Kenyan banks will take a full hit from provisions for new loans issued in 2019 and beyond after the Central Bank of Kenya (CBK) refined its capital waiver rules.
The banking sector regulator had earlier published draft guidelines, which proposed a five-year transition period during which incremental provisions may be added back to earnings for purposes of computing core capital.
This came in the wake of adoption of more conservative International Financial Reporting Standards (IFRS9) and which took effect on January 1.
Expected loan losses
This will see banks provide for expected loan losses rather than those already incurred, potentially reducing their profitability and eroding their capital base.
The CBK says in a new circular to bank executives that the provisions to be added back over the five-year period will now be limited to good loans outstanding as of December 31, 2017 and those issued this year.
“All provisions under the expected credit loss (ECL) model for facilities/loans issued after 2018 shall not be added back for purposes of computing regulatory capital,” the CBK says in the circular dated April 6.
The regulator added that during the transition period, institutions should disclose, in their published results, their core and total capital ratios including adjusted ratios after the additional expected credit loss provisions have been added back.
The CBK says this will facilitate assessment of the impact of the additional ECL provisions on the institution’s capital position.
The CBK position means that banks that will end this year with large portfolios of good loans will benefit the most from the directive.
Lenders are now expected to pare back lending to riskier borrowers in the coming months to reduce their exposure from the IFRS9 effects.
This will further intensify the banks’ risk aversion seen in the wake of interest rate controls, with the lenders piling into treasuries.