The impact of climate change on the performance of banks in Southern Africa

Abstract

Using a sample of 12 countries from the SADC region, the study investigates the impact of climate change on the performance of commercial banks. The study this paper uses temperature and rainfall levels to measure climate change. Secondary data gathered through extraction of historical databases obtained from World Bank Development Indicators is used to deduce the relationship of these variables. The results suggest that climate change matters. The study finds that although there is a positive relationship between bank profitability and climate change, there is a threshold beyond which further increases in temperature and rainfall will adversely affect bank profitability. Also, banking sector concentration has a positive effect on banking profitability, while loan loss provisions and costs can erode profits if not managed properly. We also discover that there is no difference in how South Africa is affected by climate change compared to the rest of the SADC countries. A number of policy recommendations emanate from the study. First, it imperative for banks to begin to take into account climate change in the operational activities. Second, there is no country immune from the ravages of climate change. All countries in the SADC region must cooperate to address the serious challenges emanating from climate change. For example, the impact of climate for South African banks is not different to the banking sectors in other countries in the SADC region. Indeed, across most countries in the region natural disasters, such as droughts and floods, are becoming more frequent and also more devastating. Third, to address some of the challenges there is need to address the problems of, data scarcity and to use technology innovation to prevent natural disasters. These recommendations will equip the SADC region to be able to tackle the anticipated consequences of climate change on the financial institutions