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Bank loan loss provisioning for sustainable development: the case for a sustainable or green loan loss provisioning system

Ozili, Peterson K (2023): Bank loan loss provisioning for sustainable development: the case for a sustainable or green loan loss provisioning system. Published in:

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Abstract

The purpose of this study is to present a sustainable (or green) loan loss provisioning system that align bank loan loss provisioning with the sustainable development goals. The findings of the study are that the proposed sustainable (or green) loan loss provisioning system will align bank loan loss provisioning with the sustainable development goals by adjusting loan loss provisions estimates to reflect the environmental benefits and costs of borrowers’ business activities. Banks will incur additional provisions above normal provisions for loans issued to businesses whose activities are harmful to the environment and the climate. Banks will allocate fewer provisions whenever they issue loans to eco-friendly or green businesses. The implication of the proposed sustainable (or green) loan loss provisioning system is that bank regulators and supervisors need to consider the impact of the sustainable (or green) loan loss provisioning system on bank capital and bank stability.

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