Ethical banking is the term that encompasses any banking system that embraces environmentally and socially conscious practices. While the banks still try to earn profits, they try to do it in the way that's consistent with their practices. It is a fairly broad concept that can encompass anything from banks that provide financing to encourage affordable housing to banks that finance the start-up costs for ecologically friendly manufacturers. The key to ethical banking is deciding on the common set of principles and sticking to them no matter what.

Understanding Ethical Banking

A bank provides a wide variety of services. This includes managing their clients' money, facilitating financial transactions,  lending money to qualified borrowers and issuing debt securities that are backed by the previously mentioned loans. However, those services are not accessible to everyone. The banks aim to make profit first and foremost. This means that try not to take on clients that would cost them too much money. For example, banks do not usually made loans to people whose credit history and income makes it more likely that they will fall behind and default. They may also be reluctant to provide their services in lower-income neighborhoods and, in case of international banks, developing countries. The banks are similarly reluctant to lend money to ecologically friendly projects on the ground.

As the result, lower-income individuals have less opportunities to save and borrow money. This, in turn, limits their ability to improve their lives and their communities. Proponents of ethical banking argue that this traps low-income communities and developing countries in a cycle of poverty, since they do not have the means or the funding to improve their situation. The development of poor communities benefits the country and the world as a whole, since it increases national tax revenues and lowers the number of people who are dependant on government aid. But to achieve this, profit-based policies alone would not suffice.

What is Ethical Banking?

As mentioned before, "ethical banking" is a fairly broad term. This allows financial institutions to decide for themselves what sort of policies they wish to pursue and which principles they are willing to follow. Those principles and policies are often written down in policy documents that are available to the public and their clients. But while the banks may have policy differences, they do tend to share some common characteristics. They include:

  • Community involvement: The bank takes an active interest in it's community's welfare and takes steps to improve it. Among other things, this can include funding affordable housing projects, providing scholarships for students in local high schools, sponsoring community events and holding seminars to educate members of the community about their services.
  • Sustainable practices: The bank makes an effort to apply environmentally-friendly practices whenever possible, as well as to support clients who practice those policies.
  • Client screenings: The bank screens it's clients in order to avoid doing business with individuals, organizations and corporate entities with a history of unethical and immoral practices. For example, it may avoid doing business with a company that has a history of using child labor.
  • Consistent internal and external ethics: Simply put, the bank practices what it preaches. If a bank applies the same ethical centers to it's internal operations as it does to it's external operations. For example, if a bank is not going to do business with a company that does not offer it's employees health insurance, it cannot refuse to offer health insurance it's own employees.

Ethical Banking and Profits

It is important to remember that while financial institutions that practice ethical banking try to serve the disadvantaged, those aren't the only services they provide. It is also important to remember that just because a bank is ethical doesn't mean it should not keep an eye on it's bottom line. As the collapse Chicago's ShoreBank demonstrated, good intentions and humanitarian efforts don't protect banks from financial weaknesses and economic downturns.

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