Kenyan banks have been given a five-year waiver from higher
capital requirements in the wake of a more conservative accounting
standard that took effect on January 1.
Adoption of the
International Financial Reporting Standards (IFRS 9) will see banks
provide for expected loan losses rather than those already incurred,
reducing their profitability and eroding their capital base.
The
Central Bank of Kenya (CBK) has however written to banks, notifying
them that it will overlook capital shortfalls brought about by the new
accounting standard.
The decision, which will allow
lenders to also report their accounts as if IFRS 9 has not come into
force, is meant to buy them time to bolster their capital.
This means that weaker lenders will not have to immediately
raise new capital as earlier feared. This should ease the sudden impact
which had been estimated at a capital decline of more than Sh20 billion
across the industry.
“CBK proposes a five-year
transition period during which the incremental provisions may be added
back to earnings for purposes of computing core capital,” the regulator
wrote to financial institutions in draft guidelines seen by the Business Daily.
“Any
incremental provisions under the ECL (expected credit loss) model
should be charged to the income statement but the same should be added
back over a five-year period for purposes of computing core capital to
lower the impact of the additional provisions on core capital during the
transition period.”
The
regulator says the expected credit losses to be added back shall be
limited to loans existing and performing as at the end of 2017 and new
ones booked this year.
CBK says the new accounting
system, which has replaced the International Accounting Standard (IAS)
39, is projected to dent banks’ earnings and balance sheets in the near
term.
“The implementation of IFRS 9 is expected to have
some impact on the profitability and capital positions of institutions
since banks may have to set aside greater provisions for expected credit
losses,” CBK’s director of bank supervision Gerald Nyaoma wrote to bank
CEOs in a December 21, 2017 letter.
No comments :
Post a Comment