The banking sector in Bangladesh is currently undergoing a significant transition as it moves to adopt the International Financial Reporting Standard 9 (IFRS 9), specifically its forward-looking Expected Credit Loss (ECL) model. This shift from the traditional “incurred loss” model is not merely a technical accounting change; it represents a fundamental overhaul of how credit risk is assessed, provisioning is made, and, crucially, how public trust in the financial system’s health is maintained.
The Mandate for Change: Bridging the Provisioning Gap
For years, loan classification and provisioning in Bangladesh have been governed by regulatory circulars from the Bangladesh Bank (BB) which primarily followed an incurred loss model. This model only required banks to set aside provisions after a loan showed objective evidence of impairment (i.e., when a default had already occurred or was imminent).
- The Problem: This system was widely criticized by international bodies, including the IMF, for leading to a significant understatement of Non-Performing Loan (NPL) ratios. By delaying loss recognition, the true extent of credit risk remained obscured, eroding investor and public confidence.
- The Response: To address this, and as a condition for receiving an IMF loan package, the Bangladesh Bank issued a roadmap (BRPD Circular No. 03, January 23, 2025) mandating the implementation of the IFRS 9 ECL model by December 2027. This framework is intended to replace the existing incurred-loss model entirely.
IFRS 9: A Forward-Looking Approach to Risk
IFRS 9 demands a paradigm shift, requiring banks to estimate potential credit losses in advance by considering not only historical data but also current conditions and forward-looking macroeconomic forecasts (like GDP growth and unemployment).
The core of the ECL model is the Three-Stage Approach (General Measurement Approach):
| Stage | Credit Risk | Provisioning Required | Interest Revenue Basis |
| Stage 1 | No significant increase in credit risk since initial recognition. | 12-Month ECL | Gross Carrying Amount |
| Stage 2 | Significant increase in credit risk since initial recognition. | Lifetime ECL | Gross Carrying Amount |
| Stage 3 | Credit-impaired (default has occurred). | Lifetime ECL | Amortized Cost (Net) |
The most immediate impact on the Bangladesh banking sector is the requirement to provision for loans in Stage 1 and Stage 2—loans that were previously only subject to general, low-rate regulatory provisions.
Challenges to Implementation: Technical, Cultural, and Institutional
The road to full IFRS 9 compliance is fraught with challenges, which directly bear on the trustworthiness of the resulting financial reports:
- Data Gaps and Quality: The ECL model demands high-quality, granular data on historical credit loss experiences, as well as complex macroeconomic variables. Many banks in Bangladesh lack the sophisticated IT infrastructure and historical data depth required for robust modeling.
- Model Complexity and Managerial Judgment: Developing and validating complex Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD) models requires specialized expertise. Furthermore, the standard requires significant managerial judgment in assessing what constitutes a “significant increase in credit risk” and incorporating forward-looking information, which can open the door to discretionary provisioning practices if not tightly controlled.
- Regulatory Harmonization: A critical challenge lies in harmonizing the new ECL provisioning with the existing local loan classification rules, which are less stringent. For instance, a loan overdue by 30 days is classified as “unclassified” under current BB rules, but may be required to be moved to the higher-provisioning Stage 2 under IFRS 9. This discrepancy must be clearly bridged by the central bank’s circulars.
- Impact on Capital: The initial adoption of IFRS 9 is expected to lead to a significant increase in loan loss provisions. This will reduce reported profits and, consequently, retained earnings, which forms a part of Tier 1 regulatory capital. Banks must prepare for a potential strain on their capital adequacy ratios.
Conclusion:
The implementation of IFRS 9’s Expected Credit Loss model is a necessary and long-overdue step for the Bangladesh financial sector. By mandating the early recognition of potential credit losses, it forces banks to present a more accurate and prudent view of their financial health.
Ultimately, the successful adoption of IFRS 9 will not only enhance the financial stability of individual banks but also be instrumental in rebuilding the “impairment of trust” that currently plagues the system. Greater transparency, more realistic NPL figures, and reduced managerial discretion in provisioning are the keys to restoring confidence among international investors, regulators, and the public in Bangladesh’s banking sector.
Implementing IFRS 9 is not just a regulatory requirement—it is a strategic necessity for ensuring transparency, restoring confidence, and strengthening capital resilience in Bangladesh’s banking sector. But navigating the technical, data, and modeling complexities of the ECL framework requires specialized expertise.
At FineIT, we support financial institutions in Bangladesh with end-to-end IFRS 9 implementation services, including:
✔ ECL model development (PD, LGD, EAD)
✔ Data gap assessments and IT integration
✔ Scenario modeling and forward-looking macroeconomic overlays
✔ Model validation and regulatory compliance alignment
✔ Training for management and risk teams
If your institution is preparing for the IFRS 9 transition under the 2027 mandate, now is the time to act.
👉 Contact FineIT today to ensure a smooth, compliant, and future-ready IFRS 9 implementation.
Visit: fineit.io