Ethics in Banking

[Monirul Islam]

Mirza Azizul Islam


In light of the scenario described above, it is evident that ethics in banking is of supreme importance for the economy and the society. In my judgment, ethics in banking must be firmly anchored on four pillars.
First, banks must comply with all laws, rules and regulations that are usually framed in any country to ensure soundness of operations and to enhance confidence of the society. These laws, rules and regulations may relate to, among others, capital adequacy, maximum shareholding by members of a family, qualifications and tenure of members of the Board of Directors and Managing Directors, representation of depositors on the Boards, credit rating requirements, maximum limits on single party exposure, liquidity and credit/deposit ratios etc. Banks are additionally subject to provisions of company law, tax laws and securities laws. Any attempt to circumvent any legal provisions must be considered unethical. The universe of law and the universe of ethics are not necessarily coterminous, but violation of law is rarely, if ever, ethical.
Second, banks must ensure fair and equitable treatment of all stakeholders. The interests of various stakeholders such as shareholders, depositors, borrowers and employees do not necessarily coincide. For example, banks may be inclined towards offering low returns to depositors and charging high interest rates from the borrowers in order to maximize profits and dividend for the shareholders. Such conflict of interest must be ethically balanced keeping in view the greatest good of the greatest number.
Third, the banks must ensure full, truthful and transparent disclosure of their financial health. As noted before, many of the assets which turned out to be toxic were treated as off-balance sheet items. The concerned stakeholders were thus deprived of the right to get a transparent picture of the true financial health and the risks that were being assumed.
Fourth, banks must behave as socially responsible corporate citizens. Milton Friedman, a nobel-laureate economist and an ardent proponent of free market economy wrote in 1970 that there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profit so long as it stays within the rules of the game. One may interpret this statement to mean that business is simply about maximizing profit without violating laws and regulations. This is obviously an untenable position. It may be observed here that banks did not apparently violate any prevailing laws and regulations, yet their activities inflicted severe negative externalities upon the society, as noted earlier. In this context, it may be mentioned that many of our corporate entities, including banks, gloat with satisfaction about fulfillment of social responsibility by offering a few scholarships, making donation to some clinics or offering some support for some charitable activities. While such initiatives are welcome, these touch only the fringe. Social responsibility must be viewed from a wider perspective, taking into account the impact of banks' activities on growth, employment and emphatically in our case, poverty alleviation as well.
With the above hindsight, I would suggest a few do's and don'ts for banks to meet ethical standards. This list is by no means exhaustive.
Do's:
* Ensure a fair return to the depositors and safety of deposits.
* Minimize spread between cost of funds and lending rates.
* Engage in transparent accounting practices.
* Comply with all laws, rules and regulations promulgated by relevant regulatory authorities.
* Develop effective risk management systems.
* Treat clients with courtesy.
* Offer services promptly.
* Make proper use of information and communications technology to enhance efficiency in providing services.
* Protect minority shareholders' interest.
* Set up management systems which clearly specify the functions of the Board, key management personnel such as the Managing Director, Chief Financial Officer, Company Secretary, Heads of Divisions and Departments etc.
* Treat employees fairly and compassionately.
* Arrange for requisite employee training.
* Ensure non-discrimination in personnel practices and support employees' and their family members' access to basic health, education and housing needs.
* Finance activities which contribute to environmental protection, employment creation, poverty alleviation and women's empowerment.
* Devise innovative products without assumption of undue risk.
* Arrange flexible mortgage payments for poor people's housing.
* Try to expand operations to unbanked or underbanked sectors, regions and population groups.
* Emphasize recovery, but with a human face.
* Develop an internal code of ethics and set up an institutional arrangement to monitor compliance and suggest remedial actions, where needed.
Don'ts:
* Don't prove Mark Twain's statement "banks will lend you money if you can prove you don't need it."
* Don't reschedule loans at the last moment to enable powerful, but delinquent borrowers to participate in elections.
* Don't permit sexual discrimination with respect to depositors, borrowers and employees.
* Don't be lavish in branch decorations and perks for Board Members and senior management personnel.
* Don't engage in unhealthy competition to steal qualified employees or wean away depositors from other banks.
* Don't engage in collusive interest rate fixing.
* Don't finance activities which aggravate pollution, employ child labour and injure human health.
* Don't finance unsustainable bubble in real estate or stock prices.
* Don't bow down to illegitimate pressures exerted by political personalities, bureaucrats or musclemen.
* Don't appoint pliable auditors to prepare opaque, non-transparent financial reports.
* Don't be an accomplice to money-laundering activities or illicit trade.
As mentioned already, this is by no means exhaustive. Yet it possibly sounds like a tall order. One can, therefore, legitimately ask why banks should behave in an ethical manner. There are several justifications.
Banks' Benefits from Ethical Conduct:
A symbiotic relationship is likely to emerge between ethics and competitive advantage. Through pursuit of ethical practices, banks can acquire brand reputation. This should help them expand customer base and increase income.
The brand name reputation is also likely to attract ethically conscious clients. As a result, the banks will be greatly relieved of the problem of non- performing loans.
The banks well-known for ethical conduct should be able to attract and retain bright and honest employees. Thus, they will be relatively free from the problems created by quick employee turnover or inability to hire smart and honest employees. Human resource management would be easier, internal governance would improve and operational efficiency would increase.
Brand reputation would make it easier to raise additional capital in a cost-effective manner, as and when needed.
Relevance of External Conditions:
While the responsibility for implementation of ethical principles lies primarily with the banks themselves, certain elements in the external environment confronting them would be helpful in generating necessary inspiration or compulsion.
An independent, honest and competent judiciary is of seminal importance in this regard. If the banks are convinced that they would get a fair treatment in legal disputes, they are unlikely to indulge in unethical practices. Moreover, the judiciary can play an important deterrent role against violation of ethical principles.
Active civil society groups focusing on the operations of banks can also be helpful. Similar comments would apply to the media.
Most importantly, the regulatory authority must play a vigorous role to ensure real time monitoring and surveillance over the banking operations. The authority should have the competence to promptly identify violations of ethical norms and initiate remedial measures, including legal actions, without being influenced by political pressure or any other extraneous consideration.

Source: https://www.thedailystar.net/news-detail-217940