Local finance companies considering raising limits of real estate guarantees

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Changes create significant operational challenges

KUWAIT CITY, April 7: Some local finance companies are considering raising the limits of their real estate guarantees required by the customer by an additional 33 percent from the current rate.

This step aims at reducing the financial pressures resulting from the implementation of the International Financial Reporting Standard (IFRS) No. 9, concerning financial instruments and provisions, reports Al-Rai daily quoting sources.

The sources said the financing companies plan to raise their real estate guarantees from 150 percent to 200 percent, indicating that these companies rely on the contribution of the targeted action to reduce the need to build additional allocations required by the new accounting standard.

The IFRS 9 supersedes IAS 39, introducing new requirements for classification, measurement and hedge accounting that finance companies believe will affect their future.

According to the previous accounting instructions, if the client fails and the period specified in accordance with the regulatory instructions is exhausted, the finance company will build its allocations based on the result of the deduction of the value of the collateralized property from the total indebtedness. If we assume that a financing entity granted a customer a loan of one million dinars, and obtained a real estate guarantee of one million dinars, after the period of failure of the client, where the funding was deducted in accordance with the previous accounting instructions value of the property (million dinars) of the total indebtedness (also million) Thus creating a value that should be built at a rate that is often zero, so financing companies have not faced a major challenge in this regard.

However, with the requirements of applying the criterion (9) according to the above example, the financier will have to deduct half of the value of the property from the total indebtedness, which will result in a difference of 500 thousand dinars, and this means requires the construction of a corresponding allocation, and here only half of the problem arises.

In accordance with the requirements of applying IFRS 9, the period of time required to build provisions will be reduced by 100 per cent on the client. Previously, the fi- nancier had to build full provisions on the client’s loan if it faltered for 365 days or the relationship between the creditor and the debtor became a legal dispute.

Now, the financier will have to make a 100 percent allowance if the client fails for a period of three consecutive months. If the client subsequently settles in the payment, the financier should not liquidate the provisions made for its financing until one year after regular repayment.

The sources indicate that the accounting changes imposed by the application of IFRS 9 have created significant operational challenges to the business model of the finance companies, which they believe should not be treated in a controlled manner with the same rules applied to the banks themselves

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