A dearth of data among Uganda commercial banks is hampering the implementation of new rules on debt provisions that came into effect with the new year.

The banks spent the latter part of last year investing in system upgrades and staff training in readiness for the IFRS 9, which requires them to provide for risky assets within 30 days, unlike the old guideline IAS 39, which gave a lead time of up to 120 days.

The director for commercial banking at the Bank of Uganda Benedict Sekabira said financial institutions had finalised on the compliance requirements, but were facing challenges in obtaining reliable data on credit transactions.

Mr Sekabira said that data on small and medium-size enterprises (SMEs) — the largest pool of borrowers — was only available for two years whereas data covering 20 years of inflation, economic growth rates, exchange rates and clients’ credit history was required.

The new guidelines also require banks to make advance provisions for mortgages, government securities and letters of credit.

Loans disbursed to borrowers whose risk profiles have slightly deteriorated and those with increased default risks that are close to irredeemable will also carry higher provisioning costs. The latter could bear a credit provision of 90 per cent as soon as it is confirmed.

“Compliance with IFRS 9 demands a lot of data input and the Central Bank is likely to put more pressure on banks to improve credit portfolio assessment,” a credit analyst with one of the banks who requested anonymity said.

Bancassurance licences

Commercial banks have in recent times been moving to bancassurance and agency banking but Mr Sekabira said microinsurance and agricultural insurance products held much more potential.

So far, Stanbic Bank Uganda and Barclays Bank Uganda have acquired bancassurance licences from the insurance regulator since the regulations were issued in July 2017.

Parliament had a year earlier passed amendments to the Financial Institutions Act of 2004 allowing for the new lines of business.

“Commercial banks have enjoyed reduced cost of funding but those that have invested more in lending activities might reap better returns because of stable lending rates than those that are heavily engaged in investments targeted at Treasury bills and bonds whose yields have fluctuated significantly this year,” said Mr Sekabira.

The Central Bank Rate (CBR) — a key determinant of the cost of funds incurred by commercial banks dropped by seven percentage points during the 2016/17 financial year.

The CBR was slashed to 10 per cent in June 2017 and closed the year at a record low of 9.5 per cent, putting pressure on debt yields and prime lending rates.

Besides the huge compliance burden on banks, the IFRS 9 has also raised new taxation headaches.

Credit provisions

Under current tax procedures, credit provisions are added back to income and are subject to income tax.

With higher provisioning requirements, banks are likely to pay more taxes in 2018. For example, an additional credit provision of Ush2.2 billion ($604,641) might yield an extra tax expense of Ush600 million ($164,902).

“We are talking to BoU and Ministry of Finance on how to mitigate this challenge,” said Citi Bank Uganda chief finance officer Simon Kavuma.

Transition

In Kenya, guidelines issued by the Central Bank two weeks ago allowed banks a five year transition period during which expected losses charged on income should be recouped to avoid eroding the banks’ core capital.

It also proposed CBK provisions above the IFRS9 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 ratios both before and after the additional expected credit loss provisions have been added back,” the bank said.

Under IFRS 9 any loan that falls due by more than a day will be required to be moved to a new classification, requiring more provisioning.

In the IFRS reporting, Kenyan 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 loan booked in 2018,” said the regulator.

Banks are expected to give their input before the transition guidelines are polished for adoption.