Implementing Expected Credit Loss in the Iranian Banking Industry

Document Type : Original Article


1 Monetary and banking research institute central bank of the Islamic Republic of Iran, Tehran, Iran

2 Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran


IFRS 9 changes the bank’s impairment accounting for debt instruments by replacing the incurred credit loss model with a forward-looking expected credit loss (ECL) model. This study examines the challenges of switching to the ECL model in the Iranian banking industry. We designed a questionnaire with 46 questions and sent them to four groups include: "banks", "bank auditors", "regulatory bodies" and "academic experts and researchers". The questionnaire’s rate of return was 90% and data were analyzed using fuzzy logic. We find that factors such as the prolonged judicial process of receiving receivables, related parties or political cronies, obligations imposed by the government, inefficiency of risk management and etcetera have caused banks to have a large volume of non-performing loans (NPLs). Failure to solve these problems will cause the ECL model not to be implemented properly. Also, according to our findings implementing this model will majorly change how Iranian banks manage and report their credit risks and reserves. The successful implementation of an ECL approach for impairment accounting will heavily depend on providing the necessary infrastructures at the macro level, supervision, and banks. It seems to require a relatively long time and careful planning to implement the ECL approach according to the current situation and infrastructures.


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