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Published On: Tue, Jan 16th, 2018

IFRS 9: Banks to cut credits to private sector to mitigate impact


New credit regulatory standards imposed by international financial regulatory agencies in 2018 may pose a fresh challenge to Nigerian banks. The introduction of International Financial Reporting Standard (IFRS) 9, according to analysts, may lead to local banks cutting down the size of their credits to the organized private sector (OPS) as they struggle to protect their books from the impact of making provisions for bad and doubtful loans.

IFRS 9 which was approved by the International Accounting Standards Board (IASB) in 2008 became operational on January 1, 2018. It requires commercial lenders to change their impairment model from backward looking to forward looking. And with implementation of IFRS 9, banks would now have to make provisions for excess credit loss rather than incurred loss. The new policy wants them to take into account their operating environments in making bad debt provisions.

The implementation of IFRS 9 would make banks e more selective in loans they extend to customers, thereby taking a toll on underlying operating profit.

“IFRS 9 compels banks to provide for items they have not been making provisions for before and would eat more deeply into their profits,” explains Moses Ojo, financial analyst, Panafrican Capital Plc in a telephone interview with Business Hallmark.

The new policy would take more money away from banks and this would lead to a further crunch in domestic credit, says Dr Vincent Nwani, Director, Research and Advocacy, Lagos Chamber of Commerce and Industry (LCCI).  “It would limit their ability to give loans, especially to the private sector. Right now, they give limited loans to the private sector. If banks are going to write off more loans, it would reduce their profits. It will also reduce their willingness to give out credits, because the private sector is very risky; they would want to give money that would not be impaired. They would prefer to invest in government securities,” he noted.

Banks’ credit to the private sector declined -0.42 per cent to N21.93 trillion in October from N22.02 trillion in September, according to data obtained from the tradingeconomics.com. Non-performing loan (NPL) ratio averaged 13 per cent last year against the 5 per cent regulatory threshold, induced bythe 13 months recession the country suffered, before the economy took a bend and recorded its first growth in Q2 2017 and the GDP stood at 1.4 per cent as at September. This has spurred most banks’preference for investment in government securities.

Banks in the country have already started the implementation of IFRS 9. Mr. Tunde Mabawonku, Chief Financial Officer, Wema Bank, told Business Hallmark in a telephone discussion that “We have submitted all compliance reports and the Central Bank has come for verification. And on January 1, we have started implementation.”

He also explained how the new rule would have minimal impact on commercial lenders, saying, “It means if the economy is bad, it creates more risks and when it is favourable it gets better (We have done our simulation. The impact would be very limited. We don’t see any deterioration in capital adequacy. The impact would be seen when we publish first quarter results.”

Dr Uju Ogubunka, former registrar, Chartered Institute of Bankers of Nigeria (CIBN) and lecturer, Banking and Finance at the University of Lagos conceded that banks have made adequate preparation for the implementation of IFRS 9. “Given the length of time it has taken to prepare for the implementation of this policy, they should all be prepared. Accounts of banks follow International Financial Reporting Standards. So, if they have already been reporting within that framework, I believe they are prepared. I don’t see it posing any problem to them,” he reasoned.

Meanwhile, the interest incomes of many banks dropped in Q3 2017, while fees and commission revenues were up on the back on increased income from trading activities, especially securities.

The federal  borrowed heavily locally last year , causing its domestic debt to jump 15.22 per cent to N12.5 trillion in September from N10.85 trillion in the comparable period in the previous year.

But it has promised to drastically cut down its local debts, and even planned to obtain $5.5 billion foreign loan with the aim of spending $3 billion to refinance its domestic debts. This would further reduce the money would rake in from securities this year.

The decision of Federal Government to trim down its local debt would encourage commercial lenders extend more credits to the private sector, which has been crowded out.

But DrNwani believed no manufacturer would survive with almost 30 per cent interest rate which banks currently charged.

The benchmark is presently pegged  at 14 per cent, but the CBN Governor, Godwin Emefiele hinted at the bank’s last Monetary Policy Committee meeting in December that interest rate would likely be reviewed downward before the end of the first quarter.


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