Managerial discretion in loan loss provisioning under IFRS 9: evidence from MENA banks

This thesis examines the influence of the accounting change from IAS 39 to IFRS 9 on the discretionary reporting of loan loss provisions. Using 1,043 bank-year observations from 139 Islamic and conventional banks across 14 MENA countries over 2010–2022, the study develops a panel-based empirical design that estimates the discretionary LLPs and regresses them on the variables of interest in a two-stage regression model. The findings show that IFRS 9 is associated with higher discretionary provisioning, indicating greater scope for managerial discretion under the ECL model of IFRS 9. The study also provides evidence that discretionary LLPs are associated with increased regulatory capital management practices under IFRS 9 than under IAS 39. In contrast, the earnings management results show that the association between discretionary LLPs and the earnings management indicator weakens under IFRS 9, suggesting that IFRS 9 dampens traditional incentives for earnings management through LLPs. Moreover, the findings demonstrate that discretionary LLP reporting under IFRS 9 is weaker in countries with higher religiosity, highlighting the role of religiosity in constraining bank managers’ behaviour. In contrast, organisational religiosity, proxied by Islamic-bank status, shows only weak and inconsistent evidence of a moderating effect, mainly because Islamic-bank observations are small in the study sample. Finally, discretionary reporting of LLPs under IFRS 9 decreased during the COVID-19 pandemic, consistent with the notion that forward-looking LLPs under IFRS 9 mitigate the impact of shocks. Overall, the thesis contributes to the literature by demonstrating how IFRS 9 reshaped discretionary provisioning among MENA banks, shifting managerial focus from earnings to capital management. Additionally, the thesis extends the literature by integrating informal institutional constraints, particularly religiosity. The study therefore contributes to a more comprehensive understanding of how accounting standards, managerial incentives, and institutional constraints interact in shaping banks’ provisioning behaviour.