Climate change poses a significant threat to the lives of millions across African nations, which are historically minor contributors to global emissions. Frequent extreme weather events—such as floods, heatwaves, and droughts—intensify issues like hunger, insecurity, and displacement. While Africa is home to about 30% of the minerals essential for transitioning away from fossil fuels, the continent often exports these resources in raw form, allowing other nations to profit from the production of low-carbon technologies and digital infrastructure. To address this, sustainable development economists Michael Adetayo Olabisi and Howard Stein advocate for the establishment of a new “green bank” in Africa.
Mechanics of an African Green Bank
The proposed bank would be established by African governments, functioning as a national institution jointly owned by the countries on the continent. This structure would enable access to international financing resources that individual nations often cannot tap into.
Control over management, capital distribution, and voting rights would reside entirely with African nations, mitigating the challenges faced by other pan-African organizations that are often weighed down by donor dependency, impeding sovereign decision-making. For instance, non-African entities currently hold 42% of the voting power in the African Development Bank.
Drawing inspiration from Japan’s primary banking system, these African green banks would have the capability to take small equity stakes in the projects and companies they finance, allowing for effective oversight and revenue generation.
We envision the creation of seven specialized divisions within the bank, enabling targeted services to address specific capability gaps. The proposed divisions include:
- Green energy production
- Agricultural initiatives utilizing green technologies
- Support for processing and manufacturing of vital minerals like lithium and cobalt, which are typically exported for production abroad
- Climate-smart manufacturing services, including support for local enterprises that install solar-based irrigation systems in drought-prone regions
- An investment arm focused on attracting and brokering foreign investment in critical green industries across Africa
- Agreen extension service, providing expertise in engineering, science, and industrial policy for managing renewable energy transitions—similar to a successful model in Taiwan
- A holding company for monitoring and reporting on project progress and departmental outcomes
While African green banks would offer financial loans, their role would extend beyond that of conventional financial institutions. They would serve as the continent’s central coordinating body for industrial policy aimed at facilitating a sustainable economy grounded in renewable energy. Unfortunately, regional development banks and international financial institutions that support African governments have struggled to effectively promote and finance green energy and industrialization initiatives.
Establishing such a bank could represent a pivotal step away from Africa’s historical pattern of extracting and exporting raw materials.
Accessing climate finance remains a challenge in the current international financial system, which is structured hierarchically and makes funding both difficult and costly for Africa’s poorer nations. For instance, it is projected that sub-Saharan Africa will secure only 9% of the necessary financing for climate change mitigation between 2024 and 2030—the lowest share globally. Additionally, the continent lacks robust national and sub-regional development banking institutions dedicated to green industrialization. Green banks could streamline access to critical expertise by uniting top engineers, scientists, industrial planners, and financial specialists.
Global Shifts in Climate Finance
Africa and other developing regions have been promised climate adaptation financing by the wealthier nations that have historically contributed to climate change. Our proposal suggests that these countries allocate transition costs directly to green banks, establishing a solid capital base in hard currency. African nations should also contribute to this capital in relation to their gross domestic product, facilitating a blend of local and hard currencies in the funding pools.
Additionally, gold reserves could potentially serve in place of hard currencies, while bonds could be issued within and outside Africa to finance green initiatives.
The African green bank would also extend loans in both local and international currencies for state-backed projects. This strategy not only funds green manufacturing but also restricts loans to multiples of the countries’ contributions. To enhance flexibility, partial repayment options could involve various currencies.
Moreover, this bank would promote green industrialization and could play a role in stabilizing regional currencies, potentially reducing reliance on the US dollar. By enabling African countries to repay hard currency loans with local currencies, and by establishing factories for green energy components that serve both domestic and export markets, the bank could contribute to diminishing dollar dominance.
With a portfolio of diverse currencies, the bank can facilitate smoother transactions across the continent. For instance, payments from a solar farm in Tanzania to a factory in Kenya or Ethiopia could be processed directly through the bank’s balance, gradually turning it into a hub for intra-African currency transactions.
Collaborative Efforts with Existing Development Banks
We recognize that high-income countries may hesitate to channel climate finance to governments they perceive as corrupt or technologically challenged. By providing a transparent and accountable mechanism for climate finance, green banks could improve confidence among potential lenders and donors, fostering collaborative financing efforts with institutions such as the World Bank and regional development banks—provided they align with the priorities of African banks.
Leading African development banks, including the African Development Bank and the African Export-Import Bank, are increasingly focusing on climate-aligned strategies. However, tangible progress on climate adaptation finance remains elusive.
Thus, we propose a collaborative approach between green banks and existing development institutions as common goals evolve. At the same time, it is crucial to maintain focus on how industrial policies can equip nations to better adapt to climate change.
Identifying Key Challenges
Establishing a new bank to tackle the continent’s financial, industrial, and climate challenges is undoubtedly necessary. However, creating such an institution will not be a straightforward process; it will require consensus among African nations, coupled with a commitment from Global North countries to allocate climate financing to new organizations.
The current international order is undergoing significant shifts, raising questions about the influence of competing global powers. Given these dynamics, it may be time for nations prioritizing independence to forge new alliances aimed at cultivating a better future for Africa.
