Looming Financial Risks from Nature Loss in African Banking Systems

A recent stress test of five African banking systems has revealed potential systemic risks from nature loss that could threaten financial stability, reports Reuters. Central banks in Morocco, Rwanda, Zambia, Ghana, and Mauritius participated in the study, which highlighted the vulnerability of banks with substantial loans to agriculture and forestry firms. According to this report, the findings indicated that these sectors could see profits slashed by half over the next two decades due to ongoing deforestation and the loss of vital pollinators like bees.

Oswald Mungule, a senior analyst at the Bank of Zambia, emphasized Africa’s heavy reliance on nature and the need for coordinated risk management to prevent systemic risks and contagion effects in the financial sector. This warning comes as the world prepares for the U.N.’s COP16 biodiversity conference in Colombia this October, where leaders will face mounting pressure to protect crucial ecosystems.

The new stress test, shared exclusively with Reuters, builds on an initial analysis from 2022 and is the first comprehensive look at the economic destabilization caused by biodiversity loss since the COP15 global deal in Toronto. Coordinated by the African Natural Capital Alliance (ANCA) with British development agency FSD Africa and McKinsey, the tests revealed that agriculture, mining, and food sectors face the most significant challenges. In Ghana, agricultural firms could see a 50% profit drop, while Zambian mining firms could experience a 32% decline if current trends continue.

Dorothy Maseke, head of ANCA and FSD Africa Nature Lead, warned that cumulative credit losses across the five countries could rise by up to 21% by 2050 without nature-positive actions. She painted a grim picture, emphasizing the urgency for coordinated efforts to mitigate these risks. In response, Zambia’s central bank is pushing for a shift in loan allocations towards greener, more sustainable activities and plans to conduct regular climate-stress tests. ANCA has also established memorandums of understanding with four African countries to support policymaking, aiming to extend this support to eight nations by year-end.

Source- Reuters