Barclays Bank of Kenya yesterday hosted a workshop for various industry players on the implementation of the IFRS 9 standards and its subsequent effects. The IFRS 9 international accounting standard is expected to replace the IAS 39 which is currently in use. The IFRS 9 standards come to effect globally as from 1st January 2018. This change is expected to have a big effect on the financial statements of companies in the financial services and insurance companies.
These new standards are expected to enhance the resilience of financial institutions by enforcing more prudent governance rules in accounting for financial instruments like loans and advances, government securities, customer deposits and derivatives.
The IAS 39 which is currently in place came into effect in 2005, this was with the aim of prescribing unified rules for reporting of financial instruments. This was in a bid to have companies present them in a transparent and consistent manner. However, the IAS 39 was deemed as too complicated and contained too many exceptions and inconsistencies which led to the development of IFRS 9. IFRS 9 was introduced in 2014 by the International Accounting Standards Board (IASB) but a phased approach was adopted with early adoption being allowed. Barclays Bank was among the early adopters and have implemented some parts of the standards for two years now.
Effect of the implementation of the accounting standards;
Banks will now have to recognize impairment loss earlier than they did with the IAS 39. Basically, banks will have to estimate credit risk of say a loan at the point of origination. This means that losses are recognized earlier which is a good thing in the long run but in the short run it will eat into the bank’s available capital. Under IAS 39, banks used to recognize the loss after default.
The IFRS 9 provisions are expected to be greater that the regulatory provisions issued by the Central Bank of Kenya. This will have a negative effect on the capital of banks which means some of the smaller banks might some trouble complying.
The IFRS 9 standard is data intensive and it will require financial institutions to collect a lot of data on say their clients. Banks will either have to invest in the systems or hire a third party to do the data analytics. This will be an extra cost to the banks.
Banks will put pricing considerations when giving out loans to customers. Given the fact that the interest rate cap law is still in place, they will look at other factors like the credit history of a client among other factors in deciding whether to give out a loan. This is might lead to a further slow down in credit, already Equity Bank has signaled that they will stop lending to Salaried employees and small businesses.
Customers will have to ensure that they make their loan payments on time as even one day past the due date is considered as a default. This is enough to see on blacklisted. Also if one has various loan products in a bank, a default in one might see you blacklisted for all this ruining your credit history.
Due to the fact that the IFRS 9 is more stringent when it comes loans which are even one day past due. We might see a preference by banks for short term loans which have a lower risk of default and requires lower impairment loss. Banks will also have to relook at their debt collection strategies in a bid to ensure that chances of default by their customers are minimized as much as possible.