Banks in Kenya feared the new accounting model would have further slowed down private sector credit growth. PHOTO | FILE
Kenyan banks have been spared the aftershocks of new provisions
for bad debts that come into effect with the New Year, ensuring riskier
small borrowers and households can continue accessing credit.
In
guidelines released for industry consultations, the Central Bank of
Kenya said it would give banks five years in which to factor in
additional provisions brought by a new accounting standard IFRS 9 that
is being effected globally.
The rule requires banks to
provide for expected credit losses as well as actual losses which are
presently provided for. That would mean assigning risk elements to
government securities and trade finance instruments, which were
previously not provided for, eating into their profitability.
The
banking regulator is proposing that expected losses charged on income
should be recouped within five years to avoid eroding the bank’s core
capital. It also proposes CBK provisions above the IFRS 9 requirements
be charged on reserves instead of on income.
“During
the transition period, institutions should disclose in their published
results their core and total capital rations both before and after the
additional expected credit loss provisions have been added back,” the
bank said.
Under the new requirements any loan that
falls due by more than a day will be required to be moved to a new
classification, requiring more provisioning unlike in the previous case
where loans were reclassified after they fell 90 days due.
“Therefore, such excess shall be created to the statutory loan
loss reserve as provided for by CBK’s risk classification of asset and
provisioning,” the banking regulator says.
Previous case
In
the IFRS reporting, banks were expected to deduct the difference
between what IFRS 9 requires them to provide and what they currently
have from their retained earnings. This would have exposed the small
lenders who have low retained earnings, yet a higher appetite for risky
lending.
“The expected credit losses to be added shall
be those relating to loans existing and performing as at the end of
2017 and new loans booked in 2018,” the note says.
Kenya Bankers Association (KBA) chief executive officer Habil Olaka said the note from CBK offers relief to stability of banks.
“The
regulator is trying to ensure, through the proposed five-year
transition period that banks are not punished by applying this new
accounting method,” Mr Olaka said.
Applying the
standard strictly would have seen banks shun further lending to small
and micro enterprises as well as households as they cannot factor the
liability when pricing loans because of interest rate caps.
A
recent report by KPMG said it expects the stock of impairments in Kenya
to increase by up to 100 per cent on the first day of 2018 when IFRS 9
takes effect.
Deepak Dave of Riverside Capital said the move by CBK was sensitive to the market.
Deepak Dave of Riverside Capital said the move by CBK was sensitive to the market.
“It is going to do a lot of good especially on the credit growth fears as banks will save on their buffers,” Mr Dave said.
However,
he felt the transition should have been staggered with big banks, which
have a core capital above $2 billion getting three years and smaller
players getting five years.
Bankers feared the new
accounting model would further slow down private sector credit growth,
which dropped from 17 per cent in December 2015 to a low of 1.7 per cent
in August 2016.
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