Why Kenyan banks lack expertise to assess green financing risks

Commercial banks in Kenya have been urged to finance green projects, that they have shied away from for long citing high risk.

This is in efforts to create a resilient green economy by financing nature-related enterprises, despite the high risk nature of green projects.

According to the Kenya Bankers Association, (KBA) many banks have indicated that their teams currently lack the expertise to evaluate nature-related risks effectively.

Studies show that many nature-related projects are perceived as high-risk by banks due to their long time horizons, limited track records, and their link to carbon and biodiversity credit schemes to create revenue.

According KBA, the return on investment for nature-positive projects is not yet well established and perceived financial risks remain high, particularly credit risk.

READ: Climate summit puts spotlight on debt trap behind green loans

The regulator advises that banks should consider blended finance models, combining commercial lending with donor support or concessional capital.

Further, focusing on smaller-scale projects would lower down the value chain reducing risk.

The Bankers umbrella body has said that Kenya’s manufacturing, water resource management, environmental services, and agriculture sectors present the most viable opportunities for nature-positive financing.

The four sector are projected to hold combined nature-related investment and financing opportunities valued at Sh19.4 trillion over the next 5 to 10 years.

Environmentally sound and commercially viable projects such as agriculture, environmental services, energy and water resource management, that contribute to nature-positive outcomes have been identified as key projects that commercial bank consider for financing.

Findings of the report show that agriculture is most relevant sector for nature-positive outcomes, with investment and financing demand estimated at USD 500 million in the next six months, rising to USD 1.7–2 billion over the next two years.

Kenya’s manufacturing sector, a pivotal component of the economy that faces a substantial financing gap of approximately Sh2.2 trillion, particularly among Micro, Small, and Medium Enterprises(MSMEs) has been identified as a relevant sector for nature-positive financing for Kenyan banks.

Kenya’s real estate sector also presents significant financing opportunities for commercial banks, driven by a growing demand for residential, commercial, and industrial properties.

In 2023, the sector output stood at Sh1,265.4 million, up from Sh946.7 million in 2019. According to the Nature Positive report, the market is expected to reach a value of US$773.02 billion by 2025.

“Kenya faces a significant infrastructure financing deficit estimated at $2.1 billion annually, which constrains growth and development,” KBA report read. 

However, Nature Positive Financing Assessment Report by Kenya Bankers Association (KBA) shows that a critical gap exists between the nature-related risks embedded within projects and the ability of credit risk officers to accurately assess their financial implications.

And as banks tap into nature finance to scale green economy, their annual credit to Micro, small and medium sized enterprises MSMEs) shot 2 per cent, to hit Sh153 billion up from the Sh150 billion target.

“We are committed to supporting the industry in advancing the sustainable finance agenda in the country while also promoting financial inclusion for underserved segments, and enhancing MSMEs’ access to affordable finance,” Raimond Molenje KBA CEO said.

The disconnect between nature-related risks and the ability of credit risk officers can be bridged by seeking technical assistance to support more robust assessments of nature-related risks at the project level and training credit risk officers.

Also, it reveals that the lending portfolios of many Kenyan banks for now remain concentrated in “do no harm” sectors with significant nature impacts and dependencies that can give rise to nature-related risks.

Given this, banks have been tasked to make meaningful progress in aligning with nature- and climate risk disclosure frameworks.

To Mitigating nature-related risks is essential for Kenyan commercial banks looking to finance nature-positive outcomes.

“Guarantee mechanisms and insurance products offer practical solutions to help de-risk such investments, providing banks with greater confidence to lend,” KBA Nature Positive Report 2025.

According to the report, while some banks have a pipeline and track record in projects promoting nature-positive outcomes, majority of Kenyan banks is not well-versed in nature-positive financing and, as a result, does not recognise such projects within their portfolios and pipelines.

“Kenyan banks are largely unfamiliar with the criteria for assessing eligible activities contributing to nature-positive outcomes,” Report.

ALSO READ: Unpacking the CBK climate related risks management guidelines

Mohamed Awer, WWF-Kenya Chief Executive Officer, that Kenya’s prosperity is deeply tied to nature, with nature-based sectors, including agriculture, tourism, forestry, and fisheries, contributing approximately 42 per cent of the country’s GDP.

“This showcases the intersectional role the financial sector plays in driving a nature-positive economy and how we can close the biodiversity finance gap.”

Many banks have already launched corporate social responsibility (CSR) initiatives aligned with nature positive principles, the report attributes the growing interest among Kenyan banks to their willingness to better understand and engage in nature-related financing.

“With the right tools, banks can identify where nature and finance intersect - turning risk into opportunity and unlocking investment where it matters most for people and planet,” the Kenya Bankers Association.

While promising nature-related financing activities exist across various sectors, overarching barriers continue to limit banks’ financing and investment opportunities. Bankers, according to the report, agree that barriers must be addressed and considered. The lenders have also acknowledged the urgency of engaging with this emerging asset class.

Lack of supportive policy, evident return on investment, investing in a new asset class, and difficulty determining Monetary value of ecosystem services have been identified barriers limiting financing opportunities.

In April 2025, the Central Bank of Kenya (CBK) issued the Kenya Green Finance Taxonomy (KGFT) and the Climate Risk Disclosure Framework (CRDF) to promote environmentally sustainable financial activities and greening the banking sector.