The new standards will see lenders seek more information from their clients

National bank banking hall Harambee avenue branch taken on PHOTO:WILBERFORCE OKWIRI

NAIROBI, KENYA: Commercial banks will have to up their game in collecting and keeping data about its creditors to avoid colliding with external auditors.

This will follow the implementation of new the accounting rule, International Financial Reporting Standard (IFRS) 9 in January next year.

The new rules will require huge data to help banks in pricing customer risks and making provisions for loan losses.

Unlike now when the current rule, International Accounting Standard (IAS) 39, only requires banks to consider customer’s debt repayment history in making provisions, the new standard will require more information than is in their current data bank.

According to Barclays Bank of Kenya (BBK)Chief Executive Officer Jeremy Awori, the new standard will force banks to invest more in data analytics to comply.

“Data analytics is going to be unavoidable because even when auditors come in and find that you have allowed a certain amount as provision, you will have to explain the assumptions used to arrive at that number. There has to be logic. You can’t just pick a number,” said Awori.

Under IFRS 9, provisions will be based on customer’s historic data on debt repayment, the current information about the customer, the macro environment and the future expectations in the market.

Mr Awori told Financial Standard that banks will be under increased pressure to show and prove to auditors how a given portfolio has performed over a number of years and explain how the default level was arrived at.

“There will be much more requirement to analyse customer portfolios to come up with assumptions that you will make to predict future anticipated losses and the level provisions to make,” he said.

IAS 39, which was hugely blamed for the 2008 financial crisis has been regarded as a reactive standard, only making banks to make provision when there is an event to justify so.

However, the new standard, regarded as forward-looking, will compel banks to provide for things that are expected to happen.

Even the traditionally regarded as risk-free government securities will require a provision.

KPMG Kenya Advisory Services Ltd Director Joseph Kariuki expects financial institutions to equip their data banks further to increase their ability to make reasonable provisions. He notes that a higher level of disclosure around the assumptions made in preparing financial statements will be required.

“IFRS is data intensive and we expect auditors to become more thorough. They will have to be satisfied that management is providing the right data and judgment. If not in agreement, they will meet the board or even the regulator to share this,” says Kariuki.

Banks whose books will not be in conformity with the new standard will be at the risk of getting a qualified opinion from auditors.

The BBK chief executive whose bank has been preparing for this standard for the last two years, says that data analytics is going to be unavoidable.

“It is going to be a requirement to start analysing your historical data. You have to analyse that to come up with the assumptions you will use to predict future anticipated losses and what provisions to make,” he says.

This will be key in helping the internal auditors explain to external auditors the reasons behind the level of provisioning they put in their books.

This has to be through logical process showing how a given loan has performed over time.

The BBK boss says that smaller banks may be challenged in meeting the new standard which is set to require new data analysis tools to be used by economists, statisticians, actuaries and credit analysts.

“It is definitely an increased burden and they will have to work with third-party audit firms and other experts to engage them to come and help in putting everything in place,” says Awori.

Comparing performance

Banks are in rush to comply with the new standard which binds all firms in the world.

Accounting books have to be prepared with uniform rules for ease of comparing the performance of firms operating in different countries.

Even with the data, banks may also face an additional headache.

They may have to prepare three sets of financial statements to please the needs of three different regulators.

Central Bank of Kenya, the Kenya Revenue Authority and International Financial Reporting Standards Board have a different take on the level of provisioning.

The high level of provisioning will mean a reduction in profits which will eat into the amount of tax that KRA will get from banks.