Banks should focus on ethical behaviour

Financial institutions should build a culture that insists on ethical behaviour and putting societal welfare ahead of short-term profits, said a former central banker from India.

“If an institution targets societal welfare, profits automatically roll in,” said Duvvuri Subbarao, a former governor of the Reserve Bank of India.

Subbarao's comments came at the 16th Nurul Matin Memorial Lecture on Ethics in Banking, held at the auditorium of the Bangladesh Institute of Bank Management in the capital on Tuesday.

Since 2001, the BIBM has been organising the annual lecture in memory of AFM Nurul Matin, a former deputy governor of the Bangladesh Bank, who made significant contribution toward rehabilitating the banking system after the emergence of Bangladesh.  

“If we look around today, many of our venerable firms are those that have a reputation for ethical behaviour and value-based business practices.”

They have not merely survived but have prospered, whereas firms that compromised ethics have vanished.

The notion that good ethics weigh against profitability is wrong and must be demolished.

“Indeed, the opposite is true,” said Subbarao, who served the central bank of India from 2008 to 2013.

Ethics in banking recognises two realities.

One, banking can add value to collective societal welfare if, and only if, it is based on ethical foundations.

Two, the deep anguish that somewhere along the way banking has lost its moral core to such an extent that some people think of ethics and banking as a quintessential oxymoron.

As per popular perception, unethical behaviour is not only common in the financial sector but is becoming pervasive, he said.

The environment in the financial sector -- the pressure and opportunity to bend the rules, the high pay-off and the low-risk of getting caught -- encourages ethical compromises, said Subbarao, also a former lead economist of the World Bank.

He believes it is possible to build an ecosystem of ethical finance provided everyone involved -- the individual financial firms, the finance industry as a collective and the financial sector regulators -- makes a commitment to building an ethical ecosystem of finance.

“It should be obvious that the effort to build financial business on ethical standards must begin at the firm level.”

It is now common practice for financial firms, especially banks, including those in emerging economies like Bangladesh and India, to adopt a mission statement laying out its business philosophy.

“Such a charter exhorting values, ethics and good behaviour is undoubtedly an important first step. Disappointingly, it most cases, it remains the only step.”

No concerted effort is made to operationalise that mission statement into the day-to-day business of the institution.

Subbarao went on to advise financial firms to build and nurture an institutional culture that believes that the long-term net worth of a company is maximised not by driving short-term profits but by driving enduring contribution towards societal welfare.

He also urged the firm management to set an example of ethical behaviour.

Most managements exhort their staff to be ethical, but such exhortations remain just empty words because managements themselves routinely breach ethics, and to add insult to injury, implement an incentive structure that encourages unethical behaviour down the entire hierarchy, Subbarao said.

His third recommendation is to tailor human resource policies at the firm level to reflect the ethical values of the institution.

Every segment of the financial industry such as banks, non-banks, insurance companies, pension funds, hedge funds, private equity and investment banks should agree on a self-regulating code of conduct for their segment of the industry, Subbarao said.

“They are best placed to do this because they are best aware of the operational realities of their respective businesses segments.”

About the role of regulators in fostering ethics, Subbarao said they should not stop at just checking for risk management and consumer safety.

They should also make sure that the firm is conducting its business in a prudent and socially responsible manner.

The former RBI governor also talked about the microfinance sector in India, which took a lot of lessons from Bangladesh's pioneering experience.

The backlash against the microfinance sector in the northern state of Andhra Pradesh in 2010 was a choppy period for Subbarao.

In late 2010, the microfinance sector in Andhra Pradesh was pelted with allegations of usurious interest rates, coercive recovery practices and unscrupulous business practice to lure in borrowers with multiple loans.

“There were, of course, excesses and malpractices but we could not risk throwing out the baby with the bath water.”

He put an upper limit on the interest rate that the microfinance institutions could charge their borrowers.

“The industry is back on track and is growing at a healthy clip,” he added.

Fazle Kabir, governor of the BB, and Toufic Ahmad Choudhury, director-general of the BIBM, also spoke.