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Future of ethical banking: Is it a feasible option for the industry?

Banking can be described as many things, but the words ethical or sustainable rarely come up, especially if one has just received an unexpected overdraft charge. Even a ‘friendly’ bank, such as Co-op, is receiving negative press. There are some providers hoping to change this reputation, so what is the future of ethical banking?

Is ethical banking a feasible option? It has certainly been tried before. The most prominent example in the UK is the Co-operative Bank. It operated an ethical policy which, by and large, excluded the provision of any banking services to businesses which took part in certain business activities or sectors.

Recent years have not been as kind to the Co-operative Bank. In 2013-14, the bank needed a rescue plan to address a capital shortfall of approximately £1.9bn ($2.4bn). Over the last five years, it has accumulated losses of £2.6bn and since 2012, its branch network from 353 locations to 95. In February 2017, the bank’s board announced they were ‘inviting offers’ for a possible sale.

Away from financial stability, other unethical stories emerged regarding the Co-operative Bank, chiefly its former chairman Paul Flowers caught buying crack cocaine and methamphetamine.

If the most prominent ‘ethical’ bank in the country turned into this, what chance does anyone else have?

Are ethics sustainable for a bank?

Ethics can be a costly endeavour, as the Co-operative can attest. However, it does not have to be that way as the future of ethical banking may differ to its past.

The Global Alliance for Banking on Values (GABV), which comprises of 40 banking institutions across the globe, believes that this alternative can actually strengthen financial markets and can bring steady financial returns.

Marcos Eguiguren, executive director of the GABV, explains: “We can find these [sustainability-focused] banking institutions in different markets, all serving diverse needs but they all are using specific business models driven by a set of common guidelines, the Principles of Sustainable Banking. One of the reasons why these banks are growing in size and number is because they are meeting the needs of individuals and enterprises in the local communities.”

The alliance’s 2016 report states: “Sustainability-focused banks are growing in strength and number because they focus on real human needs in the real human economy.

“Since the financial crisis seven years ago, a group of sustainability-focused banks have demonstrated that a focus on the real economy with a dedication to supporting economic social and environment impact delivers steady financial returns.”

According to the report, sustainability-focused banks (SFBs) are big financers of the real economy in terms of loans to total assets, which was 76.8% in 2015.

This is nearly double the loans to total assets ratio of Globally Systemically Important Financial Institutions (GSIFIs), which are banks such as Barclays, Deutsche Bank and Santander.

In addition, in terms of growth, SFBs have had higher levels of grown than GSFIs with regards to loans, deposits, assets, equity and total income over a five and a ten year period. However, the SFBs have come from a much lower base.

Read the full article here.

Courtesy of Retail Banker International and Verdict.

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