Financial Instruments in the Banking Sector: Challenges and Way Forward

The accounting standards are sets of principles and guidelines required to follow in the recording of financial transactions and in the preparation and presentation of financial statements of any organisation. International Accounting Standards (IAS)/Financial Reporting Standards (IFRS) are adopted by the Financial Reporting Council (FRC) in Bangladesh for application in the measurement, recording of financial transactions and in the preparation of financial statements. The IAS/IFRS ensure harmonisation and comparability of financial statements with global best practices in accounting and reporting. IFAC (previously IASB) issues accounting standards, and all members of the IFAC are expected to follow the standards. World Bank, IMF and all other donor agencies prefer that we adopt the standards so that they can read financial indicators and health in the same yardstick as they do for other countries.

FRC is an apex body for the promulgation of accounting and reporting standards and works as an oversight body for accounting professions in the country since 2015, along with ICAB. FRC has adopted IFRS in Bangladesh since 1 July 2020. Before the enactment of the FRA, the Institute of Chartered Accountants of Bangladesh (ICAB) had been playing a vital role in both promulgating and ensuring the application of accounting standards. Mentionable that though FRC had the official authority since September 2015 as per the Financial Reporting Act (FRA) 2015, ICAB had been performing the responsibility on behalf of FRC during the transition. Compliance with the financial reporting standards is not an option rather legal obligation to all the relevant stakeholders as per FRA 2015: Sections 40 and 44.

To establish the principles for the financial reporting of Financial Assets and Financial Liabilities and to provide relevant and useful information to users of Financial Statements, it is inevitable to follow IFRS accounting. IFRS will help users to assess the amount, timing and uncertainty of an entity’s future cash flow. The scope of the IFRS 9 is Financial Instruments concepts; Classification and measurement; Impairment; Hedge Accounting and Disclosures and presentation requirements. The standard covers both asset and liability instruments, meaning financial assets on the one hand, but the same is treated as a liability on the other hand. For example, Investment in a Bond, on the hand of the investor, is a financial asset; however, it is a financial liability to the issuer.

Bangladesh’s banking sector is on the verge of a major accounting and risk-management shift. As a part of the central bank’s continuous efforts to enhance risk management capabilities of banks and strengthen the transparency of the financial reporting, Bangladesh Bank has taken initiatives to implement the expected credit loss (ECL) methodology-based provisioning system for banks in accordance with International Financial Reporting Standards (IFRS 9) by a circular issued in November 2024. The ECL-based model enables banks to manage their credit loss/risk more effectively by considering past events, current conditions of borrowers and future forecasts compared to existing rules-based provisioning. In early 2025, Bangladesh Bank’s directive laid out an implementation timeline; however, detailed central-bank guidelines will be circulated by January 2026, on automated ECL models, which is planned to apply by mid-2026 and pilot rollouts covering 25%–50% of loan portfolios in late-2026, and wider adoption in 2027. Parallel (provisional) IFRS-9 reporting is also expected during the rollout.

A high-powered working committee has been formed with industry experts, along with relevant central bank officials to review, supervise and guide the transition and supervision of ECL–based Loan Classification and provisioning under IFRS 9. Accordingly, on 25^th June 2025, Bangladesh Bank directed all banks to prepare the Loan Classification (CL) in the new format, which will be used as input for the ECL model in the coming days. The circular also directed to use of sector codes specified in the Scheduled Bank Statistics (SBS). Now Bangladesh Bank will have to redirect this data for the database and trend analysis for each sector, customer group, along with linkage with CIB data and default history.

This change is not just a technical adjustment to financial statements. IFRS 9 forces banks to recognise expected credit losses earlier, requires forward-looking models, and demands higher quality data, model governance and stronger coordination between credit risk and finance and IT functions. If we give a closer look on IFRS 9 , the scope of IFRS 9 will cover loans, Government security, equity investment and debt security, investment in capital market and other account receivables including interest receivables. The standard will affect recognition of both assets and income and subsequent measurement and valuation of all financial assets under the standards.

The implementation of ECL or IFRS 9 requires the involvement of three broad categories of stakeholders, ie Bangladesh Bank, colleagues involved in Credit functions and Finance Functions of scheduled banks and more importantly, the group that will audit and express an independent opinion on those ECLs, that are external auditors of banks.

Bangladesh Bank will issue policy guidelines with historical data for the analysis of the history of credit and supervise the implementation process. Staff of banks will prepare the ECL model as guided/directed by the policy of Bangladesh Bank and report the same. The external auditors will review, check and validate the data, ECL model and judgment of management independently to express their opinion. Moreover, we expect the Department of Banking Inspection (DBI) and the Department of Offsite Supervision (DoS) to also review the same data, model and judgment in their inspection and review processes.

The implementation of ECL models will not be smooth. However, the issues and plausible ways of minimising those are elaborated. Considering the present situation of financial sectors and non-performing loans (NPL), if the sector goes for the implementation of the ECL model, shifting from a rule-based model, this will impact the credit rating of the banking sector and sovereign rating, too. The diminished sovereign rating also has an adverse impact on the negotiation with the corresponding banks abroad, who might cancel agreements or increase interest rate/commission. Phased capital treatment and policy buffers can be considered as ECL causes sharp capital hits, temporary transitional arrangements or capital buffers as seen in other jurisdictions, provided they are transparent and conservatively designed.

Bangladesh Bank has taken initiatives to implement the ECL model for the loan assets for banks only, but IFRS 9: Financial Instruments is more than just loan assets. The full scope implementation is not planned, and we should plan for the full scope implementation of IFRS 9; otherwise, the financial statements will not be fully IFRS compliant, and the external audit may put a reservation on their independent opinion

Though banks have been brought under the ECL model, NBFIs are not yet directed to the ECL model implementation. This deviation in implementation will bring in challenges with auditors, external investors and lenders. The readers of financial statements may be confused while comparing Banks' and NBFIs' statements, as these exist in the same environment.

The impact of the implementation of ECL models/IFRS 9 on banks’ profit and then capital should be assessed and considered beforehand. If necessary, Bangladesh Bank will have to support banks additionally by relaxing or in any other ways to meet the regulatory capital requirements under Basel Guidelines.

IFRS 9 requires key data (Input for the proposed models) to develop models, and the required data should be available at free of cost. Bangladesh Bank can only build a data warehouse and link with SBS and Credit Information Bureau (CIB) for Government and Private banks.

IFRS 13: Fair Value Measurement is suggested to consider as this is very relevant for the valuation of financial Instruments. Unique behavior of the client may not be found which will impact on the development of ECL model. Different models will be used by different banks for the same category or class of customers based on their judgement. There are still many banks that do Branch Banking, and they will struggle further in consolidation of data and development of ECL Models. The use of management judgments will be applied widely and this will differ significantly with the external auditors. Bangladesh Bank will have to support by guidelines to keep the judgmental issue to a bare minimum.

Model complexity and governance may be issues for the ECL methods implementation, but the well-defined model building, validating and maintaining 12-month and lifetime ECL models, including staging criteria, forward-looking scenarios and overlays with the involvement of the specialist skills in credit analytics, model validation and documentation, will be supportive. Many banks may be supervised more closely by Bangladesh Bank and external auditors.

Board of Directors needs a briefing to interpret IFRS-9 impacts so that they can govern the bank’s management and investors’ expectations accordingly, especially for the dividend. ICAB Involvement as a regulator of external auditors should be immediately with the implementation process and share their view on the proposed ECL Models.

In addition, the BSEC and the internal audit function should be involved in the process of the transition. There should be well-planned for many workshops and seminars to educate and train relevant stakeholders, including DBI, DOS, staff of credit functions and finance functions of the banking industry.

The robust change management initiatives and processes should be in place to manage and cope with all challenges in the IFRS 9 Implementation process, with the involvement of all the relevant stakeholders under discussion, including the Central bank, all scheduled banks, external auditors, DBI’s inspectors, including internal auditors of banks. IFRS 9 is a leap forward for transparency and resilience in Bangladesh’s banking system. But the transition will be a journey — not a single event. Success will depend less on a single model and more on leadership, data foundations, governance, change management and effective regulator-industry partnership.

Mohammad Abdul Ohab Miah FCA, Council Member, Chairman, IFRS 9 Implementation Taskforce of the Institute of Chartered Accountants of Bangladesh (ICAB), Financial Controller, BRAC Bank PLC