Kenyan banks have been spared the aftershocks of new provisions for bad debts that come into effect with the New Year, ensuring riskier small borrowers and households can continue accessing credit.
In guidelines released for industry consultations, the Central Bank of Kenya said it would give banks five years in which to factor in additional provisions brought by a new accounting standard IFRS 9 that is being effected globally.
The rule requires banks to provide for expected credit losses as well as actual losses which are presently provided for. That would mean assigning risk elements to government securities and trade finance instruments, which were previously not provided for, eating into their profitability.
The banking regulator is proposing that expected losses charged on income should be recouped within five years to avoid eroding the bank's core capital. It also proposes CBK provisions above the IFRS 9 requirements be charged on reserves instead of on income.
"During the transition period, institutions should disclose in their published results their core and total capital rations both before and after the additional expected credit loss provisions have been added back," the bank said.
Under the new requirements any loan that falls due by more than a day will be required to be moved to a new classification, requiring more provisioning unlike in the previous case where loans were reclassified after they fell 90 days due.
"Therefore, such excess shall be created to the statutory loan loss reserve as provided for by CBK's risk classification of asset and provisioning," the banking regulator says.
In the IFRS reporting, banks were expected to deduct the difference between what IFRS 9 requires them to provide and what they currently have from their retained earnings. This would have exposed the small lenders who have low retained earnings, yet a higher appetite for risky lending.
"The expected credit losses to be added shall be those relating to loans existing and performing as at the end of 2017 and new loans booked in 2018," the note says.
Kenya Bankers Association (KBA) chief executive officer Habil Olaka said the note from CBK offers relief to stability of banks.
"The regulator is trying to ensure, through the proposed five-year transition period that banks are not punished by applying this new accounting method," Mr Olaka said.
Applying the standard strictly would have seen banks shun further lending to small and micro enterprises as well as households as they cannot factor the liability when pricing loans because of interest rate caps.
A recent report by KPMG said it expects the stock of impairments in Kenya to increase by up to 100 per cent on the first day of 2018 when IFRS 9 takes effect.
Deepak Dave of Riverside Capital said the move by CBK was sensitive to the market.
"It is going to do a lot of good especially on the credit growth fears as banks will save on their buffers," Mr Dave said.
However, he felt the transition should have been staggered with big banks, which have a core capital above $2 billion getting three years and smaller players getting five years.
Bankers feared the new accounting model would further slow down private sector credit growth, which dropped from 17 per cent in December 2015 to a low of 1.7 per cent in August 2016.