DMIT Annual Report 2017

N OTES TO THE C ONSOLIDATED F INANCIAL S TATEMENTS (Thousands of US dollars) Dar Al-Maal Al-Islami Trust 35 4. Financial instruments (continued) The Group’s debt-to-equity ratios for the given years were as follows: 2017 2016 Total debt 1,147,991 1,150,113 Less: Cash and bank balances (1,008,457) (923,378) Net debt 139,534 226,735 Total equity 289,000 294,713 Debt-to-equity ratio 48% 77% C. Financial risk management The Group’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. The Group’s aim is to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Group’s financial performance. The Group’s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Group regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. Risk management is carried out by individual entities within the Group under policies approved by their respective Boards of Directors. The Boards provide written principles for overall management, as well as written policies covering specific areas, such as market rate risk, credit risk and use of non- derivative financial instruments. In addition, internal audit is responsible for the independent review of risk management and the control environment. The most important types of risk are credit, liquidity and market risk. Market risk includes currency risk, profit rate and other price risk. D. Credit risk The Group takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss for the Group by failing to discharge an obligation. Credit exposures arise principally in lending activities that lead to loans and advances (including accounts and other financial assets). There is also credit risk in off-balance sheet financial instruments, such as loan commitments. Credit risk management and control are carried out by credit risk management teams, which report to the Boards of Supervisors through risk management committees. Credit risk measurement The Group has well defined credit structures under which credit committees, comprising senior officers with required credit background, critically scrutinise and sanction financing. The Group’s exposure to credit is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. To reduce the potential of risk concentration, credit limits are established and monitored in light of changing counterparty and market conditions. Besides financial, industry and transaction analysis, the credit evaluation also includes risk rating systems which gauge risk rating of all customers. The significant concentration of the Group’s credit risk is in Ithmaar Holding B.S.C., Ithmaar manages its credit risk arising from its banking exposures by implementing robust policies and procedures with respect to identification, measurement, mitigation, monitoring and controlling the risks. Ithmaar has proper processes in place, not only to apprise but also regularly monitor credit risk. Regular reviews are carried out for each account and risks identified are mitigated in a number of ways, which includes obtaining collateral, assignment of receivables and counter-guarantees. The corporate accounts are rated on a credit risk rating model, this enhances the process of credit review and ensures timely identification of any deterioration of the corporate’s status and corrective actions can be implemented. The credit risk rating model incorporates both quantitative and qualitative risk parameters for the grading and classification of corporate customers. A centralized credit risk management system is in place where all corporate credit proposals are independently reviewed by the RMD before the same are approved by appropriate approval authorities. The Group seeks to limit its credit risk with respect to cash and cash equivalent by dealing with reputable banks which are independently rated. The Group seeks to limit its credit risk with respect to loans by setting credit limits for customers and monitoring outstanding exposures before standard