Remittances: Helpful for Development?
Migrants often send back money to their families. Laura Thompson explains the possibilities and limitations of remittances as a tool for development.
Bankers do not enjoy the best reputation these days. During the financial crisis in particular, banks were seen as the root of the problem, and cases of corruption discussed in the global media did the rest. But there is another side to banking: Banks provide the financial means that enable people and businesses with ideas to realise their visions. If banks do not focus exclusively on profit, and also look at the nature of the projects they support, they can become drivers of sustainable progress. There are a variety of approaches to ethical or sustainable banking. One is the Global Alliance for Banking on Values (GABV), a worldwide network of banks that aims to develop an alternative financial system to drive social and environmental development. DDD spoke with newly appointed Executive Director, Dr Marcos Eguiguren.
That is quite difficult to answer, but I would say, no, there is nothing wrong with the system as a concept. What is wrong is what people have done in some isolated cases recently.
We need banking in our modern society. We would have to invent it if it did not already exist.
The problem is how some people have abused the power of banking. We need banking in our modern society. We would have to invent it if it did not already exist. In an ideal world, the principle of banking should be understood and leveraged differently. That’s what we’re working towards in the GABV. Our role as bankers is to understand society and the needs and risks that exist in society. As bankers, we have access to extra liquidity and it’s our duty to invest that money in an appropriate way by investing in people, initiatives and organisations making a positive economic, social and environmental impact. This is what bankers do; it is as simple as that. I think what we do is good. The point is, if you don’t do it properly; if you do not appropriately value the risk that you are taking when you tailor deposits for your clients, it can create big problems. As bankers, we should not put profit first when defining our business strategies. We should put people first. Because if we serve individuals, organisations and communities by leveraging our people, capital and resources, we will be serving the real economy, and that will result in decent profits. This is one of the fundamental differences of values-based banking when compared to the more traditional perception of mainstream banking.
Still, on the one hand bankers want to turn money into more money. On the other hand, we want responsible bankers. How can values-based banking help overcome this contradiction?
Taking money and making it into more should not be a banker’s aim. The role of the banker should be to serve as an intermediary between people who have extra liquidity and people who have projects that will promote progress.
Values-based banking places its emphasis here: Profit is generated by relocating money so that it serves the priorities of communities.
If you relocate a dollar to where it will have more positive impact, you can create a profit of 5 to 10 cents on that dollar. Values-based banking places its emphasis here: Profit is generated by relocating money so that it serves the priorities of communities.
As an economist, I can also define values-based banking in more technical terms: A values-based bank uses deposits from customers to provide loans to the real economy, not the financial (speculative) economy. When you look at the balance sheet of a values-based bank in comparison to a mainstream bank, the ratio of loans to deposits is a lot higher. These ratios are between 70% and 80% at a values-based bank. It means we don’t use our clients’ money for anything other than investing in positive impact and of course meeting our reserve requirements, and complying with banking regulations. So the majority of the balance sheet for values-based banks goes into loans: loans to the real economy. Mainstream banks on the other hand – especially the big systemic banks that are often described as too big to fail – have a loan-to-deposit ratio of between 40% and 50 %. In effect, they receive deposits from their clients and only devolve less than half of it to the real economy. The rest goes into the stock exchange market, industrial shares, or other financial investments. This is speculative and we don’t think this is the right way to approach banking.
We need to lend to those who either have positive impact or at least to those who are neutral or on a path to becoming neutral in their impact.
The second difference is that the values-based banks focus on loans to those initiatives and organisations that consider at least a double or a triple-bottom-line approach of creating positive economic, social and environmental impact (also known as people, planet and prosperity). Again, looking at this through the lens of an economist, values-based banks care about the effect of what we lend money for. And that who we lend it to is also open to this reciprocal effect. By nature, banking is an industry with a multiplier effect. This is fine. It makes being a banker great, if you do your job in a positive and ethical way. It can be incredibly powerful and a privilege to support progress in society. But in order to do so, we have to consider impact in everything we do. We need to lend to those who either have positive impact or at least to those who are neutral or on a path to becoming neutral in their impact.
So you are saying that bankers have to know the effects the projects they support might have. But in a society with a high division of labour, is it really possible for bankers to understand these structures, to see the effects and the people affected by their decisions?
That is a very good point. I should explain what I meant when I said that it is good to be banker. My perception is somewhat different from the idea that has emerged in recent years.
When I say it is good to be a banker, I think of somebody who really understands society…
We imagine bankers as people in expensive suits and ties, very distant from the real world, and not in personal relationships with clients. Bankers talk to the big guys, the big corporations and big government. This is not my idea of bankers. When I say it is good to be a banker, I think of somebody who really understands society, not because bankers are smarter than other people, but because they are curious. If you want to be a good banker, you really have to investigate what is going on around you. If you don’t, you cannot manage the risks, and your depositors will realize it. You need to be very close to your clients and very close to your community. The kind of banker I believe in, the banker who works to uphold the GABV’s mission, is a banker with very close relationships to his or her customers; someone who understands the needs of the communities they serve, and the unique role they and their banking institutions play in using all their resources, people and capital to strengthen those communities.
Profit might play a role in motivating people not to act as the type of banker you describe. How do you encourage people to follow the spirit of banking with values?
The numbers are open and transparent, so you can see that values-based banks follow a different approach when it comes to remuneration of top management. We don’t have those incredible salaries and bonuses for CEOs or chairpersons we constantly read about in the press.
We stand for a different kind of psychological contract for people who really want to be bankers, but not just for the profit.
We are modest in our compensation, and try to apply a decent salary policy. The question is how do we attract talent? We pay good salaries, but not investment bonuses. We try to attract people with decent pay that promises a good living. But what we actually offer is the opportunity for a professional career in a financial institution where values are a priority; we care about the effects on the community, and people are our priority. The pressure to achieve goals is more limited. Of course we have goals; we need goals just like any other organization. But we put people first, so we manage things in a different way. We stand for a different kind of psychological contract for people who really want to be bankers, but not just for the profit. The professional values-based banks attract are people who believe in something better, people who want to put their skills in service of making the world a better place.
And what is the deal for investors? A lot of people with money do not invest in values-based approaches. They invest in the big banks because they are promised higher returns. How could you change that?
It is not true that you get higher yields from the big banks; that is a myth. If you compare return on assets and return on equity over the 12-year period from 2003 to 2014, the results of values-based banks and the big systemic banks are comparable on average.
Investing with a values-based bank can be very profitable, and it is also good way to diversify your portfolio.
The differences are not relevant. In some years, the rates of values-based banks have even been better. And we have one additional advantage: Return on equity has been very stable for values-based banks, while return on equity has been very volatile for systemic banks. Investing with a values-based bank can be very profitable, and it is also a good way to diversify your portfolio. We are a good investment, very stable, and not very aggressive when it comes to taking risks. Our return on equity is not impressive, but it has very low volatility, which is good for most investors.
The GABV is a network with banks all over the world. How do the approaches differ in relation to the respective regions? How does values-based banking work in Europe compared to Latin America for example?
What we have in common is that we share the six GABV principles. The way these principles are followed is different. For example, in northern European countries, our triple bottom line approach is very solid. These societies are very advanced from many different angles, and the banks mainly focus on how to improve the planet, the environment and the culture, and how to help entrepreneurs. This is a more European way of looking at the triple bottom line approach.
The way the principles are put in practice is different: They differ according to the situation of each community.
However, if you look at other banks in Latin America or Asia, these communities logically have other challenges. It is like Maslow’s Hierarchy of Needs: In Bangladesh or in Salvador, the main focus is still on poverty, unfortunately. Our bankers care about the environment, but they put more emphasis on issues of fighting financial exclusion, for instance. They work with people who are not wealthy, the middle class who does not have bank accounts. They try to use the microfinance weapon to help those people progress in their small rural communities. So, yes, the approach is very different, but the principles are the same. The way the principles are put in practice is different: They differ according to the situation of each community.
It is difficult to say because I have too many anecdotes and stories. I am proud to say that the GABV banks manage more than 100 billion dollars in assets and have more than 20 million clients all over the world. If you consider that, on average each client has a family, works and interacts with a range of other people, we have the potential to touch the lives of more than 200 million people all over the world. It is exciting and should be more. That’s why it is challenging to name only one success story, there are so many!
We could learn a lot from the mobile banking system in Bangladesh.
Something else comes to mind though, not the case of a client exclusively, but the approach of one of our banks to solving the problems of a community. This story is also a lesson for us Europeans, because we sometimes have the tendency to see the world from a European perspective. We have a GABV founding member in Bangladesh called BRAC Bank. They use banking to foster financial inclusion in Bangladesh and focus especially on women. Traditionally it is hard for women to open bank accounts and it has been shown that rural communities develop better when women have access to banking. BRAC Bank decided to invest in a very sophisticated and easy-to-use mobile banking system. This was based on the realization that even the poorest person who lives very far away from a bank has access to a mobile phone. So they developed a very good mobile banking system, and got lots of new clients. People who had never had a bank account before have one now and can apply for microfinance credits. With the help of a mobile system, they can also support small ventures in rural areas. This is a powerful way to help a lot of people out of poverty. We could learn a lot from the mobile banking system in Bangladesh.
For more information on the work of GABV visit the links below.
Photo: “New York” by Daniel Foster
2016 - licenced under Creative Commons Attribution (2.0)