Overview of ECL under IFRS 9 in Bangladesh

The banking and financial sector in Bangladesh is currently undergoing a monumental shift in how it manages and reports credit risk. By moving from the traditional Incurred Loss (IL) model to the Expected Credit Loss (ECL) model under IFRS 9, Bangladesh is aligning its financial reporting with international standards.

1. The Core Shift: Incurred vs. Expected

Historically, Bangladeshi banks recognized loan losses only when a “trigger event” occurred (e.g., a payment was missed). This was often criticized as being “too little, too late.”

The IFRS 9 ECL model is forward-looking. It requires banks to estimate potential credit losses at the time of loan disbursement and throughout the loan’s life, incorporating:

Historical Data:

Past default rates and recovery experience.

Current Conditions:

The present financial health of the borrower.

Forward-Looking Information:

Macroeconomic forecasts such as GDP growth, inflation, and interest rate trends.

2. The Three-Stage Impairment Model

Under IFRS 9, financial assets are categorized into three stages based on the change in credit risk since initial recognition:

Stage	Criteria	Provision Requirement
Stage 1	No significant increase in credit risk (SICR).	12-month ECL: Potential losses from defaults in the next year.
Stage 2	Significant increase in credit risk (SICR) since inception.	Lifetime ECL: Potential losses over the remaining life of the loan.
Stage 3	Credit-impaired (defaulted).	Lifetime ECL: High provisioning; interest income calculated on net amount.

3. The Roadmap in Bangladesh

Bangladesh Bank (BB) has issued a clear timeline for implementation via BRPD Circular No. 03 (January 2025). The goal is a phased transition to ensure banks have the data and infrastructure ready.

Phase 1 (2025):

Banks must form implementation teams, develop a database of historical borrower data (dating back to Jan 2022), and conduct pre-assessment reports.

Phase 2 (2026):

Pilot implementation and parallel preparation of financial statements under both the old and new rules.

Phase 3 (2027):

Full implementation of ECL-based loan classification and provisioning by December 2027.

4. Key Challenges for the Local Sector

While the transition improves transparency, it presents several hurdles:

Data Quality:

Many banks lack the deep, granular historical data needed to calculate Probability of Default (PD) and Loss Given Default (LGD).

Economic Volatility:

Incorporating macroeconomic forecasts is difficult in a shifting global and local economic landscape.

Capital Impact:

Because ECL recognizes losses earlier, banks may see an initial “hit” to their profitability and capital adequacy ratios as they build higher reserves.

Conclusion:

The transition to ECL under IFRS 9 marks a new era of transparency and resilience for Bangladesh’s economy. While the operational challenges are significant, the move is essential for attracting foreign investment and ensuring the long-term stability of the banking sector.

Fineit supports banks and financial institutions with Bangladesh Bank–aligned IFRS 9 services, including ECL modeling, data readiness, and regulatory implementation support.
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