Strategic Implementation of International Financial Reporting Standard 9 and Profitability of Listed Commercial Banks in Kenya

Abstract

The adoption of IFRS 9 weakened capital adequacy and increased the likelihood of loan defaults. This study examined the implementation of IFRS 9 and its impact on the profitability of listed commercial banks in Kenya. The objectives were to establish the extent of IFRS 9 adoption among these banks, determine its impact on their profitability, and evaluate the relationship between IFRS 9 implementation and profitability. Theories of Credit Risk, Agency, and Asymmetrical Information (moral hazard and adverse selection) were used. Data from the 10 listed commercial banks in Kenya were analyzed from 2015 to 2020 using regression analysis, descriptive statistics, and Pearson correlation, focusing on ROE, LLP, CAR, and NPL. The findings revealed significant variations in ROE across different banks and periods, with the average ROE declining notably from 21.07% pre-IFRS 9 to 15.98% post-IFRS 9. LLP increased substantially post-IFRS 9, indicating a proactive approach by banks to manage credit risk, while CAR remained relatively stable, reflecting banks' compliance with regulatory requirements amidst IFRS 9 implementation. NPL ratios showed an upward trend, increasing year on year over the study period. Inferential analysis through regression revealed that LLP (β = 0.161, p > 0.05) and NPL (β = -1.097, p < 0.01) had significant impacts on ROE for the entire period. A strong negative correlation existed between ROE and NPL (r = -0.695, p < 0.01), highlighting the adverse impact of NPL on profitability. In conclusion, IFRS 9 has posed significant challenges to Kenyan banks, requiring effective credit risk management and strategic adjustments to sustain profitability, with regulators needing to facilitate a smooth transition. oo