STATEMENT OF CHANGES IN EQUITY ATTRIBUTABLE TO THE UNITHOLDERS
11. FINANCIAL RISK MANAGEMENT
This note presents information about the Fund’s objectives, policies and processes for measuring and managing risk and the Fund’s management of capital.
Risk management framework
The Fund maintains positions in non-derivative financial instruments in accordance with its investment management strategy. The Fund’s investment portfolio comprises of investments in mutual funds and debt securities.
The Fund’s investment manager has been given discretionary authority to manage the assets in line with the Fund’s investment objectives. Compliance with the target asset allocations and the composition of the portfolio are monitored by the Investment Committee of the Fund. In instances where the portfolio has diverged from target asset allocations, the Fund Manager is obliged to take actions to rebalance the portfolio in line with the established targets, within prescribed time limits
Alawwal Invest Sukuk Fund
(Formerly known as HSBC Sukuk Fund)
NOTES TO THE FINANCIAL STATEMENTS (continued)
At 31 December 2022
18 11. FINANCIAL RISK MANAGEMENT (continued)
The following table shows the Fund’s maximum exposure to credit risk for components of the statement of financial position.
The Fund does not have a formal internal grading mechanism. Credit risk is managed and controlled by monitoring credit exposures, limiting transactions with specific counterparties and continually assessing the creditworthiness of counterparties. Credit risks are generally managed on the basis of external credit ratings of the counterparties.
The Fund’s cash at bank is held with Bank AlBilad which is rated A3 (2021: A3) respectively, based on Moody’s ratings.
Analysis of credit quality
The Fund has sukuk placements with counterparties with the following credit quality:
31 December 2022 USD
31 December 2021 USD
A1 18,312,299 16,238,270
A2 2,192,967 2,350,209
A3 9,278,041 13,112,026
B1 1,019,977 2,971,287
Ba1 972,726 1,007,500
Baa1 4,553,132 4,295,447
Baa2 4,241,376 2,333,700
Baa3 1,233,117 5,875,867
Unrated 7,107,942 7,247,383
───────── ─────────
Total 48,911,577 55,431,689
═════════ ═════════
The Fund’s cash and cash equivalents are held with SABB and with Al Bilad Investment Company which is a wholly owned subsidiary of Bank AlBilad. Based on Moody’s credit ratings, SABB is rated A2 (2021:A2) and Bank Al Bilad is rated A3 (2021: A3). Receivables and advances are usually related to the settlements of trades and issuance of the Fund’s units in a normal course and does not carry credit risk.
Credit risk
Amounts arising from ECL
Expected credit loss on investments at FVOCI has been measured on a 12-month and lifetime expected loss basis and reflects the maturities of exposures. The Fund considers that these exposures have low credit risk based on the external credit ratings of the counterparties.
31 December 2022 USD
31 December 2021 USD
Bank balance 621,553 234,766
Investments held at FVOCI 40,502,334 48,174,192
Investments held at FVTPL 3,034,138 3,317,372
Investments held at Amortised Cost 8,409,243 7,257,497
Receivable and advances - 221
───────── ─────────
52,567,268 58,984,048
═════════ ═════════
Alawwal Invest Sukuk Fund
(Formerly known as HSBC Sukuk Fund)
NOTES TO THE FINANCIAL STATEMENTS (continued)
At 31 December 2022
19 11. FINANCIAL RISK MANAGEMENT (continued)
The Fund has recorded expected credit loss on investments at FVOCI amounting to USD 16,624 as at 31 December 2022 (31 December 2021: USD 90,118) During the year, there were no stage movements in ECL of investments at FVOCI.
Liquidity risk
Liquidity risk is the risk that the Fund will encounter difficulty in releasing funds to meet the commitments associated with financial liabilities.
The Fund’s Terms and Conditions provide for the subscriptions and redemptions of units on each business day, and it is, therefore, exposed to the liquidity risk of meeting unitholder redemptions.
The Fund Manager monitors the liquidity requirements on a regular basis and seeks to ensure that sufficient funds are available to meet any commitments as they arise.
Market risk
Market risk is the risk that changes in market prices - such as foreign exchange rates, special commission rates and equity prices will affect the Fund's income or the fair value of its holdings in financial instruments.
The Fund's strategy for the management of market risk is driven by the Fund's investment objective as per Fund's terms and conditions. The Fund's market risk is managed on a timely basis by the Fund Manager in accordance with the policies and procedures in place. The Fund's market positions are monitored on a timely basis by the Fund Manager.
Special commission rate risk
Special commission rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Fund is subject to special commission rate risk or future risks on its special commission bearing assets including its investments in sukuk.
The following table demonstrates the sensitivity of the Fund’s profit or loss for the period to a reasonably possible change in the interest rates, with all the other variable held constant.
Management has determined that a fluctuation in commission rates of 10 basis points is reasonably possible, considering the economic environment in which the Fund operates. The table below sets out the effect on the Fund’s net assets (equity) attributable to the Unitholders of a reasonably possible increase of 10 basis points in commission rates at 31 December. The impact of such an increase or reduction has been estimated by calculating the fair value changes of the fixed-interest debt securities and other fixed-interest-bearing assets, less liabilities. The impact is primarily from the decrease in the fair value of fixed income securities. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.
Effect on net assets (equity) 31 December
2022 31 December 2021
USD USD
Net assets (equity) attributable to the Unitholders 265,864 170,156
Alawwal Invest Sukuk Fund
(Formerly known as HSBC Sukuk Fund)
NOTES TO THE FINANCIAL STATEMENTS (continued)
At 31 December 2022
20 12. LAST VALUATION DAY
The last valuation day of the year was 31 December 2022 (year ended 31 December 2021: 31 December 2021).