The financial landscape in the United Arab Emirates (UAE) is governed by two major frameworks: IFRS 9 (accounting) and Basel III (regulatory capital). While they serve different purposes—one for financial reporting and the other for bank stability—their interaction is one of the most critical challenges for risk managers and CFOs in the region.
1. The Core Paradox: Accounting vs. Regulation
The primary tension between these two frameworks lies in how they view “Expected Loss.”
- IFRS 9 (Accounting Perspective): Focuses on the Expected Credit Loss (ECL) model. It requires banks to recognize losses earlier by looking forward. This reduces the bank’s “Retained Earnings” on the balance sheet as soon as provisions are made.
- Basel III (Regulatory Perspective): Focuses on Capital Adequacy. Its goal is to ensure banks have enough Common Equity Tier 1 (CET1) capital to survive a crisis.
Because IFRS 9 provisions are deducted from equity, a sudden spike in ECL (e.g., during an economic downturn) can “hit” a bank’s capital ratios, potentially pushing them below the minimum levels required by the Central Bank of the UAE (CBUAE).
2. The UAE’s “Prudential Filter” Solution
To prevent a “cliff effect” where banks suddenly lose significant capital due to new accounting rules, the CBUAE introduced Transitional Arrangements. This is known as a Prudential Filter.
As of 2024–2025, the UAE is in the final stages of this transition. The filter allowed banks to “add back” a portion of their IFRS 9 provisions to their regulatory capital. The schedule followed a declining percentage:
- 2020–2021: 100% add-back
- 2022: 75% add-back
- 2023: 50% add-back
- 2024: 25% add-back
- 2025: 0% (Full “Fully Loaded” IFRS 9 impact)
3. Key Areas of Interaction in UAE Banking
A. The Three-Stage Model and RWA
Under Basel III, Risk-Weighted Assets (RWA) are calculated based on the riskiness of loans. IFRS 9 categorizes these same loans into three stages:
- Stage 1: Performing (12-month ECL)
- Stage 2: Underperforming (Lifetime ECL)
- Stage 3: Defaulted (Credit-impaired)
When a loan moves from Stage 1 to Stage 2, the IFRS 9 provision jumps significantly. Under Basel III, this same movement often triggers a higher risk weight, creating a double hit to the bank: higher expenses (lowering capital) and higher RWA (raising capital requirements).
B. Pro-cyclicality
Both frameworks can be pro-cyclical. In a bad economy, IFRS 9 requires higher provisions, which lowers capital. Simultaneously, Basel III requires more capital for riskier assets. This interaction can limit a bank’s ability to lend exactly when the UAE economy might need it most.
C. Pillar 3 Disclosures
The CBUAE requires rigorous Pillar 3 Disclosures. UAE banks must now publish “Fully Loaded” capital ratios alongside “Transitional” ratios. This transparency allows investors to see exactly how much the IFRS 9 shift is affecting the bank’s actual safety margin.
Summary Table: IFRS 9 vs. Basel III
| Feature | IFRS 9 (Accounting) | Basel III (Regulatory) |
| Objective | Fair representation of financial health | Solvency and depositor protection |
| Main Metric | Expected Credit Loss (ECL) | Capital Adequacy Ratio (CAR) |
| Impact of Loss | Deducted from Profit & Loss/Equity | Deducted from CET1 Capital |
| UAE Context | Mandatory for all listed banks | CBUAE Standards (Pillars 1, 2, & 3) |
Conclusion
The interaction between IFRS 9 and Basel III in the UAE is a balancing act between transparency and stability. As the transitional relief ends in 2025, UAE banks have had to significantly mature their data modeling and capital planning to ensure they remain compliant with the CBUAE’s stringent Basel III requirements while absorbing the full volatility of IFRS 9.
Fineit helps UAE banks and financial institutions design, validate, and automate IFRS 9 ECL models that are fully aligned with CBUAE regulations and Basel III capital requirements. From stage allocation and macroeconomic overlays to governance, validation, and regulatory reporting, we ensure your IFRS 9 framework is accurate, auditable, and future-ready.
Connect with Fineit to strengthen your IFRS 9 compliance and capital planning strategy in the UAE.