Regulatory Alerts2018-04-09
Microfinance Banking Circular No. 1 of 2018
This circular, issued by the Director of Bank Supervision, provides guidance for microfinance banks in Kenya on implementing International Financial Reporting Standard (IFRS) 9 on financial instruments. The new standard replaced IAS 39 and took effect from January 2018. As a guideline, this Circular is based on Section 48(2A)(b) of the Microfinance Act, 2006, which requires the Central Bank of Kenya to issue guidelines for maintaining an efficient deposit-taking microfinance system. The Guidance Note aims to clarify how institutions should comply with IFRS 9 in preparing financial statements, as required by the Institute of Certified Public Accountants of Kenya. As per this circular, during the transition period of five years, banks must add back provisions related to performing facilities/loans outstanding up to December 31, 2017, and those issued in 2018, but not for any such provisions issued after 2018. Additional rows have been added to the financial statements and other disclosure templates to facilitate the calculation of core, total, and adjusted capital ratios incorporating the additional expected credit loss provisions. The monthly return on Capital Adequacy has also been amended to consider the implications of the IFRS 9 Guidance Note. Additionally, a new monthly return - the "IFRS 9 Implementation Transition Return" - has been developed to assist in monitoring provisions for facilities/loans outstanding and performing as at December 31, 2017, and those issued in 2018 but are still performing. The primary purpose of this circular is to issue the Guidance Note on implementing IFRS 9 for reference by microfinance banks in calculating their regulatory capital.