Capital Markets Authority’s move to launch green bond guidelines will increase available financing, and help Kenyan banks grow and diversify their lending and funding profiles.
In its credit outlook, Moody’s Investors Services says the legal framework will pave way for financial institutions to issue green bonds on the Nairobi Securities Exchange, which will increase funding for green projects in the country and the regional market.
Kenya is susceptible to environmental risk, especially drought. Agriculture accounts to 40 per cent of employment in the country, and makes up 37 per cent of the economy’s gross added value in 2017.
Kenya is also highly dependent on rain-fed power, which contributes 37 per cent of the country’s electricity. The scenarios highlight risks that bank have on a community that is dependent on environment.
“Increased green financing will gradually help to address this event risk for banks,” says Moody’s.
It will also likely spur new environmentally friendly projects for banks to finance, creating opportunities for banks to grow and diversify their loan books. By issuing green bonds, banks can diversify their funding and investor profiles, and raise funding with maturities beyond five years to finance these projects.
“At present, Kenyan banks mainly rely on deposits with maturities of less than one year and, to a lesser degree, development finance institutions for funding. Banks’ bond issuance is limited,” added Moody’s.
Kenya becomes the third sub-Saharan African country to have guidelines for green bond issuance after South Africa and Nigeria.
The City of Cape Town issued in June 2017 a $74 million 10-year note maturing in 2027, with proceeds dedicated to refinancing and financing water, sanitation and transportation projects to mitigate and adapt to climate change; and Nigeria in December 2017 issued a $29.7 million green bond with proceeds earmarked for renewable energy and afforestation projects.
Five years ago, supranational development banks dominated the global green bond market, but issuers are now increasingly diverse. Financial corporates led the market in 2018 and issuance by sovereign-related entities, like various water authorities, has also increased.
“We expect a similar pattern to emerge in SSA, with multinational development banks early green bond issuers. We also expect financial institutions’ green issuance to increase, with proceeds potentially being used to finance long-term environmentally friendly projects in both Kenya and East Africa,” says Moody’s.
Sovereigns and sovereign-related issuers are likely to leverage investor interest to advance their environmental policies.
“We expect inter-regional issuance will be supported by multinational development banks, which are moving away from being primarily green bond issuers to being facilitators of green bond issuance in emerging markets by providing technical assistance, credit enhancements and anchor investments in green bonds,” says Moody’s.
Recently, International Finance Corporation and Paris-based asset management company Amundi launched the world’s largest green bond fund, which will deploy $2 billion to emerging markets over its lifetime, potentially also supporting issuance in Kenya.
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