African banks are facing rising climate-related credit vulnerability, mainly from transition risks in the near term and physical risks later.

 According to its Climate Vulnerability Signals (Climate.VS), transition risk (VSt) is the main source of climate‑related credit vulnerability for African banks, due to their exposure to carbon‑intensive sectors and increasing sensitivity to global decarbonisation trends and evolving regulatory frameworks.

It added that credit implications are moderate near term, but banks should strengthen risk frameworks, diversify portfolios, and adapt funding structures.

Fitch expects the credit implications of climate risk for African banks to materialise gradually. “Risks are driven by transition dynamics in the near term and increasing physical risk exposure over the longer term”.
It continued that physical risks (VSp) are structurally significant due to Africa’s exposure to droughts, floods, heat stress and water scarcity, but are less material from a credit perspective until the mid‑2030s.

“However, we expect vulnerability to physical risks to increase in the long term, driven by more frequent and severe climate hazards. Climate.VS point to a gradual convergence between transition and physical risks, with physical risks becoming more prominent toward 2050”.

The transmission of climate risk to banks is primarily indirect, through borrower performance, collateral values and sovereign risk.

The Uk-based firm said banks’ exposures to agriculture, real estate and other climate‑sensitive sectors increase their vulnerability to both physical and transition risk channels. “Recurrent climate shocks and policy changes may weaken borrowers’ repayment capacity, potentially affect asset quality and increase credit losses”, it added.
Furthermore, regulatory developments, including carbon pricing mechanisms and enhanced climate risk disclosure requirements, and are likely to increase compliance costs and affect carbon‑intensive sectors, further shaping banks’ credit risk profiles.

Fitch concluded that Climate‑related financing and green financial instruments may support funding diversification, but only slightly due to heightened funding costs and underdeveloped capital markets in many African economies.