Banks have expressed fears of increased loan defaults due to exposure to environmental and social, and climate-related risks.
The banking sector says that the emerging risks posed a danger to their businesses and listed disasters such as droughts, floods, and environmental and social risks such as encroachment on riparian areas among the biggest threats.
“Although the internal operations of banks do not generate significant environmental and social impacts, their credit operations which make loans to businesses and projects expand their exposure to the risks borne by the beneficiaries of this lending,” reads a report by the Kenya Bankers Association (KBA) on environmental risk exposure.
The lenders noted that impacts of the factors on economic activities could be seen in how events such as the drought in 2017 caused a decline in agricultural commodity production and livestock herds.
“The fiscal liability of floods, which are increasingly linked to climate change, is equivalent to 5.5 percent of gross domestic product (GDP) every seven years, while that of droughts is equivalent to 8 percent of GDP every five years, according to the second National Climate Change Action Plan 2018-2022,” the report stated.
The sector also observed that when in 2018 over 4,000 buildings were earmarked for demolitions in Nairobi for being constructed on riparian land, many banks were exposed, having lent out money to some of the people who had set up the establishments.
“Many of the buildings involved were developed before the enactment of the Environmental Management and Coordination Act 1999, the principal legislation for the protection of various aspects of the environment. As such, a lot of the encroachment before 2000 may be attributed to a lack of regulation to guide the riparian reserves,” KBA observed.
The sector highlighted the disparity in environmental regulation, particularly riparian land zoning rules that is contributing to environmental risk exposure and called on the government to harmonise operations.
According to the report, land surveys and cadastral maps have not demarcated riparian boundaries and wildlife migratory routes, which has left lenders issuing loans against properties established on lands classified as riparian, only to be demolished later.
KBA chief executive Habil Olaka observed that sound risk assessment and management would ensure the stability of the banking industry.
“By harmonising the spatial land use plans and the wildlife laws, we can reduce the financial risks to both banks and Kenyans,” Dr Olaka said.
