Friday 29 Mar 2024
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This article first appeared in ;Personal Wealth, The Edge Malaysia Weekly, on Feb 15 - 21, 2016.

 

When the global financial crisis wreaked devastation on the world’s economy, a lot of it was blamed on the wrong kind of banking. Now, a growing number of banks are coming together to show that banking can be done another way, for the good of the community and environment, and still be profitable.

The fourth principle has to do with being client-centred. “Our banks look at the relationship with clients in a much more human way. We see them as partners, as someone who is also trying to do good in the world,” says Eguiguren. 

“There is an old joke that banks are those who give you an umbrella when it is sunny and take it away when it starts raining. Having worked for decades in a mainstream bank, I can say that it’s true. 

“Values-based banks try to approach it in a more human way. When a client is in trouble, we do not turn our backs on them but try to sit down and understand where the problem is and whether we can work together for a solution. This is profitable for the client if it can reverse this negative situation and at the same time, positive for the bank because it avoids future problems.”

The fifth principle has to do with long-term resilience. “We are looking for banks that perform very well financially, have very good and inclusive governance, a strong supervisory or governing board that is a countervailing power to the executive board. We are looking for banks with very good solvency, if possible, well above the standard of the regulator, with very good liquidity and reasonable and stable profitability. We are looking for banks that show that our model of business is possible with decent, stable returns,” he says.

There’s a story here. One of the founding banks, ShoreBank based in Chicago, ran into financial difficulties while the GABV was in its infancy. 

“ShoreBank was a very good bank that became too complex to manage, and when the [global financial] crisis blew up, it was not sufficiently capitalised,” says Eguiguren.

In the beginning, he says, the other founder banks were not even fully aware of what ShoreBank was facing. “The challenges arose just a few months after the GABV was created, when we had not even started to create a full governance model and principles.”

When ShoreBank alerted the other members of its problems, there was still hope that with an injection of private capital and some help from the US authorities, it would pull through. This did not happen and it went under.

The six principles of sustainable banking that nurtured the GABV’s approach to social and values-based banking were written more than a year after the ShoreBank problems arose. “Precisely for that reason, it was a decision of the member banks to add, as a relevant principle of values-based banking, long-term resilience. The GABV does not want to live through another situation like the one with ShoreBank in the very early months of our existence.”

Today, six years later, the financials of member banks are scrutinised on an annual basis. The GABV wants its full member banks to be slightly overcapitalised and reasonably diversified. “Today, the banks of the GABV are more resilient and have better solvency than systemic and most other commercial banks,” says Eguiguren. “Sometimes learning from the mistakes of others is a good antidote against future problems,” he adds.

The final principle is that all five principles are embedded in the culture of the bank. “It can’t be something hanging on the wall or in the mumbling of the bank’s CEO. You should be able to sit down with any of the bank’s employees and get a sense that they are really serious about these principles and that they really want to bank that way,” says Eguiguren.

The GABV’s present members are banks that are fulfilling these criteria. “You cannot pretend to be perfect in everything because perfection doesn’t exist. Some of our banks are a little better in some of the principles and improving in others,” he says.

Today, the GABV is looking to raise its visibility. “We are continually scanning the global banking landscape to identify banks, which from an external perspective at least, fit our approach. We then approach them and engage in discussions with the CEO and the board to see if what we have read or heard is correct.”

Alternatively, a bank could approach the GABV to seek admittance. “Sometimes, a bank hears of us and looks at who the members are and realises that what we have been doing is what they have been doing and they really want to be part of this. Because we are not just another network, we are a movement, a movement of banks who care, who want to show the world that it is possible to decently and profitably practise a different kind of banking,” says Eguiguren.

Any banks from Malaysia? “To be honest, we are having a look at Malaysia. There are a couple of banks — a conventional bank and an Islamic bank — which have caught our attention. Our experts and analysts are now looking to see whether, at least from a distance, they could fit,” he says. 

“Maybe in a few months, we might be sitting in Kuala Lumpur with these banks and telling them what we do and hearing more about what they do, and see if they would like to join our alliance. But at this moment, we are just having a look.”

Doing good and doing well

Contrary to popular belief, banks with a social mission do not underperform their conventional counterparts. In fact, by some measures, they outstrip the performance of the mainstream and global systemic international financial institutions (GSIFI). 

“We post a report annually comparing the performance of the Global Alliance for Banking on Values (GABV) banks with the GSIFI, the big fish who are defined by their financial stability — the JP Morgans, Barclays, HSBCs, Santanders, Deutsche Banks,” says GABV executive director Dr Marcos Eguiguren.

In this report, the GABV takes the aggregate annual accounts of the systemic banks and compares them with the aggregate annual accounts of its members. “We pick things like solvency as defined by the regulators — liquidity, growth, profitability, return on assets and return on equity,” he says.

“We took it as an average of 12 to 14 years because systemic banks were having some troubles during the crisis, so it wouldn’t be fair [to compare only in those years]. And as an average, values-based banks had better solvency than systemic banks. Pre-crisis, it was almost twice. During the crisis, it was not twice, but we were still a lot more solvent. 

“And now, post-crisis, we are still about 20% to 30% more solvent than systemic banks. And don’t forget that solvency in systemic banks has increased over the years because the regulators have pushed. The regulators didn’t have to push us because our solvency has always been much higher than what they were asking us to provide.”

Eguiguren says values-based banks have better liquidity and equal profitability. “In some years, the profitability of values-based banks have been better. The big difference in profitability, if you compare values-based banks with systemic banks (taking systemic banks as a proxy for mainstream banks), is that our profitability is not volatile at all. It has been very stable through the years.”

The profitability of systemic banks, however, is anything but. “Some years pre-crisis, their profitability was very high, sometimes double digits, like 12% to 13% return on equity. And then, it just falls to -7%, -8%. And then it’s up again to 1% or 2%. So it’s very, very volatile”

Values-based banks have also been growing at a rapid clip. “If you look at the growth in asset size and deposits, values-based banks have been growing at three to four times the rate of systemic banks in the last 12 to 13 years. We are still relatively small as an industry, but our growth rate is huge and though it will take time, we are catching up,” Eguiguren points out.

The GABV banks’ ratios are defined by its principles. “One of our principles is that our banks have to lend to the real economy. So, when we look at the percentage of loans to real assets, we see that the GABV has a very high loan-to-assets ratio, that is, in the 70% to 80% range. This means that a huge part, almost the whole balance sheet, is devoted to lending. 

“However, if you look at systemic banks, you will see that this ratio is about 40%, just half of it. Where are the other 60% of the assets going to? I don’t really know, but not to lending.”

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