The relationship between a bank and its customers has changed a great deal in the past few years. From the time when paperwork and bureaucracy was the order of the day to when technology is driving faster, more focused transactions, the business of banking has changed in a big way and mostly to the benefit of the customer.
The customer is no longer just an anonymous number. Banking is nearly at a stage where products and services are tailored for the individual customer. Banks are close to create products, price them, and offer them to customers at an individual level.
Yet, the growing complexity of financial products, and the entire financial industry, has meant that regulation has had to follow suit. Even as new products and new ways of selling them are being developed, banking still needs to be as solid, trustworthy and safe as it has always been, perhaps even more so.
Lessons the world painfully absorbed in the aftermath of the 2007-08 financial crisis brought home the fact that regulation as it were prior to the crisis had not served customers, banks, the economy and society as well as it should have. In the decade since, this realisation has led to the review of accounting standards to create a more resilient and stable banking sector.
One of the most significant changes in this arsenal is a new reporting standard that is due to come into effect on January 1, 2018 across the globe. International Financial Reporting Standard 9, or IFRS 9, was developed in response to the global financial crisis to help ensure financial institutions recognise and account for risk more prudently. The standard was issued by the International Accounting Standard Board (IASB), and for which compliance is a regulatory requirement in the Kenyan Companies Act, 2015.
IFRS 9 deals with accounting for financial instruments such as loans and advances, customer deposits, government securities, cash, borrowings, other debtors and creditors. The standard guides the classification and measurement, impairment and hedging of these financial instruments.
While IFRS 9 may sound complicated and esoteric, it is at its core, very simple, the fundamental change being recognition of credit risk losses. Credit risk is the risk that a borrower will default on their contractual obligation to repay a loan. Traditionally, a bank (or any other financial institution offering credit products) has recognised a loan’s risk at the point of default.
Article: Business Daily