Why Africa needs a green bank to fund climate action and build its own renewable technology

Climate change is a profound challenge to the livelihoods of many people in African countries who have contributed so little to its cause. More frequent extreme weather events (floods, heatwaves and droughts) are making hunger, insecurity and displacement much worse. The continent holds an estimated 30% of the minerals that are essential for the future transition away from fossil fuels. However, Africa mostly exports these raw, leaving companies in other countries to reap the rewards of manufacturing low-carbon technologies and digital infrastructure. Sustainable development economists Michael Adetayo Olabisi and Howard Stein propose a new African “green bank” as a solution. How would the African green bank work? Our vision is that this bank would be established by African governments as a kind of state-owned bank, owned collectively by the countries of Africa. Such a bank would have the ability to access international finance that is not available to individual countries. The management, capital and voting structure would be completely controlled by African countries. This would help avoid problems evident among other pan-African organisations. They often rely too heavily on donor assistance, which has undermined sovereign decision making. (For example, 42% of the voting power of the African Development Bank is controlled by non-African countries.) The international order is shifting: African countries have an opportunity to reshape global power relations

Along the lines of the Japanese main banking system, the African green bank would have the option to take small ownership stakes in projects or companies that receive loans. This would allow the bank to monitor the project and bring in some income. We propose that the bank should have seven divisions. This would allow it to provide different services that work together, address gaps in capacity, and still allow each division to specialise. The service divisions we propose are: Green energy production.

Agricultural and related value chain activities that employ green technology.

Support for processing and manufacturing from critical minerals like lithium and cobalt. (These raw minerals are usually sent overseas to be manufactured into renewable energy parts.)

Climate-change adaptation manufacturing and services, such as support for African companies that manufacture and install solar based drip irrigation systems for climate caused drought areas.

An investment division that attracts and brokers foreign investment to key green industries in African countries.

A green extension service. This would offer consultations from experts in engineering, science and industrial policy on how to set up successful renewable transition projects. A similar model exists in Taiwan.

The seventh division would be the holding company. This would manage ownership shares in the divisions listed above. It would specialise in monitoring and reporting back on how projects are going.

The African green bank would provide financing but it would not just be a financial institution. It would be a continental industrial policy organisation to support and stimulate every activity in Africa needed for a transition to a renewable energy-based sustainable economy. The regional development banks and international financial institutions serving African governments have a poor record of promoting and financing industry in general, and green energy and manufacturing in particular. The bank is what Africa needs to finally break away from the long-term colonial pattern of extracting and exporting raw materials. Using green banks to solve America’s affordable housing crisis – and climate change at the same time

The international financial architecture with its hierarchy of currencies makes accessing climate finance difficult and costly, and leaves poorer countries in Africa lagging behind the rest of the world. For example, sub-Saharan Africa will access only 9% of the funds it requires for climate change mitigation between 2024 and 2030. This is by far the lowest amount of climate finance in the world. The continent also lacks national and subregional development banking institutions that specialise in green industrialisation. A green bank could bring together scarce skills – top engineers, scientists, industrial planners and financial experts – in one place. How would it change how climate finance currently works globally? Africa and other developing regions have been promised climate adaptation funds by global north countries that caused climate change. Our proposal is that these countries should allocate transition costs to the green bank, so that it has a capital base of hard currencies. African countries should also contribute to the bank, based on the size of their gross domestic products. The money coming into the bank should be a mix of individual African countries’ currencies and hard currencies. African development banks need scale, urgently. Here’s how it can be done

Gold deposits could be used in lieu of hard currency. Bonds would be issued within and outside Africa to finance green projects. The green bank would issue loans in both African and non-African currencies to state-sponsored or guaranteed projects. In this way, it would finance green manufacturing. Financing would be limited to a multiple of each country’s capital contribution. We believe repayments could sometimes be made in a different mix of currencies. Climate shocks and the economy: we asked South Africa’s central bank what role it plays in bringing stability

The bank would drive green industrialisation. This could help stabilise currencies in the region and promote de-dollarisation by giving African countries the option to repay hard-currency loans with local currencies. Reducing the power of the American dollar would also happen if African countries set up factories to make green energy components and sold these on the export market. As a custodian of many currencies, the bank could also make transfers within Africa easier. For example, payments from a solar farm in Tanzania to a solar cell factory in Kenya or Ethiopia could be credited directly to each project’s balance at the bank. Over time, the bank could become a clearing house for African currencies, reducing the need to convert them into US dollars before transactions. How would the African green bank work with other development banks? High-income countries may be sceptical about handing climate finance funds to governments that they perceive as corrupt, or as less technically capable. The green bank would provide a transparent, accountable channel for climate finance. This could reassure existing lenders and donors. It would also make co-financing easier with institutions like the World Bank and regional development banks, as long as they accept the African bank’s priorities. Large African development banks like the African Development Bank and the African Export-Import Bank are moving towards more climate-aligned priorities. But there is no clear evidence of progress towards making climate adaptation finance happen. Has finance for green industry had an impact in Africa? What’s happened in 41 countries over 20 years

We propose that the green bank would work side-by-side with other development banks as common objectives evolve. At the same time, it should keep its focus on how industrial policy can be used to make sure countries adapt to climate change. What are the biggest obstacles to it happening? The need for a new bank to deal with the industrial, financial and climate change challenges of the continent is unquestionable. Establishing such a bank will not be an easy task. It will require a consensus of the countries on the continent. Countries in the global north will also need to be willing to allocate climate change funding to the new organisation. The international order is fractured currently. With growing concerns over competing dominant powers and how they behave in the world today, this could be the moment for independently minded nations to generate new alliances to help build a better African future.

Howard Stein receives funding from the International Development Economics Associates (IDEAS). Michael Olabisi received funding from International Development Economics Associates (IDEAS).