The Shareholders and Board of Supervisors continue to uphold a high level of corporate governance, ensuring that the Bank’s management practices are always aligned with the principles of good governance.

GOVERNANCE REPORT AND AIB COMMITTEES

Shareholders

The Bank has three shareholders, two holding 46.25 percent each and one with 7.5 percent. The shareholders operate under a policy of non-interference in management decisions and the Bank’s operations. The positive reputation and widespread business and relations of the Bank’s shareholders in Afghanistan have contributed significantly to the success of the institution. Each shareholder appoints one person to the Board of Supervisors.

Shareholder	Beneficial Shareholder	Type of Company	Incorporated	Board Members	Ownership %
Asian Development Bank (ADB)	N/A	Development Bank	Manila, Philippines	Hasib Ahmed	7.50
Horizon Associates	Mohammed Abrahim Mohib	Holding Company	Delaware, USA	Hamidullah A. Mohib	46.25
Wilton Holdings	Lutfullah Rahmat Izzatullah Rahmat Nasrullah Rahmat	Holding Company	Cayman Islands	Lutfullah Rahmat	46.25

Board of Supervisors

The major purpose of the Board of Supervisors is to ensure that the Bank’s overall strategic and financial objectives are met, and that the risks associated with a financial institution operating in Afghanistan are managed and monitored.

The Board of Supervisors comprises the Chairman, three shareholder representatives, and three independent directors. The Chairman is also an independent director, in compliance with Central Bank regulations. Independent Board members are in the majority, in line with international governance standards. Brief biographical profiles of the seven current directors are included in this annual review.

The Chairman is a non-executive director and is responsible for leadership of the Board and ensuring its effectiveness. The three shareholder representatives are appointed by the respective shareholders of the Bank and represent the interests of these shareholders.

Finally, the independent directors are expected to bring impartial judgement to the Board through their expertise in the financial world, as well as governance experience. Independent directors and directors who are shareholder representatives are appointed every four years.

The Board has established four committees: the Compensation Committee, the Risk Committee, the Investment Committee, and the Strategy and Planning Committee.

A fifth committee, the Audit Committee, reports directly to the shareholders as specified in the Law of Banking in Afghanistan and Central Bank regulations. Each committee has a formal charter to guide its activities.

The Board of Supervisors meets monthly: four times in person and the balance by conference call. The Board committees meet four times a year in person and in conjunction with Board meetings, with occasional conference calls. The Audit Committee meets four times annually. Board committee meetings are attended by the Chief Executive Officer and the Chairman of the Audit Committee. Minutes of committee meetings are circulated to all Board members for their information. The role of these committees is explained in more detail, in the following subsections.

Strategy and Planning Committee

The Strategy and Planning Committee’s mission is to provide oversight to AIB’s strategic planning and annual budgeting and planning processes, as well as the development of major new initiatives. Its members are: Ronald Stride (Chairman and independent director), Aditya Srivastava (independent director), Lutfullah Rahmat, and Hasib Ahmed.

During 2015, the committee spent the majority of its efforts in guiding and overseeing the business plan of AIB. The Bank faced uncertain market conditions and a drop in business confidence in 2015, and it was therefore important to closely monitor the goals of the Bank to ensure financial performance and stability.

Additionally, the committee monitored relationships with AIB’s two correspondent banks to ensure that the Bank meets the requirements of these correspondents. Another key focus of the committee during the year was progressing Sharia banking. To that end, a three-year Sharia banking growth plan was approved. Finally, as 2016 appears to be another year of uncertainty for the Afghan economy, the plan for next year will contain two fallback scenarios based on various economic and security outlooks.

Risk Committee

The Board’s committee to provide comprehensive oversight and best practices in risk governance and risk management comprises Hasib Ahmed (Chairman), Hamidullah A. Mohib, and two independent Board members – Ronald Stride and Aditya Srivastava.

The principal role of the committee is to review the Bank’s risk exposure under different products. This encompasses foreign exchange positions, asset and liabilities, capital adequacy, credit and market risk, and sovereign risk. The committee also reviews performance of the classified and non-performing loan portfolio and, most importantly, reviews and submits to the Board of Supervisors all the Bank’s policies associated with risk management. Finally, the committee identifies unacceptable risk conditions to the full Board for consideration and action.

The Board and the Shareholders of AIB place high priority on implementing, maintaining, and developing the highest standards in Anti Money Laundering (AML) and Counter Terrorism Financing (CTF). During the year, AIB initiated a Financial Crime Compliance/AML project by appointing an external firm to help AIB further strengthen its KYC, AML, and CTF processes. The committee introduced a measure to ensure the early detection of borrowers who appear to be having problems in their business. The committee also oversaw other key initiatives during the year, including an external consultant completing a Credit Risk review of the Bank’s loan portfolio, with recommendations currently being implemented, as well as refinements to the Bank’s business continuity plan.

The committee was pleased to note that the external consultancy that had conducted an IT penetration audit had commended AIB’s IT architecture, and provided assurance that the Bank would be able to withstand an external attack on its systems.

Due to uncertainties in the economic outlook for Afghanistan, the Risk Committee adopted a conservative approach for the Bank’s risk profile. This approach will continue in 2016 to ensure the balance between risk and return is maintained.

Compensation Committee

The Compensation Committee comprises four directors, three of whom are independent, including the Chairperson, Veronica John. The other members are Ronald Stride, Salman Shoaib, and Hamidullah A Mohib.

The Compensation Committee has two principal roles: (1) to establish compensation policy for the Chief Executive Officer, members of the Management Board, and other senior managers; and (2) recruitment of Board members and senior management.

In 2015, the committee focused on the composition of the senior management team, identifying the development and recruitment actions necessary in order to adopt a suitable organisational structure and Management Board composition for the future. As part of this succession planning, increased focus was placed on the development of several ‘high flyer’ Afghan staff identified as demonstrating the potential to grow into executive management within AIB. This emphasis is in line with the desire of the Board and shareholders that the majority of the Bank’s senior management will ultimately be Afghan.

The committee oversaw the progression of initiatives, such as childcare support for working mothers, and engagement by management with female staff to ensure access to an enhanced working environment and opportunities.

Also during 2015, the committee provided guidance on the redrafting of executive management employment contracts, with the goal of equalising expatriate and Afghan employees’ compensation and benefits. This activity will be concluded in 2016.

In its role of setting compensation policy, the committee establishes guidelines for base salary, bonus, and fringe benefits for each executive, and recommends to the Board and shareholders any changes to the compensation structure. The committee also reviews, and reports to the Board and shareholders, the performance of senior management through a formal goal-setting and monitoring mechanism. During the year, the committee recommended an amendment to the methodology of calculating the executive management bonus pool and suggested changes to HR Policy, which will be finalised in 2016 and then will better conform to international practices.

Investment Committee

The Investment Committee comprises three directors, two of whom are independent, including the Chairman, Salman Shoaib. The other members are Hasib Ahmed and Aditya Srivastava (independent). The Chairman of the Board attends meetings as an ex-officio member.

The committee’s mandate covers allocation, investment, and oversight of a portfolio of fixed-income securities. Its principal role is to oversee the Bank’s investment policy and to ensure this is modified and executed in the context of the Bank’s risk and capital parameters. In this regard, the committee works with the Board and management to develop investment policies, oversee investment of the Bank’s funds, and monitor the mandate and performance of independent Asset Managers hired by the Bank.

The committee conducted ongoing reviews of the performance of the two Asset Managers against pre-set return on investment targets. The committee commented on the performance of the Managers, and made recommendations to management on potential steps to enhance performance or achieve objectives, including adjusting risk parameters to improve yield and ensure that the Bank’s fixed-income portfolio remained in compliance with regulations from the Central Bank.

Audit Committee

The Audit Committee is established under the Banking Act in Afghanistan. The committee reports directly to the shareholders, and the committee’s chairman and its members are appointed at the annual general meeting of shareholders. Appointments are for not more than four years and may be renewed for like periods. Members of the committee are subject to the same fit and proper requirements as members of the Board of Supervisors. The committee has three members, all qualified and experienced in accounting or banking.

The Audit Committee is responsible for overseeing financial reporting, compliance with risk management policies and procedures, internal controls, ethics, and management and functioning of internal audit. In 2015, the committee assessed and approved the annual internal audit plan, including budget and resources, and regularly monitored progress of the plan during the year. The committee also monitors and assesses the role and effectiveness of the Internal Audit function.

The committee receives reports on a quarterly basis from major operational segments of the Bank, which are reviewed at every quarterly Audit Committee meeting. The reports included the key performance indicators of different segments and the issues related to operational and financial controls.

At its quarterly meetings, the committee discussed control environment issues reported by the Internal Audit Department, their root causes and management responses, and remediation activities. In addition, any significant audit issues were brought to the committee’s attention.

The committee is also responsible for relationships with the external auditors, and meets them on completion of the annual audit and quarterly reviews. On the recommendation of the Audit Committee, the Board of Supervisors approves the Financial Statements of the Bank. These meetings allow committee members to discuss matters relating to the external auditors’ remit and issues arising from the audit.

During 2015, the committee focused on the controls and issues related to Anti-Money Laundering and Countering Financing of Terrorism. The Regulator’s report was also reviewed, along with actions taken by management for implementing recommendations of the Regulator.