A stress test of five African banking systems has revealed that some lenders in the region could collapse if losses due to nature reduce the profits of the agricultural and forestry companies to which they have granted loans.
The analysis carried out in Zambia, Ghana, Rwanda, Morocco and Mauritius revealed that companies in certain sectors could see their profits halved over the next two decades if impacts such as deforestation and the loss of pollinators like bees continue to be ignored.
‘Africa depends on nature… if we don’t coordinate in terms of how we are dealing with the risks that come from nature, from climate change, we could start to see some systemic risks and contagion effects in the financial sector in Africa,’ Oswald Mungule, a senior analyst at the Bank of Zambia who took part in the study, told Reuters.
The warning comes ahead of the UN’s COP16 biodiversity conference in Colombia in October, where world leaders are under increasing pressure to prevent further destruction of key ecosystems.
The new stress test, shared exclusively with Reuters, is the first since the global agreement reached at COP15 in Toronto in 2022 to analyse the degree of economic destabilisation from biodiversity loss.
The World Economic Forum estimates that around two thirds of Africa’s economic output is highly or moderately dependent on the natural environment.
The stress tests, co-ordinated by the African Natural Capital Alliance (ANCA), together with the British development agency FSD Africa and the consultancy firm McKinsey, showed that the agriculture, mining and food sectors face the greatest challenges.
If little is done in the next 25 years, agricultural companies in Ghana and mining companies in Zambia are expected to suffer a 50 per cent and 32 per cent drop in their profits respectively, creating negative feedback loops for banks.
‘The cumulative expected credit losses (in the five countries) could increase by up to 21 per cent by 2050 if positive measures for nature are not taken,’ Dorothy Maseke, Director of ANCA and FSD Africa Nature Lead, told Reuters. ‘It’s a very bleak picture.’ She added.
Trouble ahead
Mungule, an official at Zambia’s central bank, also heard by Reuters, explained that another major problem is the risk of food shortages, which history has shown will push up inflation and interest rates.
According to Reuters, a severe drought in Zambia last year led to an increase in food prices, which account for more than 50 per cent of the country’s CPI basket. It adds that, in addition to a national debt crisis that is only now being resolved, this means that almost 14 per cent of the loans that Zambia’s commercial banks have granted to agricultural and forestry companies are now ‘non-performing’, a figure that is set to rise.
Agriculture traditionally contributes less than 4 per cent of Zambia’s GDP, according to IMF figures, but the mining sector, which the study warned could suffer a drop of more than 30 per cent in profits over the coming decades, has a much larger share, at 17.5 per cent.
To try to limit these problems, Zambia’s central bank is pushing for fewer loans to be granted to mining companies and more to companies with more ecological and nature-friendly activities.
The central bank also wants to carry out regular climate resilience tests on the banking system and is applying to join the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), Mungule added.
Maseke said that the ANCA now has ‘memoranda of understanding’ with four African countries, including Zambia, to help with policy development, and aims to support eight in total by the end of the year.
The results of the stress tests for individual banks have not been made public, but they evaluated three main scenarios: one that assumes no additional measures to deal with natural and climate risks; a second in which governments tighten the rules but companies are slow to act; and a third in which they take coordinated action together.
If companies manage to reduce their impact on nature and adjust prices in response to the costs they face, the impact on profits could be between 78 per cent and 27 per cent lower, according to the study.
Semanário Económico
