International Financial Reporting Standard 9 and Performance of Commercial Banks in Kenya

Abstract

Commercial banks play a critical role in resource allocation and financial intermediation, channeling funds from depositors to investors. In response to the 2007–2008 global financial crisis, regulators introduced measures to enhance financial stability, including the International Financial Reporting Standard 9 (IFRS 9), issued by the International Accounting Standards Board in 2014. IFRS 9 replaced IAS 39, aiming to strengthen bank financial performance through a forward-looking credit risk management framework and expected credit loss (ECL) provisioning. However, studies have suggested that the early recognition of credit losses and stricter risk management practices under IFRS 9 may negatively impact bank profitability. This study examines the impact of IFRS 9 on the financial performance of commercial banks in Kenya, focusing on loan loss provisioning, credit risk, and capital adequacy. Additionally, bank competition was analyzed as a moderating factor. The research is grounded in Credit Risk Theory, Asymmetric Information Theory, Agency Cost Theory, the Basel Capital Adequacy Framework, and the Structure-Conduct-Paradigm Theory. A positivist research philosophy and a longitudinal design were employed, utilizing secondary data from 39 banks over the period 2018–2022, sourced from audited financial statements and Central Bank of Kenya supervision reports. Descriptive statistics and panel regression analysis were conducted, alongside diagnostic tests to ensure data reliability. The findings indicate that loan loss provisioning, credit risk management, and capital adequacy have a significant positive impact on bank performance. Additionally, market share was found to moderate this relationship. The study recommends that bank managers enhance loan loss provisioning, maintain adequate capital buffers to meet regulatory requirements, and strategically expand market share to improve financial performance.

Keywords: IFRS 9, Performance, Commercial Banks