How safe is banking industry?


A man withdraws money from an ATM machine. (File)


RE:How new global financial reporting standard will affect local banking industry” (The New Times, January 23).

There is no cause for alarm. In the short term, provisions may rise but the impact on regulatory capital is expected to be limited.

But the bottom line is that IFRS 9 will protect depositors and promote the stability and efficiency of financial system in Rwanda and around the world.

Jean-Marie Gacandaga


You are being economical with the facts here. How do you square this round peg: loan loss provisions/impairment costs are projected to rise based on IFRS 9’s default probability prescription of 10% in year 1 of any issued loan/credit facility, whether borrowing facility has been fully drawn or not, whether borrower has exhibited any repayment stress signs or not?

Under the old IAS 39 regime a manageable 5% probability would be prescribed to a loan upon the first sign of repayment stress in year 1, progressively increasing provisioning thereafter.

And this goes for not only cut and dry loans but also overdrafts, credit card facilities, off-balance sheet items such as guarantees and letters of credit as well as trade finance (factoring arrangements).

Local banks are going to have to either call in most of their loan book assets or run the risk of having to come up with ever large capital buffers to cushion all these supposed losses regardless of asset quality. Profitability too will wane. And so too will return on equity/investment.

Ultimately IFRS 9 is going to curtail bank loan books, credit growth in the economy. A slowdown in money velocity will negatively impact on economic growth. And yet most long dated bank capital is denominated in foreign currencies.

These seeding foreign banking/financial institutions won’t hum too hard when it comes to calling in these pre-arranged loan facilities due to IFRS 9 calling them to book or having to recapitalize themselves.

Sinister as it may sound, but one wonders who is the net beneficiary of all this rule book shuffling. It appears that western capital houses are the intended winners here due to the insurmountable home bias all the carry trade capital commands. So in addition to the recent tax revision by the Trump administration IFRS 9 will in time be seen to be yet another US fiscal stimulus of sorts. It will drive capital back “home”. And the dollar will be on a tear once more.

Is this “America First” yet again? But what about frontier market economies like Rwanda? Going against the grain would warrant a rap by the international clearing houses, let alone being thrown out of the swift system. But should we start considering shadow/black market banking instead on the local scene in order for our local banking institutions to survive?

Ggwanga Mujje