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Economy

New accounting rules to fuel SME loans drought

KBA chief executive Habil Olaka. FILE PHOTO | NMG
KBA chief executive Habil Olaka. FILE PHOTO | NMG 

Loans to the micro, small and medium-sized enterprises are likely to be hit further by the onset of new global accounting standards in January, bankers have said.

Kenya Bankers Association chief executive Habil Olaka said smaller enterprises, which have borne the brunt of credit crunch because of rate cap law, will face more stringent conditions in accessing loans when the International Financial Reporting Standard (IFRS) 9 comes to force.

The new accounting standard, among other measures, requires banks to immediately start setting aside cash for the loans they advance to risky borrowers. 

This is a departure from the current rule where banks start setting aside cash when a borrower defaults on loan repayment.

Unforeseen shocks

The IFRS 9 has been adopted to cushion lenders from unforeseen shocks drawing from lessons during the 2008-9 global financial crisis.

It will replace the International Accounting Standard 39 from January 1, although the accounting period for Kenyan banks falls in December 2018.

“For high-risk borrowers, you are bound to book that provision much earlier at the point of inception rather than when default occurs.

“This means if you cannot adjust that in the pricing (of the loan) because of interest capping law, then you are stuck and you will possibly shy away from it (loan),” Mr Olaka said.

Vulnerable sectors

“Our view is that it will affect the same sectors that are vulnerable (to the rate cap) and whereas the interest capping law is within our (Kenya’s) control as we can do something about the law, IFRS 9 is a global practice.”

Micro and small enterprises, the dominant businesses in the Kenyan economy, have struggled to access credit since the introduction of legal caps on commercial lending rates in September last year.

Lenders have responded by cutting credit growth to small and medium-sized businesses, saying the interest cap takes away their ability to give loans to risky borrowers.
The rules also look set to affect bankers’ regulatory capital and shareholder funds.

“IFRS 9 will certainly increase loan provision burden because when you book in a loan, looking at risks involved, you start providing for it from day one,” Gulf African Bank chief executive Abdalla Abdulkhalik told the Business Daily in an interview.

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