A banking system to support the real economy

Four questions for Marcos Eguiguren, Executive Director of Global Alliance for Banking on Values.

Raccords: Many sustainable projects with the potential for economic, social and environmental benefits struggle to be funded by traditional institutions because of the lack of a promise of immediate returns. Values-based banks have decided to remedy this failure.

What were the objectives of the Global Alliance for Banking on Values (GABV) when it was created back in 2009? Was GABV a first of its kind?

Marcos Eguiguren: Because they wanted to promote a values-based banking model as an alternative to the traditional model that led to the financial crisis, three values-based banks—BRAC Bank, Shorebank and Triodos Bank—founded the Global Alliance for Banking on Values. These institutions now have to their credit decades of responsible banking activity and an unconditional commitment to the real economy.

Marcos Eguiguren (Executive Director of the Global Alliance for Banking on Values) Photo credit: Banco Popular Honduras/GABV

More specifically, it means that they choose to lend to companies, entrepreneurs, micro-entrepreneurs and individuals in traditional industries that produce tangible goods and services and improve people’s quality of life in a sustainable way. Traditional banks, on the other hand, tend to focus their activities on finance and speculation, and to provide funds regardless of the benefits or nuisances that the project they support may generate for society.

During the 2007-13 recession, values-based banks expanded their reach to small, growing companies that were developing green and sustainable initiatives, offering them a wider range of long-term banking services. In Sweden, for example, in response to increasing investment requirements and in a context of a transfer between generations, many dairy farms were about to close. One of our members therefore undertook to offer lower interest rates to specifically support organic and biodynamic farms.

Through these types of services, values-based banks have highlighted their key role as pillars of equitable and inclusive capitalism. The Alliance was not the first initiative of its kind, but it provided a unique platform for smaller financial institutions to help each other to make greater changes in the world.

What are GABV’s most significant achievements in the last 10 years? What major obstacles do we still have to overcome for a financial system that really helps the social and ecological transition?

The greatest achievement we had in the past ten years is that we managed to stay loyal to our mission to make financing more accessible for everyone, while safeguarding the health of our planet. By developing banking products for the greatest number of people rather than sophisticated solutions for a minority, we have given priority to the development of an inclusive system.

What distinguishes values-based banks from traditional banks is that they take into account the externalities that are produced by the projects and the clients they finance. It is not only a question of lending to the real economy, but also of giving priority to activities, companies and industries that work for the public good and work to eradicate poverty, strengthen community development or promote a more sustainable economy.

Specific criteria for assessing social and environmental impacts dictate the values-based banks’ lending choices and their review of applications. They began applying this grid many years before international regulators looked into it. At the end of their analysis, as well as that of the entire chain of actors involved in an industry, they ultimately reject a large number of credit applications that do not meet their requirements.

The relationship with the individuals and communities they finance is essential, as there is a shared responsibility for the risks involved. An example is a partnership with a cooperative that distributes clean energy in a given community or neighbourhood.

Both the bank and the cooperative take risks if the expected returns are not achieved, but unlike traditional institutions, values-based organizations will work with the client to find a solution. It is not a question of taking risks with a view to high and quick returns, but rather of building a relationship of trust to support clients in their long-term development efforts.

This is why values-based banks register very low volatility. In the end, the financial benefits of a system serving the real economy are more reliable than those recorded by some of the world’s largest banks. And this success is verified by several independent research reports¹.

One of the greatest challenges we face is to find a way to collaborate with policy makers around the world, whether central banks or financial market authorities, to promote these methods more broadly.

Assessing its level of social and economic impact is one of the challenges financial innovation is facing. Can you tell us about the scorecard GABV has created? How do we ultimately measure the value of this impact

GABV has developed a scorecard as a structured approach to capture the vision, strategy and results of values-based banking. It enables a bank to self-assess, monitor and communicate its progress. The objective of the scorecard is to highlight the creation of value for society on both sides of the balance sheet.

With regard to loans, the aim is to finance an activity that has a positive impact on society and a more environmentally and consumer-friendly approach. One of our member banks in Malaysia, Bank Muamalat, associated itself to one of its clients to invest in education capital and essential medical equipment such as dialysis machines and nitrogen storage tanks. This initiative includes the operation of mobile health clinics and providing free treatments to the nearly 5,000 members of the region’s most vulnerable communities.

For the bank users, they see their investments contributing in part to programs related to financial literacy and customer education. On both sides, these initiatives generate, with capital, positive value for society.

Photo credit: Banco Popular Honduras/GABV

These scorecards, developed thanks to the experience of specialists, can help a bank wishing to reorient its activities to deploy its human and economic resources in an appropriate way. The scorecard is compiled by the bank itself but requires full transparency of information sources. Anyone who consults it must be able to assess the information in a comprehensive and nuanced way.

What are the recent innovations that led the way to more concrete solutions in the fields of community development or social economy?

Values-based banking, unlike traditional banking methods, is an innovation in itself. And there are many examples of its application by our members around the world.

The Caisse d’économie solidaire Desjardins in Montréal, a member of GABV, launched a new product, the “garantie solidaire”, based on a partnership with three of the main foundations in Québec who accepted to offer a $15 million guarantee to social economy enterprises in order for them to qualify for loans that would be out of their reach otherwise.

One of our members from the United States, City First Bank of DC, is offering affordable housing program specifically designed to help communities in need in Washington, DC.

Banque Triodos in Europe offers mortgages whose interest rates depend on the energy efficiency of your house. If you improve energy efficiency of your home, your interest rate drops.

Many people associate innovation with digitalization and technological advancements. Technology does help us connect ourselves to anywhere in the world and gives us access to information that is vital. We are able to generate statistics on how many individuals do not have access to banking services and which regions they come from, including the causes behind this situation. In addition, our members in developing countries are starting to test artificial intelligence solutions to accelerate financial integration and facilitate the disbursement of loans to underfunded entrepreneurs. But these technological advances are only facilitators. The real innovation is how we can use that technology to make financial services fair and available to more people around the world, to work towards more equality in society, more prosperous economy and a more sustainable planet.

1. 1. «The Effect of Ethics on Banks’ Financial Performance», Radek Halamka  et Petr Teplý, Prague Economic Papers, 2017.