Yandraduth Googoolye: International Financial Reporting
Standards (IFRS 9) - implementation issues
Keynote address by Mr Yandraduth Googoolye, Governor of the Bank of Mauritius, at the Seminar
on "International Financial Reporting Standards (IFRS 9) - Implementation Issues", Ebène, 19
August 2019.
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Ladies and gentlemen
Good morning.
I thank Mr Abdoul Aziz Wane, the Director of AFRITAC South and the Africa Training Institute,
and Mr Ravi Mohan, Resident Advisor, for inviting me to address you this morning.
The AFRITAC South (AFS) has been instrumental in promoting capacity building in this side of
the continent. It has hosted a few seminars on International Financial Reporting Standards
(IFRS) for countries in Sub-Saharan Africa to enable them to prepare for the implementation of
IFRS9. In case you are not aware, the origin of these seminars was from a suggestion made by
the Bank of Mauritius at one of the Steering Committee meetings of the AFS. Let me thank the
AFS for its efforts to build capacity in this region.
With the onset of the global financial crisis more than a decade ago, bank supervisors were
heavily criticised for having failed to spot the risks building up in the financial system and the
inadequacy of provisions made by banks. The incurred loss model of provisioning came under
heavy criticism, as it resulted in too little provisions too late. In the midst of public backlash, the
International Accounting Standards Board was faced with the need to review the provisioning
methodology to make it more forward-looking. This triggered the development of the expected
loss model under IFRS9.
IFRS9 is a complex accounting standard. It relates to financial instruments and requires great
deal of understanding and application on the part of prudential supervisors and auditors of
financial statements. Intricately connected to IFRS9 are two other accounting standards, namely
IFRS7 (Financial Instruments: Disclosures) and IFRS13 (Fair value measurement of financial
instruments). This seminar, I understand, covers important aspects of these three standards.
Rest assured, I will not go into the details but leave it to the experts to delve into the technicalities
of IFRS9.
It is essential that supervisors and regulators are well aware of the underlying concepts of IFRS9.
They need to be equipped with the right tools and techniques to conduct supervision of banks
and financial institutions in the most effective way. It is only then that they will be able to gain
adequate insights into the implications of IFRS9 on credit risk models and blend the IFRS9
requirements with existing methods and models used for risk and regulatory purpose.
Given the complexities of IFRS9, many jurisdictions still consider that it can be very beneficial to
share country experiences on implementation issues and challenges. Allow me, ladies and
gentlemen, to share the experience of Mauritius in the implementation of IFRS9. I will also brush
over some of the recent developments in the regulatory and supervisory framework of the
jurisdiction.
Experience on implementing IFRS9
As an International Financial Centre, Mauritius is committed to adopting international standards
and best practices. IFRS9 became effective since January 2018 in Mauritius. To meet the
deadline of January 2018, the preparatory work for the execution of IFRS9 started as early as
2016.
The Bank of Mauritius introduced a programme to closely monitor progress by each bank and
non-bank deposit-taking institution in implementing IFRS9. As from March 2016, the Bank of
Mauritius held a series of consultations with external auditors and banks to ensure smooth
execution of IFRS9. Regular meetings were held with each licensee to discuss their execution
plans and the potential impact of the new standards. The central bank started requesting for
quarterly progress reports from concerned institutions to monitor progress.
In the light of the complexities involved, these institutions were requested to complete a
comprehensive survey, where they were asked details about the impact of IFRS9 on their
profitability and capital adequacy as well as the expected completion date. The survey revealed
that the increase in provisions would generally range between 2 to 87 per cent, with an average
increase of 18 per cent. Eight banks out of a total of 21 reported that there would not be any
increase in provisions. The predicted impact on the Capital Adequacy Ratio ranged from 0.1 per
cent to negative 2.20 per cent, with an average impact of negative 0.48 per cent.
The survey also revealed that banks used varying models to estimate credit losses given that
IFRS9 is a principles-based standard and thus was not prescriptive on the calculation of the
expected losses. However, judgement was required in choosing forward-looking parameters for
the model used and in identifying significant increase in credit risk. The Bank of Mauritius was
aware that banks might lack the required historical data on defaults in order to estimate losses
accurately. This might partly explain the varying potential impact of the standard on the provision
required by banks.
Conscious of the challenges ahead, the Bank of Mauritius revised its Guideline on Credit
Impairment Measurement and Income Recognition, which will come into effect as from 1 January
2020. To ensure consistency and address the concerns on modelling risk, the Guideline sets
regulatory floors for provisioning. That is, when a financial institution makes accounting
provisions lower than the regulatory floors, the shortfall will be accounted for either through
additional provisions or a charge to the equity of the financial institution. The Bank of Mauritius is
equally considering the possibility of a phase-in period of one year for provision levels to be met
so that financial institutions have ample time to make the necessary adjustments.
In March 2019, the Bank of Mauritius conducted a workshop on IFRS9 in collaboration with the
Mauritius Bankers Association and a consultancy firm. The Bank of Mauritius has also hired a
Consultant to train supervisors on IFRS9 and to assist in the development of a set of IFRS9
returns to be submitted by the financial institutions. The returns will capture data on the
calculation of expected credit losses under IFRS9 and on governance as well as the model's
methodology and set of assumptions. The draft returns are expected to be finalized shortly.
Recent developments
Ladies and gentlemen, as we now reach the second part of my remarks, I will provide an
overview of some of the recent developments in the regulatory and supervisory landscape in
Mauritius.
The Bank of Mauritius is actively working on the modernization and consolidation of its
supervisory framework. We have embarked on the implementation of a full-fledged risk-based
supervisory framework. Our supervisory approach is evolving from a compliance-based
framework to a risk-based framework, which is expected to be completed by end-2020.
A separate module on Money Laundering/Fighting against Terrorism risks is being incorporated
in our risk-based supervisory framework. The Supervision Department now has a dedicated unit
to monitor Money Laundering/Fighting against Terrorism risks in the banking sector through
offsite surveillance as well as on-site examinations.
Many of you might be aware of the Mutual Evaluation Report published by the ESAAMLG in
September 2018 on the assessment of the AML/CFT measures of Mauritius. We have since
made significant strides in addressing the deficiencies highlighted in the Report. In a follow-up
Mutual Evaluation Report published in April 2019, the ESAAMLG concluded that Mauritius has
made significant progress in resolving the technical compliance shortcomings. Further, Mauritius
submitted an application for Technical Compliance Re-rating of 12 recommendations, of which
11 were successfully upgraded. The Financial Services Commission, the Bank of Mauritius and
the Financial Intelligence Unit closely collaborate to fight financial crime. A memorandum of
understanding between the three regulatory institutions was signed last year.
The central bank is currently working on the establishment of a Deposit Insurance Scheme. The
legislation was approved by Parliament and received Presidential Assent in April 2019. However,
it is yet to be proclaimed. The central bank has already started working on the operational
aspects of the Scheme, which will guarantee coverage to eligible depositors up to a specific
amount. At the same time, we are also working on a crisis resolution framework.
Collaboration with Supervisory Authorities
Many jurisdictions represented here are host to Pan-African banking groups and Mauritius is no
exception. Some of our local banks have also extended their footprint on mainland Africa. Home
and host authorities are increasingly required to work closely for effective supervision of banks.
The Bank of Mauritius has signed Memoranda of Understanding with 17 foreign regulatory
authorities, which include banking sector regulators of Kenya, South Africa, Nigeria, to name a
few. Consolidated supervision is now part of our supervisory toolkit and is conducted on a regular
basis. Home and host regulators are able to share their insights on the risk management
framework of banking groups in supervisory college meetings. New areas such as cyber risks
are closely monitored.
In March 2019, the Ombudsperson for Financial Services was appointed. Complaints from
consumers of financial services against financial institutions licensed by the Bank of Mauritius
and the Financial Services Commission are now handled by the Ombudsperson's Office. This is
expected to fast-track complaints resolution. It is also incumbent on the Office of
Ombudsperson for Financial Services to inform and educate the general public on investments
in financial services offered by financial institutions.
My address will be incomplete if I do not mention the significance of corporate governance in
banks. Although a risk-based supervisory framework will ensure the strength and credibility of our
financial system, it cannot eliminate the possibility of failure of an institution. I constantly remind
my officers to keep a close watch on the governance practices of banks. It is an advice that I
extend to all of you.
Concluding note
I am sure that the seminar will provide you with a good insight into the challenges of
implementing IFRS9 as well as key takeaways from the experiences of other countries. Learning
from others' experience will undoubtedly assist you all to improve your own supervisory
practices.
I am delighted to open this Seminar on "International Financial Reporting Standards:
Implementation Issues" and wish you all fruitful deliberations.
Thank you.