UAE banks to assess impact of new rules on impairments

Banks in the United Arab Emirates have been given until June 16 to assess the impact of new accounting standards, which are likely to raise the impairments required against bad loans, according to a central bank document seen by Reuters.

Lenders across the world are preparing for a change to international accounting rules governing bad loans due to take effect on Jan. 1 2018.

The UAE central bank has instructed banks to assess the changes they will have to make to comply with the International Financial Reporting Standards (IFRS) 9 rule, which is designed to improve the resilience of the banking system to shocks, the circular said.

The regulations were expected to have significant impact on banks’ operations and possibly raise impairment requirements, according to the central bank document.

Many UAE banks have felt the pain of a rise in bad loans in the past year, partly as a result of financial problems besetting some small and medium sized companies.

The central bank was not available to comment.

Under current standards, banks build provisions for loans when borrowers fail to repay. The new rules mean banks will have to switch to an expected credit loss model, meaning they have to start building provisions much earlier.

Although the rules require banks to begin disclosing earnings taking into account the new rules from the start of 2018, they will have to start adopting the requirements internally from next year to ensure they can make annual comparisons, banking sources said.

“IFRS 9 is going to be a paradigm shift for banks,” said Luke Ellyard, financial services partner at KPMG. “This should lead to higher provisions, more complexity and deeper risk management involvement.”

Specific provisions for non-performing loans across the banking sector rose by 3.8 percent in March from a year earlier, while general provisions accelerated by 8.9 percent over the same time period, according to central bank data.