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Climate crisis will bring more risks to banks

By Lynet Otieno | November 26th 2021

The one-year ultimatum by CBK for lenders to integrate climate risk management in their operations is timely. [Courtesy]

Parts of Kenya harbour some ugly gully erosion. The erosion, happening gradually, worsens with flooding because of soil types, poor farming practices, or sand harvesting in the ravines.

With time the erosion grows in depth, width and length, meaning people’s pieces of land are degraded or encroached, while roads and other structures are destroyed. In some cases, graves have been swept away.

Some of the most affected areas are arid and semi-arid lands. Old men and women in such areas as western Kenya, Narok (Suswa), Kisumu/Homa-Bay (Awach) will tell you those were people’s land. Some are now confused for seasonal rivers.

The risk of losing land to landslides is, for instance, higher in Meru, Kakamega or Elgeyo Marakwet. Chances of land being rendered useless because of migration to evade drought may be higher in the coastal, North-Eastern or Eastern regions.

A few years ago it flooded in Nairobi, and houses near certain rivers were marooned and people, some still paying mortgage, displaced.

People have borrowed loans against some of these properties. Even with due diligence before lending, the physical risks of climate crisis remains a reality for banking and mortgage institutions.

Risks such as climate-induced conflict and migration, or change of land use and planning, may not appear real at first, but should be seriously considered as threats to businesses by lenders.

This calls for incorporating of climate change in strategic plans, structures and governance as a risk factor.

But there is opportunity on the flip side of the coin, like special rates, within the law, for borrowers against high-risk property; funding of smart agriculture and reafforestation; or working with partners to boost transition to clean energy to replace firewood.

Lenders can also be directly involved in climate action as corporate social responsibility. They are most likely to make losses when potential clients lose jobs, livelihoods, lives or property.

The recent one-year ultimatum by the Central Bank of Kenya for lenders to integrate climate risk management in their operations is, therefore, timely.

This being the decade of action to achieve the global Sustainable Development Goals, Climate Action (Goal 13) can be realised through Partnership (Goal 17) locally, by lenders actively and collectively channelling funds towards green projects, as instructed.

It is a give-and-take, as there is opportunity to make money in capacity building and engagement in businesses that promote resilience as well as mitigation of this crisis. This has worked elsewhere in developed countries, and Kenyan lenders can lead the way here.

-Lynet is Quality Assurance Editor at the Standard Group

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