Ethical Banking

The core set of principles and ideals that govern how banks interact with their clients, their community, and the world in general

What is Ethical Banking?

Ethical banking involves consciousness of how banking practices affect society and the environment. Financial institutions that emphasize ethical practices seek profit like any other financial institution. However, they strive to generate earnings without sacrificing principles or causing harm.

Ethical Banking

The term is a fairly broad one, which means it covers a wide range of ideas and concepts under its umbrella. A wide scope of things is included, ranging from banks offering loans and financial assistance to start-ups that are environmentally friendly to those that serve struggling communities or help individuals looking for affordable housing.

The root of ethical banking is a core set of principles and beliefs. Ethical banks remain true to their core model of conduct, even if it does not particularly help them realize a profit.

Summary

Ethical banking is a fairly broad term used to describe banks that operate around a set of principles and ideals that are used to govern how they interact with their clients, their community, and the world in general.
While each bank is left to determine what principles will sit at its core, most have a few characteristics in common, which include community involvement, client screening, and consistency of internal and external ethics.
Ethical banking can help to build strong, financially capable communities. The reality, though, is that being held to a rigid set of principles can often prove difficult to implement from a purely practical point of view.

Basic Characteristics of Ethical Banks

Because ethical banking is such a broad term, banks enjoy a lot of flexibility when it comes to the exact nature of how they operate. That being said, there are a few key characteristics that nearly all banks maintain when it comes to ethical guidelines:

1. Screening clients

It is important for any bank to screen its clients, though the most common reason is to be certain that the client is financially sound. With ethical banking, however, screening clients is additionally important so that a bank does not end up working with companies and individuals who do not maintain ethical practices.

2. Getting involved in the community

Banks following ethical principles are typically eager to interact with their local communities and foster a healthy and prosperous local environment. Their guidelines may include things such as establishing funding for affordable apartment complexes, acting as a sponsor for a community event, or setting up college scholarships for high school students.

3. Consistency of ethics

Banks need to “walk the walk,” keeping both internal and external ethics consistent. Whatever the bank deems ethical externally must be maintained in-house. If, for example, an ethical bank declines to work with a client because the company doesn’t accommodate handicapped workers, it should accommodate staff with different types of handicaps.

The Pros and the Cons

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 a practice are also often the last chance available to many start-ups at getting the funding necessary to get off the ground.

The practical reality, however, is that while establishing a set of core principles to operate by is a noble endeavor, refusing to take on clients or work with organizations who somehow “violate” said principles can spell financial disaster, both for the clients and the bank.

More Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below: