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Notes to the Consolidated Financial Statements
30
Dar Al-Maal Al-Islami Trust
Annual Report 2014
4. Financial instruments
A. Strategy in using financial
A.
instruments
By its nature, the Group’s activities
are principally related to the use of
financial instruments. The Group
accepts investments from customers
at varying rates of return and for
various periods and seeks to earn
above average profits by investing
these funds in high quality assets.
The Group seeks to increase these
margins by consolidating short
term funds and investing for longer
periods at higher return potential
whilst maintaining sufficient liquidity
to meet all claims that might fall
due.
The Group also seeks to raise its
profit margins by obtaining above
average margins, net of provisions,
through transactions with its
commercial and retail customers.
Such exposures involve not just
on-balance sheet Islamic financings
but the Group also enters into
Islamically acceptable guarantees
and other commitments such as
letters of credit and performance
and other bonds.
The Group also trades in financial
instruments where it takes positions
in traded and over the counter
instruments including derivatives to
take advantage of short term market
movements in the equity and bond
markets and in currency and profit
rates. The individual subsidiary’s
boards place trading limits on the
level of exposure that can be taken
in relation to both overnight and
intra-day market positions. Foreign
exchange and profit rate exposures
associated with these derivatives
are normally offset by entering into
counterbalancing positions, thereby
controlling the variability in the net
cash amounts required to liquidate
market positions.
The Group utilises the following
derivative instruments for both
hedging and non-hedging purposes.
(i) Currency forwards represent
commitments to purchase foreign
and domestic currency, including
undelivered spot transactions;
(ii) equity futures are contractual
obligations to receive or sell shares
on a future date at a specified
price established in an organised
financial market; and (iii) equity
options are contractual agreements
under which the seller (writer)
grants the purchaser (holder) the
right, but not the obligation, either
to buy (a call option) or sell (a put
option) at or by a set date or during
a set period, a specific amount of
shares at a predetermined price. In
consideration for the assumption
of the risk, the seller receives a
premium from the purchaser.
Options may be either exchange-
traded or negotiated between the
Group and a customer (over the
counter).
B. Capital management
The Group’s objectives when
managing capital, which is a
broader concept than the ‘equity’
on the face of statement of financial
positions, are:
i) To safeguard the Group’s
ability to continue as a
going concern so that it can
continue to provide returns for
shareholders and benefits for
other stakeholders; and
ii) To maintain a strong
capital base to support the
development of its business.
DMI itself does not engage in
banking business and is therefore
not required to comply with any
minimum capital adequacy
requirements.
In order to maintain or adjust
capital, the Group may adjust the
amounts of dividends paid to equity
participants, issue new equity or
sell assets to reduce debt. The
Group monitors capital on the basis
of a gearing ratio. This ratio is
calculated as net debt divided by
total capital. Net debt is calculated
as total borrowings less cash and
cash equivalents. Total capital is
calculated as equity as shown on
the face of the consolidated financial
statements.