The State Bank of Pakistan (SBP) has introduced revisions to the classification and provisioning framework for microfinance banks (MFBs) under the implementation of International Financial Reporting Standard 9 (IFRS 9). The updated guidance, shared through a circular issued to the presidents and chief executives of all microfinance banks, specifically addresses adjustments to the Days Past Due (DPD) mapping that forms part of SBP’s IFRS 9 Application Instructions.
According to the circular, the regulator has decided to update the DPD mapping in line with the revised classification and provisioning requirements for the sector. Annexure-C of the existing instructions has been amended to reflect these changes. While the updated rules bring refinements to how overdue loans and advances are recognized and managed under IFRS 9, SBP clarified that all other earlier instructions remain unchanged.
The move underscores SBP’s continued focus on aligning Pakistan’s banking practices with global financial reporting standards while tailoring them to the unique dynamics of the microfinance sector. For microfinance banks, accurate recognition of non-performing loans and timely provisioning are critical, given their role in serving low-income segments and small enterprises that are often more vulnerable to financial stress. By updating the DPD mapping, SBP aims to provide clarity and consistency in how MFBs classify overdue exposures, ensuring that financial statements reflect a true and fair view of risks.
IFRS 9, which governs financial instruments, requires institutions to adopt an expected credit loss (ECL) model rather than relying solely on incurred losses. This forward-looking approach demands that banks evaluate potential credit risks more proactively and set aside provisions accordingly. For microfinance banks operating in Pakistan, where borrowers often lack formal credit histories, this can present additional challenges. The revised mapping introduced by SBP is expected to provide a clearer framework to navigate these complexities.
Industry experts view this development as part of a broader effort by the regulator to strengthen risk management practices in the microfinance sector. As microfinance banks expand their outreach to underserved communities, maintaining balance sheet resilience becomes increasingly important. The update also reflects SBP’s intent to ensure that regulatory expectations keep pace with evolving international standards, without imposing unnecessary burdens on institutions that cater to financially excluded populations.
For MFBs, the revised instructions will likely require adjustments to their internal systems, reporting mechanisms, and risk assessment models. However, by streamlining the mapping of overdue accounts, the updated framework offers greater predictability and uniformity across the sector. This, in turn, could help improve transparency for stakeholders, including investors, regulators, and development partners who track the financial health of Pakistan’s microfinance industry.
The SBP’s latest circular reinforces its commitment to striking a balance between prudential regulation and enabling growth in the microfinance space. While the technical updates primarily affect back-end processes, their implications are significant for ensuring sustainable lending practices in a segment that plays a pivotal role in financial inclusion.
Follow the PakBanker Whatsapp Channel for updated across Pakistan’s banking ecosystem.