Challenges and Benefits of Implementing Expected Credit Loss Model For Microfinance Institutions in Ethiopia: Case Study on Some Selected Microfinances
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Date
2024-02-13
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A.A.U
Abstract
According to Financial reporting proclamation 847/2014 ratified by House of people representative, both public and private interest entities were required to prepare their financial report in accordance with International Financial Reporting Standard. Pursuant on the proclamation issued financial Institutions adopted IFRS9 along with other standards. The new standard introduces the expected credit loss model, which is the new impairment model, to allow for up-to-date recognition of credit losses, estimated not only on the actual credit loss, as well as details on the present loan portfolio's prospects. The primary goal of this study was to investigate the challenges and benefits associated with implementing the International Financial Reporting Standard 9 (IFRS 9) Expected Credit Loss Model. Even though the purpose of ECL implementation is to simplify existing rules and increase investor confidence in financial institutions' financial statements, financial institutions confront numerous challenges during implementation. In order to achieve its goals descriptive research design is implemented along with non-probability purposive sampling. Both primary and secondary data gathering approaches are employed to answer the study questions and fulfill the research's goal. The study assessed five microfinance institutions on their implementation of expected credit loss. The research finds that lack of skilled personnel, inadequate data collection and management systems, challenges in obtaining reliable forward-looking information, difficulty in forecasting the expected cash flows of various assets, difficulties in developing suitable models for classifying loans, IT infrastructure related challenges, External challenges are identified as major challenge. This finding recommends the need for Data management systems, implementation of technology and tools, regular ECL model development and validation, Incorporation of scenario analysis and forward looking information, Staff training and Collaboration with external parties are proposed in order to minimize the challenges the institutions are facing.