De­fault prob­a­bil­ity

The East African - - BUSINESS -

BANK MANAGERS will be ex­pected to de­fend how they ar­rived at the prob­a­bil­ity of de­fault for each loan prod­uct and bor­rower when the In­ter­na­tional Fi­nan­cial Re­port­ing Stan­dard 9 takes ef­fect.

The In­sti­tute of Cer­ti­fied Public Ac­coun­tants of Kenya (ICPAK) is com­ing up with guide­lines on how com­mon el­e­ments of the bal­ance sheet will be treated in or­der to avoid con­fu­sion in the mar­ket.

For ex­am­ple, ICPAK will set a com­mon de­fault rate to be ap­plied on gov­ern­ment se­cu­ri­ties to avoid one bank say­ing it as­sumed a de­fault prob­a­bil­ity of one per cent al­low­ing it to de­clare bet­ter per­for­mance than a more con­ser­va­tive one which as­sumes a rate of five per cent.

South Africa pro­poses the as­sumed rate of de­fault for gov­ern­ment se­cu­ri­ties at be­tween one and five per cent. Coun­tries that do not have a credit rat­ing such as Burundi, Tan­za­nia and South Sudan will make it even harder for bankers to fac­tor the de­fault prob­a­bil­ity.

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