An analysis of credit risk disclosure practices on loans by South African banks

Abstract: Banks today are some of the largest financial institutions worldwide. With branches and subsidiaries on the doorsteps of most, they are virtually part of the communities within which they operate. However, as part of their day-to-day operations, commercial banks constantly face a number of risks. Being cognisant of the fact that credit granting is one of the main sources of bank income, credit risk is therefore seen as one of their most significant risks, as it has the propensity to affect the decisions that users of financial statements can make about the entity. The main purpose of this research is to conduct a content analysis of the disclosed credit risk information by South Africa’s four major banks in relation to their offered loans and advances, so as to establish the extent of their compliance to the International Financial Reporting Framework (IFRS) 7 disclosure requirements. The aim is to assess the significance of the disclosed credit risk information by establishing the extent to which the four banks have adequately, sufficiently and appropriately disclosed the nature and extent of their exposure to credit risk. This assessment is primarily based on the changes to their credit risk profiles that arise from these loans and advances. This will enable the ability of users of these banks’ financial statements to evaluate the nature and extent of credit risk exposure arising from these loans and advances. As well as the resulting impact on these credit risk profiles that stems from the unprecedented growth in the same loans and advances. To achieve the above aims, a content analysis study was conducted from two alternative perspectives: one from a quantitative perspective (to test the existence of the specified credit risk disclosures), and the other from a qualitative perspective (to test the quality of the disclosed credit risk information). The content analysis performed revealed that the four major banks in South Africa are fully compliant with the IFRS 7 credit risk disclosure requirements, and that the quality thereof is generally of a “basic” level.M.com. (International Accounting