What is Expected Credit Losses (ECL)?
Expected credit losses are the probability-weighted estimate of credit losses on financial assets over their lifetime or 12-month horizon, as required by IFRS 9 for impairment.
How It Works
- Classify exposures into Stage 1, 2, or 3 based on credit risk evolution.
- Apply PD × LGD × EAD models to compute ECL.
- Update ECL each reporting period based on forward-looking information.
Saudi Context
SAMA-regulated Saudi banks apply IFRS 9 ECL models with macro overlays calibrated to Saudi GDP, oil price, and household debt dynamics.
Example
A Saudi bank holds a SAR 100 million loan in Stage 2 with PD 5%, LGD 40%. Lifetime ECL is about SAR 2 million.