One of the effects of the global financial crisis was to call into question the sustainability of contemporary banking models.
The post-crisis backdrop is therefore one of concern about financial institutions’ ability to sustainably fulfil their economic, social and environmental responsibilities.
For some time, I had been thinking about tackling the subject of ethical banking but just couldn’t knuckle down to it until Reserve Bank governor Dr Gideon Gono made a telling remark about bank recapitalisation.
“The Reserve Bank of Zimbabwe expects these banks to finalise their capitalisation initiatives and contribute meaningfully to economic growth and development, otherwise there won’t be further social justification for existence of these banks if they are not servicing their communities effectively,” said Dr Gono.
The key phrase is “social justification”. I was reminded about the situation in the United Kingdom where the regulator has also echoed similar sentiments that some precrisis financial products were “socially useless.”
Against this background, this week we explore the social relevance of banks in the light of ethical banking — also called sustainable banking — as it would appear that it is an idea whose time has come.
It’s one thing for banks to provide appropriate services, employment and investment opportunities in the ordinary economic context; it is quite another when they also have to consider the social and environmental implications of their footprint. In this article, we use “ethical” and “sustainable” interchangeably.
From a regulatory perspective sustainable banking used to be mainly about governance and the effects of projects on the environment and people, but it is now also about a banking business model that provides essential services to the broader economy and can be counted on not to destabilise the financial system, says Brooke Masters a Financial Times correspondent.
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“To be sustainable in banking today means being fully compliant with all regulations while maintaining an acceptable risk-adjusted profitability spread over the cost of equity,” says Orlando Hanselman of consultancy firm Fiserv.
Given these insights, how do the ethical credentials of local banks measure up when one considers the impact of the prolonged recapitalisation process on overall market stability?
Characteristically, ethical banks accept deposits from “socially conscious” savers and lend to socially-responsible businesses such as renewable energy and social housing projects. They sometimes even go to the extent of inviting depositors to visit the projects they fund.
One of the hallmarks of ethical banking is the adoption of fairer policies for staff such as ensuring the highest paid executive does not earn more than a certain number of times the salary of its lowest paid employee.
Ethical banks also typically aim to offer fairer products such as a motor vehicle insurance policy that monitors drivers’ behaviour using tracking devices and alters premiums payable accordingly.
A credit card that rewards ethical product purchases is another example.
The downside of ethical banking is that its socially-minded model tends not to prioritise profit growth as aggressively as others might and could therefore be deemed to have a higher risk profile than profit–oriented businesses.
However, proponents of the model argue there is no shortage of ethical businesses which compete favourably at a commercial level.
A potential challenge for ethical businesses is that as competition intensifies, financial pressures could cause them to compromise their values.
Globally, concern about sustainability is starting to permeate the financial services sector and according to Leah Jin, climate change and sustainability partner at KPMG China, there is now seeing a clear trend in shifting focus from profitability to sustainable development.
Externally this is being driven by regulators and internally by the desire to modernise corporate governance and risk management.
In some jurisdictions regulatory bodies have issued guidelines encouraging financial institutions to fulfil economic, social and environmental responsibilities.
Given governor’s recent statement, could the Reserve Bank be moving in that direction?
So what could Zimbabwean banks start doing in order to lend an air of sustainability to their business models? A starting point would perhaps be to consider using equator principles (EPs) — a voluntary set of social and environmental standards governing project finance lending — to inform lending decisions.
EPs normally govern long-term projects exceeding $10 million in value and given the current dearth of long-dated capital in Zimbabwe, they may not be entirely suitable, but experts argue that they can influence other types of lending such as corporate loans and promote sustainable banking.
A survey of 2010 financial results for banks revealed that most of their corporate social investment initiatives are concentrated in the areas of sports, the arts and culture, education, health, orphanages and old people’ homes.
Apart from isolated tree planting initiatives and clean up campaigns, not much attention is paid to weighty issues of an environmental nature. Notably Barclays Bank launched a financial inclusion programme that benefits rural farmers engaged in sustainable agriculture in Mashonaland East.
The annual reports say much about leveraging technology in order to meet evolving customer needs, but there are no discernible efforts to innovate for fairer products that promote sustainable banking. In future mention of efforts to ensure fairer remuneration policies can go a long way in promoting transparency and sustainability in the banking sector.
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