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An ethical bank, also known as a social, alternative, civic, or sustainable bank, is a bank concerned with the social and environmental impacts of its investments and loans.The ethical banking movement includes: ethical investment, impact investment, socially responsible investment, corporate social responsibility, and is also related to such movements as the fair trade movement, ethical consumerism, and social enterprise.
Other areas of ethical consumerism, such as fair trade labelling, have comprehensive codes and regulations which must be adhered to in order to be certified. Ethical banking has not developed to this point; because of this it is difficult to create a concrete definition that distinguishes ethical banks from conventional banks. Ethical banks are regulated by the same authorities as traditional banks and have to abide by the same rules. While there are differences between ethical banks, they do share a desire to uphold principles in the projects they finance, the most frequent including: transparency and social and/or environmental values. Ethical banks sometimes work with narrower profit margins than traditional ones, and therefore they may have few offices and operate mostly by phone, Internet, or mail. Ethical banking is considered one of several forms of alternative banking.
Since old time Christian communities were based on the anti-materialism of Jesus, banking was ethical and any form of "Usura" (interest lending), was considered as immoral. In England, King Offa of Mercia in 791, then King Alfred the great (849-899), as well as King Edward the Confessor (1042-1066), outlawed usurers.
Mainstream financial banks have had varying relationships with corporate social responsibility and ethical investment. However, a clearer movement has emerged since the 1990s.With changing social demands, and as more is known about the effects that banks can have through their lending policies, banks have begun to feel pressure from the general public, NGOs, governments, regulatory bodies and others to consider their social and environmental impact.
In general banks play an intermediary role in the economy; because of this the possibility for banks to contribute to sustainable development is extensive. Jeucken 2002 Banks have efficient and tested credit approval systems, which gives them a comparative advantage in knowledge (regarding sector-specific information, legislation and market developments). Jeucken & Bouma 1999 Banks are experienced and capable of weighing risks and attaching a price to these risks; because of this banks can fulfill an important role in reducing the information asymmetry between market parties and allow them to make better decisions. When depositors allow a bank to invest for them they may assume that the bank will attempt to select investments to maximize their returns. However, if clients are concerned with more than the simple monetary return and they, for instance, are interested in the costs to society and to the environment, then they may need to turn to an ethical bank which takes their ethics and morality into account when investing.
Some businesses externalize costs onto the environment and society. Aiming to create a more equitable distribution of costs in society, banks can raise interest rates or apply tariffs on loans given to clients and projects with high external costs. This would mean that companies would pay more if their business caused extensive environmental damage; taking some of the cost off of society as a whole and putting it on the company. This sort of tariff differentiation could stimulate the internalization of environmental costs in market prices. Jeucken & Bouma 1999 Through such price differentiation, banks have the potential to foster sustainability. Jeucken & Bouma 1999 .
Banks may be able to support progress toward sustainability by society as a whole—for example, by adopting a ‘carrot-and-stick’ approach, where environmental and social front-runners would pay less interest than the market price for borrowing capital, while environmental laggards would pay a much higher interest rate. Jeucken & Bouma 1999 Banks can also develop more sustainable products, such as environmental, social, or ethical investment funds. By investing selectively based on values, ethical banks can promote socially/environmentally responsible companies and penalize those who do not conform to these standards. But there is a risk that banks could simply adopt certain practices that make them appear ethical (see greenwashing) while not adopting other practices that would have a greater impact.
Numerous ethical banks (as well as some conventional banks) allow customers to contribute to organizations that have positive societal/environmental impacts either in the local community or in developing countries. Examples include an evaluation of the energy efficiency of a home and potential improvements in this; carbon-offsets; Coro Strandberg 2005 credit cards that benefit charitiesor lower interest rate loans for low emission cars.
Ethical banks excel in community involvement, as do other financial institutions such as credit unions. Community involvement is not limited to ethical banks as conventional banks also partake in such actions. The following are a few examples of community involvement done by ethical banks, credit unions, and conventional banks:
The environment is a key focus for ethical banks as well as for some conventional banks that believe adopting more environmentally ethical practices to be to their advantage. Banks operating in this field are often referred to as sustainable or green banks. In general bankers "consider themselves to be in a relatively environmentally friendly industry (in terms of emissions and pollution). However, given their potential exposure to risk, they have been surprisingly slow to examine the environmental performance of their clients. A stated reason for this is that such an examination would ‘require interference’ with a client's activities." Jeucken 2002 While the desire not to interfere with the business of the client is valid, it could also be noted that banks are required to interfere in the business of their clients regularly to ensure that the clients’ business plan is viable before issuing them a loan. The kind of analysis that all banks partake in is termed a single bottom line analysis (this analysis only considers financial performance). It is arguable whether or not performing a triple bottom line analysis (an analysis that takes into account environmental, social, and financial performance) would be any more intrusive.
Conventional banks deal with mostly internal ethics, ethical banks add to internal concerns by applying external ethics.
Internal ethics are concerned with the well being of employees, employee and customer satisfaction, benefits, wages, unionization, fair sex and race representation, and the banks environmental standing. Environmentally the potential combined effect of banks switching to more environmentally friendly practices (i.e. less paper use, less electrical use, solar power, energy efficient light bulbs, more conscientious employee travel policies with concern to commuting and air travel) is huge. However, when compared with many other sectors of the economy banks do not incur the same burden of energy, water and paper use. Jeucken & Bouma 1999 Many times such energy efficient changes are not based on moral concern but on cost efficiency.
External ethics are concerned with the wider ramifications of banks actions. External ethics looks at the impacts that their business practices, such as who they loan to or invest in, will have on society and the environment. In applying external ethics, one looks at how the products of banks can be used unethically, for example how borrowers use the money that is lent out by the bank.
Banks are often reluctant to broaden the scope of their external ethical policies because of the significant nature of the changes. However, by incorporating ethics that account for societal costs in their practices, banks may improve their reputation.
Ethical banking is a relatively new sector and this relatively undeveloped nature causes some problems. These problems can be divided into two categories: the first concerns depositors, and the second concerns ethical banks.
In the first category lies the issue of understanding how ethical banks measure or qualify their ethical policies. For example, when Vancity/Citizen Bank states ‘we seek to work with organizations that demonstrate a commitment to ethical business practices,’ the depositor is unable to understand what ‘seek’ means. These claims do not reveal to potential depositors how the bank evaluates or uses these statements. Even when given the opportunity to view an accountability report it is difficult to truly understand what their screening processes are. For example, the Van City Accountability Report for 2006/07 (for Van City credit union and Citizens Bank in Canada) states:
"the Ethical Policy requires that all business accounts are screened at the time of account opening by the staff person dealing with the member. Social and environmental risks of larger business banking loans (non-credit-scored loans) are assessed at the time of the loan application, guided by the Ethical Policy and Lending Policies."
This statement does not give the reader the information they needs to understand the criteria used in assessing clients. However statistics such as that given by the Cooperative Bank (UK), stating that in 2003 they reviewed 225 potentially problematic financial opportunities and of these 20% were found to be in conflict with their ethical statements and were subsequently denied further business, costing the bank 6,887,000 pounds Coro Strandberg 2005 , give the consumer the impression that the banks’ proposed ethics, however ambiguous, are being taken seriously.
Another issue in this category is that of codes of conduct. Many ethical banks as well as conventional banks voluntarily join larger bodies that put forth certain regulations that, according to the rules set by the body, should be followed by members. Such outside bodies could act as overarching institutions that could guarantee a certain level of conformance with certain regulations. An example of this in the United States is the Food and Drug Administration. Depositors who use ethical banks do not have this assurance because there is no external regulatory body that sets minimum acceptable legal standards.
In the second category ethical banks face obstacles such as losing business and consumer support to conventional banks, and having to regulate above and beyond the present international legal systems.
According to Cowton, C. J., and P. Thompson, "banks that had signed the United Nations Environment Programme (UNEP) Statement, a voluntary industry code that promulgated environmental stewardship, transparency, and sustainable development, did not act significantly different than the non-signatories." Cowton & Tompson 2000 They concluded that, for codes to be more effective; regulators, monitors, and methods of enforcement need to be in place. Cowton & Tompson 2000 This problem is similar to the problems faced by the fair trade movement. Both the fair trade movement and ethical banks rely on people to pay extra for known ethical goods. There is a limit to how much more people will pay for that guarantee, after that point further initiatives will undercut the banks income and therefore are likely to not be followed.
Losing business to banks that do not screen so strictly is a problem for ethical banks. Many times ethical banks must work with much lower budgets because of this. Ethical banks exclusion of unethical borrowers often results in the borrowers going to other banks, this brings up the importance of industry wide regulations. One way of raising the industry wide regulations would be for citizens to apply pressure on banks. Without this rise it is difficult to impede unethical businesses from finding a bank to finance their projects. A rise in regulations that deal with moral topics is not out of the question. The current industry wide codes, for example, prohibit the financing of illegal drug production. This reflects the prominent societal morals against such drugs.
Ethical banks cannot solely rely upon the legal system to determine whether or not a potential client has acted unethically or whether or not their future plans are unethical. This is because of the wide range of laws throughout the world. While a business may be lawful in the international setting, this does not mean that the laws were up to the moral standards in which the bank originates. For example, extensive pollution and labor laws that would not be considered lawful in many developed countries are allowed in many lesser-developed countries.
Claiming to be an "ethical" bank requires an objective way to determine what is ethical. Popular ethical theories that could be used include those of Mill, Kant and Aristotle.
John Stuart Mill expanded on Jeremy Bentham's utilitarian theory. Bentham's fundamental axiom holds "it is the greatest happiness of the greatest number that is the measure of right and wrong". Mill observed that this axiom alone would allow for actions that lacked morality, in the ethical and even legal sense. For example, under Bentham's unqualified fundamental axiom, it would not only be admissible, but "right" to live in a Robin Hood society, where one person's happiness (the robbed rich man's) is sacrificed in favor for the substantially improved happiness of the greatest number. On this account Mill elaborated on the ethical dimension of Utilitarianism, measuring the right- and wrongness of an action both in terms of aggregate happiness, or "utility", following Bentham's fundamental axiom, but not without disregard of moral or ethical quality of the action itself.
Therefore, in Mill's perspective a bank would be moral if it tended "to promote happiness".(p. 10) Mill 1957 If the bank in question acts in way that produces the greatest amount of happiness for the greatest number of people then it will be acting morally according to Mill. Because the banking sector is so large, complex and far-reaching in its effects it is difficult to accurately judge the happiness of everyone affected by the conduct of banks in general or by certain banks in particular. However, it is sometimes possible to discern which of different possible courses of action would produce the most happiness. For example, the act of generous philanthropy in forms such as giving back to communities, employees, members, environmental/development groups, etc. will on the whole increase happiness. Similarly lending to businesses that do not "produce the reverse of happiness"(p. 10) Mill 1957 by, for example, giving to businesses that treat employees fairly and are concerned with such public goods as the environment would also be considered ethical according to Mill. Given that things such as global warming, air pollution, water contamination, and soil pollution negatively affect large groups of the population, if not all of the population (in the case of global warming), banks that chose to partake in the above examples could be viewed as contributing to the overall happiness of all people and would hence have moral value.
According to Immanuel Kant's Categorical Imperative, morality concerns intentions, and not outcomes. A person is moral insofar as they act with a good will, regardless of the consequences. With this knowledge one could propose that the act of lending money is not in and of itself immoral and according to Kant's perspective banks should not be judged as moral or immoral based on the outcomes of their lending. However the second formulation of Kant's categorical imperative states: "act in such a way that you always treat humanity, whether in your own person or in the person of any other, never simply as a means, but always at the same time as an end" (pg. 66–67) Kant 1956 . Based on this formula, one could argue that the whole practice of lending is not ethical, since it treats human persons merely as means to gaining money, ('mere means') rather than as ends in themselves.
For Aristotle, lawfulness is important in the measurement of morality, as is equality and justice. Whether an action is or is not in accordance with the law is an important measurement of morality for Aristotle. Many banks do business in accordance with the law in all practices. They may also specifically seek to do business with law-abiding clients. Nevertheless, this can be problematic, as laws vary internationally. This means that a bank could be viewed as ethical even while funding clients who lawfully conduct business in harmful manners. However this measurement is challenged by Aristotle's statement: "what is just in transactions is something equitable, and what is unjust is something inequitable."This means that a bank needs to take into account the unjust/inequitable behavior of its borrowers to qualify as an ethical bank. For example, lending to a law-abiding corporation that does not pay its employees a sufficient living wage would be immoral.
1. The Puruṣārtha (Dharma, Artha, Kama, Moksha) Concept: This ethical guideline speaks about the necessity to keep Dharma (Righteousness) as the foundation for every choice that is made. Artha stands for generation and sustenance of wealth, including monetary wealth. Kama is related to choices made regarding fulfillment of desires, and Moksha is about spiritual fulfillment. Exploration related to Artha and Kama has to be done within the contexts of Dharma and Moksha. Moksha is considered the supreme goal. These four are considered to be Purushaartha.
2. Paropakaaraartham Idam Shareeram: The body is meant for the service of the noblest ideas and to contribute to the well-being of all.
3. Atmano Mokshartham Jagat Hitayacha: The actions one perform in achieving one's liberation/ fulfillment has to be done in the context of the well-being of the world.
One argument against regulating banks is that the regulations would violate the proper functioning of the free market economy. Severyn T. Bruyn suggested that the extreme disconnection between market actions and morals was never the intent of the market economy's founding thinkers, specifically Adam Smith and that putting standards and regulations in place that rest on the basic morals of society should not conflict with the free market, but are actually an important part of the proper functioning of the free market.
Rudolf Steiner suggested that capitalism has the task of funding economic initiatives; capital should be directed into directions productive for society. He proposed that rather than prices being set through either the total control of government regulation, or the total lack of control of a free market, each industry could have self-regulating associations of producers, wholesale and retail businesses, and consumers. These associations would determine prices fair to all three groups. The state would not interfere with purely economic decisions but would be responsible for protecting human rights (this could include a minimum wage and safety in the workplace) and equality of its citizens' rights.(See Steiner's Threefold Social Order.)
Credit unions are not banks but they offer many of the same services as banks (e.g. investment opportunities, commercial and business loans, checking & savings accounts, etc.). Credit unions are member-owned rather than shareholder-owned. This gives each member more influence in the decision-making process. When a credit union has surplus, the profits made will either be invested into the community or will go back to the members in the form of "patronage rebates" (i.e. cheques). Credit unions focus on the members because they are also the owners, and on the communities in which they are situated. Credit unions put a higher focus on local community development than banks do. Most credit unions lend strictly to people and businesses in the community where the union is located. This fact leads credit unions to affect communities more positively than regular banks.
However, credit unions do not necessarily have the same potential to cause widespread change in business practices as ethical banks do. This is because credit unions largely avoid the problem of funding unethical corporate/business activities by focusing on funding local businesses, which are easier to monitor and arguably less capable of generating wide-reaching social and environmental benefit.[ citation needed ]
The Global Alliance for Banking on Values (GABV) is a membership organization founded in March 2009 by BRAC Bank in Bangladesh, GLS Bank in Germany, ShoreBank in the US, and Triodos Bank in the Netherlands.It is currently made up of 27 of the world’s leading sustainable banks, from Asia, Africa, Latin America to North America and Europe.
Islamic banking or Islamic finance or sharia-compliant finance is banking or financing activity that complies with sharia and its practical application through the development of Islamic economics. Some of the modes of Islamic banking/finance include Mudarabah, Wadiah (safekeeping), Musharaka, Murabahah (cost-plus), and Ijara (leasing).
In economics, moral hazard occurs when someone increases their exposure to risk when insured, especially when a person takes more risks because someone else bears the cost of those risks. A moral hazard may occur where the actions of one party may change to the detriment of another after a financial transaction has taken place.
A commercial bank is a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products that is operated as a business for profit.
Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient.
A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stakeholding structures.
A bank run occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system, numerous customers withdraw cash from deposit accounts with a financial institution at the same time because they believe that the financial institution is, or might become, insolvent; they keep the cash or transfer it into other assets, such as government bonds, precious metals or gemstones. When they transfer funds to another institution, it may be characterized as a capital flight. As a bank run progresses, it generates its own momentum: as more people withdraw cash, the likelihood of default increases, triggering further withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden bankruptcy. To combat a bank run, a bank may limit how much cash each customer may withdraw, suspend withdrawals altogether, or promptly acquire more cash from other banks or from the central bank, besides other measures.
A 'financial system' is a system that allows the exchange of funds between lenders, investors, and borrowers. Financial systems operate at national and global levels. They consist of complex, closely related services, markets, and institutions intended to provide an efficient and regular linkage between investors and depositors.
Bank regulation is a form of government regulation which subjects banks to certain requirements, restrictions and guidelines, designed to create market transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. As regulation focusing on key actors in the financial markets, it forms one of the three components of financial law, the other two being case law and self-regulating market practices.
A mortgage broker acts as an intermediary who brokers mortgage loans on behalf of individuals or businesses.
Triodos Bank N.V. is a bank based in the Netherlands with branches in Belgium, Germany, United Kingdom and Spain. It was founded in 1980 with a mission to 'help create a society that protects and promotes quality of life and human dignity for all' by means of ethical banking. Triodos Bank finances companies which it believes add cultural value and benefit both people and the environment. That includes companies in the fields of solar energy, organic farming or culture. The name Triodos is derived from the Greek "τρὶ ὁδος - tri hodos," meaning "three roads". Triodos Bank's balance sheet was worth EUR 5.3 billion by the end of 2012. The bank was founded as an anthroposophical initiative and continues to honor the work of Rudolf Steiner as the inspiration for its approach to banking.
Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world.
Socially responsible investing (SRI), or social investment, also known as sustainable, socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social change regarded as positive by proponents.
The most important difference between non-banking financial companies and banks is that NBFCs don't take demand deposits. A non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFI facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples of these include insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations. Alan Greenspan has identified the role of NBFIs in strengthening an economy, as they provide "multiple alternatives to transform an economy's savings into capital investment which act as backup facilities should the primary form of intermediation fail."
Bank regulation in the United States is highly fragmented compared with other G10 countries, where most countries have only one bank regulator. In the U.S., banking is regulated at both the federal and state level. Depending on the type of charter a banking organization has and on its organizational structure, it may be subject to numerous federal and state banking regulations. Apart from the bank regulatory agencies the U.S. maintains separate securities, commodities, and insurance regulatory agencies at the federal and state level, unlike Japan and the United Kingdom. Bank examiners are generally employed to supervise banks and to ensure compliance with regulations.
A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.
Social enterprise lending is a form of social finance which refers to the practice of offering loans and other financing vehicles below current market rates to social enterprises and other organisations pursuing social goals. This is often referred to as 'patient lending', or financing with 'soft' terms. Patient lending recognises that projects with social outcomes often reach profitability later than commercial projects. Softening the terms of a loan means that a social lender may offer provisions such as longer loan terms, lower interest rates and repayment 'holidays' where capital and interest repayments and are not due until the project is profitable. Social lenders might also offer small grants as part of an investment package.
Financial Fragility is the vulnerability of a financial system to a financial crisis. Franklin Allen and Douglas Gale define financial fragility as the degree to which "...small shocks have disproportionately large effects." Roger Lagunoff and Stacey Schreft write, "In macroeconomics, the term "financial fragility" is used...to refer to a financial system's susceptibility to large-scale financial crises caused by small, routine economic shocks."
Mercury Provident was the first British ethical bank, noted for its "Target Accounts" which allowed depositors to select a rate of interest and a field to invest in. It was founded in 1974 and merged with Triodos Bank in 1994.
Profit and Loss Sharing (also called PLS or "participatory" banking is a method of finance used by Islamic financial or Shariah-compliant institutions to comply with the religious prohibition on interest on loans that most Muslims subscribe to. Many sources state there are two varieties of profit and loss sharing used by Islamic banks – Mudarabah and Musharakah. Other sources include sukuk and direct equity investment as types of PLS.
Islamic banking and finance — the industry built around avoiding interest and other financial practices found in violation of sharia — has been both praised and criticized by observers.