Ethical Banking in the Modern Era


Ethics deals with the concept of morality; it revolves around the idea of what is right and what is wrong, establishes the decisions that shape our understanding of society, and dictates the socially acceptable rule of thumb. A bank, on the other hand, is a financial institution that provides tertiary services such as the extension of loans, wealth management, and deposits and withdrawals, et cetera. The pecuniary nature of banks assumes a highly corporate establishment that is profit-driven. So, how does a philosophically abstract premise get entwined with the technical, concrete idea of banks?


The notion of a non-human entity concerned with the human concept of ethics and morality seems highly absurd and implausible. However, the term ethical banking does not posit the idea of a financial institution becoming human; rather, it implies adopting humane practices. Ethical banking, in a broader sense, questions the endeavour of a bank. It involves the recognition of how banking practices have an impact on the societal structure and the ecosystem. This inconclusive definition is precisely what we aim at dissecting in terms of the actions of banks that have a tangential impact on society and the environment and the characteristics of such a practice.


Banking as a sector is highly conspicuous because these establishments lay the foundation of the financial situation of a country. The sector practically controls every aspect of the world economy considering monetary support is the minimum requirement in any field. So, it is safe to assume that the practices of banks do have far-reaching repercussions. Since there is no universal code of ethics, banks adopt ethical or moral principles that they may choose to follow at their discretion.


Banks are profit-making institutions, and as such the services provided are not accessible to everyone. For instance, a bank would be unwilling to take on clients with a bad credit score or prevailing from a humble background (in other words, clients that would cause the banks to potentially lose money). Therefore, lower-income individuals fail to avail the services. Proponents of ethical banking maintain that this traps the plebeians in a chronic cycle of poverty since they do not have the means or the funding and this compromises personal and community growth. The development of poor communities helps boosts the economy due to the rise in national income and reduces the number of people dependent on government aid.


Nevertheless, community involvement comes under the ethical practices followed by banks. Financial institutions must take an active interest in the welfare of the community which can be in the form of funding affordable housing projects, sponsoring community events and seminars to educate members of society, and providing scholarship schemes to students in schools. As per Section 135 of the Indian Companies Act, 2013, a company, meeting the applicability threshold needs to spend 2% of its average net profit on Corporate Social Responsibility (CSR). In recent years, HDFC bank, one of the largest private banks, spent Rs, 535 crores on community development programs in FY 2019-20 and contributed Rs 70 crores toward PM CARES Fund to support the government’s fight against Covid-19 in FY 2020-21. Now, this is imperative because it shifts the aim from just increasing the size of the pie to dividing the pie into chunks for each sector (social or private).


Client screening is the process of doing a background check on potential clients and determining whether they are part of any blacklists or regulatory lists. RBI has made client screening mandatory to make sure that the customer is not affiliated with any criminal or terrorist individuals or organizations. Performing such screening processes accurately and meticulously is also a key part of ethical banking.


Ethical banking entails banks trying to apply environment-friendly practices whenever possible too. Sometimes banks externalize costs: banks can raise interest rates or apply tariffs on loans given to companies/individuals with a higher external cost. For instance, projects that may be substantially damaging to the environment will have to pay extra money to compensate for the high negative externality. Conversely, projects that are pro-environment and practices sustainable development can get additional aid in the form of lower interest rates on loans. Thus, banks have the potential to foster sustainability.


As people become seemingly more aware of the need for responsibility towards society and the environment, the requirement of ethical banks has only multiplied. In the current scenario, there are only a handful of banks known for their ethical practices. Leading the list is UK registered bank, Triodos. Established in 1980, Triodos has invested more than £6 billion in projects to benefit people and society across Europe and expends its profits into local communities. Closely following is Ecology, a green financier. Though it does not accept deposits, its main objective is to grant home loans to people who wish to build an environment-friendly home or make eco-friendly modifications.


In a capitalist world, the idea of ethical banks seems highly utopian. Seeing all the banks converting into ethical banks would be a huge paradigm shift. However, we cannot deny the fact that banks have the power and the funds to bring about a fundamental change in the environment and society, and consumers have become much more aware of where their money goes once invested. Therefore, it is important to recognize that momentum for ethical banking must grow, now more than ever.

References:


https://indiacsr.in/corporate-social-responsibility-csr-hdfc-bank-spends-rs-535-cr-on-community-development-in-fy-2019-20/

https://www.new-money.co.uk/nm-blog/top-5-ethical-bank-accounts-for-2020/

https://corporatefinanceinstitute.com/resources/knowledge/finance/ethical-banking/

https://www.finweb.com/banking-credit/what-is-ethical-banking.html

https://www.igrad.com/articles/ethical-banking-fad-or-future