What is Expected Credit Loss?
Expected credit loss (ECL) is a forward-looking measure of the lifetime or 12-month credit losses that a financial asset is expected to suffer, calculated under IFRS 9. It replaces the old incurred loss model and recognises losses earlier.
How It Works
- Allocate each financial asset to stage 1 (performing), stage 2 (significant increase in credit risk), or stage 3 (credit-impaired).
- Measure 12-month ECL for stage 1 and lifetime ECL for stages 2 and 3.
- Compute probability of default, loss given default, and exposure at default.
- Apply forward-looking macroeconomic scenarios and weights.
- Discount the expected losses to present value using the effective interest rate.
Saudi Context
Saudi banks regulated by SAMA and listed corporates applying IFRS 9 must run an ECL model on receivables, loans, and debt investments. SAMA issues regular guidance on ECL stage migration and overlays during economic shocks.
Example
A SAR 1,000,000 receivable in stage 1 with a 12-month PD of 1.5% and an LGD of 40% has an ECL of 1,000,000 × 1.5% × 40% = SAR 6,000.