Bangladesh Bank model could ease banks’ shift to ECL framework: Experts

Experts said today (23 September) that a Bangladesh Bank-developed indicative model could help banks transition more smoothly to the Expected Credit Loss (ECL) framework for loan classification and provisioning, as many lenders currently lack the capacity to develop robust ECL models independently.

They made the observations at a special workshop titled "Implementation of Expected Credit-Loss (ECL) Loan Classification and Provisioning of Banks: Preparedness, Challenges and Way-outs", organised by the Bangladesh Institute of Bank Management (BIBM) at its campus in Dhaka, with Bangladesh Bank and other stakeholders invited, according to the press release.

Bangladesh Bank Deputy Governor Dr Md Kabir Ahmed attended the workshop as the chief guest, while BIBM Director General Dr Md Ezazul Islam chaired the closing session.

BIBM Professor and Director of Training Dr Mohammad Tazul Islam delivered the welcome address.

BIBM Professor (Selection Grade) Dr Prashanta Kumar Banerjee presented a research paper on the issue on behalf of the research team comprising Md Mohiuddin Siddique, Dr Md Mahabbat Hossain, Sonali Bank PLC CFO and Head of Treasury Md Iqbal Hossain, and Najeefa Kabir.

BIBM Supernumerary Professor Md Ali Hossain Prodhania; Bangladesh Bank Executive Director Md Ashraful Alam; and Pubali Bank PLC Managing Director Mohammad Ali participated as designated discussants.

An open-floor discussion and question-and-answer session followed the presentation.

Speaking as chair of the closing session, Dr Md Ezazul Islam said the transition to the ECL framework should be viewed as a risk-governance reform rather than merely a compliance exercise.

"Bangladesh has made a meaningful start towards ECL implementation, but credible implementation will depend on the quality of data, systems, professional judgement, governance and model validation," he said.

He said a proportionate and phased approach could facilitate the transition, while the ultimate objective should remain full and consistent coverage under IFRS 9.

Ezazul also stressed the importance of industry-wide consistency given the uneven modelling capacity among banks.

In this context, he said a standardised indicative framework with controlled scope for bank-specific customisation could merit serious consideration.

He said BIBM was ready to support the transition through targeted professional training, certification, applied research, technical guidance and a continuing platform for dialogue among regulators, banks, auditors and experts.

The recommendations emerging from the workshop, he added, would help finalise the research paper and support the broader ECL implementation process.

In his address, Bangladesh Bank Deputy Governor Dr Md Kabir Ahmed said the reform should remain time-bound, but its implementation must be based on demonstrable institutional readiness.

He emphasised that data quality and governance are foundational to the ECL framework, noting that sophisticated models cannot generate credible ECL estimates without reliable historical, credit-performance and recovery data.

Kabir said the banking industry appeared to need greater methodological consistency, potentially through an indicative or minimum framework, while retaining the necessary scope for bank-specific judgement.

The deputy governor also called for immediate attention to model validation, technical capacity, automation and capital planning to ensure a sustainable transition to the new framework.

He said successful implementation would require coordinated efforts from all stakeholders, with Bangladesh Bank ensuring regulatory clarity and effective supervision, banks strengthening their internal governance and systems, and BIBM and professional bodies providing sustained capacity building and technical support.

Kabir thanked the participants for making the discussion constructive and solution-oriented.

The research paper presented at the workshop found that the transition from Bangladesh's existing rule-based loan classification and provisioning system to the ECL framework would involve much more than an accounting change.

It would require significant improvements in credit-risk assessment, data architecture, governance, modelling, technology, capital planning and supervisory practices.

According to the paper, IFRS 9 is principle-based and requires ECL estimates to reflect the characteristics and credit risk of individual credit portfolios.

Bangladesh Bank has therefore advised banks to develop their own ECL frameworks, with proportionality based on the nature, size and complexity of their credit exposures.

However, the study identified significant concerns among banks regarding their capacity to develop robust ECL models independently.

The survey found that only 31.25% of participating banks supported developing ECL models independently, while 68.75% did not favour such an approach.

Respondents said a Bangladesh Bank-developed indicative model could help promote greater consistency, comparability, auditability and supervisory oversight, while also reducing implementation costs.

The workshop brought together invited representatives from Bangladesh Bank, commercial banks, BIBM and other relevant stakeholders to discuss the banking sector's preparedness, implementation challenges and possible ways forward for the effective adoption of the ECL framework in Bangladesh.