- Overview of Financial Reporting Standards with regards to growing economies and flow of finance
- What IFRS may do in boosting FDI influx in a country through a compliant and transparent banking sector
- Assessment of the impact of IFRS 9
- Challenges of compliance with IFRS 9
Conformity to international banking standards has immediate positive implications for attracting foreign investments. International standards of banking seek to create an atmosphere for investment which is uniform, transparent and predictable.
Tanzania has made noticeable progress towards establishing an open and increasingly transparent and consistent legal framework for Foreign Direct Investment (FDI). However, there is a need for further improvement especially in the banking sectors. Adoption of international banking standards will pave a way for attracting foreign capital through banking channels and elevate the country’s status in the global trade and finance community. See growth in the Banking and finance sector in Mauritius assured that it became the number one receiver of India’s FDI to the tune estimated at 90%.
Tanzania is still a new player in the FDI field as a result of changing economic ideologies and trade practice limitations such as socialist ideologies. Improvements in the investment framework are fresh and institutions for FDI promotion are new. Tracking down FDI in Tanzania would reveal that FDIs have been predominantly invested into just one sector, namely mining, but the lesson is clear: when locational assets are packaged in “the best of its kind” investment regime, investors will come. Unexploited potential for further investment extends from mining through the services sector, to agriculture and small scale manufacturing. The challenge now is to push FDI to new frontiers, achieving higher levels of investment inflows and increasing the scale and scope of benefits from FDI. What the Government can do to take up this challenge is the central focus of this Review.
The Banking and Finance Department together with our Investment Department at Breakthrough Attorneys prepared this article to give an insight and assess the compliance of various international banking standards by Tanzania, and the emanating impact. In this article, we intend to pinpoint some of the international banking and financial transactions standards which may bolster Tanzania’s credentials in receiving FDI.
2. International Financial Reporting Standards
International Financial Reporting Standards (IFRS) are a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the IFRS Foundation and the International Accounting Standards Board (IASB).
They specify exactly how accountants must maintain and report their accounts in order to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a result of growing international shareholding and trade; and are vital for countries that have dealings in several jurisdictions. It goes without saying that the largest investors Tanzania has are multi-faceted international organizations with mere subsidiaries or sister companies in Tanzania.
IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. The IFRS have the following significance;
- Maintenance of stability and transparency in the financial world.
- Creation of a predictable investment environment that allows investors to make good financial decisions.
Focus on IFRS 9 – (classification and measurement of financial instruments, impairment of financial assets and hedge accounting)
In July 2014, the IASB issued the IFRS 9 Financial Instruments which replaces IAS 39. These new standards became effective on 1st January 2018.
IFRS 9 has the following attributes:
- A new expected loss impairment model that requires more timely recognition of expected credit losses.
- Unlike the old Incurred Loss Model (under IAS 39), IFRS 9 does not wait for customers to default on loan repayment or show signs of credit weaknesses before booking impairment for loans and advances.
- The new standard requires entities to account for expected credit losses when financial instruments are first recognized and to timely recognize full lifetime expected losses.
3. Compliance of IFRS 9 by banks in Tanzania
Our Banking and Finance Law department is aware that the Bank of Tanzania has ordered all banks to mandatorily adopt the IFRS 9 standards in their banking/lending operations. To be precise, the Banks have been ordered to adhere full compliance to IFRS 9 from 1st January, 2018. For effective implementation of IFRS 9, banks are required to do the following:
- Put in place extensive information systems capable of obtaining all relevant information about past events, current conditions and forecasts of future economic conditions that will help in determining expected losses.
- Reshape the overall asset allocation and cover both undrawn and contingent commitments.
- Recognition of impairment sooner and estimation on lifetime expected losses against a wider spectrum of assets.
- New extensive disclosures will be required to improve comparability of information, provided by different entities.
The Bank of Tanzania in assuring compliance on the Standards, it even issued guidelines to banks in order to ensure robust and consistent implementation of IFRS 9. It is within our knowledge that the BOT has conducted various training workshops for Banks and other stakeholders for capacity building and familiarization of the Standards.
4. Challenges of implementation of IFRS 9
As any new system, especially to a Banking jurisdiction anew to global pace, the new impairment requirements give rise to a number of implementation challenges as new models will need to be developed to incorporate the forward looking concept that is the basis of the new standard. More judgments will have to be exercised by the management.
The key challenges likely to face Tanzanian banks in the implementation of IFRS 9 include:
- Lack of good data systems in place
We reckon that the task of obtaining quality data required to develop the models that will help in compliance with the new requirements under IFRS 9. There is need to either upgrade or build completely new IT infrastructure that can handle the data requirements under IFRS 9.+
- Skillset Requirements and Shortcomings thereto
Shortage of skills among bank staff. There is a need for banks to engage with external consultants to help them meet the requirements under IFRS 9. The BOT trainings may assist but they are seemingly very partial to create an in-depth expertise in navigating the Standards.
- Data Analysis, Storage, Retention and Integrity Warehousing.
Most banks have insufficient data warehouses to perform the analysis required under the new standards. Banks may need involvement of multiple divisions and departments within their banks which is costly.
It is important to note that in addition to compliance with the IFRS, banks are inclined to comply with other international financial standards introduced by other financial regulatory bodies such as the Bank of International Settlement (BIS) and the Financial Stability Board (FSB). This is important since sources of FDI differ and may require compliance to different standards rather than a single set standard.
All major investors require sound and transparent financial management at all levels of the government as well as financial institutions. The IFRS 9 provides investors and other users of financial statements with the ability to compare the financial performance of publicly listed companies. Also, the standards help to create stability and sustainability in banks and credit institutions, instill transparency and create a trustworthy environment for investors.
The Banking and Finance department at Breakthrough invites all stakeholders to embrace the changes and work towards full adoption of the new standards. Adherence to international financial standards cannot be overemphasized due to its significance to attraction of investors, as per our opening note regarding the boosted Mauritius FDI capacity as many investors targeting the African market have picked it as the safe haven for their finance.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.