Investors don’t get clear picture as banks barely follow IFRS

Unlike other companies in Bangladesh, banks and non-bank financial institutions have not been fully adhering to the International Financial Reporting Standards (IFRS), so the real scenario of the financial sector is hidden from public view.

The IFRS is a set of accounting rules that determines how transactions and other accounting events are required to be reported in financial statements. It is followed by more than 100 countries, including those in the European Union. It is intended to make financial reports consistent, transparent and easily comparable around the world.

However, as banks have not been following the IFRS, their health appears better than it is in reality. Moreover, they are showing high profits and disbursing dividends, deteriorating their health further, according to financial analysts.

The Bangladesh Bank (BB) itself provides the opportunity for financial institutions to dodge some requirements of the IFRS by giving waivers through circulars. Banks then follow the central bank's circulars when preparing financial reports, artificially presenting themselves as healthier.

However, while banks and NBFIs have not been following the IFRS fully, all other companies in the country adhere strictly to international standards to prepare their financial reports.

As banks have not been following International Financial Reporting Standards, their health appears better than it is in reality

Shahadat Hossain, a former president of the Institute of Chartered Accountants of Bangladesh (ICAB), said that if the gap between the IFRS followed standard and local standards rises, it indicates that the true picture of the companies is not reflected in the reports.

Md Mahamud Hosain, a former vice-president of the ICAB, said the ground reality for most banks is very different from what is shown in their financial reports because of the deviation in accounting standards.

Sometimes, the central bank used to give waivers to serve political interests, he said, adding that a roadmap should be prepared for banks to get them to follow international standards within the next three years.

If they are suddenly forced to follow global standards, their situation may deteriorate so much that their credit rating may fall, which will impact the opening of letters of credit, he pointed out.

Both Shahadat and Mahamud recommended slowly adopting the IFRS fully.

Among the major waivers from the central bank, the waiver on provisioning against total loans has created a big difference.

According to the IFRS, provision on total loans and advances needs to be kept on the basis of expected credit loss for one year plus on the basis of the history of the banking industry and the reality of the economy on a lifetime basis.

Apart from this, if a bank identifies that a specific borrower is facing financial difficulties and the bank assesses that there is a higher probability that this borrower will default, the bank keeps additional specific provisions on this loan.

However, Bangladesh Bank allows much smaller provisions on unclassified loans, ranging from 0.25 percent to 5 percent. It prescribes that banks need to have 20 percent provision when loans become sub-standard, 50 percent when they turn doubtful and 100 percent if it becomes bad loans.

According to several veteran chartered accountants, if banks followed IFRS for provisioning, their provision requirement would increase by roughly 10 to 13 times, mainly because of the lifetime expected credit loss based provisioning.

As of the second quarter of fiscal year 2023-24, the required loan-loss provisioning of banks collectively was Tk 98,941 crore whereas they set aside Tk 79,679 crore to cover the bad debts.

A local regulator can modify some rules considering the context and it is not violation of the IFRS, said AF Nesaruddin, a former president of the ICAB.

"As the economic and financial condition of the country is different from other countries, the adjustment is okay," he said.

However, by not fully following the IFRS, banks can show higher disbursed loans even if loans become classified. Interest income will also vary massively if they follow international standards.

Banks should follow the basic standards of the IFRS to improve financial reporting standards to the international level, said Syed Mahbubur Rahman, a former chairman of the Association of Bankers, Bangladesh.

Several strong banks are already following some IFRS stipulations that were waived by the central bank. If all the banks followed these standards, the standard of their financial reports would improve.

The central bank should analyse whether there is anything that is not applicable to Bangladesh considering its environment, added Rahman, who is also managing director and CEO of Mutual Trust Bank.

Sayeed Ahmed, an executive director of the Financial Reporting Council, said his organisation has informed the central bank about the distortion of the reporting of the financial institutions.

"It will obviously impact the financial health of banks and NBFIs if they follow the IFRS. Even, some can drown into losses."

So, an empirical analysis should be done to gauge the impact that following international standard accounting rules would have on the sector.

To improve the standards of the banking sector, the central bank should lift waivers it has provided in phases, he said.

Ahmed recommended forming a roadmap to follow the IFRS in the financial sector gradually so that no firm faces any adverse situation suddenly.

Usually, a tripartite meeting between the management of financial institutions, external auditors and a team of the central bank gives waivers on the basis of the health of financial institutions, according to an auditor.

"It is an uncommon practice worldwide. Accounting practices should be the same for all," he added.

Currently, Bangladesh Bank is following a rule-based classification and provisioning system, according to central bank Spokesperson Husne Ara Shikha.

"To increase the risk management capacity of the scheduled banks, Bangladesh Bank has prepared a draft plan to implement IFRS 9 for the banking sector."

The central bank plans to implement the loan classification and provisioning system based on Expected Credit Loss (ECA) under IFRS 9 by 2027, she said.

She added that instructions would be issued for banks as a preparatory measure to implement the same.

IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities and some contracts to buy or sell non-financial items.