African banks face high risk on Oil, agric loans

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Sopuruchi Onwuka

More pressure is coming on local and international financial institutions to cut down their exposure to petroleum and other sectors that are vulnerable to impacts of climate change and the concerted global measures to switch to cleaner energy.

According to latest report by multinational investor advisory firm, Moody’s, the comprehensive impact of climate change is pushing the agriculture sector to the precipice in Africa;  while concerted global action is ongoing to curb extractive industry operations that contribute to climate change.

Moody’s Investors Service stated in the report on credit ratings on African financial systems that climate change has continued to cause serial shock on African economies struggling with impacts of draughts and withering farms. It warned banks to exercise caution in further exposure to sectors that come under the direct effect changes in climate and measures against it.

The warning came as Moody’s drew attention to over $218 billion loans advanced by some 49 banks in sectors that now at risk of huge losses or uncertain demand future.

Moody’s findings indicate many of Africa’s largest industries, such as oil and gas, mining and transport face high environmental threats, given their high exposure to carbon transition or physical climate risk.

Oracle Intelligence reports that the increasing pressure on banks and other financial institutions to see risks in funding agriculture and petroleum industry projects holds grim economic implication for Nigeria. Whereas agriculture contributes the country’s highest gross domestic product (GDP), petroleum industry provides nearly all the country’s total foreign exchange income, contributes to the GDP and over 70 percent of government’s overall revenues through taxes and sundry payments.

Globally, the petroleum industry is currently in search of new funding channels following withdrawal of international multilateral lenders from supporting fossil fuel projects. Most oil and gas industry projects in Nigeria are funded with loans arranged or directly advanced by local banks.

Also, several government funded credit facilities floated for farmers in the northern parts of the country might also affected if local banks begin to count risks imposed by the grim impacts of raging climate change and rapid desertification.

“We expect environmental factors will lead to a deterioration of the banks’ credit quality and profitability in the long term if banks do not take measures to prudently manage climate-related and environmental risks.”

In pointing at two Africa’s biggest oil and gas producers, Moody’s stated that financial institutions in Nigeria and Angola also face additional risks in their large exposure to sovereign bonds at a time of rapid energy transition and global consternation against continued funding of fossil fuel projects.

Oracle Intelligence reports that the invasion of Nigeria by marauding Fulani herders from the Sahel and their constant clashed with local farmers in the country are part of the direct consequences of climate change as the nomadic cattle rearers push towards the lower Niger area in search of lush vegetation.

The clashes over land for farming and cattle rearing have led to huge losses to crop farmers and nomadic livestock farmers.

In Kenya and other East African nations, climate change has caused critical shortage of water and food for millions of people, worsening the situation of traditional nomadic pastoralists as they scramble for spaces around shrinking water sources.

Banks in Democratic Republic of the Congo and South Africa have engaged in extensive lending to the mining industry; banks in Uganda are heavily exposed to farming and fishing, making them vulnerable to droughts and other consequences of climate change.