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Operating in Afghanistan: Kabul-based member Muhammad Abdul Basit talks about the benefits of network membership and the challenges of implementing IFRS 9

1st December 2020

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Interviewed for a feature in November’s edition of the International Accounting Bulletin (IAB), Muhammad Abdul Basit, Managing Partner at MGI Ilyas Saeed Chartered Accountants explains some of the tangible benefits of being part of MGI Worldwide CPAAI international accounting association and the impact that the implementation of IFRS 9 is having on the accounting industry in Afghanistan.

Q: What is the advantage of being part of MGI Worldwide?

Muhammad Basit: MGI Ilyas Saeed Chartered Accountants, Kabul, Afghanistan became part of MGI Worldwide network in 2017 and since then we have observed tremendous growth in our business. Our firm is market leader in provision of Assurance and Advisory services to financial institutions including micro-financing institutions, leading telecom sector organisations e.g. Afghan Telecom and Etisalat Afghanistan and UNICEF and UNDP. MGI Worldwide has helped us in lead generation for our business and expand regionally. Hence being part of MGI Worldwide we have following advantages:

  • Regular networking and events help us grow our business regionally
  • Knowledge exchange and resources availability issues were resolved
  • International quality control reviews improved our documentation system and quality of our engagement performance
  • Global IFRS group improves our technical expertise
  • Online training for our senior and junior staff
  • We receive regular business and industry news
  • Customised firm marketing support
  • CaseWare is the MGI’s Global technology partner focused on automated data input, artificial intelligence and cloud accounting. This will help us in our future transition towards automation
  • International webinar series offer opportunity for us to learn from one another, share know-how and exchange stories about experiences in respective fields
  • We have access to online, downloadable and customisable audit and assurance manuals based on ISA and ISQC1
  • MGI’s new global procurement platform will present us with new business opportunities by providing detailed information on local, national and international tenders in more than 200 countries.

Q: What will be the outlook for the Afghanistan economy and investor confidence with the adoption of IFRS9 practices across the accountancy industry in Afghanistan? How will this be rolled out?

Muhammad Basit: IFRS 9 adoption has significant implication for the Banking, Insurance and Telecom Industry in Afghanistan.  Presently Banking Law of Afghanistan regulates the banking industry however for Insurance and Telecom sector guidance by regulators regarding IFRS 9 implementation is limited.

As the economy of the country is in the beginning stage of its evolution, historical data in structured or semi structured format is not available to organisations for IFRS 9 implementation. Our observations in this regard are as follows:

  1. Scoring models for retail credit scoring and corporate credit scoring have not been implemented in Afghanistan so far. Specifically, data regarding application or behavioural scoring of retail customers is not available. Similarly, for corporate clients, information about agency rating and shadow rating is not available. Therefore, organisations are using an expert-based approach for corporate credit scoring.

  2. Many organisations have switched their legacy systems to automated systems such as flex cube and core banking systems. Therefore, there are missing values in the data, and most analytical techniques cannot work with missing values, so pre-processing is required.

    Missing values can occur for various reasons. The information can be none-applicable in the old system but required in the new system. For example, when modelling the date of default, this information is only available for the defaulters and not for the non-defaulters since it is not applicable there.

    Information can also be undisclosed such as a customer who decides not to disclose his or her income because of privacy. Missing data can also originate from an error during merging (for example typos in name or ID). These missing values are major obstacles in IFRS 9 implementation.
  1. As the credit scoring models are not implemented effectively, measuring the performance of these models is not possible at all.

  2. In Afghanistan institutions are very small compared to other countries. As a result, the number of clients is very limited - less than 100 in some cases- and rating systems are also not available. Therefore, performing Rating Migration Analysis and development of the matrix is also not possible. However, a flow rate model could be a good alternative for probability-of-default (PD) modelling and calibration.

  3. In some cases, modelling techniques such as Linear Regression, Logistic Regression and Weight of Evidence cannot be performed due to data limitations.

  4. Asset Classification and Provisioning regulation for banks ignore cash flows from the realisation of primary and secondary security against the loans. Reasons behind this are their marketability and inflated price in the current economic scenario. IFRS 9 adoption where loss-given-default (LGD) modelling considers the present value of cash flows from such collaterals would change the dynamics for the banks and will result in reduced ECL provisions in comparison with the Banking regulations, which simply ignore the value of such collaterals.

  5. Issues related to exposure-at-default (EAD) modelling and credit-conversion-factors for non-fund based facilities were also observed by us.

Besides these issues, we are helping our sectoral clients to devise a strategy to model PD, LGD and EAD. We help them in the:

  • Assessment of their portfolios and measurement of 12 months ECL or lifetime ECL depending upon the staging
  • Gap analysis on IFRS 9 implementation and the requirements of regulators
  • Assessment of potential impact on regulatory capital and capital ratios
  • Determining possible effects of implementation of IFRS 9 on earnings and loan risk management practices
  • Development of client-specific web-based models for future use
  • Corporate training on IFRS 9

Investor confidence is linked with the economic and political stability of the country, which is currently not very stable. Recently, the Central Bank of Afghanistan allowed IFRS 9 adoption for banks with CAMELs rating of three, two and one, which certainly will help these banks improve their regulatory ratios on the books. However, IFRS 9 rules will help in achieving increased comparability internationally in the accounting for financial instruments, and paint a fairer picture of an entity’s risk management policy and strategy.

Q: What is the current state of play within local accountancy firms in terms of qualified practitioners able to implement IFRS9? How is training being improved in your organisation?

Muhammad Basit: Following the closure of the BIG 4 audit firms in Afghanistan, local accountancy firms lack resources to implement IFRS 9, which is why local firms rely on resources from international networks or other regional countries.

MGI Ilyas Saeed Chartered Accountants arranged international IFRS 9 training for its key resources in Afghanistan. This helped improve our technical expertise and as a result we implemented IFRS 9 successfully on many banking and telecom sector organisations.

Q: How are you investing in learning and development and incentivising new recruits into your organisation?

Muhammad Basit: MGI Ilyas Saeed Chartered Accountants has developed a training mechanism for all levels of our employees. For juniors and newly recruited interns we conduct weekly training where guidance on executing field work is provided and last week’s progress is discussed in detailed. This training is provided by seniors and managers.

For senior-level staff, issue specific training and general training on International Standards on Auditing (ISAs) and IFRS is provided. This is provided by advisory and assurance partners or external consultants.

For top management, MGI Worldwide training webinars and external consultants provide training.

Besides these, we also have our own online learning management system for training staff and clients.

Q: How important is it for your firm to implement IFRS 9 to solicit new business referrals and lead generation?

Muhammad Basit: Regulators from central and south Asian countries have delayed the implementation of IFRS 9 for quite some time. Therefore, our IFRS 9 expertise will certainly help us grow our business in all these countries and will generate leads for other MGI Worldwide network firms in this region.

As of now, we have performed impact assessments and implementation of IFRS 9 on many commercial banks, micro-finance institutions, telecom companies. We have received inquiries from different countries of the region about implementation.

Q: How will this affect reporting across practice lines, advisory business and disclosures and meeting international MGI Worldwide network stipulates on promoting transparency?

Muhammad Basit: Transition from the Incurred Loss Model (IAS 39) to Expected Credit Loss (IFRS 9) has also changed the disclosure requirements. IFRS 7 deals with such disclosures, which are intended to enable users of the financial statements to understand the effect of movements in credit risk on the amount, timing and uncertainty of future cash flows. Disclosure requirements under IFRS 7 are extensive and are both qualitative and quantitative.

MGI Worldwide encourages its member firms to adopt international standards and best practices across all service lines and these adoptions are ensured through quality-control reviews.

Q: How is MGI Worldwide supporting with advising on implementing IFRS9 endeavours in Afghanistan?

Muhammad Basit: Members firm of MGI Worldwide and its IFRS Group help with implementation. Member firms can contact the IFRS Group in this regard.

In cases where a member firm needs technical expertise that from MGI Worldwide, then regional heads of MGI Worldwide ask member firms across the globe to assist with those skill requirements. This helps in lead generation and pooling of skills. This has been the case and experience of our firm in Afghanistan.

Q: What advocacy work are you conducting with the local industry regulator to strengthen accountancy practices within both private and public sector client organisations and with meeting IFAC requirements? What are current local norms and limitations?

Muhammad Basit: In order to regulate the accountancy profession in Afghanistan, CPA Afghanistan was formed by the Ministry of Finance. This is the only professional accountancy organisation, and the regulator of the accountancy profession in Afghanistan with particular focus on:

  • Professional accountancy education and professional qualification
  • Practice licensing and registration of individual CPA and CPA firms
  • Adoption and implementation of international standards for use in Afghanistan
  • Professional conduct, including external quality assurance, investigation of misconduct and disciplinary measures

The CPA Law of Afghanistan has been approved by the Parliament; however, being a newly formed organisation, CPA Afghanistan is struggling to set in place procedures and practices for the accountancy profession.

About Ilyas Saeed Chartered Accountants (ISCA)

Ilyas Saeed Chartered Accountants – Kabul started operations in Afghanistan in May 2016. Mr. Muhammad Abdul Basit is the managing partner of the Kabul Office. The firm is registered with AISA (I-81736) and currently employs more than 15 staff to run its operations. Since its incorporation the firm has executed numerous projects in various sectors of economy.

Ilyas Saeed is a member of MGI Worldwide CPAAI. For further information please visit our website mgiworld.com or contact Muhammad Basit at basit@ilyassaeedca.com.

To read the full article in November’s edition of the IAB, as well as past issues, log in to the Member Area of the website and click on Key International Organisations at the bottom of the left-hand menu.

MGI Asia is part of MGI Worldwide with CPAAI, a top 20 ranked global accounting network and association with almost 10,000 independent auditors, accountants and tax experts in some 460 locations in over 100 countries around the world.

 

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