Since January 1, 2018, the Saudi Central Bank (SAMA) has mandated the adoption of IFRS 9 for all licensed banks and financial institutions. This shift moved the Kingdom from the backward-looking “incurred loss” model to a proactive, “Expected Credit Loss” (ECL) methodology.
Under Saudi Vision 2030, SAMA has intensified its oversight to ensure that the banking sector remains a resilient foundation for economic diversification.
1. The Three-Stage Impairment Model
The core of SAMA’s framework is the classification of financial assets into three distinct “stages” based on their credit risk profile. This determines how much provision a bank must set aside.
- Stage 1 (Performing): Assets with no significant increase in credit risk (SICR) since origination. Banks must recognize 12-month ECL.
- Stage 2 (Underperforming): Assets that have experienced a Significant Increase in Credit Risk (SICR). Banks must recognize Lifetime ECL.
- Stage 3 (Non-Performing): Assets that are credit-impaired or in default. Banks recognize Lifetime ECL, and interest income is calculated on the net carrying amount.
2. Key SAMA-Specific Requirements
While IFRS 9 is a global standard, SAMA has introduced specific “local flavors” to ensure the stability of the Saudi market
A. Significant Increase in Credit Risk (SICR)
SAMA expects banks to go beyond the “30 days past due” rule. Banks must use qualitative triggers such as:
- Significant changes in internal credit ratings.
- Adverse changes in the borrower’s industry (e.g., impact of oil price volatility).
- Restructuring or “forbearance” of loans.
B. Forward-Looking Information (FLI)
Saudi banks must incorporate macroeconomic forecasts into their ECL models. SAMA typically requires at least three scenarios:
- Base Case: The most likely economic path.
- Optimistic: Higher non-oil GDP growth and stable oil prices.
- Pessimistic: Downturns in the global economy or sharp oil price drops.
C. Islamic Finance Integration
As a global leader in Islamic finance, Saudi Arabia requires IFRS 9 to be applied to Shariah-compliant products like Murabaha, Ijara, and Sukuk. The “Contractual Cash Flow Characteristics” (SPPI) test must be carefully managed to ensure these instruments are measured at amortized cost.
3. Governance and Reporting
SAMA’s Banking Supervision Department maintains a high bar for model governance:
- Audit Trails: Banks must provide clear documentation on how PD (Probability of Default), LGD (Loss Given Default), and EAD (Exposure at Default) were calculated.
- Quarterly Disclosures: Detailed reporting templates must be submitted to SAMA, showing the movement between stages and the impact of macroeconomic variables.
- Model Validation: Models must undergo regular independent validation to ensure they aren’t under-provisioning during economic shifts.
4. Conclusion
For Saudi banks, IFRS 9 is more than just an accounting change; it is a strategic risk management tool. By aligning with SAMA’s rigorous guidelines, financial institutions contribute to a stable and transparent environment that attracts global investment and supports the goals of Vision 2030.
SAMA’s expectations around IFRS 9 continue to evolve, placing greater emphasis on model governance, forward-looking analysis, and audit transparency. FineIT works with Saudi banks to design, implement, and enhance SAMA-compliant IFRS 9 frameworks—from ECL modeling to regulatory reporting.
Speak with FineIT about IFRS 9 compliance for Saudi banks.