Will banks have to become sustainable?
Posted by Allison on 4 April 2009, 09:59
Banks have never been seen as having a responsibility in terms of promoting sustainability or even ethical banking.
However since the credit crunch happened in the United States, many banks have found that they are having to come up with new ways that they can attract customers and ensure that they can survive into the future.
Historically, sustainable banking was seen as very much of a niche market. It was definitely viewed very differently from the mainstream of banking with its sole purpose of making money and as much money as it could.
So what has happened and are we about to see an explosion in terms of sustainable banks? Or is this just a flash in the pan, which is more about banks expunging the guilt that they feel over the credit crunch? Whilst some banks are willing to become more sustainable, is it realistic to think that banks will start to become leaders, in terms of sustainability?
The impact of the credit crunch
After the credit crunch started to bite, banks and financial institutions all over the United States found themselves subject to quite stinging criticisms. They were basically accused of having been greedy and irresponsible. They had lent money to people who really could not afford to pay it back and when they couldn't pay back, they lost their homes.
Banks were also given a wake up call in terms of how they were going to get through the credit crunch, after all money was very tight, and indeed it is still tight, so how could new investors be attracted?
In 2003, 10 banks launched a set of guidelines called the Equator Principles. These set out details of how banks and financial institutions should manage issues such as financing environmentally sensitive projects such as power stations, dams, or even mineral extraction facilities.
Despite the fact that these guidelines were only launched in 2003, the number of financial institutions who have now joined up to the equator principles, now number 60. So it is obviously becoming lucrative to be able to advertise your bank or financial institutions as being aware of and committed to, sustainability principles.
A few years ago most people in financial institutions saw sustainability as being a bit of a smokescreen If they could demonstrate that they were a little bit aware of sustainability then they could hide behind this if ever they were in a situation where they were attracting negative publicity.
However all that seems to have changed now and most leading financial institutions view sustainability as being a way of helping customers to beat any future problems with regard to the environment and social responsibility. So any bank or a financial institution that is able to promote itself on sustainability grounds will be able to have a competitive advantage over its rivals who are not as equipped to deal with sustainability issues.
In addition many banks as well as financial institutions have recently become much more aware of the issues surrounding global warming.
Historically, global-warming was also seen as being something of interest only to environmentalists and hippies throughout the world. However, following the international tour and debate instigated by Al Gore, the former vice-president of the United States, global warming is now seen as a more mainstream issue that potentially could affect everybody, including those in the financial markets.
Banks are now starting to play a leading role in the market surrounding carbon trading and indeed, they have been advising clients and management within the banks of how they can fund a project which will significantly reduce emissions.
Some have even taken steps to reduce their own carbon footprints and become more sustainable as an institution. This is seen as a major change in how banks actually conduct business.
Bottom of the pyramid
Some banks have recently tried to target money specifically towards the 'bottom of the pyramid'. This is a term that is used to describe people who live on less than $2 a day. Currently there are around 4 billion people in the world who live on less than $2 a day.
Conventionally these people were viewed as being the bottom of the pyramid and to some extent they were viewed as a drain on the world's resources, because they were so reliant on handouts and loans from the World Bank.
However, a new way of looking at these people is slowly emerging and that is to see them as people who are actually in need of services and products, which may be able to help them get out of poverty and potentially they will be able to instigate enterprise within their society.
Ultimately this will mean that they are not reliant on hand outs and are able to live independently, without help from the World Bank and the more developed countries.
To some extent this is quite a long term view, since it is unlikely that complete self-reliance on the part of undeveloped countries will happen within the next 20 or 30 years, but it is a long-term goal that can be achieved, or at least quite a few banks and financial institutions think that this can be achieved.
Although there are around 4 billion people living on less than $2 a day, the IFC and World Resources Institute, carried out a study which found that collectively they will have somewhere in the region of $5000 billion to spend.
Collectively this gives them a significant spending power. Yet historically this market has been largely ignored by many of the developed countries. So it is a new market to tap into. And many banks have seized that opportunity.
It is basically a very rural market, with quite great geographical distances involved as well as a significant amount of cultural differences between countries. However, these people have been served with very poor quality goods and services and what is more they have found it very difficult, to access services particularly in very poor areas where people have very restricted access to transport.
So, if banks are able to offer better services and better goods to these people, then they will be able to take control of their lives and instead of living on handouts, they will be able to start businesses or maintain businesses and thus become more self-reliant.
Some of the products which banks may be able to offer are not just loans but also new concepts such as crop insurance or life insurance. The aim of these is to make life easier and less stressful for the people who are living on the edge of extreme poverty. Crop insurance alone could make a huge difference to people living in areas where it can be difficult to grow crops.
But, due to the fact that banks have been making money out of selling products to people in underdeveloped countries, some non-government organisations and charities have been criticising their actions.
However, banks replied that their work is at least promoting some good within these very poor communities and is helping them to become more self-reliant. Moreover banks are very different from charitable organisations and they actually have to make money, otherwise they will not be able to survive particularly in the aftermath of the credit crunch in the United States.
Some banks are instigating new initiatives, involving micro finance institutions. These initiatives work by lending money to institutions who in turn lend the money to people who are too poor to be able to access the conventional financial institutions.
Banks are then able to control this lending by making sure that the micro finance institution is ethical in its approach to lending money. In some countries, if people miss one repayment on a debt, they will find that it is dealt with quite ruthlessly and someone may come round to their house and beat them up. However, with these new financial institutions, banks can exert an influence to ensure that violence is not carried out and that people are dealt with in a responsible way.
Indeed the private sector part of the World Bank, which is known as the International Finance Corporation has recently announced that it is going to develop a set of principles to ensure that money that is loaned within the Third World, will be collected responsibly. These principles will probably include some information about how banks can monitor the activities of financial institutions that they lend money to in undeveloped countries.
Banks will be encouraged to be proactive and to ensure that it does not loan money to organisations, which will inappropriately target people who may not be able to repay a debt.
Banks are also discovering that there are lots of ways to make money from people in undeveloped countries who are at the bottom of the pyramid. One way which is being viewed very positively is encouraging people, even the poorest people to save money, which ultimately will mean that they do not have to go to moneylenders and pay exorbitant rates of interest. Since many of these moneylenders operate within the black market, it is very difficult to regulate the sector and the money may be channelled outside the local economy. This makes the money that moneylenders make of no practical use to local people and the local economy, it just puts people deeper into debt.
One initiative is being undertaken in Ghana by is the British bank Barclays. In Ghana there is an ancient tradition of saving, where people who are known as Susu traders will take and keep money for people who are market traders. The traders will use the Susu collector, a bit like a bank. Susu collectors are now being offered deposit accounts with Barclays Bank, so that they can earn interest on any money that they are holding.
This is seen as a way of helping those who are very much at the bottom of the pyramid, but who are able, with a little assistance, to improve the quality of their lives quite dramatically. Each party is a winner in this kind of transaction, the bank gets some people to save up on a regular basis and the Susu traders will also benefit from the interest that they are given, because it is from a deposit account and not from a current account, so they get much more money.
Even a few years ago and banks and financial institutions would have held their hands up and shrieked at the prospect of being involved in these kind of activities, but increasingly they are being seen as mainstream. Who knows how this change will alter the face of banking as we know it, but it is likely to effect change at least in some way?
There has also been a sea change in how people, particularly in Africa, view saving. Previously, whatever money people had, they would have soon found a way to spend it. Now they seem to be actively planning for the future and ensuring that they have a sum of money to which they can have access when they need it, a kind of emergency fund.
To give some indication of the scale of savings in Africa, in 2006, some $1.2 billion was saved by over 5.7 investors. This was double what it had been in 2005 so Africans really have got the saving bug. In Malawi alone, historically one of the poorest countries on the planet, over 123,000 bank accounts have been opened over the last five years. These bank accounts hold an average of $100 and it is thought that this figure could rise considerably, over the next few years. These bank accounts have all been set up with the assistance of a UK micro finance charity organisation, which has radically transformed the economy of Malawi. Only 3% of the population of Malawi actually have access to a traditional financial institution like a bank. In effect people in Malawi are effectively denied access to financial institutions and so they are unable to save, in the same way that people in the developed countries take for granted.
Thus, anyway that they can be encouraged to save more will help them to become more self-reliant and also it will help the local economy, because people will have more money to be able to spend more on local goods and products. The banks will also win, because they have more people saving and more money coming in to their bank. So once again, this really is a win win situation.
Is sustainability the future for banking?
It is hard to know if sustainability and sustainable practices will become part and parcel of every bank, or whether the 60 banks that have signed up to the Equator Principles will be the only 60 banks in the world that are interested in sustainability issues.
However, with more mainstream interest focussing on the issues of climate change and global warming, it is likely that more and more banks will be forced into showing an interest in sustainability issues. They may even have more stringent responsibilities placed on them, to make sure that they are banking in a way that is not at odds with sustainability issues.
Banks have never been at the vanguard of change. They have always been seen as quite traditional institutions that do not generally embrace change and they like to keep everything as it was and keep traditional methods of banking, to do their business. However, this view of banks and banking is starting to change. The credit crunch has shown that traditional ways of banking and doing business are not always for the best and that sometimes the only way out of difficult situations is to embrace change and find new markets for the services and products that you can provide.
In a sense, this is exactly what sustainable banking can offer banks. They are able to find new customers, even those who are at the bottom of the economic pyramid and they are able to create a culture whereby saving is seen as a very good thing to do. This enables banks to actually attract new customers and create new ways of doing things. And what is more, it seems to be working, which is the most important aspect of it, for both the banks and the people who are at the bottom of the pyramid!
So, the reality is that this may well just be the start of ethical and sustainable banking and who can foresee how this will actually affect and shape the financial markets over the next few years. Partly this has been borne from necessity, rather than a burning desire to 'do good', but the outcomes are the same and it is already starting to make a difference to some people's lives and that can only be a good thing. But it looks like the next few years will be an interesting time for anyone involved in financial issues, particularly if sustainable banking does take some giant leaps forward!