Page 214 - Bank-Muamalat_Annual-Report-2023

BANK MUAMALAT MALAYSIA BERHAD

NOTES TO THE
FINANCIAL STATEMENTS
31 DECEMBER 2023 (18 JAMADIL AKHIR 1445H)

2. MATERIAL ACCOUNTING POLICIES (CONT’D.)
2.2 Material accounting policy information (cont’d.)

(b) Financial assets (cont’d.)
(iv) Impairment of financial assets

The MFRS 9 Financial Instruments impairment requirements are based on an Expected Credit Loss
(“ECL”) model. The ECL model applies to financial assets measured at amortised cost or at FVOCI
(with recycling to profit or loss), irrevocable financing commitments and financial guarantee contracts,
and financing of customers and debt instruments held by the Group and the Bank. The ECL model also
applies to contract assets under MFRS 15 Revenue from Contracts with Customers and lease receivables
under MFRS 117 Leases.

The measurement of ECL involves increased complexity and judgement that include:
(1) Determining a significant increase in credit risk since initial recognition

The assessment of significant deterioration since initial recognition is critical in establishing the
point of switching between the requirement to measure an allowance based on 12-month ECL
and one that is based on lifetime ECL. The quantitative and qualitative assessments are required
to estimate the significant increase in credit risk by comparing the risk of a default occurring on
the financial assets as at reporting date with the risk of default occurring on the financial assets
as at the date of initial recognition.
The criteria for determining whether credit risk has increase significantly vary by portfolio and
include quantitative factors such as delinquency, historical delinquency trend, changes in credit
ratings and qualitative factors such as well as a backstop based on delinquency. For retail portfolio,
a combination of deliquency, historical delinquency trend and qualitative factors are used to
determine significant increase in credit risk. For non-retail portfolio, internally derived credit
ratings have been identified as representing the best available determinant of credit risk whilst
for financial securities, external ratings attributed by external agencies are used.

The assessment of significant deterioration since initial recognition is critical in establishing the
point of switching between the requirement to measure an allowance based on 12-month ECL
and one that is based on lifetime ECL. The quantitative and qualitative assessments are required
to estimate the significant increase in credit risk by comparing the risk of a default occurring on
the financial assets as at reporting date with the risk of default occurring on the financial assets
as at the date of initial recognition.
The Group and the Bank assigns each counterparty, financial securities and financial instrument,
credit rating at initial recognition based on available information about the counterparty,
financial securities and financia instrument. Credit risk is deemed to have increase significantly
if the credit rating has significantly deteriorate at the reporting date relative to the credit rating
at the date of initial recognition.

Nevertheless, regardless of the change in credit rating, a backstop is applied and a financial assets
is considered to have experienced a significant increase in credit risk if the financial asset is
more than 30 days past due on its contractual payments. In addition, the Group and the Bank
may determine that an exposure has demonstrated a significant increase in credit risk based on
certain qualitative factors using its expert credit judgement and, where possible, relevant historical
experienced that are considered to be indicative of such increase whose effect may not otherwise
be fully reflected in its quantitative factors.

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