Social Impact Finance

Cristina Trullols, F. Al-Atabani, Kenneth A. Loparo, F. Al-Atabani, Faisal M. Atbani

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137372697
• Topic: Business
• Subtopic: Financial Services
• Index: Business

As a result of the recent financial crisis, new ways of doing finance have developed, creating alternatives to the regular financial system. This book explores non-conventional banking and financing mechanisms in detail, with case studies and examples in which these alternative methods have succeeded.

Part I
Trends

A. Ethical Banking

Introduction to Ethical Banking from a European Perspective

Miguel Ganzo

This section on ethical banking aims to cover a worldwide movement but it is written from a European perspective.

The Roots: Saving Banks

The roots of the European tradition of ethical banking can be found in the rise of saving banks during the nineteenth century – first in Great Britain but soon to spread across the whole continent and the world. The end of the eighteenth century brought widespread change to Europe. A new view of mankind and people’s ability to shape their own destinies began to gain acceptance. It brought both theoretical and practical changes. Savings banks were one of the new praxes that arose. But what was new about savings banks?

When the Ruthwell Parish Bank, one of the first savings banks, was founded in 1810 in Scotland, the established banks of that time asked for £10 to open an account while the Ruthwell Parish Bank asked only for sixpence. This was a small-scale financial revolution but with big-scale consequences, raising lots of people out of financial exclusion. It’s easy to see the similarities with the rise of the microcredits movement at the end of the twentieth century.

But the savings banks were not only offering bank services to people that couldn’t afford them before. Another characteristic that differentiated them from the established banks was their focus on the local and real economy – and of course the principle of not sharing profits among stakeholders. The profit should stay in the local community – in schools for children from the lower classes, hospitals, scholarships and so on. Again it’s easy to see the similarities between these practices and the eco-social-transparent banks of today.

These are the historical characteristics of savings banks, but very often these savings banks evolved and became big institutions more and more similar to conventional banks, both in their structure and in their practices. But the need, the vision and the will to create and run ethical banks is still there – it’s just that new actors have taken the initiative.

Modern Ethical Banking

Eco-social-transparent banks

In the last 40 years we’ve seen the rise and development of a new kind of bank that focuses on cultural, social and ecological projects. This means that they use sets of ‘ethical criteria’ to decide which projects they can give a loan to, and which not; that is, positive screening and negative screening. Besides this ethical criteria they also use ‘economic criteria’ to decide whether a project is viable or not, and how much risk they want to take. They show this criteria to the public and to their savers, so these banks are transparent banks, with a higher or lower degree of transparency. This means that the information about who takes out the loans is published and everyone can read about it. For the banks with a higher degree of transparency, it is possible to read everything about the loans – not only who is taking out the loans but also how much money is involved and the length of the repayment period. Savers choose this kind of bank because they want to know how their money is used (and not used).

The question of ownership and governance is resolved in different ways among these banks. Some of them are ‘classical’ private companies with stakeholders, while others are cooperative banks. For example the GSL bank in Germany is a cooperative owned by 24,600 members (May 2012) and Banca Popolare Etica in Italy is owned by 38,800 members (August 2012). On the other hand, the Triodos Bank is a company with stakeholders, although they are not listed on the stock exchange, as they write on their webpage, ‘to avoid a system of pricing that does not reflect the reality of the business of the bank’.

GSL, Banca Popolare Etica and Triodos are three of the biggest actors in this group that we’ve called eco-social-transparent banks, but at the other end of the size-scale we can see a multitude of small new projects doing this kind of banking (sometimes even without a formal bank license), finding other legal ways of collecting savings and giving loans that focus on cultural, social and ecological projects – and of course practicing transparency. Two organizations that link together some of these banks are Global Alliance for Banking on Values (http://www.gabv.org/) and FEBEA (http://febea.org/).

Interest-free banks

The movement in interest-free banking started in Denmark at the beginning of the 1930s with the creation of the first JAK bank. The Danish JAK movement created not only a bank but also an alternative currency. The initiative was taken by farmers in a period of economic depression. They had land and animals and they were willing to work as they used to work, but there was no money available, so they decided to create their own money. The JAK currency was very successful, maybe too successful, so it was soon forbidden by the Danish government. Later the farmers decided that if they couldn’t have a currency they could own a bank instead. So they founded the first JAK bank, a cooperative and interest-free bank, a bank where the savers get no revenue for their savings while the loan-takers only pay a fee for the administrative costs that are needed to run a bank without profit.

The Danish JAK bank grew, went through various ups and downs and developed different sets of rules for the relationship between the savings and the loans. In the 1960s, a group of Swedish people created the Swedish JAK, also a cooperative and interest-free bank with rules that bound together the loans with the saving of the members. Putting it simply, if you take a loan from a JAK bank you are forced to make savings.

This movement in interest-free banking has grown a lot in the last ten years, and today there are projects going on in Germany, Italy, Finland, Spain, Holland, Kenya and France. Some of them are already running a savings-and-loans activity. Others are still working on the structures that are needed to start such activities.

Why not use interest? For ethical reasons. For example, the Swedish JAK considers receiving money in exchange for labor as legitimate, but not simply earning money with money, because then you’re ‘taking’ the money that is generated by the work of another person. And at a systemic level they argue that in an interest-based economy, money is moved from those who have less to those who have more, and thereby assets are concentrated in the hands of the few.

These interest-free banks (or projects) that somehow are inspired by the JAK model are not formally organized at an international level. Nevertheless they started meeting biannually to gather and spread the movement.

Merging of ‘eco-social-transparent’ and ‘interest-free’ aspects

It is interesting to observe that these two different cultures of ethical banking are merging in some aspects. First of all because in most of these banks – especially those which are cooperatives or NGOs – it is easy to find volunteers, which makes them not only banks but also active grassroots movements.

But they also merge in the way they conduct their banking. Some of the eco-social-transparent banks, such as the German GSL, the Swedish Ekobanken or the Spanish FIARE, offer savers the option of choosing reduced interest payments (or none), so the bank is able to grant loans to some projects with an interest rate that only covers the basic loan administration costs of the bank. On the other hand, we have the Swedish JAK which offers savers the option of choosing a project in which their money is going to be used. These committed savers lose their privileges as future loan-takers but they gain the power to decide that their money is going to be used according to their ethical principles.

Microcredits

A review of ethical banking would not be complete without mentioning microcredits. The microcredit institutions address the problem of financial exclusion and are the way out of poverty for many people around the world. Some institutions, such as the Grameen Bank (http://www.grameen-info.org/) or Oikocredit (www.oikocredit.org), are firmly grounded in the purpose of helping people, while other financial institutions – often commercial banks with a microcredit branch – have jumped into microcredits in order to maximize profits.

1

How Finance Could be Embedded in Ethics: The Case of Islamic Finance

Elias Erragraguy, Kader Merbouh, Bernard Paranque

In light of the current financial and economic crisis, the question we are asking is how ethics can be restored to the heart of society and finance put back in its place. In other words, what legitimacy does the creation of shareholder value have in defining and attaining social welfare? Our hypothesis is that the subject should be reversed. Rather than obliging companies to add a socially responsible dimension to their financial performance, this responsibility should instead be placed at the heart of management.

The tension, not to say contradiction, which exists within the company between its different possible missions (objective of corporate function) has not been lost on the theorists. In 2001, Jensen set out the terms of the debate nicely to then justify the dominant position of the shareholder in bringing the expectations of other stakeholders into line.¹ It entailed giving (or returning) legitimacy to the manager, having to ensure a trade-off at the point where the expectations and demands of those involved meet. This effort towards integration can be found in human resource management policies and their development,² which aim to promote behavioral changes by encouraging employee access to share-ownership so that they act ‘like’ shareholders.³ It can also be found in the theme of corporate social responsibility (CSR), which strives to broaden the managerial horizons of company boards by obliging them to build-in other dimensions, taking into account the interests of other stakeholders. Some consider that this requirement only acts at the periphery of shareholder performance without affecting the heart of the matter – which is that of coherence (compatibility) between corporate performance (firm), that of enterprise (collective organization) and society. We are faced with an issue of domination and therefore embedding. As Polanyi stated, ‘Instead of economy being embedded in social relations, it is the social relations that are embedded in the economic system’,⁴ and one might say that the latter is itself embedded in the financial system. This domination is illustrated by CSR policies which have also come to be embedded and slotted-in to contain the excesses of finance, whereas one could insist on the contrary with finance being subject to a shared ethic at society-level (the City). This reversal seems to us to be possible – at least it is suggested to us by Islamic finance, whose goal is to control finance through the use of those ethical principles established as primary (without being naive as to their possible circumvention), insofar as social values determine the conditions and ‘legitimate’ space for financial activity (in both senses of the expression).

Islam and Business Ethics Theory

The principal sources of Islamic ethics are the Quran, the immutable collection of revelations received by the prophet Muhammad, and the Sunnah, which is custom sanctioned by tradition, particularly records of the action...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Tables and Figures
• Foreword
• Preface
• About the Editors
• Notes on Contributors
• Introduction: Ethics and Moral Responsibilities in Finance
• Part I Trends
• Part II Practical Examples: Global Problems, Local Solutions
• Conclusion: The Future of Finance
• Index