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ANNUAL REPORT 2021 117

Notes to the fiNaNcial statemeNts

2. significant accOUnting POlicies (cOnt’D.)

2.4 Summary of significant accounting policies (cont’d.)
(f) Financial assets (cont’d.)
(v) Financing and receivables

Financing and receivables consist of Murabahah, Tawarruq, Ijarah, Istisna’, Bai’ Al Dayn, and Kafalah.
These contracts are recognised at amortised cost (except for Kafalah contracts), including direct and
incremental transaction costs using the effective profit method. These contracts are stated net of unearned
income and any amounts written off and/or impaired.
Definition of Shariah concept:

(a) Murabahah: Sale of an asset by the Bank to the customer at cost plus a mark-up in which the profit rate has
to be disclosed to the customer. The Sale Price is payable by the customer on deferred terms.

(b) Tawarruq: An arrangement that involves sale of commodity by the Bank to the customer in which the
Sale Price is payable on a deferred basis and subsequent sale of the commodity to a third party on a cash
basis to obtain cash.

(c) Ijarah: A lease contract to transfer the usufruct (benefits) of a particular property of the Bank to the customer
in exchange for rental payment for a specified period.

(d) Istisna’: An agreement to sell to the customer a non-existent asset that is to be manufactured or built
according to the agreed specifications and delivered on a specified future date at a predetermined
selling price.

(e) Bai’ Al Dayn: Sale of debt in which the customer sells his payable right to the Bank at discount price or at
cost price on the spot payment basis.

(f) Kafalah: Conjoining the guarantor’s liability to the guaranteed party’s liability such that the obligation of the
guaranteed party is established as a joint liability of the guarantor and the guaranteed party.
(vi) Derivative instruments and hedge accounting

(a) Derivative instruments
The Group and the Bank enter into derivative contracts such as interest/profit rate swaps, cross-currency
interest/profit rate swaps, and forward contracts. Such derivative financial instruments are initially
recognised at fair value on the date on which a derivative contract is entered into and subsequently
re-measured at fair value. Fair values are obtained from quoted market prices in active markets, including
recent market transactions and valuation techniques, 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 statement of profit
and loss.