African banks wanting to write letter of credit (L/C) business will come under additional pressure next year with the introduction of International Financial Reporting Standard (IFRS) 9 in January.

The continent's banks already face difficulties with L/C transactions since so many international financial institutions have terminated correspondent relationships with their African counterparts over recent years.

Transactional risks

As of 1 January 2018, African banks will be required under IFRS 9 to set aside money for trade financing transactions such as L/Cs and guarantees, which were previously considered risk-free.

This is expected to eat into bank profits and erode their reserves. Smaller lenders may be hardest hit while small- and medium-sized businesses may suffer a credit squeeze.

Increased provisioning

The new standard requires lenders to consider all credit, including to government, as risky and to set aside money that would cushion them in case of actual default.

Previously, banks were only required to provide for loans that had not been serviced for a period exceeding 30 days, while lending to government was considered risk-free and did not require provisioning.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.