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Key IFRS 9 Compliance Gaps Identified in SAMA Inspections

In the rapidly evolving financial landscape of Saudi Arabia, IFRS 9 compliance has shifted from a one-time implementation project to a continuous cycle of refinement. As the Saudi Central Bank (SAMA) sharpens its focus on financial stability under Vision 2030, its inspection teams are moving beyond checking for the existence of models to evaluating their effectiveness, transparency, and data integrity.

For Senior Finance Professionals and Risk Managers, understanding the specific gaps SAMA has identified is no longer just about avoiding audit points, it is about ensuring your institution's resilience in a volatile global economy.

Based on recent industry trends and inspection feedback as we move into 2026, here is an in-depth exploration of the most common IFRS 9 gaps found in SAMA inspections and how to bridge them.

1. The Forward-Looking Information (FLI) Documentation Gap

IFRS 9 is fundamentally a "forward looking" standard. Unlike the old "incurred loss" model, it requires institutions to look into the future and estimate losses based on what might happen.

The Common Gap

SAMA inspectors frequently find that while banks use multiple economic scenarios (Base, Optimistic, and Pessimistic), the justification for the probability weightings assigned to these scenarios is often thin. For instance, assigning a 50% weight to a "Base" scenario without a documented, data-driven rationale is a major red flag.

The Inspection Reality

Inspectors are now asking: “Why is your Pessimistic scenario only 25% likely? Is this based on historical volatility, or is it a management hunch?” The Fix: Move away from expert judgment as the sole pillar for scenario weighting. Use statistical back-testing and sensitivity analysis to show how changes in macroeconomic variables (like Brent oil prices or Saudi non-oil GDP) correlate with your credit risk. Ensure your Economic Forecasting Unit and Risk Team are synchronized so that the narrative in your disclosures matches the math in your model.

2. Over-Reliance on the "30 Days Past Due" Backstop

The transition from Stage 1 (12-month ECL) to Stage 2 (Lifetime ECL) is triggered by a Significant Increase in Credit Risk (SICR). IFRS 9 provides a "backstop" stating that if a payment is 30 days overdue, it’s automatically Stage 2.

The Common Gap

Too many institutions use the 30-day mark as their primary trigger rather than a secondary backstop. SAMA has been vocal that by the time a borrower is 30 days late, the "increase in risk" has already happened, you’re just late to the party.

The Inspection Reality

Inspectors look for proactive triggers. If a corporate borrower’s industry is facing a downturn (e.g., specific construction or retail pressures), SAMA expects to see that borrower moved to Stage 2 before they miss a payment.

The Fix: Incorporate qualitative triggers into your SICR framework. These should include:

• Watchlist status changes.
• Significant drops in internal credit ratings.
• Industry-specific macroeconomic headwinds.
• Breach of non-financial covenants.

3. The "Black Box" Problem in Governance

Model governance is perhaps the most scrutinized area in recent reviews. SAMA expects the Board and Senior Management to not only approve the models but to actually understand them.

The Common Gap

The "Black Box" gap occurs when the Risk team cannot clearly explain the logic behind an ECL output. This often manifests in two ways:

1. Lack of Independent Validation: The team that built the model is often the one "validating" it, leading to a lack of objective challenge.
2. Opaque Management Overlays: When the model produces a number that doesn't "feel" right, management often applies a manual adjustment (an overlay). SAMA frequently finds these overlays are poorly documented and lack a clear "unwinding" plan.

The Inspection Reality

SAMA wants to see a formal Model Challenge Process. If management decides to add a SAR 50 million overlay to the ECL, they need to document exactly why, what data supported that decision, and under what conditions that overlay will be removed.

The Fix: Invest in a truly independent Model Validation (MV) function, either a separate internal team or an external third party. Ensure your Post-Model Adjustments (PMAs) are governed by a strict policy that requires quantitative evidence and regular reporting to the Board Risk Committee.

4. Data Quality and "Proxy" Fatigue

The accuracy of an IFRS 9 ECL model is only as good as the data fed into it. Many institutions in the Kingdom still struggle with historical data gaps, particularly regarding Loss Given Default (LGD).

The Common Gap

To fill data gaps, many banks use "proxies" market averages or data from similar portfolios. While this was acceptable in 2018-2019, SAMA is now pushing for bank-specific data.

• Collateral Valuation: Inspectors often find that collateral values (especially real estate) are outdated, leading to inaccurate LGD calculations.
• EAD Accuracy: Exposure at Default (EAD) for revolving facilities (like credit cards) often lacks sufficient behavioral analysis.

The Inspection Reality

Inspectors are digging into the data lineage. They want to see how a data point travels from the core banking system into the ECL engine. If there are manual "data cleaning" steps in Excel along the way, the risk of error is considered high.

The Fix: Automate your data pipeline. Move away from manual spreadsheets and toward integrated IFRS 9 platforms. Additionally, implement a strict Collateral Refresh Policy to ensure that the "L" in your LGD reflects current market values in Riyadh, Jeddah, or Dammam, rather than three-year-old appraisals.

5. Shariah-Compliant Product Nuances

In the Saudi market, the majority of assets are Shariah-compliant (Murabaha, Ijara, Sukuk). While IFRS 9 is a global standard, applying it to Islamic contracts requires specific care.

The Common Gap

A frequent gap is the treatment of modification gains or losses on restructured Islamic financing. Because these contracts don't use "interest" in the conventional sense, the calculation of the "Effective Profit Rate" (EPR) can be complex. SAMA has identified inconsistencies in how different banks calculate the present value of future cash flows for restructured Murabaha contracts.

>The Fix: Ensure your accounting policy clearly defines the EPR for each Shariah contract type. This policy should be vetted by both your Shariah Board and your external auditors to ensure that the "time value of money" concept is applied without violating Shariah principles.

Summary Checklist for SAMA Readiness

Conclusion:

SAMA’s inspections are not just a "check-the-box" exercise; they are designed to ensure that the Saudi banking system remains one of the most stable in the world. The shift we are seeing in 2026 is a move toward Model Transparency. To stay ahead of the curve, your institution should focus on:

• Narrative-driven documentation: Don't just show the math; tell the story of your assumptions.
• Qualitative SICR triggers: Get ahead of defaults by identifying risk early.
• Rigorous Governance: Treat your ECL model as a living entity that requires constant, independent "health checks."