New accounting rules signal rise in monthly loan charges

Bank borrowers face higher monthly loan repayments as lenders shorten credit tenures following the new global accounting standards.

The new accounting standard, among other measures, requires banks to immediately start setting aside cash for the loans they advance to risky borrowers. 

This is a departure from the current rule where banks start setting aside cash when a borrower defaults on loan repayment.

Shortening of the loan repayment period is likely to help lenders cut costs of maintaining unsecured facilities, said Barclays Bank CEO Jeremy Awori, following the implementation the stringent conditions in accessing loans when the International Financial Reporting Standard (IFRS) 9 took effect this month.

“With IFRS 9, once you move to where a customer has defaulted, you have to provide for the life of the loan,” Mr Awori said.

READ: What the new global accounting standards mean for your business

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Shorter loan tenure

“So if you have got a longer tenure loan, you obviously have to provide more and that’s where we could start seeing a shortening of the tenures of the products which had moved out to 84 or even 96 months for unsecured loans. I expect that to start shortening.”

Those paying Sh23,268 monthly for a Sh1 million loan of 60 months borrowed at 14 per cent interest will pay Sh34,177 when they take a similar credit with a repayment period of 36 months.

Monthly repayments for a Sh500,000 loan will increase to Sh17,088 from Sh11,634, reflecting an increase of 31 per cent, when subjected to a similar shortening.

IFRS 9 has been adopted to build buffers against unforeseen shocks drawing from lessons during the 2008-9 global financial crisis.

It will replace the International Accounting Standard (IAS) 39 from January 1, although the accounting period for Kenyan banks falls in December 2018.

Micro and small enterprises, the dominant businesses in Kenya, will be hardest hit by the new accounting standard because they are perceived the most risky.

READ: New accounting rules to fuel SME loans drought

Rate caps

The small businesses have also struggled to access credit since the introduction of legal caps on commercial lending rates in September 2016.

Lenders have responded by cutting credit growth to small and medium-sized businesses, saying the cap takes away their ability to give loans to risky borrowers.

“If you can’t price out for a higher risk due to a longer tenure, you start going short term on the tenure or just put your money in government securities which is risk-free,” Mr Awori said.

Non-performing loans (NPLs) accounted for 10.5 per cent of the industry’s total loan book last September from 9.9 per cent in June, data from the Central Bank of Kenya shows, driven by a softening economy which last year grew at the slowest pace since 2012.

Regulatory capital

The new international accounting standard also look set to affect bankers’ regulatory capital and shareholder funds.

The shift that requires lenders to shift their loss models from incurred to expected will need banks to increase the provision by between 15—27 per cent, bankers say.