Kenyan financial sector  bracing for impact of new accounting standard

With the adoption of the new International Reporting Financial Standard 9 (IFRS 9) next year impacting banks and  insurance companies  mainly in terms of credit losses and  commitments to credit.

“It is widely expected that IFRS 9 will increase the stock of credit impairment provisions,” said Jeremy Awori, Managing Director Barclays Bank of Kenya.

However, Awori is for the view that the kind of environment that will be created with the impact of the new financial model. “Kenya needs flourishing companies that will create jobs. As banks we also need to lend to companies that can afford to repay successfully.”

Kenya need’s flourishing companies that will create jobs. Financial institutions meet to lend to Cos that can afford to repay #BbkIFRS9 pic.twitter.com/ZuvAgYmYzk

— David Indeje (@David_Indeje) September 25, 2017

Yusuf Omari is Chief Financial Officer at Barclays Bank of Kenya  says. “The main challenge and cost will be preparing for three sets of accounts for impairment – one for Central Bank of Kenya (CBK), Kenya Revenue Authority (KRA) and IFRS9.”

He was, speaking at a Barclays IFRS 9 workshop on Monday that sought to inform and  empower in order to ensure quality reporting in the lead up to the implementation of the new rules.

This is because IFRS 9 is data intensive and will look at the the quality of data and reconciling it to bank financial statements.

Banks globally are expected to adopt the  International Financial Reporting Standard (IFRS) 9, effective January 2018, switching from the 13-year old International Accounting Standard (IAS) 39.

The forum brought together Industry experts from the Institute of Certified Public Accountants(ICPAK), Kenya Bankers Association(KBA), Capital Markets Authority(CMA) and the Nairobi Stock Exchange(NSE).

Under the new accounting standard, banks will be required to switch to an expected loss model, as opposed to the incurred loss model that is used now under the current accounting standard.

Essentially, this means banks will have to make provisions in anticipation of future losses, rather than the current practice of making provisions only when loans have been classified as impaired.

Hence, for a performing loan, banks will have to make provisions on the basis of projected losses over 12 months. If there are signs that the loan’s credit quality is weakening, then losses will have to be booked over the loan’s entire lifetime.

Habil Olaka is the chief executive officer of the Kenya Bankers Associations for the Kenyan financial sector, “We are fairly satisfactory getting ready. However, there is disparities in terms of readiness among the tier 2 and  banks.” “We are not badly off,” he added.

Currently, the Institute of Certified Public Accountants of Kenya (ICPAK) is working on consistent and uniform application of the standard, and these will be ready by end of October 2017.

Olaka notes that the guidelines will be useful besides the initiative by the CBK to ensure a unified approach within the industry, “I think we may not achieve a scenario where all of us are equally ready due to a variation on resources.”

As banks deal with the higher provisioning, they may reprice or restructure loans — making it more expensive for borrowers with riskier credit profiles, according to Cliff Nyandaro,  Head of Technical  Services, ICIPAK.

Industry observers, meanwhile, Tony kimaru from the NSE noted that with its implementation, it would not be very possible for analysts to project investment decisions until they receive a full set of financial reports.

“70 percent of trade at the Nairobi bourse is foreign. The investors will expect the NSE to facilitate the reports.”

“It will be disastrous not to prepare reports in compliance with the IRFS 9,” he cautioned.

Key data requirements under the IFRS 9 standard include:  macro-economic indicators, delinquency information, product characteristics, contractual cash flow prepayments, ratings data,) borrower-specific information, and risk parameters.

These will be used by banks to determine the sufficient level of provisioning. According to KPMG Kenya Advisory Services, IFRS 9 could result in a 50 percent to 100 percent  increase in provisions affecting profitability, hence a possible need to raise the capital base of banks. As at H1’2017, loan loss provisioning had increased to 54.0 percent from 48.8 percent in H1’2016.

“The new standard will lead to a more stable and safe banking sector, however the increased provisioning will put pressure on capital ratios of smaller banks and may result in capital raisings and mergers,” according to Cytonn Investments.