Afghanistan International Bank (AIB)

Philosophy of governance

AIB endeavours to enhance shareholder value; protect the interests of all stakeholders including shareholders, customers, employees, regulators, and the public at large; and ensure compliance with international best practices for financial institutions. The Bank complies with all legal and regulatory requirements of Afghanistan – but also formulates and adheres to strong corporate governance practices beyond what is mandated by regulators. In fact, ‘international’ in our name reflects the standard of performance we strive to achieve.

The adoption and implementation of corporate governance is the direct responsibility of the Board of Supervisors. In this role, the Board ensures that the management of the Bank is meeting the requirements and obligations of good governance.

Shareholders

The Bank has three shareholders, each with an ownership percentage as shown in the table below. The shareholders operate under a policy of non-interference in management decisions and the Bank’s operations. The positive reputation and widespread business interests and relationships of the Bank’s shareholders in Afghanistan have contributed significantly to the success of the institution. Each shareholder has the right to appoint one individual to the Board of Supervisors.

Board of Supervisors

The major purpose of the Board of Supervisors is to formulate the overall strategic and financial objectives of the Bank; to monitor these objectives and ensure they are met by management; and to ensure that the risks associated with operating a financial institution in Afghanistan are managed and mitigated as far as possible. Ensuring the upholding of good corporate governance is key to the Bank achieving its goals, and the Board ensures that best practices are maintained.

The Board is composed of the Chairman, shareholder-appointed directors, and independent directors. The Chairman is an independent director, which complies with Central Bank regulations.

Independent Board members are in the majority, in line with regulations and international governance standards. According to the Articles of Association, each shareholder has the right to appoint one shareholder-designated director. The shareholders have agreed to a Board of Supervisors consisting of seven individuals. There are currently seven Board members: five independent and two shareholder-appointed. This reduced to six with the resignation of one independent director on 31 December 2017. It is the intention of the shareholders and the Board to fill this vacancy at the annual general meeting of shareholders to be held in March 2018. Brief biographical profiles of the seven current directors are included in this annual report.

The Chairman is a non-executive director and is responsible for leadership of the Board and ensuring its effectiveness. Shareholder-nominated directors are appointed by the respective shareholders of the Bank and represent the interests of these shareholders. There are currently two shareholder-appointed directors.

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 through having served on other boards. Independent directors and directors who are shareholder representatives are elected/appointed for terms of four years, but must stand for reappointment each year.

The Board has five committees: Remuneration; Nominating; Risk; Planning and Strategy; and Audit. Each committee has a Chairman and a formal charter to guide its activities.

The Board of Supervisors meets monthly: four times in person and the balance by conference call. The Committees of the Board meet four times a year in person and in conjunction with Board meetings, with occasional conference calls. Board committee meetings are attended by the Chief Executive Officer. 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.

In 2017, the Board met 12 times. During each meeting the Board monitored the financial performance of the Bank as well as the status of non-performing loans and operational risks. Each quarter, the Board reviewed the anti-money laundering/ compliance dashboard to ensure the Bank’s adherence to the policies and procedures established for this function by outside experts. The Bank has invested significant resources into compliance, resulting in very satisfactory implementation of these policies and procedures, although more needs to be done.

In addition to routine matters conducted during the year, the Board and shareholders approved the purchase of 15 percent of the Bank by the Internal Finance Corporation (IFC). This acquisition reflects the sound position of AIB in Afghanistan and the Bank’s commitment to help develop the economy of Afghanistan. We are proud that the IFC has chosen AIB as the commercial bank to invest in.

Another major achievement in 2017 was the completion of the Bank’s second strategic plan. The first plan was formulated in 2012 to cover a period of five years. The new plan spans three years through 2020, and is focused on external market development and internal capability-building.

The Board and shareholders were planning to have the Bank’s new headquarters building completed in 2016, but unfortunately, due to delays, the head office will now be occupied in the first quarter of 2018. We are excited about finally having our own headquarters building.

Planning and Strategy Committee

The committee is responsible for AIB’s strategic plan and annual business plan and budget. It also monitors management’s performance quarterly against plans. At its July meeting, the Board decided to merge the Planning and Investment Committees, as there was significant overlap in committee memberships and this action was deemed to more efficient in managing the affairs of the Bank.

In 2017, the committee met four times in person. Specific accomplishments during the year were:

Developing a three-year strategic plan to cover the years 2018 to 2020

Developing the business plan and budget for 2018

Instituting planning by business unit/segment

Developing plans for each business unit: corporate and institutional, business banking, community banking, and consumer banking.

Developing profit and loss statements and balance sheets for each business unit

Establishing a method for monitoring each unit’s plans

Monitoring the investment portfolio, which yielded 2.63 percent (about $5 million) in interest income in 2017

Approving a plan to realise additional major contract guarantee business

Approving model branch cost/benefit analysis to include staffing and organisation, physical layout, cost structure, service standards, and performance measures

Approving a revised organisation structure for the Bank

As a part of its ongoing responsibilities, the committee monitored progress of the 2017 business plan and budget each quarter. As the political, security, and economic conditions in Afghanistan are not likely to improve in 2018, the committee has taken a conservative approach to planning the Bank’s activities and finances.

Risk Committee

The Board’s committee to provide comprehensive oversight and best practices in risk governance and risk management.

The principal role of the committee is to review the Bank’s risk exposure under different products. This encompasses foreign exchange positions, assets 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 completed a financial crime compliance/AML project with the assistance of a reputed external firm to ensure ‘know your customer’, AML, and CTF processes are best in class. 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. A new chief risk officer has been appointed to further strengthen the risk function.

The committee was pleased to note that the external consultancy that 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 2018 to ensure that the balance between risk and return is maintained.

Audit Committee

The Audit Committee is responsible for overseeing financial reporting; compliance with risk management policies and procedures; internal controls; ethical behaviour; and management and functioning of the internal audit department. Consistent with previous years, in 2017 the committee assessed and approved the annual internal audit plan, including budget and resources, and regularly monitored progress of the plan. The committee also reviews the Bank’s annual budget and business plan, and recommends to the Board of Supervisors the payment of dividends. The committee regularly monitors and assesses the role and effectiveness of the internal audit function.

The committee receives quarterly reports from major operational segments of the Bank, reviewed at every quarterly committee meeting. The reports include the key performance indicators of different segments and issues related to operational and financial controls.

The committee discussed control environment issues reported by the Internal Audit Department, their root causes and management responses, and remediation activities. Significant audit issues were also brought to the committee’s attention.

The committee is responsible for relationships with the external auditors, and meets them on completion of the annual audit and quarterly reviews. On the committee’s recommendation, the Board of Supervisors approves the annual financial statements and three quarterly-reviewed condensed financial information. These meetings enable committee members to discuss matters relating to the external auditors’ remit and issues arising from the audit.

During 2017, the committee regularly focused on the controls and issues related to anti-money laundering and countering financing of terrorism.

The committee currently has four members, all qualified and experienced in audit, accounting, or banking. Under Afghanistan banking regulations, the Board of Supervisors may appoint members to the Audit Committee who are not members of the Board of Supervisors.

Any individual who is proposed to join the committee is subject to the same fit and proper requirements as members of the Board of Supervisors. The committee currently has two non-board members.

Remuneration Committee

The Remuneration Committee has five major responsibilities:

Establish compensation policies for the Bank’s senior management to include base salary, fringe benefits, and bonus scheme.

Establish performance goals for each member of senior management and monitor performance against these goals.

Establish and review development and succession plans for senior management.

Recommend to the full Board for final decision on matters relating to senior management compensation and bonus actions.

Review and approve the Bank’s human resource policies.

The committee has four members, three of whom are independent directors including the Chairperson, Veronica John. In 2017, the committee met four times in person in conjunction with Board meetings. Major undertakings by the committee during the year included:

Reviewed action plan and timeline to upgrade all human resource functions: organisation of HR department, succession planning, skills gap analysis, career planning, job grading, performance management, training needs analysis, and employee on-boarding method.

Approved revised senior management compensation policy.

Reviewed, approved and monitored senior management goal statements.

Reviewed and approved 2016 bonus and salary actions for senior management.

Approved revised HR policy manual.

Reviewed and approved amended staff compensation scheme covering pay scales, job grades, and the like.

Approved succession and transition plan for CEO and key managers, and introduced corporate titles along with a revised organisation chart.

Reviewed staff mortgage scheme.

Many of the agenda items tabled by the committee were directed towards installing a more professional HR function in the Bank and having comprehensive and transparent HR policies.

A challenge for AIB is the ability to deploy world-class human resource leadership and knowledge in a country lacking the depth of management skills necessary to achieve the Bank’s objectives in this regard. This challenge has been further exasperated by regulations limiting the use of foreign management in the HR function.

Nominating Committee

The Nominating Committee works as a preparatory committee for the Board of Supervisors with respect to nomination and appointment of candidates to the Board of Supervisors, the Management Board, and other key senior managers as determined by the committee.

The committee is composed of five members of the Board of Supervisors, including the Chairman of the Board; two members representing employees; and two members representing shareholders. A majority of the members are independent. At least one-third of the Independent Directors of the Board are committee members.

In 2017, the committee met four times in person, in conjunction with Board meetings, and held a number of conference calls to interview Board candidates. The committee’s major activities for 2017 were:

Interviewing candidates to fill two Board positions. In all, five candidates were shortlisted and two were nominated for approval to the full Board, and subsequently to the shareholders and the Central Bank.

The committee also reviewed and approved candidates to fill key management positions: Head of Banking, Head of Internal Audit, and Chief Risk Officer.

The committee also developed a checklist for evaluating Board candidates.

The committee nominated Mr. Hugo Minderhoud, a new director, to be a member of the Audit Committee.

The committee also submitted existing Board members for re-appointment at the Annual General Meeting of shareholders.

Committee members spent considerable time and effort in 2017 due to the substantial number of positions to fill on the Board and in senior management.

Annual Report 2017

Governance Report and AIB Committees

As a matter of principle and good business practice, AIB has conducted its banking business in an ethical, prudent, and professional manner, according to international standards of governance.