Kenyan banks face a fresh shock under a new set of global accounting rules which require financial institutions to make higher loan-loss provisions for potential upsets.
The new guidelines, technically referred to as International Financial Reporting Standard (IFRS) 9, come into force on January 1, 2018 and experts expect credit impairment to almost double from current ratios.
This is because the new bookkeeping rules adopt a one-year forward-looking model rather than waiting for loans to go sour to make provisions like under the current regime known as International Accounting Standards (IAS) 39.
Loan-loss provisions are included in banks’ income statements and hence have a material effect on their profitability.
“Banks are the companies that will feel the biggest impact of this new standard. The increase could be more than 50 per cent of the current level of impairment provisioning,” said Joseph Kariuki, an audit partner at KPMG.
Total provisions for toxic loans in Kenya’s banking industry grew by a fifth to hit Sh50.78 billion in 2015, impacted by an increase in non-performing loans.
The banking industry volume of bad loans grew to 9.1 per cent of the Sh2.28 trillion loan book as at September 2016 compared to 8.4 per cent in June, according to latest data from the Central Bank of Kenya.
The new standards, though a response to the global financial crisis of 2008, have resonance in Kenya where three lenders have collapsed in less than two years — with questions on their loan book quality and provisioning. Dubai Bank went down in August 2015 followed by Imperial Bank (October 2015) and Chase Bank (April 2016).
Analysts further warned that higher impairment for bad debts will reduce equity and negatively impact on regulatory ratios, forcing banks to shore up their capital position.
“The impairment provisions are likely to have a significant impact on capital especially for banks,” Mr Kariuki said in an interview with the Business Daily.
The headache of higher credit impairment comes at a time banks are battling other headwinds such as interest rate caps and risk-based capital ratios as well as regulation.
IFRS 9 rules demand that banks project possible toxic loans for the next 12 months and make provisions. Impairments are traditionally made in a phased approach after a loan becomes non-performing.
Full-year losses
“In determining the expected credit loss, banks have to use among other things some level of forward looking information like projected interest rates, inflation and economic performance among others,” said Vincent Onjala of KPMG Tanzania.
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Credit: Business Daily
