Why ethical banking is looking bullish

Some of the world’s biggest banks are facing meltdown. So, can their sustainable cousins rise from the ashes?

The tumultuous months following the credit crunch have propelled sustainable banking into the limelight. Until the shock of the financial crisis, their progress had been steady, even unremarkable, against the headline-grabbing growth of the leading mainstream banks.

But today, the figures are pretty impressive. The ten best-known sustainable banks in the developed world alone have assets of around $30 billion – and rising. Focusing on financing environmental projects, social entrepreneurship and community businesses, these banks include names such as Triodos in the UK, ShoreBank in the US, and the BRAC Group, a Bangladeshi microfinance institution with millions of customers in Bangladesh, Tanzania and Afghanistan, among other places.

So what’s their secret, and what should the financial industry learn from them? Here are three key ingredients of success:

1.Values-driven banks focus on the relationship with customers
By highlighting their interdependence, the bank enjoys committed depositors who understand what their money is used for, and borrowers who feel supported by it. For example, Triodos customers know that their deposits are funding projects such as solar companies in Bristol, affordable housing in London and organic farms in Gloucestershire – from which the wider community benefit.

The loss of this vital bond in conventional banking has led to catastrophic consequences for the markets and millions of people connected to them. Rather than build their business on the back of real relationships, many banks invested in packaged and repackaged sub-prime mortgages and sold them to the market. This meant the buyer had no idea what to do if borrowers, who were completely disconnected from them, failed to pay interest or missed repayments.

2. They know their shareholders
Banks that are ‘listed’, and therefore work with anonymous shareholders, have to fight the perception of being weak as stock prices drop. The damage that can be done by anxious depositors transferring their money quickly via the internet is all too clear.

Ethical banks often choose not to be listed, or they deliberately follow clear, strong codes for socially responsible shareholding, so depositors know exactly what they’re letting themselves in for. Because the value of these banks is determined by the quality of their loan portfolios – grounded in real companies and the people who run them, rather than the market – this prevents speculation.

3. They are about core banking
Banks provide a public service: money, especially savings, is fundamental to the way we live our lives – just like clean drinking water, electricity, healthcare and education. But many are diversifying into potentially lucrative, less transparent products, such as insurance and investment banking.

Those that were not prepared to invest in these riskier leveraged financial products have actually fared much better. At the height of the crisis, Triodos increased its deposit base by 15% in just two months. And overall, while many mainstream banks are worth only a fraction of their value a year ago, Triodos grew by 25% in 2008. People who were once sceptical about smaller banks now understand that staying close to the real economy – through tangible projects such as renewable energy or community schemes – is safer than being involved in global markets.

A really thorough regulatory framework would ensure all banks only work in savings, loans and transactions – returning to the core business they came from and know best.

Only by applying these sustainability principles will mainstream banks make the margins they need to deliver healthy, effective and key banking services. Because, despite the financial crisis, the world isn’t short of money: we just have to make better use of it.

Dr Bevis Watts is Head of Business Banking
at Triodos Bank.

Triodos Bank is a Forum for the Future partner

16 April 2009