The chapter explores the role of the central bank of Nigeria in greening the financial system. The author explores the ways in which the central bank can green the financial system. Some of the offered suggestions include disclosure requirements, establishing green finance labs, creating a green bank, and the use of differentiated cash reserve requirement based on environmental impact. The insights offered in this chapter are useful to bank supervisors and the monetary authority in understanding how financial and monetary decisions affect the environment.
Top1. Introduction
Many central banks around the world have expanded their role beyond price and monetary stability in an attempt to mitigate non-economic exogenous shocks that affect the macro economy in unprecedented ways. For example, many central banks used unconventional monetary policy tools to respond to the COVID-19 induced health crisis (Mosser, 2020; Ozili and Arun, 2020). Some central banks have also responded to climate change by requiring regulated banks to disclose the impact of climate risk on their business (Campiglio et al, 2018). Other monetary authorities have responded to gender inequality issues in the banking sector to reduce gender inequality and the risk of social activism (Braunstein and Heintz, 2008; Ozili, 2023). These are few examples of how central banks are expanding their roles beyond their traditional function in order to address emerging non-economic issues and exogenous shocks.
An important emerging issue in the global economy is the effect of unfavourable climate change on the global economy and central banks are being pressured to respond to climate change (Dikau and Volz, 2021). In response to this, some central banks have begun to assess the potential effect of climate change related risk on the banking sector. The outcome of such assessment can offer insights to central banks on how best to mitigate climate change related risk, and also offer some insights on how to make the financial system more resilient to environmental and climate change shocks.
One way to prepare the financial system to withstand climate change shocks in Nigeria is to embark on an aggressive green finance program for the financial system. Green finance is financing that yields economic benefits while protecting the environment. Wang and Zhi (2016) define green finance as finance that protects the environment while pursuing economic profits. These two definitions show that green finance promotes the financing of projects and activities while being mindful of any damage to the environment to ensure that firms do not damage the environment in the pursuit of profits.
Given this backdrop, this chapter offers some ideas on how the CBN can green the Nigerian financial system. The chapter contributes to the existing financial stability literature by showing that green finance offers a possible solution to mitigate or dampen the effect of climate change on the financial system. The chapter also adds to the finance literature by offering insights on how innovative finance, in this case green finance, can be used to promote a sustainable financial system.
The remainder of the chapter is categorized as follows. The related literature is discussed in section 2 while the ways in which the CBN can support the greening of the financial system are discussed in section 3. Finally, the concluding remark is presented in Section 4.