Kenya plans higher capital requirements to account for climate risks

April 15, 2024|Written by Katy Lee|Central Bank of Kenya

The Central Bank of Kenya (CBK) is planning to increase banks’ capital requirements to better account for rising risks associated with climate change among other factors, its governor has announced.

CBK governor Kamau Thugge told a media briefing on 4 April that details of the proposal would be released in the next month ahead of a public consultation.

“I believe very strongly that the capital requirements for banks need to be increased. We’ve seen increased risks, whether it’s from climate change or cybersecurity,” Thugge told journalists.

“We are in the process of deciding what kind of capital requirements we would require from the banks,” he said, adding that “we need strong banks that can not only operate in Kenya, but also operate in the region” and beyond.

A stress test by the Kenya Bankers Association indicated last year that the Kenyan banking sector is vulnerable to climate change, with the associated physical risks posing major challenges to banks’ stability.

Increasing capital requirements to better account for climate risks would represent a major development in the CBK’s green finance reforms and place it among just a handful of central banks experimenting with this tool.

The Kenyan central bank issued guidance for banks on managing climate-related risks in 2021 and the following year joined the Network for Greening the Financial System (NGFS), an alliance that now includes more than 150 central banks and financial supervisors.

The CBK is developing a green investment taxonomy in collaboration with the European Investment Bank and has said it is working on a disclosure framework that will be aligned with the standards of the International Sustainability Standards Board.

Iva Detelinova, a senior advisor on climate adaptation and resilience at the African Climate Foundation, said Kenya had been “a regional leader in taking action to help manage the risks that climate change could pose to the Kenyan financial sector”.

“The Central Bank of Kenya is certainly among the pioneers in this area,” she said of the capital requirements proposal.

Another early mover has been the European Central Bank, which began applying additional capital requirements to banks that fail to effectively manage climate and environmental risks at the end of 2022.

Detelinova stressed that the extent to which capital frameworks already reflect such risks remains a subject of extensive discussions within the central banking community.

Various studies, including a 2022 report by the NGFS, have argued that more data is needed so that both central banks and lenders can better understand how an asset’s climate impact materially affects its credit risk.

This page was last updated April 15, 2024

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