IFRS 9 key Considerations
Lots of changes have happened in the banking sector. Internet and mobile banking have redefined banking convenience. It is no longer a battle of who has the biggest head office and branch network. It’s which bank is nimble and most innovative to offer effective customer convenience at the least cost. Technology is a competitive weapon in driving service quality at scale. The threats to banks is not just about themselves – but from other entities which don’t have banking licenses and the newly introduced reporting standard by the International Accounting Standards Board – IFRS 9.
Why the new IFRS 9?
International Financial Reporting Standards Nine (IFRS 9) was made mandatory effective 1st January 2018 with earlier adoption permitted. As the new reporting requirement kicked off, all Supervised Financial Institutions (SPIs) in Uganda are supposed to publish their financial statements in accordance with the new standard. In the first quarter of 2018, financial instructions in Uganda will look less profitable. The new IFRS 9 standard requires financial institutions to increase provisions for credit losses. The new rule has its roots in the financial crisis of 2007-08, in the wake of which it was declared that accounting standards needed an overhaul. Under the International Accounting Standards 39 (IAS 39), financial institutions only recognized losses after they had been incurred, even if they saw trouble coming. IFRS 9, which came into force on January 1st 2018, obliges them to provide for expected losses instead. Loans are clarified in one of the three stages under IFRS 9. When a loan is disturbed, stage one is adopted. Here, the financial institution makes a provision equivalent to the expected loss on the loan over the next 12 months (1 year). A loan will stay in stage one unless things change – if there is a significant increase in the credit risk.
A case in point:
(A local bank lent Ugx200m in December 2017 to a one John Mwanza, a second car importer. Unfortunately, Parliament passed a law that cars older than 15 years shouldn’t be brought into the country. In this case, the bank had to move John’s impairment from stage 1 to stage 2 of the significant increase in credit risk as a result of the law passed in Parliament). The bank therefore increased the provision, to the expected loss over life of the loan. The bank profit took a one-off hit. If the loan gets worse, it is passed onto stage 3.
In practice, financial institutions will increase their loan provisions. According to research, banks in the developed markets of EU had a 13% increment in loan provisioning. The effect is expected to be higher in underdeveloped markets like Uganda.
So, what next?
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