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.