European Microfinance Week 2019

PRESENTATIONS 

The moderator Micol GUARNERI introduced the four panellists and explained the concept of ethical banking. She described that there is a growing number of customers that wish to integrate moral, responsible, fair and transparent considerations in their investment decisions. At the same time, the banking business that originally had a high level of social involvement is losing this social aspect. Ethical banks attempt to incorporate these ethical finance principles in their decisions and products. 

Nicolas BLONDEAU from INPULSE added that ethical banking starts from the same philosophy as microfinance, but that there are some key differences between the two types of institutions. He highlighted four main differences. He explained that not all microfinance institutions can attract deposits, whereas the core business of ethical banks is to perform financial intermediation. In addition, as ethical banks are classified as commercial banks, they need to follow much stricter regulations than most microfinance institutions. He also showed that the social mission of both entities is different. Although microfinance institutions are socially rooted, ethical banks have a triple bottom line embedded in their business, accounting for social, financial and environmental aspects. Finally, he added that ethical banks experience a higher level of competition than microfinance institutions. Ethical banks compete with traditional banks for clients, where clients expect the same level of service as from a traditional bank. At the same time, ethical banks have a different balance sheet size (smaller). Clients of microfinance institutions are often not accepted as clients by traditional banks. 

Damien PILKA shared how the GLS Bank was founded as an anthroposophical initiative. The bank originated from a project to build a school. As the school started to provide financial support to families, an entity was needed to collect and give out money. This was the beginning of the GLS Bank, which is now a fully regulated bank. The bank still supports social and environmental projects and companies. Currently, GLS has around 250,000 clients and 50,000 members. Pilka explained how transparency is key in ethical banking. GLS publishes its investment criteria and all provided loans on its website. Pilka added that as an ethical bank, GLS chooses its investments carefully, making sure that the bank finances solutions to social and economic problems. 

Gabriele GIUGLIETTI is the founder of Banca Etica, a cooperative bank inspired by principles of ethical banking; participation, transparency, efficiency, and awareness of the non-economic consequences of economic actions are the core ethical principle of Banca Etica. Giuglietti highlighted the scale of ethical banking, demonstrating that it is in fact a large movement. In total, the global alliance of ethical banks includes 60 banks worldwide, covering 50 million clients, with assets of EUR 200 billion. He presented the extent to which Banca Etica meets Italy’s requirements of ethical banks: 1) 90% of Banca Etica’s portfolio consists of not-for-profit organisations, Italy’s goal is 20%; 2) To meet transparency requirements, all projects are published on the website; 3) The ratio of lowest  to highest salaries at Banca Etica is 1 : 3, the requirement is 1 : 5, and; 4) The bank assesses the social and environmental impact of the client financed.

Shadin VIRATHAM gave a policy maker’s perspective to ethical banking. He represented the European Commission, working at the Directorate-General Employment, Social Affairs & Inclusion. Viratham emphasised his wish that all banks should be ethical. He explained that it was both a moral issue and a business imperative. He illustrated how in Europe, 21.7% people on average are at risk of poverty or social exclusion. He added that institutions have a role to play in solving this issue. Viratham shared the Commission’s framework for actions at EU level, based on four pillars: 1) Inclusive job creation; 2) More entrepreneurial, inclusive and sustainable economy; 3) Better social cohesion and; 4) Fight against poverty and discrimination. He shared several policy instruments to support the social finance eco-system. These include financial instruments, such as the EaSI programme that provides guarantees to partners, complementary grant financing and advisory tools, composed of non-financial services. 

The panel next discussed the main challenges of ethical banking. Blondeau explained that as ethical banks are often member-based banks, they rely on equity of their members (and shareholders). As such, ethical banks quickly reach their solvability limit. He pointed to equity as the main challenge for ethical banks to grow, as few institution vehicles are ready to invest in equity of ethical banks. Pilka shared this perspective, adding that in order to increase equity the bank would need to find new members. 

Giuglietti added that despite this challenge, ethical banks are more profitable than the ‘too big to fail banks’. Banca Etica increased the value of its shares by 2% per year and reports 12% growth each year. He contributed this success of ethical banks to the fact that they do not speculate. He explained that guarantees from the European Investment Fund (EIF) were useful to reduce capital requirements, as 56% of the bank’s beneficiaries were refused by other banks. 

The moderator asked the panel how ethical banks evaluate whether an investment is ethical. Pilka explained that GLS assesses investments on how they meet positive criteria, what type of services their client provides, and whether these services are effective. Giuglietti added that in Banca Etica appropriately trained social evaluators carry out this impact assessment based on 25 indicators. Viratham highlighted the importance of accompanying services in ethical banking. 

Micol asked Viratham to comment on the future policy and tools from the European Commission, as the current budget runs until 2020. Viratham shared several indications for upcoming guidelines, which are still to be finalised. Starting in 2021, all financial instruments from the European Commission will be housed under “InvestEU”, in four dedicated social policy windows: 1) Social investment and skills; 2) Sustainable agriculture; 3) Research, innovation and digitisation and; 4) Small business. InvestEU aims to provide guarantees of close to EUR 50 billion in social investments, which can be leveraged to a total investment of EUR 650 billion. 

DISCUSSION

The moderator opened the floor for questions. A member from the audience asked when ethical banking would become mainstream, and what was needed to reach that point. Giuglietti responded that in his opinion, ethical banking had already been proven effective, adding that all banks should become ethical. The challenge for ethical banking he highlighted was to promote the awareness of ethical banking. Not only among borrowers but also among savers. Pilka shared the view that it is difficult to change the culture in larger banks. He added that the expectations of clients are changing and, as ethical banking is becoming more mainstream, banks have to meet client expectations of the mainstream market as well. Viratham stressed that consumer choices are key to bringing ethical banking mainstream, as they can increase market demand. 

Another audience member questioned the profitability of ethical banking in the long term. Giuglietti presented two main elements that result in the profitability of ethical banking, the high-quality portfolio and the strong commitment to the social impact of ethical banks by their members and employees. 

The moderator closed the session by expressing the wish that all banks would integrate ethical banking in their operations. First steps have been taken with the launch of the Principles for Responsible Banking by the U.N. However, the future will have to prove what the results of these steps will be and whether ethical banking will truly become mainstream.