What is ethical banking?
- When you put your money in a savings account, the bank or building society can lend your deposits to firms to support and grow their businesses.
- If you invest in shares, fixed-interest or investment funds, you are even more directly investing in businesses.
- Ethical saving and investing lets you be selective about which firms you help.
What counts as ethical?
- In general, there is no single definition of ‘ethical’. Each person may have their own view of the types of industry they feel unhappy to support or those they would like to actively support.
- For example, you might be concerned to avoid firms that employ child labour, while your neighbour’s priority might be green technologies to fight climate change.
- Similarly, different ethical products take a different stance on the investments they reject (negative selection) and those they support (positive selection).
- However, if you are looking for Sharia-compliant savings and investments, Islamic law sets out the principles to be followed, including, for example, avoiding investments related to pork, gambling and pornography, or the earning of interest (which is considered to be exploitation – similar to the usury laws that used to apply under Christian law).
- Overall, ethical banking works on 3 key principles.
1. Integrity: generating trust in the banking system
2. Responsibility: considering consequences of lending policies
3. Affinity: bringing depositors and borrowers closer together through shared aims
How do you find ethical banks?
- Building societies, credit unions and Community Development Finance Institutions (CDFIs) all offer ethical banking. (As an aside, CDFIs are social enterprises that support communities by providing affordable finance that would not otherwise be available)
- They guarantee wider community benefits with the money invested in their accounts
- Websites such as Move Your Money, Your Ethical Money and Ethical Consumer all offer advice on finding ethical banks.
How ethical are standard high street banks?
- High street banks are driven by profit
- However, after the credit crunch and associated recession- banks were called to account for their role in their crisis
- Mark Carney, current governor of Bank of England has emphasised that banks need to be more ethical. He has said “Bankers need to see themselves as custodians of their institutions, improving them before passing them along to their successors,” and is introducing tighter regulations and reforms
Will all banking be ethical in the future?
- It’s unlikely as the current ethical banking system could not provide the overall credit needs nor respond to the demand for liquidity
- However, after the credit crunch- there were exceptional growth rates (of more than 30%) for several ethical financial institutions.
- In the future, consumers may demand conventional financial products and services that offer broader benefits for both the local and global community as well as the environment.
- The recent financial crisis, climate change and energy issues triggered an ever bigger drive for the development of a more social, alternative, civic and sustainable banking sector.
- One major consumer boycott in the UK took place in the 1980s: a student led campaign successfully resulted in Barclays pulling out of apartheid South Africa.