Sector Capital and Liquidity Adequacy Requirements; Local Legislation/Regulation in Contrast with International Accounting Standards and Best Practices Presented by Harun Katusya Uphold public interest
Presentation agenda
Definitions A Guidance Note on Internal Capital Adequacy Assessment Process (ICAAP) was issued in November 2016 by CBK to all commercial banks and mortgage finance companies for reference in preparing or revising their ICAAP documents.
Capital Adequacy Ratio, CAR
Def: Liquidity
How can Banks Improve Liquidity
2007-2009 Financial Meltdown
Post Crisis Adjustments Bank Regulators over the world undertook fundamental reforms of the international prudential framework for the banking sector to strengthen global capital and liquidity regulations with the goal of creating a more resilient banking sector and overall financial stability A major step - Adoption of the International Regulatory Package Basel III Developed by the Basel Committee on Banking Supervision (BCBS)
BASEL III Consists of Comprehensive Set of Reform Measures which complemented the Basel II and Basel I Frameworks BASEL III rules were based on the conclusion that the financial crisis was rooted in low solvency levels on the bank balance sheets and therefore recommended tighter capital requirements with the minimum capital ratio being doubled Banks were directed to hold excess of capital as conservation (Mandatory) and Counter Cyclical Buffer (Discretionary) above the minimum Aim Strengthen the Regulation, Supervision and Risk Management of the Banking Sector
Sector Outlook in Kenya
CBK Increases Minimum Capital Requirement - AIMS
Capital and Liquidity Requirements in Kenya
In Addition - Capital and Liquidity Requirements in Kenya
Capital and Liquidity Requirements in Kenya/Comparison to BASEL III
Implementation and Compliance Kenyan Banks
Bank Performance Indicators 2005-2011 Core Capital/Total Risk Weighted Assets Total Capital/Total Risk Weighted Assets 2005 2006 2007 2008 2009 2010 2011 15.98 16.06 18.06 18.16 18.56 20.12 18.12 16.88 17.09 19.33 20.34 20.80 22.38 20.52 Return on Assets 3.70 2.40 2.60 2.60 2.60 3.80 4.40 Return on Equity 41.10 27.70 27.50 26.10 24.90 27.90 30.70 Gross Net Non-Performing Loans/Gross Loans Capital Adequacy-Bank Rating 19.90 16.20 10.60 9.20 8.00 6.30 4.40 2.00 1.00 2.00 1.00 1.00 1.00 1.00 The financial sector performance indicators improved substantially, and the sector remained profitable with return on asset indicator rising from 2.6 percent in 2007 to 4.4 percent in 2011 while the ratio of gross non-performing loans to gross loans improving from 10.6 percent to 4.4 percent over the same period
Banking Sector Performance Indicators 2017 Capital Adequacy Ratios Capital Adequacy Ratios 2014 2015 2016 2017 Minimum CAR Core Capital/TRWA 16% 16% 17% 16.5% 10.5% Total Capital/TRWA 20% 19% 19.8% 18.8% 14.5% Core Capital/Total Deposits 19% 18% 20.0% 18.9% 8.0% Key: TRWA Total Risk Weighted Assets Source, CBK 2017
Banking Sector Performance Indicators 2017 Capital Adequacy CBK The minimum regulatory capital adequacy ratios of Core Capital and Total Capital to Total Risk Weighted Assets, are 10.5 percent and 14.5 percent, respectively. Core Capital to Total Risk Weighted Assets declined to 16.5 percent in December 2017 from 18.8 percent in December 2016. Similarly, Total Capital to Total Risk Weighted Assets declined to 18.8 percent from 19.8 percent over the same period. The decline in core capital and total capital ratios is attributed to a slower growth in capital compared to the growth in total risk weighted assets.
Banking Sector Performance Indicators 2017 Capital Adequacy The ratio of core capital to total deposits decreased from 20.0 percent in 2016 to 18.9 percent in December 2017. The decrease is attributed to a higher increase in deposits compared to the increase in core capital. In 2017, the banking industry complied with the capital adequacy ratios
Banking Sector Performance Indicators 2017 Liquidity The average liquidity ratio as at December 2017 stood at 43.7 percent compared to 40.3 percent registered in December 2016. The increase in the liquidity ratio is mainly attributed to a higher growth in total liquid assets compared to the growth in total short-term liabilities. Total liquid assets grew by 16.8 percent while total short-term liabilities grew by 10.1 percent. The banking sector s average liquidity in the twelve months to December 2017 was above the statutory minimum requirement of 20 percent. CBK has been closely monitoring the banking sector particularly on liquidity and credit risks which remained elevated in 2017.
Micro-finance banks to face higher capital buffer rules CBK requires them to have a core capital of Sh60 million - to provide a buffer against potential financial downturns Currently is at Kes. 20 Million.
Sacco s Minimum Core Capital The minimum core capital for a SACCO Society shall always be Kshs.10 million (ten million shillings). This must be met before a license is issued A SACCO Society s capital levels will be monitored on a continuous basis by the Authority and may be reviewed from time to time. More than 100 deposit-taking savings and credit co-operatives (saccos) did not meet the mandatory capital ratio requirement in 2016, raising questions over their fitness in the key credit market.
In other News
In other News
In other News
In Summary Commercial banks average lending interest rates remained stable within the interest rate caps. The average commercial bank lending rate declined to 13.67 percent in 2017 compared to 16.59 percent in 2016. The interest rate capping law was effected in mid-september 2016. In 2017, the largest proportion of the banking sector gross loans and advances were channeled through the Personal/Household, Trade, Real Estate and Manufacturing Sectors accounted for 70.89%
In Summary Impact of Interest Capping There is increased demand for loans due to perceived affordability after the introduction of interest capping law in September 2016. There is also increased appetite for mortgages as more borrowers perceive that they can qualify for higher amounts. Commercial banks have on the other hand introduced tighter credit standards, so the actual loan disbursements have been lower than the increased demand. Most commercial banks have also shown preference to offer short term loans as compared to long tenure mortgage loans.
In Summary A Central Bank of Kenya (CBK) backed inquiry has recommended that capital ratios of the micro-finance banks (MFBs) should be raised to a yet-to-beestablished threshold. Currently, the CBK requires them to have a core capital of Sh60 million. The affected lenders include K-Rep, Habib, Oriental, UBA Kenya, Victoria and Equatorial commercial banks which will have to either make shareholders cash calls, merge or sell equity stakes to comply with the law.
Local Legislation/Regulation in Contrast with International Accounting Standards and Best Practices Presented by Harun Katusya Uphold public interest
News
International Financial Reporting Standards The IFRS include International Financial Reporting standards (IFRSs) developed by the IASB; International Accounting Standards (IASs) adopted by the IASB; Interpretations originated from the International Financial Reporting Interpretations Committee (IFRICs); and Standing Interpretations Committee (SICs).
Treasury Accounting Standards
Overview - PSAS In exercise of the powers conferred under section 194 (1) (f) of the Public Finance Management Act, 2012, the Cabinet Secretary to the National Treasury in consultation with the Public Sector Accounting Standard Board Gazettes the following dates for application of the Standards and guidelines
PSAS - PSASB The Public Sector Accounting Standards Board (PSASB) was established by the Public Finance Management Act (PFM) No. 18 of 24th July 2012. The Board was gazetted by the Cabinet Secretary, National Treasury on 28th February 2014. The Board is mandated to provide frameworks and set generally accepted standards for the development and management of accounting and financial systems by all state organs and public entities, and shall perform the following functions:
Functions of the PSASB 1) Set generally accepted accounting and financial standards. 2) Prescribe the minimum standards of maintenance of proper books of account for all government. 3) Prescribe internal audit procedures which comply with the Public Finance Management Act. 4) Prescribe formats for financial statements and reporting by all state organs and public entities. 5) Publish and publicize the accounting and financial standards and any directive and guidelines prescribed by the Board. 6) In consultation with the Cabinet Secretary on the effective dates of implementation of these standards, gazette the dates for application of the standards and guidelines. 7) Perform any other functions related to advancing financial and accounting systems management and reporting in the public sector.
Financial Reporting Standards In exercising this mandate, the board hereby issues the financial reporting and internal auditing standards to be applied by all state organs and public sector entities. These standards are intended to enhance quality of financial reports and improve compliance with internal controls in all state organs and public sector entities.
Financial Reporting Standards The Board has approved for adoption:- The International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board for application by State Corporations. The International Public Sector Accounting Standards (IPSAS) issued by the International Public Sector Accounting Standards Board (IPSASB) for application by all public sector entities except the State Corporations.
Financial Reporting Standards The Board has approved application of these standards as follows: The National and County government and their respective entities shall apply IPSAS cash-based standard The Semi-Autonomous National County Government Agencies shall apply IPSAS Accrual based standards. The state and County Corporations carrying out commercial activities shall apply IFRS while regulatory and non-commercial State and County Corporations shall apply IPSAS Accrual
IPSAS 41, Financial Instruments, Released August 14, 2018 TO Improve Financial Reporting Instruments
IPSAS 41, Financial Instruments, Released August 14, 2018 Applying a single classification and measurement model for financial assets that considers the characteristics of the asset's cash flows and the objective for which the asset is held; Applying a single forward-looking expected credit loss model that is applicable to all financial instruments subject to impairment testing; and Applying an improved hedge accounting model that broadens the hedging arrangements in scope of the guidance. The model develops a strong link between an entity's risk management strategies and the accounting treatment for instruments held as part of the risk management strategy.
International Financial Reporting Standard 9 (IFRS 9) International Financial Reporting (IFRS 9) Financial Instruments were issued in 2014 as the International Accounting Standards Board s replacement of IASB 39 Financial Instruments that embraces both recognition and measurement and expected to take effect in January 2018. The new regulation is anchored on three major categories which have been reduced from four that were previously under IAS 39. The categories are Classification and Measurement of financial instruments, impairment of financial assets and hedge accounting.
IAS 39 Vs IFRS 9 Under IAS 39, credit loss recognition was based on incurred losses i.e. when evidence of loss is apparent. This was criticized by the Basel Committee on Banking Supervision during the global financial crisis on the basis that accounting recognition for credit losses was too little too late. The impairment (provisioning) requirements of IFRS 9 are based on the Expected Credit Loss (ECL) approach. This approach always requires financial institutions to recognize expected credit losses, that is, not just when evidence of a loss is apparent. It considers past events, current conditions and forecasts.
Classification and measurement of financial instruments The new regulation under IFRS 9 will require that financial institutions measure their financial assets at amortized cost (amortized cost is the accumulated portion of the recorded cost of a fixed asset that has been charged to expense through either depreciation or amortization). Depreciation is used to reduce the cost of tangible assets while amortization is used reduce the cost of intangible assets) or at fair value. This will have to be determined in either profit or loss or simply by being taken to other comprehensive income (OCI) without recycling.
Impairment This is the expected outcome of financial institutions moving to an expected credit loss model. This regulation comes in three stages that should be followed by the financial institutions: STAGE 1: As soon as a financial instrument is given out, there is an expected 12-month period of either credit loss or profit. This serves as a proxy for initial expectations of credit losses. STAGE 2: This is the establishment and recognition of a full-time credit loss in either profit or loss when the credit risk increases significantly. STAGE 3: This is the stage where the credit risk of a financial asset increases to the point that it is considered credit-impaired.
Hedging accounting The main objective of this regulation is to represent, in the financial statements, the impact of an entity and its risk management activities that use financial instruments to manage outcomes and exposures that come from a particular risk that could affect the profitability of the institution. This is optional.
What IFRS 9 means for the consumer IFRS 9 is more challenging to the consumer than it is to financial institutions. Consumers who have a habit of defaulting loans will now be at risk of not accessing any other loan from any financial institution. Under this regulation, the consumer will have to pay the loan on time to avoid risking being locked out of accessing credit in future. What is more, the bank will have to use past loan records to project whether the customer can be able to pay the loan on time.
What IFRS Means for the Financial Institutions Those with low profits are likely to report losses. Dividend policies (returns on equity and capital) are likely to be negatively affected by the expected reduction in distributable profits. Core capital positions will be negatively affected.
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