Banks brace for drought-induced shocks

In an interview with Standardbusiness BAZ chief executive officer Fanwell Mutogo said the increased risk and economic vulnerabilities associated with the drought could make it more challenging for banks to manage loan portfolios.

THE BANKERS Association of Zimbabwe (BAZ) says banks will adopt more climate change risk assessments in determining which projects to support with lending owing to the increasing pressure to go green.

Several Zimbabwean banks have described the operating conditions as challenging in their financial results for the year ended December 2023 and the effects of the of El Nino induced drought is one of their major concerns.

In an interview with Standardbusiness BAZ chief executive officer Fanwell Mutogo said the increased risk and economic vulnerabilities associated with the drought could make it more challenging for banks to manage loan portfolios.

He said this could lead to a rise in non-performing loans and impact banks’ profitability as most loans are associated with agricultural projects.

Mutogo said by embracing sustainable banking practices, banks can contribute to the country’s sustainable economic growth while addressing the urgent need for climate action.

“Climate-conscious banking practices, integration of climate risk assessment, climate risk assessment would become standard practice when evaluating loan applications,” he said.

 “This ensures banks prioritise sectors and businesses that are adopting climate-resilient practices.

“In developing climate-friendly financial products, banks will offer specialised loan products, like drought-resistant crops and  irrigation systems to incentivise climate-smart investments.”

Mutogo said banks would also establish sustainability departments, which would focus on integrating environmental and social considerations into lending practices.

He said technology and digital solutions could help streamline banking processes and provide more efficient financial services to businesses affected by the drought.

Digital and technological solutions remain important for local banks as the majority of them get their revenues from non-interest incomes.

“Developing user-friendly online platforms for loan applications can streamline the process for El Niño-affected businesses.

This can expedite access to much- needed funding, especially in remote areas,” Mutogo said.

“On data analytics for risk assessment there is need to leverage data analytics tools, banks can assess creditworthiness based on factors beyond weather dependence like past performance and digital payment history.

“This can help provide access to credit for businesses with a strong track record, even during El Niño.”

He said with remote verification and monitoring fostered through mobile technology, banks could conduct remote verification of loan applications and monitor project progress in El Niño-affected regions.

“This reduces reliance on physical visits, which may be impractical during droughts or disruptions,” the BAZ boss said.

Mutogo thinks banks can strengthen their risk management practices to effectively assess and mitigate potential credit risks associated with El Nino’s impact on different sectors.

He added that this could be done through cautious lending and implementing risk management strategies.

Mutogo urged banks to be more vigilant and cautious when issuing loans, particularly for sectors heavily reliant on rainfall, in order to mitigate the risks of defaults due to the El Nino-induced drought.

He said banks can implement risk management strategies such as diversifying loan portfolios across various sectors and increasing capital buffers to prepare for potential economic downturns caused by El Nino.

Such measures help banks anticipate and address potential credit risks, ensuring the resilience of their loan portfolios in the face of El Nino-related disruptions.

“On targeted lending, banks could develop loan products specifically designed for drought- resistant crops or technologies,” Mutogo said.

“This encourages agricultural activities even during El Nino and fosters long-term resilience.”

He said for existing borrowers in El Niño-affected sectors, banks could offer loan restructuring options with flexible repayment schedules.

“This provides breathing room for businesses to weather the storm,” Mutogo said.

“Climate risk assessment, integrating climate risk assessment into loan approval processes can help banks identify and mitigate potential risks associated with El Niño.”

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