Can a bank help a farmer bounce back after a drought or a shopkeeper reopen quickly after a flood? It can - and it should. Climate change is now part of everyday banking in Kenya, but the story is not about blanket price increases. It is about smarter decisions, better products and support that keeps customers resilient.
Climate risk sits in two main categories: physical and transition. Physical risk has two faces. Acute shocks such as floods, storms and heatwaves cause sudden damage and disrupt cash flows.
Chronic shifts such as rising temperatures, sea‑level rise and prolonged droughts slowly erode asset values and productivity. Transition risk is different. It arises from changes in policy, markets and technology as the world moves toward a lower‑carbon economy.
Kenya is already feeling the strain, and so are our neighbours. Drought across arid and semi‑arid counties has stressed farm incomes and agri‑processors. Flooding along river basins and in urban areas has damaged homes and businesses, weakening collateral and disrupting trade.
Regulators and markets are responding. The Central Bank of Kenya (CBK) issued guidance on climate risk management and is steering clearer disclosure and green finance. Supervisors across East Africa are moving in the same direction.
International lenders and investors increasingly favour banks that show strong climate‑risk practices. Those who get ahead will find it easier to access capital and defend margins.
Treat climate risks like any other part of lending. Look at which sectors and places have been hit by floods or droughts before, check missed payments and changed loan terms after those events, and spread risk so you’re not too exposed in one area. Keep pricing fair – make sure the way you value collateral reflects location and resilience.
How banks value collateral can help customers prepare and recover. If a valuation flags flood risk, the bank can offer advice and finance for practical fixes - drainage, raised floors, stronger roofs or backup power.
When customers make these upgrades, lenders can reflect the lower risk with better terms, longer loan periods or lighter collateral, and after severe weather the same information can support grace periods or quick repair loans, so businesses reopen sooner.
Valuations should be guided by location and resilience, with clear notes on site, hazards, building quality and energy performance, so lenders and borrowers share the same facts and plan improvements.
Forward‑looking analysis is about readiness, not alarm. Banks already use scenarios to test portfolios under different economic paths.
Adding climate‑related assumptions - lower yields in droughts, higher operating costs in heatwaves, temporary closures after storms - helps management plan cushions and contingency actions. That planning supports steady lending through tough periods and avoids sudden tightening when customers need credit most.
Governance turns good intentions into daily practice. Clear ownership keeps climate risk on the agendas of credit committees and balance sheet discussions. The three lines of defence make this work.
The first line - front‑line business teams in lending, pricing, collections and collateral - own the risk day to day and build climate factors into origination and monitoring.
The second line - risk and compliance - sets policy, limits and controls, measures exposure by sector and geography, and challenges decisions when concentrations grow.
The third line - internal audit - provides independent assurance, testing whether policies are applied, models and assumptions are fit for purpose, and reporting gaps are closed.
There is real upside. Demand is growing for energy‑efficient mortgages, climate‑smart agriculture finance and clean‑energy assets such as solar mini‑grids. Partnerships with insurers, development banks and guarantee schemes can share risk and reduce overall borrowing costs.
Climate change will keep testing Kenya’s financial system, but a strategic approach turns risk into resilience. Banks that act now - by integrating physical and transition risks into credit, pricing, collateral and capital decisions - will support customers, safeguard profitability and stay competitive.
That is not about alarm. It is about smarter banking that helps households and businesses weather the next storm and thrive the day after.
The authors are partner and manager at PwC respectively.
