Kenya’s top banks have posted impressive profits for 2018, benefiting from the Central Bank’s one-year earnings "protection" window in the implementation of the International Financial Reporting Standard (IFRS 9) which demands higher provisioning for bad loans.
Analysts had predicted that the banks would report nearly flat revenue performance in the face of declining credit to the private sector and growth in non-performing loans.
An analysis of the 2018 financial results of top commercial banks shows that although all the banks maintained profitability, the situation would have been different if the loan-loss provision coverage had taken full effect in January.
The Central Bank of Kenya spared the lenders from charging increased loan-loss provisions in their income statements in the first year of the IFRS 9 regime (January 1 to December 31, 2018), a move that has seen banks record lower expenses while pushing up profits.
CBK allowed banks to charge their increased loan-loss provisions against the retained earnings in the balance sheet and not in the profit-and-loss account, sparing them a drastic dip in profits.
Industry sources told The East African that this year things are likely to be difficult for the banks as they will have to charge all their increased loan-loss provisions to the profit-and-loss account.
"Last year we had a window to manage our profit and loss account, but that window has closed and therefore this year we have to charge all our loan-loss provisions against our profit-and-loss account," a banker who did not want to be named said.
Under the IFRS9, which replaced the International Accounting Standard (IAS) 39, banks are expected to provide for projected loan losses rather than those already incurred, thereby reducing their profitability and eroding their capital base.
The CBK gave Kenyan lenders a five-year transition period to shore up their capital bases in compliance with the new accounting standard.
Analysts estimated that the capital bases of the lenders would drop by close to Ksh20 billion ($200 million) when the rules took effect.
The implementation of IFRS 9 is expected to impact the profitability and capital positions of lenders, since banks will have to set aside greater provisions for expected credit losses.Figures from the Central Bank, show that the volume of bad loans in Kenya’s banking industry increased by Ksh63.8 billion ($638 million) to Ksh298.4 billion ($2.98 billion) in June 2018, from Ksh234.6 billion ($2.34 billion) in June 2017, largely blamed on delayed payments by government agencies and the private sector, business […]
