IFRS 9 and the Reality of Credit Risk in the MENA Region

IFRS 9 is effective for annual periods beginning on or after 1 January 2018 with early application permitted.

IFRS9-Financial Instruments, introduced a major change in the way financial reporting and credit risk are approached. By replacing IAS 39 and keeping hedge accounting optional, the standard moved accounting away from a purely reactive mindset and toward a more forward-looking and risk-aware approach. Rather than recognizing losses only after they occur, IFRS 9 requires organizations to anticipate potential credit issues earlier and respond more deliberately, it specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items.

The core of this shift lies in the expected credit loss (ECL) model. Under IFRS 9, entities must consider future credit deterioration before an actual default takes place. This approach encourages earlier identification of risk and pushes businesses to manage credit exposure proactively instead of waiting for clear signs of distress. In practice, this means recognizing problems before they escalate into material losses.

Because of this, IFRS 9 is not simply a technical update to provisioning rules or financial statements. It reflects how seriously an organization treats credit risk and financial resilience. Many professionals view the standard as a signal of risk management maturity rather than just an accounting requirement. Its implications extend beyond finance teams and influence areas such as risk governance, capital planning, and long-term strategy.

That said, the benefits of IFRS 9 are not always achieved in practice. Studies by the European Central Bank indicate that around 35% of loans that later defaulted were still classified as Stage 1, meaning low risk, only one quarter before failure. This shows that risk indicators were present but not acted upon in time. Similar trends can be seen in parts of the MENA region, where delays in transferring exposures to Stage 2 or Stage 3 are still common. As a result, provisions are often recognized too late, leading to sudden losses and pressure on capital. Institutions with stronger capital buffers tend to act earlier, reinforcing an important point: the effectiveness of IFRS 9 depends heavily on how well and how timely it is applied.

Local market conditions across the region add another layer of complexity. In Lebanon, many small and medium-sized businesses face significant credit risk but lack reliable data, systems, or tools to apply the ECL model properly. Decisions are often driven by judgment rather than structured analysis, increasing the chance that credit deterioration is missed. In Iraq, regulators are encouraging IFRS 9 adoption, yet many banks still depend on spreadsheet-based processes, which often leads to errors in staging. In Saudi Arabia, rising corporate lending has brought greater attention to credit risk practices, with regulators urging institutions to enhance models, strengthen governance, and improve compliance. These examples highlight that IFRS 9 is no longer a theoretical reporting requirement but an increasingly important part of risk management across the region.

IFRS 9 can add real value beyond regulatory compliance. It helps organizations gain a clearer understanding of their credit exposures and identify emerging risks earlier. This improves confidence among investors and regulators and demonstrates a disciplined approach to managing uncertainty. With better-quality data and clearer insights, businesses can make more informed lending decisions, manage capital more efficiently, and align credit risk management with broader objectives such as Environmental, Social, and Governance considerations.

IFRS 9 can either become a useful strategic tool or remain a routine compliance exercise. When it is treated as a box-ticking requirement, supported by outdated models, weak governance, or untested assumptions, it offers little benefit. By contrast, organizations that invest in timely data, clear staging criteria, and well-judged overlays gain a more accurate view of their risk profile and are better positioned to act early. Effective provisioning is not only about calculations; it also relies on sound judgment and strong internal controls. When done well, IFRS 9 can provide a genuine competitive advantage.

For finance leaders, IFRS 9 ultimately serves as a test of how well risk is understood and managed within the organization. A useful question to ask is whether provisions are genuinely forward-looking or whether they only increase once problems become obvious. Strong IFRS 9 frameworks are built on models that reflect current conditions and are supported by timely, relevant data rather than assumptions from the past.

Numbers can look reassuring on paper, even the most polished figures can be misleading and creating a false sense of comfort if they’re not backed by dependable data, appropriate models, and professional judgment. Organizations that recognize this and actively invest in strengthening their IFRS 9 practices are better equipped to deal with uncertainty, protect capital, and make more resilient strategic decisions.