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The influence of climate risk on interest spread in the banking sector performance in Kenya

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  • Maru, Lucy
  • Makambi, Steve Anyona

Abstract

One of the most important steps towards a greener economy is assessing the path through which climate risks are internalized in to bank portfolios. Aligned with literature on market risks and credit risks emanating from climate risk exposure, this paper sought to assess the feedback effect between banking sector performance and climate risk and identify the transmission pathway of climate risk to banking sector performance. The paper employed conditional process analysis. Using meteorological data, data on weather disasters, bank level data and interest rate between 2011- 2022, the study found that: - i) there exists a relationship between climate risk and bank performance to the extent that changes in interest rate spread are mediated by climate disasters having been moderated by temperature variation. ii) increase in non-performing loans leads to decrease in interest rate spread. Therefore, this paper persuades policy makers to adjust risks to include climate related risks and develop risk models that capture climate related risks in risk pricing. Additionally, the paper recommends that the regulator may develop an adaptable reporting framework to transition bank portfolios to a green and financially sustainable path.

Suggested Citation

  • Maru, Lucy & Makambi, Steve Anyona, 2024. "The influence of climate risk on interest spread in the banking sector performance in Kenya," KBA Centre for Research on Financial Markets and Policy Working Paper Series 85, Kenya Bankers Association (KBA).
    • Handle: RePEc:zbw:kbawps:297994
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    References listed on IDEAS

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    Keywords

    Climate risk; Interest rate spread; non-performing loans; Carbon transition;
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