Notes to the Consolidated Financial Statements
33
Dar Al-Maal Al-Islami Trust
Annual Report 2013
4. Financial instruments
(continued)
counterparty as soon as impairment
indicators are noticed for the relevant
individual loans and advances.
Collateral held as security for
financial assets other than loans
and advances is determined by the
nature of the instrument.
(b) Derivatives
The Group maintains control limits
on net open derivative positions (i.e.
the difference between purchase and
sale contracts), by both amount and
term. At any one time, the amount
subject to credit risk is limited to
the current fair value of instruments
that are favourable to the Group
(i.e. assets where their fair value
is positive), which in relation to
derivatives is only a small fraction
of the contract, or notional values
used to express the volume of
instruments outstanding. This credit
risk exposure is managed as part
of the overall lending limits with
customers, together with potential
exposures from market movements.
Collateral or other security is not
usually obtained for credit risk
exposures on these instruments,
except where the Group requires
margin deposits from counterparties.
Settlement risk arises in any
situation where a payment in cash,
securities or equities is made in
the expectation of a corresponding
receipt in cash, securities or
equities. Daily settlement limits are
established for each counterparty to
cover the aggregate of all settlement
risk arising from the Group’s market
transactions on any single day.
(c) Credit-related commitments
The primary purpose of these
instruments is to ensure that funds
are available to a customer as
required. Guarantees and standby
letters of credit carry the same credit
risk as loans. Documentary and
commercial letters of credit - which
are written undertakings by the Group
on behalf of a customer authorising
a third party to draw drafts on the
Group up to a stipulated amount
under specific terms and conditions
- are collateralised by the underlying
shipments of goods to which they
relate and by other collaterals that
are obtained in the normal course
of business and therefore carry less
risk than a direct loan.
Commitments to extend credit
represent unused portions of
authorisations to extend credit in the
form of loans, guarantees or letters
of credit. With respect to credit risk
on commitments to extend credit,
the Group is potentially exposed
to loss in an amount equal to
the total unused commitments,
where these are not unconditionally
cancellable. However, the likely
amount of loss is less than the
total unused commitments, as
most commitments to extend credit
are contingent upon customers
maintaining
specific
credit
standards. The Group monitors
the term to maturity of credit
commitments because longer-term
commitments generally have a
greater degree of credit risk than
shorter-term commitments.
Impairment and provisioning
policies
The internal rating systems referred
to in “credit risk measurement”
focus more on credit-quality
mapping from the inception of the
lending and investment activities.
In contrast, impairment provisions
are recognised for financial
reporting purposes only for losses
that have been incurred at the date
of the statement of financial position
based on objective evidence of
impairment. Due to the different
methodologies applied, the amount
of incurred credit losses provided
for in the financial statements are
usually lower than the amount
determined from the expected loss
model that is used for internal
operational management purposes.
The Group’s policy requires the
review of individual financial assets
that are above materiality thresholds
at least annually or more regularly
when individual circumstances
require. Impairment allowances
on individually assessed accounts
are determined by an evaluation
of the incurred loss at statement of
financial position date on a case-
by-case basis, and are applied
to all individually significant
accounts. The assessment normally
encompasses collateral held
