Common IFRS 9 Compliance Gaps Found in SAMA Inspections

The adoption of IFRS 9 Financial Instruments marked a significant shift for the Saudi Arabian financial sector, moving from an “incurred loss” model to a forward-looking Expected Credit Loss (ECL) framework. While Saudi banks and insurance companies have matured in their implementation, recent inspections by the Saudi Central Bank (SAMA) continue to highlight specific areas where compliance often falls short.

Addressing these gaps is not just a regulatory necessity but a vital step in ensuring the financial resilience of institutions within the Kingdom.

1. Model Robustness and ECL Methodology

The most frequent findings in SAMA inspections involve the technical application of the ECL model. Many institutions struggle with the “non-linear” relationship between economic forecasts and credit losses.

Inadequate Scenario Weighting:

SAMA often finds that banks do not sufficiently justify the probability weightings assigned to optimistic, base, and pessimistic scenarios.

Data Granularity:

A common gap is the use of “proxies” or aggregate data when historical, instrument-level data is missing, leading to inaccurate Probability of Default (PD) andLoss Given Default(LGD) estimates.

Governance of Overlays:

“Management overlays”—adjustments made outside the model—are often poorly documented. SAMA expects a clear, audit-trackable rationale for why a model’s output was manually adjusted.

2. Significant Increase in Credit Risk (SICR) and Staging

Properly moving an asset from Stage 1 (12-month ECL) to Stage 2 (Lifetime ECL) is a critical compliance checkpoint.

Delayed Recognition:

Inspections frequently find that banks rely too heavily on the “30 days past due” backstop rather than proactive qualitative indicators like industry-specific downturns or borrower-specific financial stress.

Threshold Arbitrariness:

SAMA looks for quantitative evidence that the thresholds used to define “significant” increase in risk are mathematically sound and tailored to the specific portfolio, rather than using generic industry benchmarks.

3. Governance and Internal Controls

Beyond the math, SAMA focuses heavily on the “people and process” side of compliance.

Model Validation Gaps:

There is often a lack of a truly independent model validation unit. In some cases, the same team that develops the ECL model is involved in its validation, creating a conflict of interest.

IT System Limitations:

Many institutions still rely on manual spreadsheets to bridge gaps between their core banking systems and their ECL engines. These manual interventions are high-risk areas for data integrity errors.

4. Classification and Measurement (SPPI Testing)

The Solely Payments of Principal and Interest (SPPI) test determines if an asset can be measured at amortized cost.

Complex Products:

Gaps often appear in the assessment of ESG-linked loans or products with “step-up” interest features. If these features don’t pass the SPPI test, the asset must be measured at Fair Value Through Profit or Loss (FVTPL), which can increase earnings volatility.

Summary of Common Gaps

Area	Common Inspection Finding
ECL Models	Insufficient documentation of forward-looking macroeconomic scenarios.
Staging	Over-reliance on “30-days past due” instead of qualitative risk triggers.
Governance	Lack of independent validation and weak audit trails for manual overlays.
Data	Low data quality for LGD calculations, especially for collateral valuation.

Conclusion

As SAMA moves toward a more risk-based supervisory approach, the expectation for IFRS 9 compliance has shifted from “basic implementation” to “advanced maturity.” Financial institutions must ensure that their ECL models are not “black boxes” but transparent tools supported by high-quality data and rigorous independent validation. Closing these gaps is essential for maintaining a stable balance sheet and satisfying the evolving requirements of the Saudi regulator.

Repeated findings in SAMA reviews show that even mature IFRS 9 frameworks can fall short in model governance, SICR staging, and documentation. FineIT helps Saudi banks identify, remediate, and prevent IFRS 9 compliance gaps through independent reviews, model enhancements, and audit-ready documentation.

Engage FineIT to strengthen your SAMA IFRS 9 compliance.