The Ethics Of Banking

Michael works for Australian Ethical Investment Ltd, a “deep” green ethical investment fund.

Banks play a crucial role in the economy, as providers of finance to businesses and households. Banks pool the savings of individuals and then lend this money to borrowers, people & organizations which need to finance a project. Banks minimise their risks by lending money to a variety of different borrowers.

There are small, regional savings banks and credit unions, and there are large national and multinational banks.

The three major types of loans are home loans, loans to small businesses and loans to large corporations.

Of these, home loans are regarded as the most “benign”, ethically speaking. Home ownership is generally regarded as a “positive” outcome for people and society as a whole (provided the loan repayment schedule and interest rate charged is not too arduous for the borrower).

Loans to small businesses are also normally regarded as a reasonably “ethical” positive. Naturally it depends on the industry and activity of the borrower, but generally speaking, supporting and encouraging small businesses is also regarded as a positive outcome for society.

The smaller banks and credit unions tend to lend mostly for home loans and also to small businesses. Whereas the large banks are the main providers of debt finance to large corporations.

It is the activities of large corporations that are of most concern to ethically inclined people. In general, it is the large banks which provide finance to “dirty” industries such as the defence industry, the chemical industry (agricultural sprays), the mining industry (coal & uranium), the auto industry; and the gambling, alcohol and tobacco industries, to name but a few.

No doubt there will be some “ethically” unattractive small companies. For example the small business which is a supplier to the defence industry. Not all small businesses are “green” and “clean”.

But if you go into your local, small bank and ask them for a list of which industries they lend money to, they could probably tell you. But large multi-national banks, because of their size, will most likely be lending money to just about every industry you could think of (both “good” and “bad”) domestically and overseas.

Because the large banks are financing “big” business, in general, if you had to choose between putting your money with a small bank or with a large one, from an ethical point of view, the smaller bank would probably be the first preference.

Triodos- an “ethical” small bank

Founded in 1980, Triodos is a relatively small bank with offices in the UK, The Netherlands, Belgium and Germany. Triodos is unique in the banking and finance industry in that it only lends money for ethical causes.

Triodos says that it only lends money to organisations and businesses pursuing positive social, environmental and cultural goals. It lends money to organic farms, to the renewable energy industry, as well as to the not for profit sector. It is also involved in financing fair trade and microfinance in developing countries.

It publishes a “project list” of all the lending activities they are involved in. Further details regarding Triodos can be found at its website www.triodos.co.uk

Concluding remarks

In this article, I have made quite a number of generic comments regarding the banking industry. I strongly recommend that you do your own research, and use your discernment regarding where you place your money and which bank(s) you choose to use.

I would love to hear about any other highly ethical financial institution. You could email me at Michaelvobrien@gmail.com if you know of any. Thank you.

© Michael O'Brien 2008