CLIMATE CHANGE RISK AND BANKING INDUSTRY VULNERABILITIES: IMPERATIVE FOR SUSTAINABLE BANKING AND ECONOMIC DEVELOPMENT IN AFRICA

Abstract

Climate change increasingly threatens global financial stability, yet African banks’ vulnerability remains underexplored. This study examines the effects of physical and transition climate risks on African banks’ capital adequacy using forward-looking stress tests. Results show that while the baseline Capital Adequacy Ratio (CAR) is 11.58%, it declines to 7.97% under moderate shocks and 4.83% under severe shocks. Physical risks, especially floods in agriculture-dependent regions, have the most immediate impact, reducing CAR to 7.40% under extreme scenarios. Transition risks from adopting low-carbon technologies in high-emission sectors exert moderate but cumulative effects, potentially becoming systemic over time. The findings underscore African banks’ significant vulnerability to climate-related shocks and highlight the need for robust climate risk governance, sectoral diversification, and proactive mitigation strategies. Integrating scenario-based stress testing and climate-risk analysis into supervision can help banks anticipate capital erosion and enhance financial resilience.