A Central Bank of Kenya (CBK) survey has found that a considerable portion of financial institutions in Kenya remain inactive in tackling climate-related issues, highlighting the ongoing need for further action and advocacy in this area.
According to the recently published Banking Sector Innovation Survey 2023, only 58 percent of commercial banks and 57 percent of microfinance banks had either innovated or were in the process of innovating a climate change-related product. This is compared to 2022 findings which showed that 51 percent of commercial banks and 43 percent of microfinance banks were going green or in the process of doing so. These figures, according to the 2023 survey, show a noticeable uptick in efforts by banks and microfinance institutions to go green.
The CBK Banking Innovation Survey shows that several financial institutions are already actively responding to the challenges posed by climate change by innovating and developing climate change-related products.
These initiatives include incorporating climate risk financial analysis into loan facilities, establishing green financing frameworks to guide sustainable practices, and launching sustainability campaigns aimed at environmental conservation.
Several institutions are also already offering green financing options such as green mortgages, financing for renewable energy solutions, and sustainable trade financing. Additionally, operational changes, such as the adoption of digital banking to reduce paper usage, demonstrate a commitment by banks to sustainability beyond financial products.
Kenya’s banking sector is cognizant of the importance of addressing climate action and has increased its efforts towards offering innovative climate-related financial products and services. In this regard, CBK’s Guidance on Climate-related Risk Management, issued in 2021, has been a timely policy action that continues to steer the banking sector towards greening efforts.
While some institutions are still in the process of developing or analysing their climate-related products, overall, these efforts signify a growing recognition of the importance of climate action within the financial sector.
In the CBK Survey, Banks cite challenges regulatory bottlenecks to innovation that they face in innovating new financial products.Some shared challenges include lengthy approval processes for new products and partnerships, regulatory complexities surrounding cloud computing and third-party partnerships, and stringent requirements for customer identification and verification.
These challenges hinder the adoption of certain technologies and innovative solutions, delaying the rollout of new products and services and limiting the ability of financial institutions to meet the evolving needs of their customers.
Banks also cite a lack of clear guidelines on emerging technologies such as open banking and limited scope of Know Your Customer(KYC) identification requirements, which can create uncertainty and ambiguity for financial institutions looking to leverage digital innovations.
Banks also point to other regulatory constraints such as outsourcing requirements and physical KYC requirements which pose barriers to innovation activities, particularly in the digital realm where remote onboarding and fully digital services are becoming increasingly important.
According to CBK, the digitalization of finance presents numerous opportunities for financial institutions by leveraging technology to address various socio-economic and environmental challenges.
Digitization enables the development of climate-related products, such as green bonds and carbon offsetting programs, facilitating investments in renewable energy projects and climate-smart agriculture, thereby contributing to Climate Action.
