DMIT_Annual_Report_2018_EN

N OTES TO THE C ONSOLIDATED F INANCIAL S TATEMENTS (Thousands of US dollars) Dar Al-Maal Al-Islami Trust 39 The Group’s debt-to-equity ratios for the given years were as follows: 2018 2017 Total debt (Note 21) 1,554,059 1,147,991 Less: Cash and bank balances (798,416) (1,008,457) Net debt 755,643 139,534 Total equity 160,869 289,000 Debt-to-equity ratio 470% 48% 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 Credit risk is the risk of suffering financial loss, should any of the Group’s customers, client or market counterparties fail to fulfil their contractual obligations to the Group. Credit risk arises mainly from cash and cash equivalents, investments in islamic institution, investments in financing, investment securities (amortised cost and FVOCI) and accounts and other financial assets and cash at Central Bank. Credit risk measurement Investments in financings (incl. loan commitments and guarantees) The estimation of credit exposure for risk management purposes is complex and requires the use of models, as the exposure varies with changes in market conditions, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties. The Group measures credit risk using Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). This is consistent with the approach used for the purposes of measuring Expected Credit Loss (ECL) under IFRS 9. Credit risk grading The Group uses internal credit risk gradings that reflect its assessment of the probability of default of individual counterparties. The Group use internal rating models tailored to the various categories of counterparty. In addition, the models enable expert judgement from the management to be fed into the final internal credit rating for each exposure. This allows for considerations which may not be captured as part of the other data inputs into the model. The credit grades are calibrated such that the risk of default increases exponentially at each higher risk grade. The rating methods are subject to an annual validation and recalibration so that they reflect the latest projections in light of all actually observed defaults. The Group’s internal rating scale are set out below: Ratings Description of the class External rating: Standard & Poor’s equivalent 1-5 Investment grade AAA, AA+, AA- A+, A-, BBB+, BBB, BBB- 6-10 Standard monitoring BB+, BB, BB-, B+, B, B-, CCC to C 11-12 Sub-standard D