Ethical banking by definition means financial services that are designed to promote equity and sustainable development; their profitability is not measured only in financial terms but also in social terms. 

The topic is not widely spoken of in Sri Lanka, therefore, this week The Sunday Morning Business will be delving deep into ethical banking, backed by a June 2022 research paper compiled by M.A.K. De. S. Jayasekera and M.D. Pushpakumari of the University of Sri Jayewardenepura titled ‘Does Ethical Banking Hold the Potential to be the Future of Banking?’

The trend of ethical banking has slowly but steadily been established and people are aware that there is a need for financial institutions to engage in socially and environmentally responsible practices. Banks are considered ethically-oriented if they are concerned with the environmental and social impacts of their dealings. 

According to Jayasekera and Pushpakumari, the investments of ethical banks make society ecologically, culturally, economically, and environmentally sustainable. A socially inclusive economy can raise the earning capacities and standards of living of its countrymen. It was observed that there has been a remarkable increase in ethical banks operating in Europe, especially after the financial crisis of 2007. As ethical banking provides a whole range of banking activities, it is now being accepted as an alternative banking model to conventional banking. 

“A well-run ethical bank can be a role model to any other business organisation that aspires to function as an ethical business organisation. Ethical banks go above and beyond conventional banking boundaries to earn not only economic profits but social and environmental returns too. Ethical banks have a different set of norms and value systems, as opposed to conventional banking systems. Ethical banks invest in community-focused activities. 

“Furthermore, they understand that there is a ‘climate emergency’. Their future customers will consist of millennials and Generation Z. Their aspirations and priorities are distinct as millennials and Generation Z have thinking patterns different from the two preceding generations – they are more ethically conscious than them, thereby opting for ethical banks over conventional banks,” the study observed. 

At present, banks are responsible towards the society and the community they are part of, unlike in the past where banks and other financial institutions were only responsible to their shareholders and focused solely on maximising profits. 

A bank’s social responsibility can range from commitments towards gender equality, minority representation, commitments for supporting and investing in businesses, and the causes that align with social issues and environmental sustainability. 

Characteristics of ethical banks

There is a lot that is encompassed under the ethical banking umbrella. Whether it is offering financing to help with affordable housing or to support the costs of ecologically-friendly projects, ethical banking involves a number of aspects. However, there are some underlying characteristics followed by nearly every bank that abides by ethical protocols. 

1. Screening clients

For every bank, screening its clients is a top priority to determine whether or not they are financially stable. In ethical banking, this becomes even more crucial in order to ensure that the bank doesn’t join hands with any parties who may fail to follow ethical practices. 

2. Getting involved in the community

Generally, the banks abiding by ethical protocol prioritise interactions with local communities to promote a thriving and favourable environment locally. This protocol could incorporate things like setting up funding for sponsoring an ecologically-friendly event or supporting projects to enhance a community’s financial literacy.

3. Consistency of ethics

Ethical banking involves maintaining both internal and external ethics and keeping them uniform. It is not just about external ethical conduct; the same needs to be incorporated internally. For instance, if a bank refuses to serve a client that does not support diversity, the bank itself should accommodate a diverse staff as well. 

4. Sustainable practices

Ethical banking is about ensuring that banks instil environmentally-friendly initiatives and standards wherever they can, while also extending their support towards clients who abide by these standards.  

Demand for ethically-oriented banking

The study points out that banks are being criticised by the public for not taking responsibility for their indirect involvement in damaging the environment and neglecting sections of society. It notes that banks are required by civil society to be conscious regarding their lending policies, which could damage the environment. 

Banks are perceived as responsible corporate citizens and they act as intermediaries to direct financial capital into investments in various sectors and projects; thus, by and large, banks have a social responsibility. Banks are also expected to follow ethical principles. 

It was noted by the public and civil society that banks have failed in the discharge of this duty over the years. Banks were expected to follow ethical principles, but have failed in this aspect as well. 

The study revealed: “There has been a growing demand for ethically-oriented banking. Ethical banking emerged as a different banking model. Ethical banking aims for a triple bottom line. These banks have stood the test of time. During the financial crisis, they were the least affected. This is a sustainable banking model. Future customers – millennials and Generation Z – are an ethically-oriented generation that wishes to have a positive impact on society and the environment. 

“Banking which has a positive impact could be their preferred choice and ethical banking satisfies this need. From the study, it can be concluded that ethical banking has the potential to be the future of banking. There have been many instances of research carried out on ethical banking in the West, but few instances of this research in the Asian context. No research pertaining to the topic was found in Sri Lanka.”

Ethical banking approaches  

How each ethical bank displays its commitment to social responsibility will differ, but there are similarities to their approaches.

Most socially responsible banks publish information about their investment policies. This typically includes a pledge to avoid investing in sectors with negative environmental impacts or companies the bank believes have unethical or exploitative business practices.

Many of the banks also actively support businesses that are local or minority-owned or meet environmental or ethical business standards. They often commit to using profits for good. These commitments can include grants to organisations, political support for causes such as human rights or social justice, or ethical business processes and transparency in operations.

The banks may pursue certifications from third parties that audit their commitments, policies, and charitable giving.

Ethical banking encourages transparency, helps build strong communities, and establishes a set of principles and ideals that govern how and to whom finances flow. Banks that follow such practices are also often the last option available to many startups to obtain the funding necessary to get off the ground.

The practical reality, however, is that while establishing a set of core principles to adhere to is a noble endeavour, refusing to take on clients or work with organisations that somehow ‘violate’ said principles can spell financial disaster, both for the clients and the bank.