Rules Governing Credit Risk Exposure Classification and Provisioning

Definitions The following terms and phrases, where used in these Rules, should have the corresponding meanings, unless the context requires otherwise: SAMA: Saudi Central Bank Rules: Rules Governing Credit Risk Exposure Classification and Provisioning Credit Exposure: As prescribed by IFRS 9, this include loans and advances and other types of on- and off-balance sheet credit exposure (financial guarantees, bid and unutilized un-cancellable commitments and others), accrued commission/income receivable, commitments and contingent liabilities and any other commission / non-commission bearing credit- related instruments and arrangements. This will also include investments in nontrading debt securities (long-term/held-to-maturity investments) e.g. certificates of deposit, commercial papers and other negotiable debt instruments. Restructured Exposure: Any exposure arrangement in which the original terms and conditions have been changed or modified. Normal annual renewal of exposures should not be categorized as restructured exposure. Restructuring may occur in the form of either forbearance or renegotiation. Forborne Exposure and Renegotiated Exposure are defined as below: a. Forborne Exposure: Any exposure arrangement in which the original terms and conditions have been changed or modified such that the modified terms result in a concession to the borrower, and the modification, which would not have been otherwise granted, was granted as a result of the borrower's financial difficulty. b. Renegotiated and/or Refinanced and/or Rescheduled Exposure: Any exposure arrangement in which the original terms and conditions have been modified. However, the modification does not necessarily results in a concession to the borrower and the modification was not granted as a result of the borrower's financial difficulty. These 3 terms have the same interchangeable meanings and should be used accordingly, if needed. Any other new term should be discussed with SAMA before using in practice. Probability of Default: Measures the estimated likelihood of default over a time horizon as prescribed by IFRS 9. Exposure at Default: As prescribed by IFRS 9, it measures estimated risk exposure at the time of likely default taking into consideration any prepayments, repayments of principal and interest, and drawdowns. This includes both on and off-balance sheet exposure. No consideration is given to collateral when determining the exposure at default. Loss Given Default: Measures the estimated risk of loss as prescribed by IFRS 9 i.e. the risk exposure adjusted for collateral and other recovery proceeds, fluctuation in market value and realization costs. Eligible collateral as elaborated in Annexure 1 should be included in the Loss Given Default calculation. Financial Asset: As prescribed by IFRS 9, a financial asset is any asset that is cash, an equity instrument of another entity, a contractual right to receive cash or another financial asset from another entity or to exchange financial asset or financial liabilities with another entity under conditions that are potentially favorable to the entity. This includes derivative and non-derivative contracts. Expected credit loss: As prescribed by IFRS 9, the estimated credit losses expected to be incurred from the occurrence of a credit event, e.g. default. Lifetime expected credit loss: As prescribed by IFRS 9, the expected credit losses that result from all possible default events over the life of the financial asset. 12-month expected creditloss: As prescribed by IFRS 9, the expected credit losses that result from those default events on the financial asset that are possible within 12 months after the reporting date. Stage 1 Exposure: As prescribed by IFRS 9, any exposure for which there is no significant increase in credit risk since origination or otherwise are considered high quality (i.e. rated of investment grade) or exhibit indicators of low credit risk. This exposure can be mapped to "Regular" Loans regu