-balance
assets investments investments Financing derivative sheet derivatives sheet sheet
for the financial year ended 30 June 2017

held-for available held-to and financial credit risk OTC or credit credit risk credit risk
trading* for-sale* maturity advances instruments exposures derivatives derivatives exposures exposures
30 June 2017 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000

Agriculture 803,641 803,641 189,236 189,236 992,877


Mining and
quarrying 12,267 51,860 64,127 546 546 64,673
Manufacturing 730,143 730,143 376,603 376,603 1,106,746
Electricity, gas and
water 364,284 53,451 417,735 5,556 5,556 423,291
Construction 196,978 307,640 504,618 147,780 147,780 652,398
Wholesale and retail 806,865 806,865 191,450 191,450 998,315
Transport,
Basel II Pillar 3 Disclosures

storage and
communications 184,229 442,179 626,408 23,380 23,380 649,788
Finance, insurance,
real estate and
business services 418,487 429,220 1,494,869 13,382 2,355,958 322,846 322,846 2,678,804
Government and
government
agencies 364,286 1,490,556 2,557,813 4,412,655 4,412,655
Education, health
and others 820,689 820,689 23,635 23,635 844,324
Household 15,095,953 15,095,953 144,053 942,618 1,086,671 16,182,624
Others 6,441 6,441 6,441
Total on and off-
balance sheet
exposures 782,773 2,677,534 2,557,813 20,613,731 13,382 26,645,233 144,053 2,223,649 2,367,702 29,012,935
FINANCIALS

* Exclude equity securities


ANNUAL REPORT 2017
HONG LEONG ISLAMIC BANK BERHAD

155
HONG LEONG ISLAMIC BANK BERHAD

156
ANNUAL REPORT 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)


FINANCIALS

Gross credit exposure (continued)

(ii) The table below sets out the breakdown of gross credit exposures by sector as follows: (continued)

Off-balance
sheet Total
exposures on and
Total on- other Total off- off-
Financial Financial Financial Islamic balance than OTC balance balance
assets investments investments Financing derivative sheet derivatives sheet sheet
for the financial year ended 30 June 2017

held-for available held-to and financial credit risk OTC or credit credit risk credit risk
trading* for-sale* maturity advances instruments exposures derivatives derivatives exposures exposures
30 June 2016 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000
Agriculture 696,837 696,837 83,740 83,740 780,577
Mining and
quarrying 8,067 8,067 1,112 1,112 9,179
Manufacturing 682,651 682,651 312,811 312,811 995,462
Electricity, gas and
water 215,717 61,745 277,462 24,203 24,203 301,665
Construction 121,606 292,027 413,633 118,523 118,523 532,156
Wholesale and
retail 620,727 620,727 170,122 170,122 790,849
Basel II Pillar 3 Disclosures

Transport,
storage and
communications 35,901 450,188 486,089 114,046 7,864 121,910 607,999
Finance, insurance,
real estate and
business services 49,881 501,516 10,228 1,486,392 32,595 2,080,612 326,181 326,181 2,406,793
Government and
government
agencies 145,072 1,063,936 2,160,423 3,369,431 3,369,431
Education, health
and others 619,030 619,030 97,260 97,260 716,290
Household 13,543,390 13,543,390 992,829 992,829 14,536,219
Others 14,133 31,113 45,246 17,361 17,361 62,607
Total on and off-
balance sheet
exposures 194,953 1,952,809 2,170,651 18,492,167 32,595 22,843,175 114,046 2,152,007 2,266,053 25,109,228

* Exclude equity securities


FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

Gross credit exposure (continued)

(iii) The table below sets out the breakdown of gross credit exposures by residual contractual maturity as follows:

Less than 1-5 Over 5


1 year years years Total
30 June 2017 RM000 RM000 RM000 RM000

On-balance sheet exposures


Financial assets held-for-trading* 418,485 132,147 232,141 782,773
Financial investments available-for-sale* 216,793 2,020,340 440,401 2,677,534
Financial investments held-to-maturity 121,321 1,987,551 448,941 2,557,813
Financing and advances 2,604,489 2,790,629 15,218,612 20,613,731
Islamic derivative financial instruments 5,725 7,383 274 13,382
Total on-balance sheet exposures 3,366,813 6,938,050 16,340,369 26,645,233
Off-balance sheet exposures^
OTC derivatives 13,660 54,748 75,645 144,053
Off-balance sheet exposures other than OTC
derivatives or credit derivatives 400,653 1,822,996 2,223,649
Total off-balance sheet exposures 414,313 1,877,744 75,645 2,367,702

Total on and off-balance sheet exposures 3,781,126 8,815,794 16,416,014 29,012,935

30 June 2016

On-balance sheet exposures


Financial assets held-for-trading* 49,881 10,237 134,836 194,953
Financial investments available-for-sale* 96,220 1,647,932 208,657 1,952,809
Financial investments held-to-maturity 448,068 1,474,358 248,225 2,170,651
Financing and advances 2,104,454 2,646,507 13,741,206 18,492,167
Islamic derivative financial instruments 17,107 15,488 32,595
Total on-balance sheet exposures 2,715,730 5,794,522 14,332,924 22,843,175

Off-balance sheet exposures^


OTC derivatives 27,449 86,597 114,046
HONG LEONG ISLAMIC BANK BERHAD

Off-balance sheet exposures other than OTC


derivatives or credit derivatives 402,310 1,749,697 2,152,007
Total off-balance sheet exposures 429,759 1,836,294 2,266,053
ANNUAL REPORT 2017

Total on and off-balance sheet exposures 3,145,489 7,630,816 14,332,924 25,109,228

* Excludes equity securities

157
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

Financing and advances

(i) The table below sets out the breakdown by sector the amount of past due financing and advances, impaired
financing and advances, individual assessment impairment allowance, collective assessment impairment allowance,
charges/(write back) for individual assessment impairment allowance during the year and write-offs during the
year as follows:

Charges/
(write
back) for
individual
assessment
Past due Impaired Individual Collective impairment
Financing financing assessment assessment allowance Write offs
and and impairment impairment during the during the
30 June 2017 advances advances allowance allowance year year
RM000 RM000 RM000 RM000 RM000 RM000

Agriculture 1,456 5 1,305


Mining and quarrying 125 50,010 8,841 55 6,477
Manufacturing 1,622 1,414 1,209 2,154 74
Electricity, gas and
water 240 606
Construction 3,826 1,147 56 2,818 2,364
Wholesale and retail 19,083 4,763 3,558 3,915 (50)
Transport, storage and
communications 534 221 713
Finance, insurance,
real estate and
business services 15,713 13,244 7,349 20 (78)
Government and
government
agencies
Education, health and
others 5,249 51 1,440
Household 1,643,559 108,989 137,458
Others 114 13
1,691,521 179,844 13,664 157,826 8,885 (2,670)
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

158
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

Financing and advances (continued)

(i) The table below sets out the breakdown by sector the amount of past due financing and advances, impaired
financing and advances, individual assessment impairment allowance, collective assessment impairment allowance,
charges/(write back) for individual assessment impairment allowance during the year and write-offs during the
year as follows: (continued)

Charges/
(write
back) for
individual
assessment
Past due Impaired Individual Collective impairment
Financing financing assessment assessment allowance Write offs
and and impairment impairment during the during the
30 June 2016 advances advances allowance allowance year year
RM000 RM000 RM000 RM000 RM000 RM000

Agriculture 204 850


Mining and quarrying 232 32
Manufacturing 4,504 4,033 3,727 2,240 (2,543)
Electricity, gas and
water 302 25 460
Construction 5,690 51,614 56 2,960 (2,030) (59)
Wholesale and retail 6,362 5,438 3,638 3,067 263
Transport, storage and
communications 1,571 173 1,220
Finance, insurance,
real estate and
business services 12,988 13,207 57 6,565 14
Government and
government
agencies
Education, health and
others 1,155 23 65,804
Household 1,440,881 88,045 53,857
Others 135
1,474,024 162,558 7,478 137,055 (4,296) (59)
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

159
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

Financing and advances (continued)

(ii) The table below sets out the breakdown of geographical areas the amount of past due financing and advances,
impaired financing and advances, individual assessment impairment allowance and collective assessment
impairment allowance as follows:

Past due Impaired Individual Collective


Financing financing assessment assessment
and and impairment impairment
advances advances allowance allowance
RM000 RM000 RM000 RM000

30 June 2017
Malaysia 1,691,521 179,844 13,664 157,826

30 June 2016
Malaysia 1,474,024 162,558 7,478 137,055

Notes:
(1) A financial asset is defined as past due when the counterparty has failed to make a payment when
contractually due.
(2) For description of approaches adopted by the Bank for the determination of individual and collective assessment
impairment allowances, refer to Note 2M (i) to the financial statements.

(iii) The table below sets out the movements in individual assessment impairment allowance and collective assessment
impairment allowance during the financial year as follows:

30 June 2017 30 June 2016


Collective assessment allowance RM000 RM000

As at beginning of the financial year 137,055 143,357


Net allowance made during the financial year 64,653 34,491
Amount written off (42,061) (38,717)
Unwinding income (1,821) (2,076)
As at end of the financial year 157,826 137,055

Individual assessment allowance


HONG LEONG ISLAMIC BANK BERHAD

As at beginning of the financial year 7,478 13,150


Allowance made during the financial year 10,775 592
Allowance written back in respect of recoveries (1,890) (4,888)
Amount written off (2,670) (59)
ANNUAL REPORT 2017

Amount transfer to allowance for impairment losses on securities (1,116)


Unwinding income (29) (201)
Exchange difference
As at end of the financial year 13,664 7,478

160
4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

Credit risk exposures by risk weight

The breakdown of credit risk exposures by risk weight is as follows:

Exposures after netting and credit risk mitigation


Total
exposures
after
Sovereigns/ Banks, Insurance Higher netting & Total risk
30 June central DFIs & Cos, SF Regulatory Residential risk Other credit risk weighted
for the financial year ended 30 June 2017

2017 banks PSEs MDBs and FM Corporates retail mortgages assets assets mitigation assets
Risk
weight RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000

0% 5,721,777 (27) 5,721,750


20% 12,031 734,722 697,879 1,444,632 288,926
35% 4,142,850 4,142,850 1,449,998
50% 178,237 12,390 12,525 1,309,882 1,513,034 756,517
75% 11,158,214 4,795 11,163,009 8,372,257
100% 17,559 4,930,280 276,598 276,121 180,200 5,680,758 5,680,758
150% 41,625 14,653 2,727 59,005 88,508
Basel II Pillar 3 Disclosures

Total 5,721,777 12,031 912,959 17,559 5,682,174 11,461,990 5,733,648 2,727 180,173 29,725,038 16,636,963
Risk
weighted
assets by
exposure 2,406 236,063 17,559 5,138,488 8,673,501 2,384,656 4,091 180,199 16,636,963
Average
risk
weight 0% 20% 26% 100% 90% 76% 42% 150% 100% 56%
Deduction
from
capital
base

FINANCIALS

ANNUAL REPORT 2017


HONG LEONG ISLAMIC BANK BERHAD

161
HONG LEONG ISLAMIC BANK BERHAD

162
ANNUAL REPORT 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)


FINANCIALS

Credit risk exposures by risk weight (continued)

The breakdown of credit risk exposures by risk weight is as follows: (continued)

Exposures after netting and credit risk mitigation


Total
exposures
after
Sovereigns/ Banks Insurance Higher netting & Total risk
central DFIs & Cos, SF Regulatory Residential risk Other credit risk weighted
for the financial year ended 30 June 2017

30 June 2016 banks MDBs and FM Corporates retail mortgages assets assets mitigation assets
Risk weight RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000 RM000

0% 4,557,644 51,127 4,608,771

20% 1,240,536 770,367 2,010,903 402,181


35% 4,062,727 4,062,727 1,421,954
50% 120,974 92,822 11,237 1,293,379 1,518,412 759,206
75% 9,387,815 7,910 9,395,725 7,046,794
100% 3,668 4,463,886 299,700 391,922 539,003 5,698,179 5,698,180
150% 64,489 6,712 3,441 74,642 111,963
Basel II Pillar 3 Disclosures

Total 4,557,644 1,361,510 3,668 5,391,564 9,705,464 5,755,938 3,441 590,130 27,369,359 15,440,278
Risk weighted assets
by exposure 308,594 3,668 4,761,104 7,356,248 2,466,498 5,162 539,004 15,440,278
Average risk weight 0% 23% 100% 88% 76% 43% 150% 91% 56%
Deduction from
capital base
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

The following tables summarise the rated exposures according to ratings by External Credit Assessment Institutions
(ECAIs) as follows:

(i) Ratings of Public Sector Entities, Insurance Cos, Securities Firm and Funds Manager and Corporates 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
RAM AAA to AA3 A1 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
Exposure class Inc AAA to AA- A+ to A- BBB+ to BB- B+ to D Unrated
RM000 RM000 RM000 RM000 RM000

30 June 2017
On and off-balance
sheet exposures
Public Sector
Entities 12,031
Insurance Cos,
SF and FM
Corporates 17,559
697,877 12,267 391,786 4,580,244
697,877 12,267 391,786 4,609,834

30 June 2016
On and off-balance
sheet exposures
Insurance Cos, SF
and FM 3,668
Corporates 770,369 92,774 8,834 4,519,587
770,369 92,774 8,834 4,523,255 HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

163
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

The following tables summarise the rated exposures according to ratings by External Credit Assessment Institutions
(ECAIs) as follows: (continued)

(ii) Ratings of Sovereigns/Central Banks and Banking Institutions by approved ECAIs

Moodys Aaa to Aa3 A1 to A3 Baa1 to Baa3 Ba1 to B3 Unrated


S&P AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Unrated
Fitch AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Unrated
RAM AAA to AA3 A1 to A3 BBB1 to BBB3 BB1 to B3 Unrated
MARC AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Unrated
Rating &
Investment
Inc AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Unrated
Exposure class RM000 RM000 RM000 RM000 RM000

30 June 2017
On and off-balance
sheet exposures
Sovereigns/central
banks 141,948 5,579,829
Banks, MDBs and
FDIs 65,651 438,574 232,182
207,598 438,574 5,812,011

30 June 2016
On and off-balance
sheet exposures
Sovereigns/central
banks 10,205 4,547,439
Banks, MDBs and
FDIs 370,384 387,488 50,307 551,553
380,589 387,488 50,307 5,098,991
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

164
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

The following tables summarise the rated exposures according to ratings by External Credit Assessment Institutions
(ECAIs) as follows: (continued)

(iii) Short-term ratings of Banking Institutions and Corporates by approved ECAIs

Moodys P-1 P-2 P-3 Others Unrated


S&P A-1 A-2 A-3 Others Unrated
Fitch F1+,F1 F2 F3 B to D Unrated
RAM P-1 P-2 P-3 NP Unrated
MARC MARC-1 MARC-2 MARC-3 MARC-4 Unrated
Rating &
Investment
Inc a-1+,a-1 a-2 a-3 b,c Unrated
Exposure class RM000 RM000 RM000 RM000 RM000

30 June 2017
On and off-balance
sheet exposures
Banks, MDBs and
FDIs 172,946 3,607
172,946 3,607

30 June 2016
On and off-balance
sheet exposures
Banks, MDBs and
FDIs 1,778
1,778

Credit risk mitigation

The Banks credit principle is principally granting financing facilities on the basis of the customers credit standing,
payment and financing servicing ability. Where possible, collateral is taken to mitigate and reduce any credit risk for
the particular financing facility extended. The value of the collateral is monitored periodically and where applicable, a
revised valuation may be requested from the customer. The types of collateral accepted ranges from cash, marketable
securities, properties, machineries or equipment, inventory and receivables. In certain cases, corporate guarantees are
obtained where the credit worthiness of the corporate customer is insufficient for amount sought. There are policies
HONG LEONG ISLAMIC BANK BERHAD

and processes in place to monitor collateral concentration. For credit risk mitigation (CRM) purposes, only collateral or
guarantees that are legally enforceable are taken into account. The credit exposures are computed on a net basis only
when there is a legally enforceable netting arrangements for financing and deposits. The Bank use the Comprehensive
Approach for computation of the adjusted exposures.
ANNUAL REPORT 2017

165
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

Credit risk mitigation (continued)

The following table summarises the breakdown of CRM by exposure as follows:

30 June 2017
Exposures
covered by Exposures
guarantees covered
Exposures / credit by eligible
Exposure class before CRM derivatives collateral
RM000 RM000 RM000

On-balance sheet exposures


Sovereigns / central banks 5,721,777
Banks, DFIs & MDBs 795,525
Corporates 5,065,288 350,000 47,501
Regulatory retail 10,192,664 20,796
Residential mortgages 5,710,308 2,571
Higher risk assets 2,703 2
Other assets 180,172
Defaulted exposures 115,567 47
Total for on-balance sheet exposures 27,784,004 350,000 70,917

Off-balance sheet exposures


OTC derivatives 144,053
Off balance sheet exposures other than OTC derivatives or credit
derivatives 2,221,539 5,753
Defaulted exposures 2,110
Total for off-balance sheet exposures 2,367,702 5,753

Total on and off-balance sheet exposures 30,151,706 350,000 76,670


HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

166
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

Credit risk mitigation (continued)

The following table summarises the breakdown of CRM by exposure as follows (continued):

30 June 2016
Exposures
covered by Exposures
guarantees covered
Exposures / credit by eligible
Exposure class before CRM derivatives collateral
RM000 RM000 RM000
On-balance sheet exposures
Sovereigns / central banks 4,557,644
Banks, DFIs and MDBs 1,252,617
Corporates 4,921,779 350,000 30,116
Regulatory retail 8,322,782 18,941
Residential mortgages 5,747,187 2,966
Higher risk assets 3,443 2
Other assets 590,133
Defaulted exposures 114,761 29
Total for on-balance sheet exposures 25,510,346 350,000 52,054

Off-balance sheet exposures


OTC derivatives 114,046
Off balance sheet exposures other than OTC derivatives or credit
derivatives 2,150,072 4,985
Defaulted exposures 1,935
Total for off-balance sheet exposures 2,266,053 4,985
Total on and off-balance sheet exposures 27,776,399 350,000 57,039

Off-balance sheet exposures and counterparty credit risk

Credit limits are established to ensure that the Bank is not duly exposed to unnecessary credit risk with parties who are
unable to meet or honour their financial obligations with the Bank.

The counterparty limits for the Bank are established by taking into consideration the tenor of the obligation, rating
assignment of the country, rating assignment of the counterparty, counterpartys shareholders funds and the Banks
shareholders funds.
HONG LEONG ISLAMIC BANK BERHAD

The credit exposure for derivative transactions is calculated based on the standardised approach by applying a specific
risk factor i.e. the potential loss of the contract value, which in general is a fraction of the derivative contract or notional
amount used to express the volume of instruments.
ANNUAL REPORT 2017

In the normal course of business, the Bank make various commitments and incurs certain contingent liabilities with
legal recourse to their customers.

Nature of commitments and contingencies

Direct credit substitutes comprise guarantees undertaken by the Bank to support the financial obligations of their
customers to third parties. 167
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

Off-balance sheet exposures and counterparty credit risk (continued)

Nature of commitments and contingencies (continued)

Certain transactions related contingent items represent financial products whose crystallisations are dependent on
specific events other than default payment by the customers. They include performance related contingencies and
standby letter of credit.

Short term self liquidating trade-related contingencies relate to bills of exchange which have been endorsed by the
Bank and represent liabilities in the event of default by the acceptors and the drawers of the bills.

Assets sold with recourse and commitments with certain drawdown represents assets sold by the Bank with recourse
in the event of defects in the assets, and investment or purchase commitments entered into by the Bank, where
drawdown is certain to occur.

Obligations under underwriting agreements arise from underwriting agreements relating to the issuance of equity and
securities, where the Bank are obliged to subscribe for or purchase the securities in the event the securities are not
taken up when issued.

Irrevocable commitments to extend credit include all obligations on the part of the Bank to provide funding facilities or
the undrawn portion of an approved financing facilities to customers.

Forward foreign exchange contracts are agreements to buy or sell fixed amounts of currency at agreed rates of exchange
on a specified future date.

Profit rate swaps involve the exchange of profit obligations with a counterparty for a specified period without the
exchange of the underlying principal.

The Off-balance sheet exposures and their related counterparty credit risk of the Bank are as follows:

Positive fair
value of Credit Risk
Principal derivative equivalent weighted
30 June 2017 amount contracts amount* amount*
RM 000 RM000 RM000 RM000
Direct credit substitutes 50,000 50,000 50,000
Transaction related contingent items 98,326 49,163 49,163
Short-term self liquidating trade related contingencies 26,119 5,224 5,223
Irrecoverable commitments to extend credit
- Maturity less than one year 1,481,333 296,267 273,347
- Maturity more than one year 3,645,992 1,822,996 1,519,588
Foreign exchange related contract
HONG LEONG ISLAMIC BANK BERHAD

- Less than one year 541,236 5,286 12,344 8,390


- Over one year to less than five years
Profit rate related contracts
- Less than one year 350,000 440 1,315 263
ANNUAL REPORT 2017

- Over one year to less than five years 1,985,000 7,656 54,748 29,076
- Five years and above 700,000 75,645 44,885
8,878,006 13,382 2,367,702 1,979,935

* The credit equivalent amount and risk-weighted assets are arrived at using the credit conversion factors and risk-
168 weights as defined in BNMs revised RWCAF and CAFIB
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

A Credit risk (continued)

Off-balance sheet exposures and counterparty credit risk (continued)

Off-balance sheet exposures and their related counterparty credit risk of the Bank are as follows: (continued)

Positive fair
value of Credit Risk
Principal derivative equivalent Weighted
amount contracts amount* amount*
30 June 2016 RM 000 RM000 RM000 RM000

Direct credit substitutes 65 65 65


Transaction related contingent items 96,643 48,321 48,321
Short-term self liquidating trade related contingencies 21,314 4,263 4,263
Irrecoverable commitments to extend credit
- Maturity less than one year 1,748,304 349,661 328,708
- Maturity more than one year 3,499,393 1,749,697 1,415,928
Foreign exchange related contract
- Less than one year 1,179,528 16,185 22,342 14,025
- Over one year to less than five years
Profit rate related contracts
- Less than one year 1,720,000 922 5,105 2,334
- Over one year to less than five years 2,265,000 15,488 86,599 47,707
- Five years and above
10,530,247 32,595 2,266,053 1,861,351

* The credit equivalent amount and risk-weighted assets are arrived at using the credit conversion factors and risk-
weights as defined in BNMs revised RWCAF and CAFIB

B Market risk

Market risk is the risk of loss in financial instruments or the balance sheet due to adverse movements in market factors
such as profit rates, foreign exchange rates, equities, spreads, volatilities and/or correlations.

The Bank adopts a systematic approach in managing such risks by types of instruments and nature of exposure. Market
risk is primarily controlled via a series of cut-loss limits and potential loss limits, i.e. Value at Risk (VaR). The amount
of market risk that the Bank is prepared to take for each financial year is based on the budget, business direction, its
risk-taking strategies, the impact on earnings and capital utilisation. These factors are used as a basis for setting market
risk limits on an overall Bankwide basis.
HONG LEONG ISLAMIC BANK BERHAD

Market risk limits, the monitoring and escalation processes, delegation of authority, model validation and valuation
methodologies are built into the Banks market risk policies, which are reviewed and concurred by ALCO, endorsed by
the BARMC and approved by the Board.
ANNUAL REPORT 2017

In addition, stress tests are conducted regularly on the trading book. In performing stress-testing, the Bank uses the
following:
(i) Scenario analysis, which is a combination of expected movements on risk factors.
(ii) Historical crisis event, which is based on actual movements that occurred in the relevant risk factors. The main risk
factors that are stressed are the KL Financial Bursa Composite Index, movements in profit rates for MYR, USD and
other major currencies, migration in ratings and Foreign Exchange spot and volatilities. 169
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

B Market risk

In managing the profit rate risk exposure in the banking book, the Bank adopts methodologies that measure exposure
in both earnings at risk perspective and economic value or capital at risk perspective.

C Liquidity risk

Liquidity risk is the risk of financial loss arising from the inability to fund increases in assets and/or meet financial
obligations as they fall due. Financial obligations arise from withdrawal of deposits, funding of financings committed
and payment of funds. It is the Banks policy to ensure there is adequate liquidity across all business units to sustain
on-going operations, as well as sufficient liquidity to fund asset growth and strategic opportunities.

Besides adhering to the Regulatory Liquidity Requirement, the Bank has put in place a robust and comprehensive liquidity
risk management framework consisting of risk appetite, policies, triggers, limits and controls which are reviewed and
concurred by the ALCO, endorsed by the BARMC and approved by the Board. The key elements of the framework cover
proactive monitoring and management of cashflow, maintenance of high quality long-term marketable debt securities,
diversification of funding base as well as maintains a liquidity compliance buffer to meet any unexpected cash outflows.

The Bank has in place liquidity contingency funding plans and stress test programs to minimise the liquidity risk that
may arise due to unforeseen adverse changes in the marketplace. Contingency funding plans set out the crisis escalation
process and the various strategies to be employed to preserve liquidity including an orderly communication channel
during liquidity crisis scenarios. Liquidity stress tests are conducted regularly to ensure there is adequate liquidity
contingency fund to meet the shortfalls during liquidity crisis scenarios.

D Operational Risk

Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events.

Management oversight on Operational Risk Management (ORM) and compliance matters are effected through the
Operational Risk Management and Compliance Committee (ORMCC) whilst Board oversight is effected through the
BARMC.

The ORM strategy is based on a framework of continuous improvements, good governance structure, policies and
procedures as well as the employment of risk mitigation strategies. The Bank is further enhancing its ORM tools such as
loss event reporting, risk catalogue, control self assessment and key risk indicators in order to improve its ORM.

The results of the ORM processes using the above tools are reported to both the BARMC and the ORMCC.

These tools are based on international best practices for the management of operational risks and are explained in more
detail below:
HONG LEONG ISLAMIC BANK BERHAD

(i) Risk Catalogue (RC) records the operational risk profile of each Business/Support unit which enables them to
proactively manage operational risks.

(ii) Control Self Assessment (CSA) provides the opportunity for the Business/Support units to identify and assess the
ANNUAL REPORT 2017

effectiveness of its current controls in mitigating operational risk.

(iii) Key Risk Indicators (KRI) is a set of measures to allow the Bank to monitor and facilitate early detection of
operational risks.

(iv) Loss Event Reporting (LER) is a process for collecting and reporting operational risk events. These are further used
170 for analysis of operational risks for the purpose of developing mitigating controls.
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

4 RISK MANAGEMENT (CONTINUED)

D Operational Risk (continued)

The operational risk mitigation strategies that are implemented at the Bank are:

(i) Policies, Guidelines and Standard Operating Procedures that define the roles and responsibilities of personnel and
their respective operating limits.

(ii) Insurance against operational losses as a form of risk mitigation especially for risks which are deemed as high
severity.

(iii) System of controls, established to provide reasonable assurance of effective and efficient operation.

(iv) Business Continuity Management to facilitate the continuance of business activities in the event of disaster or crisis
situations by means of ensuring appropriate redundancy of systems are available.

(v) Outsourcing Management to ensure proper due diligence review is performed prior to engaging outsourcing
service providers and continuous tracking of existing outsourcing service providers performance, code of conduct,
compliance, and business viability.

(vi) Processes to ensure compliance to laws, regulations, guidelines and policies.

E Financial hedges to mitigate profit rate risks

The following actions describes the accounting treatment for financial hedges that may be entered into to mitigate the
profit rate risk exposures of the Bank.

(i) Financial instruments designated as fair value through profit and loss

The Bank use derivative hedge instruments, such as profit rate swaps to economic hedge part of their existing fixed
rate financings to reduce the exposure on profit rate risk as part of its risk management strategy.

(ii) Fair value hedges

The Bank use profit rate swap as the hedge instruments to hedge the profit rate risk of fixed rate financings
exposure. The profit rate swap contracts used for the hedging are contracted with other financial institutions.

Further information relating to the fair value hedges are disclosed in notes to the financial statements.

(iii) The accounting policies on derivative financial instruments and hedge accounting are disclosed in notes to the
financial statements.

5 EQUITY EXPOSURES IN BANKING BOOK


HONG LEONG ISLAMIC BANK BERHAD

The Banks banking books equity investments consist of equity holdings in organisations which are set up for specific socio-
economic reasons and equity holdings and any equity instruments received as a result of financing restructuring or financing
conversion.
ANNUAL REPORT 2017

The Banks banking books equity investments are classified and measured in accordance with FRS 139 and are categorised
as financial investment available-for-sale. Refer to the financial statements for the accounting policies of the Bank.

Details of investments in financial investments available-for-sale of the Bank are set out in Note 6 to the financial statements.

The Banks equity exposures in the banking book during the year is nil (2015: Nil).
171
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

5 EQUITY EXPOSURES IN BANKING BOOK (CONTINUED)

Exposures
subject
to risk- Risk
weighting weights
RM000 %
30 June 2016
AFS securities
Unquoted equity securities

30 June 2015
AFS securities
Unquoted equity securities 0%

6 PROFIT RATE RISK/RATE OF RETURN RISK (PRR/RORR) IN THE BANKING BOOK

To evaluate the potential impact of profit rate risk in the Banking Book, the Bank consider the effect on both their earnings
and underlying economic value. These two view points must be assessed to determine the full scope of the Banks profit rate
risk exposure.

The earnings perspective provides the impact of profit rate changes on the Banks reported earnings i.e. a reduction in
earnings caused by changes in profit rates can reduce earnings, liquidity and capital. This perspective focuses on risk to
earnings in the short term, i.e. one year, and will be reported through changes in the Banks Net Profit Income (NPI) i.e.
the difference between total profit income and total profit expense. The changes in the Banks NPI may vary depending on
timing of reprising basis, yield curve risks and options position.

The application of earnings perspective solely may not be sufficient as the earnings perspective only take into account short-
term positions.

The economic perspective provides a measurement of the underlying value of the Banks current position and seeks to
evaluate the sensitivity of that value to changes in profit rates. This perspective will allow the Bank to evaluate the changes
in economic value of assets, liabilities and off-balance sheet instruments against the movement in profit rate. The economic
values of these instruments are equivalent to the instruments present value of future cash flows.

By analysing the impact of profit rate changes on the value of all future cash flows, the economic perspective can provide a
more comprehensive measurement of profit rate risk than the earnings perspective. The future cash flow projections used
to estimate the economic exposure provides a pro forma estimate of the future income generated by its current position. In
general, the measurement of present value of the instrument will be able to give an overview of the Bank economic value
of equity (EVE) over a longer time period.
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

172
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

6 PROFIT RATE RISK/RATE OF RETURN RISK (PRR/RORR) IN THE BANKING BOOK (CONTINUED)

The increase or decline in earnings and economic value for upward and downward rate shocks which are consistent with
shocks applied in the Banks stress test for measuring PRR/RORR in the banking book are as follows:

Impact on positions 100 basis


points parallel shift
Increase/
Increase/ (Decline) in
(Decline) in Economic
Earnings Value
30 June 2017 RM000 RM000

100 bsp upward


Ringgit Malaysia (35,540) (231,532)

100 bsp downward


Ringgit Malaysia 18,653 245,919

30 June 2016

100 bsp upward


Ringgit Malaysia (34,713) (227,099)

100 bsp downward


Ringgit Malaysia 22,214 242,571

7 COMPLIANCE

Compliance is a culture that is an essential part of Hong Leong Islamic Bank. In promoting compliance culture and displaying
adherence to good corporate governance, the Bank has introduced the Regulatory Compliance Framework to promote higher
standards of compliance and integrity within the Bank.

The Regulatory compliance framework is built around a set of values that enable the Bank to effectively manage its regulatory
compliance risk arising from its day-to-day business operations.

a) Compliance starts at the top. It is most effective in a corporate culture that emphasizes standards of integrity and in
which the Board and Senior Management lead by example.

b) The Board and Senior Management promotes a consistently strong compliance culture across the Bank.

c) Regulatory Compliance function must be independent of risk-taking functions and business lines in order to perform its
HONG LEONG ISLAMIC BANK BERHAD

role as a control function effectively.

d) Functionally, to ensure an effective management of compliance:


ANNUAL REPORT 2017

The business lines are accountable for assessing, controlling and managing compliance risk inherent in the day-to-
day activities, processes and systems of their respective business.
The compliance function is responsible for ensuring that controls to manage compliance risk are adequate and
operating as intended.
The internal audit function is responsible for providing independent assurance to the board and senior management
on the quality and effectiveness of the overall internal controls, risk management and governance systems and
processes, including those instituted by the compliance function.
173
FINANCIALS

Basel II Pillar 3 Disclosures


for the financial year ended 30 June 2017

7 COMPLIANCE (CONTINUED)

The Framework facilitates consistency in ensuring adherence to the laws and regulations applicable to business and
operations of the Bank. It outlines the roles and responsibilities of employees at various levels in ensuring compliance with
the applicable regulatory requirements; as well as describes the approach adopted by the Bank in implementing, assessing
and monitoring compliance within the regulatory requirements landscape.

8 SHARIAH COMPLIANCE RISK MANAGEMENT

In October 2010, Bank Negara Malaysia has issued Shariah Governance Framework (SGF) to guide Islamic financial
institutions to establish a comprehensive governance policy framework which sets out the strategic roles and functions of
each organ of governance and mechanism in ensuring that the overall Islamic financial system operates in accordance with
Shariah principles. The new Islamic Financial Services Act (IFSA) 2013, which came into force on 30 June 2013, statutorily
enforce the management of Shariah non-compliance risk and require Islamic financial institutions to ensure that their aim,
operation, business, affairs and activities are Shariah-compliant at all time.

The Bank has developed a Shariah Compliance Risk Management Framework (SCRMF) to ensure that the management of
Shariah non-compliance risks in the Bank is of the highest standards in line with the SGF and IFSA.

SCRMF is to govern and guide the Bank on the on-going development and enhancement of its Shariah compliance risk
management infrastructure. It forms the basic foundation upon which Shariah compliance risk management policies are to
be developed, Shariah compliance risk management structure is to be operated in and Shariah compliance risk management
initiatives are to be carried out.
HONG LEONG ISLAMIC BANK BERHAD
ANNUAL REPORT 2017

174

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