Major lenders including KCB and Absa expand sustainable building finance amid regulatory pressure and rising insurance claims
NAIROBI—Kenya’s largest banks are overhauling their construction lending as new environmental regulations force developers to choose between compliance costs and project delays.
The shift comes as the government’s 2030 carbon emissions targets for buildings create a Ksh 180 billion (US$ 1.4 billion) financing gap that traditional loans cannot fill. Banks gathered in Nairobi last week to pledge expanded green lending, acknowledging that standard construction finance no longer works in the new regulatory environment.
“We’re seeing fundamental changes in how buildings get financed,” said Ken Luusa, head of projects and investments at Kenya Commercial Bank. The country’s largest lender has earmarked 15% of its construction portfolio for green projects, offering mortgage rates up to 0.75 percentage points below standard loans.
Rising compliance costs
The pressure stems from Kenya’s National Buildings and Construction Decarbonisation Roadmap, which requires new commercial buildings to achieve near-zero emissions by 2030. Compliance adds an average Ksh 2.3 million (US$ 18,000) to mid-sized projects—costs that existing loan structures don’t accommodate.
Construction expenses have jumped 23% since the regulations took effect in 2022, driven largely by imported sustainable materials and mandatory energy audits. Only 23% of completed projects now meet government emissions standards, according to State Department data.
The compliance burden hits smaller developers hardest. Erdemann Property Group, a Nairobi-based firm, postponed three residential projects worth Ksh 4.2 billion (US$ 32 million) after failing to secure adequate financing for green building requirements.
“Traditional lenders haven’t adjusted their risk models for sustainability compliance,” said Peter Erdemann, the company’s managing director. His firm eventually secured financing from development bank AfDB, though at rates 2.5 percentage points above standard construction loans.
Insurance drives change
Weather-related building claims have surged 340% since 2020, forcing insurers to recalculate coverage strategies. Britam, Kenya’s second-largest insurer, paid out Ksh 1.8 billion (US$ 14 million) in climate damage claims last year compared with Ksh 530 million four years earlier.
The insurer now requires buildings in flood-prone areas to meet stricter construction standards or face coverage exclusions. GA Insurance has rejected 15% of coastal property applications this year due to climate risks.
“We cannot continue underwriting properties that don’t account for extreme weather,” said James Mwangi, Britam’s chief underwriter. The company offers 20% premium discounts for climate-resilient buildings to encourage compliance.
Financing solutions emerge
Banks are developing new products to bridge the gap. Absa Bank allows borrowers to retrofit existing properties within five years of purchase, financing upgrades through additional lending secured against increased property values.
The approach has generated Ksh 890 million (US$ 6.9 million) in retrofit loans since March. “We separate solar, water harvesting and insulation from the original mortgage,” said Beatrice Chege, Absa’s head of mortgages business.
Stanbic Bank partnered with renewable energy suppliers to offer integrated packages that combine construction loans with solar financing, cutting processing time from 12 weeks to six weeks.
Housing Finance Company reports strong demand for green mortgages despite higher equity requirements that exclude 40% of middle-income applicants.
Market constraints
Kenya needs Ksh 12 billion (US$ 93 million) annually in green building investment to meet 2030 targets, but current financing reaches only 35% of this amount, according to the Global Buildings Performance Network.
Development finance institutions provide 60% of sustainable construction funding, with commercial banks contributing 28%. This concentration creates bottlenecks when international development priorities shift.
KCB’s green portfolio shows promising early results. Default rates on sustainable building loans average 3.2% compared with 4.8% for conventional construction finance. The bank attributes this to lower utility costs for borrowers in energy-efficient buildings.
However, environmental due diligence adds six to eight weeks to loan processing, testing patience in competitive markets. Banks must balance expanded green lending with operational efficiency as compliance requirements grow.
The construction industry’s adaptation to climate regulations will determine whether Kenya can meet environmental targets without sacrificing economic growth. Success requires coordinated policy support, expanded insurance coverage and streamlined certification processes that make sustainable building economically viable for developers across all market segments.
Written by Wambui Ndetto
