A paradigm shift – rethinking finance

The outdated financial system and its shortcomings

The current global financial system is outdated and is serving only a narrow elite by enabling them to accumulate wealth without taking into account the negative effects of environmental damage and social inequalities. The system is not sustainable, and it does not consider the long-term impact of its actions on the environment or society. Instead, it prioritizes the accumulation of wealth for a select few, even if it comes at the expense of the greater good. Ethical banking is a potential solution to the negative impacts of the current financial system, as it promotes transparency and social responsibility in banking practices, prioritizes the well-being of all stakeholders, and aims to create a more sustainable economy.

We need a paradigm shift in the way we approach finance and the economy. A sustainable finance system is not only necessary for the long-term health of the planet and society but is also critical to ensuring that everyone has access to opportunities and resources to live a fulfilling life.

Ethical banking: prioritizing social and environmental values

Ethical banking, also known as sustainable banking, is a banking system that prioritizes ethical and social considerations alongside financial profitability. They seek to balance their financial goals with social and environmental values and aim to invest in projects that have a positive impact on society and the environment.

Ethical banks take a more holistic approach to banking, which includes ensuring that their investments are consistent with the bank’s values, such as supporting local communities, reducing carbon emissions, and promoting social justice. Ethical banks may also take steps to ensure that their operations are sustainable, such as reducing paper usage and investing in renewable energy.

In addition, ethical banks often offer transparency and accountability to their customers, allowing them to see where their money is being invested and how it is being used. This approach provides customers with the opportunity to support positive social and environmental projects through their banking choices.

Differences between ethical and conventional western commercial banking

Ethical banking and conventional Western commercial banking differ in several key ways.

1. Values: Ethical banks prioritize ethical and social values alongside financial profitability, while conventional Western commercial banks prioritize financial profitability above all else.
2. Social and Environmental Impact: Ethical banks aim to invest in projects that have a positive impact on society and the environment, while conventional Western commercial banks may invest in projects that prioritize financial returns, even if they have negative social or environmental impacts.
3. Transparency: Ethical banks often offer transparency and accountability to their customers, allowing them to see where their money is being invested and how it is being used. This approach provides customers with the opportunity to support positive social and environmental projects through their banking choices. In contrast, conventional Western commercial banks may not always provide customers with information about how their money is being used or invested.
4. Risk Management: Ethical banks tend to take a more holistic approach to risk management, which includes considering social and environmental risks alongside financial risks. This approach can help reduce the risk of investing in projects that have negative social or environmental impacts. In contrast, conventional Western commercial banks may focus primarily on financial risks and may not always consider social or environmental risks.

Overall, ethical banking and conventional Western commercial banking differ in their values, priorities, and approach to risk management. Ethical banking seeks to create a financial system that is aligned with social and environmental values and promotes a more sustainable and equitable economy. In contrast, conventional Western commercial banking prioritizes financial profitability above all else.

Examples of ethical banks around the world

There are several ethical banks around the world, including:

1. Triodos Bank: Triodos Bank is a European bank that focuses on sustainable banking and investments. The bank invests in a range of sectors that align with its values, such as renewable energy, organic farming, and social housing.
2. Amalgamated Bank: Amalgamated Bank is a US-based bank that aims to promote social justice and equality through its investments and operations. The bank invests in community development, affordable housing, and renewable energy, among other sectors.
3. Ecology Building Society: Ecology Building Society is a UK-based building society that specializes in sustainable mortgages and investments. The society supports projects that promote environmental sustainability and social well-being, such as renewable energy projects and community-led housing.
4. Aspiration: Aspiration is a US-based online bank that aims to provide customers with socially responsible banking options. The bank offers customers the opportunity to choose where their money is invested and offers a range of sustainable investment options.
5. Merkur Bank: Merkur Bank is a Danish bank that operates on the principles of sustainability and social responsibility. The bank invests in renewable energy, organic farming, and social housing projects, among others.

These ethical banks prioritize social and environmental values alongside financial profitability, offering customers the opportunity to support positive social and environmental initiatives through their banking choices.

Islamic banking: an ethical alternative to western banking

Also, Islamic banking is often considered more ethical than Western banking because it emphasizes social justice and fairness, and it operates based on ethical principles and values.

One of the primary ethical principles that distinguish Islamic banking from Western banking is the prohibition of interest (riba) and speculation (gharar). The Islamic banking system requires that profits and losses be shared between the bank and its customers, which promotes a more equitable and just financial system. This approach discourages excessive risk-taking and speculative behavior, which is often associated with Western banking practices.

In addition to the prohibition of interest and speculation, Islamic banking also prohibits investments in industries that are considered haram (forbidden), such as tobacco, alcohol, and gambling. This restriction ensures that investments made by Islamic banks align with ethical and social values and do not harm society or the environment.

Islamic banking also emphasizes the importance of social responsibility and encourages investments in projects that have a positive impact on society and the environment. This approach is consistent with the principles of sustainable and responsible banking, which are gaining popularity in Western banking.

Overall, Islamic banking is considered more ethical than Western banking because it prioritizes ethical and social values, promotes fairness and justice, and encourages investments in projects that have a positive impact on society and the environment.

Towards a paradigm shift in the financial system

In summary, a paradigm shift in the financial system towards ethical banking is needed to promote sustainability, social justice, and responsible business practices, and to ensure that the financial system serves both humanity and the planet.

Interesting facts

• The world’s top 1% owns more wealth than the bottom 50% of the global population. (Credit Suisse, 2021)
• The number of billionaires has doubled in the last decade, and their combined wealth has increased by over 60%. (Oxfam, 2022)
• The wealth of the world’s 2,153 billionaires is greater than the combined wealth of 4.6 billion people. (Oxfam, 2020)
• In 2020, the world’s 10 richest people saw their wealth increase by $540 billion, while the pandemic pushed 150 million people into extreme poverty. (Oxfam, 2021)
• The current financial system incentivizes short-term profit-seeking, leading to unsustainable practices such as fossil fuel extraction and deforestation. (United Nations, 2019)
• The global economic cost of environmental damage caused by human activity is estimated at $4.7 trillion per year, equivalent to 6.2% of global GDP. (World Wildlife Fund, 2020)
• Environmental damage disproportionately affects marginalized communities, with 1 in 8 people globally living in areas with air pollution levels that exceed safe limits. (World Health Organization, 2018)
• The global gender pay gap stands at 16%, with women earning less than men in all countries and industries. (World Economic Forum, 2021)
• In the US, the average CEO earns 299 times more than the average worker. (Economic Policy Institute, 2021)
• The COVID-19 pandemic has widened existing social inequalities, with low-income households and communities of color disproportionately affected by job losses and economic hardship. (International Labour Organization, 2021)
• Calls for reforming the financial system to prioritize social and environmental well-being over profit have been growing in recent years, with initiatives such as impact investing and divestment from fossil fuels gaining momentum. (United Nations, 2020)