Ethics in particular sector of finance industry for investors globally
What is the Place of Ethics in the Banking Industry?
Recently finance ethics have drawn the attention of government regulators as well as scholars. This paper will address the issue of ethics in the banking industry. The argument is that ethics are central to the operations of the banking industry, a perspective that has been received less attention. The paper aims at addressing the issue of ethics especially with regards to money transfer given the rapidly growing in complexity and diversity of many financial institutions. For many years, many financial institutions such as banks of various types, private equity firms, insurance companies, pension funds among other have been considered by many as solely concerned with wealth creation. As Epstein and Spalding (1993) notes, the performance of financial institutions is then mainly tied to their capacity to maximise financial assets. This implies therefore that their performance is gauged basing on some of the issues that spell out the results of monetary reviews. According to Hazard and Geoffrey (1995) a major focus has been on returns and asset accumulation, how much profit they get from equities they successfully issue in the finance market, the bon that they float and the loans and credits that they extend to their customers.
The banks are gauged based on their ability to come up with financial instruments, for instance, complex derivatives as well as high tech credit schemes that are mainly aimed at connecting the investors’ money with the various companies that are interested the resources. As they work towards attaining their objectives, the financial institutions have always defended the privacy of information that is concerned with their businesses. These include client data as well as the sources of their resources. Others include policies regarding credit lending processes and more aspects concerning banking profession which that are likely to be transparent.
As Shleifer (2000) notes of late financial institutions are more complex and sophisticated in their operations. The services and products they offer tend to be complex by the day. The manner in which they carry out their business functions, the design, promotion and implementation of the credit facilities is remarkable. The evolving speed is on the increase. . Unfortunately, governments, regulators and other institutions simply cannot cope with this rapid evolution of the banking industry. Banks are developing at a high rate therefore the government as well as other regulatory entities need to keep up with the pace. This therefore has resulted in the overlooking of critical concerns by institutions charged with regulation of the society for the common good
Ethics and Money Transactions
How banks use money cannot be discussed away from the moral or ethical point of view. According to Alston (2004) by giving little attention to the operations of financial institutions and failing to realise the ethical implications of their operations is to erroneously conclude that money is just another commodity that is being traded. As Benedikter (2011) notes, treating money just like any other commodity is to declare money as a means to an end. Such conclusions can have devastating consequences to the common good of all members of the society globally. Money is not just any other commodity, be it in form of credit or in the form of investments. It is a commanding means through which great impacts can be created. This implies that the things that are done with money and the things
are not irrelevant from an ethical perspective.
Berg (1993) posits that, money implies actions, money allows things to happen, and money enacts and promotes changes. To say the least, money is essential as it enables all that happens in the world to happen. Therefore since banks are the intermediaries of money, there is need to critically analyse and oversee their operations in terms of how they handle money and what they do with it. According to Artigas (2006) to assume that money can be handled like any other commodity an ignore the ethical implication associated with it is to overlook the critical moral inference that could be promoted, financed and enacted by investor’s money. Since money can be (is in fact frequently used) used in the wrong way, keeping in mind that the banks money belong to individual investors. It then becomes imperative to question whether the secrecy and confidentiality that banks use in their operations should be upheld despite the ethical implications of their transactions. In addition, we need to question the banks arms-length method of approach to the investments as well as the financing significances and impressions on the world in their desire to create more wealth. Most importantly, we need to question whether it is morally acceptable for banks to lend and invest money indiscriminately. In the next section, I will be discussing the role that banks play in the supply chain of fuelling illegal practices around the world
Role of Banks in Fuelling Unethical Practices around the World
As much as monies in the banks belong to individual investors, when it’s invested by the bank in wrong places, the ethical responsibility squarely lies on the financial institution and not the individual. Banks can be involved in fuelling wrong doings in two main ways; first of all by lending money to their clients who may be governments, individuals or organisations, and secondly, by actively and directly investing monies using both other parties and their names, they get involved in illegal practices. According to Jeucken (2002) lending money to clients is not evil in itself but the clients themselves may be involved in illegal activities. Even so, that doesn’t mean that banks cannot be held responsible. As aforementioned, money can create or promote actions and so by lending to institutions that are involved in illegal activities such as terrorism, human trafficking, drug trafficking, manufacture of weapons of war, is in fact promoting their agenda. That why Brennan (2003) argues that it is erroneous to argue that banks are just in the business of lending and financing, and that they have no control of how such monies will be used thereafter. Banks are mandated to carry a background check on entities before lending them money and thus lending to individuals or organisation involved in illegal activities is to support their illegal course.
The involvement of banks in illegal practices comes in many ways ranging from issuance of credit to clients in questionable business, holding shares of companies dealing in illegal activities, speculation and other questionable matters (Lyne et al, 2009). In the next section I will be highlighting some of these dealings of banks that have dire ethical implications. To begin with, there is evidence that banks have been involved in providing financial assistance to companies that have little or no obligation to social responsibility. As McMichael (2009) notes, they grand credit facilities to companies and by doing this, they help in raising the level of capital within the financial market. Some of the companies operate with little or no social responsible agenda. Examples of such companies are especially found in third world countries and are usually in support of child labour, pollution of environment, black economies, abuse of workers’ rights among other things (Taleb and Mark, 2009). Banks mainly put a lot of emphasis on risk-return ratio and pay little attention on social impact agenda. There have been cases where banks finance companies that are involved in the infrastructure industry that operates in a very dictatorial way in some countries. According to Hitt et al, 1998 some infrastructural developers especially those who build dams have done so leading to massive displacement of people in order to build dams for economical gain. For instance in Burma Junta and Sudan, the companies have been responsible for manipulating some of the portable sources of water through associating themselves with existing corrupt regime.
Even more importantly is the ecological impact resulting from receiving money from banks.
Some of the companies are known to carry out activities that cause considerable environmental damage by way of extracting fossil fuels causing pollution to sea waters through release of toxic chemicals. Some also manufacture products which are associated with health concerns. This form of companies should not be receiving any financing from banks or any other financial institution for that matter (McMichael, 2009). Even though that eliminating environment is very hard to achieve, some regulatory practices need to be put in place. Such companies should be encouraged to strike a balance between making profit and environment impact. This also applies to companies involved in unsustainable harvest of natural resources, including fishing, timber and other natural resources should be thoroughly questioned by banks before financing (Shleifer, 2001). Furthermore, banks, pension funds and in general, every investor should be very cautious when it comes to buying securities in such firms. By investing in the environmental unfriendly companies, they are given the leeway to continue accessing large sums of capital, which as a result, cause huge damage to the environment. This is because by investing in these environmentally unfriendly companies, banks give them access to important sums of capital, which in turn results in a larger environmental damage (Taleb and Mark, 2009). The same argument applies to entities that are involved in massive but unnecessary animal testing as well as household products (Alston, 2004).
Involvement in social enterprise is another avenue through which banks have promoted unethical practices. According to Dobson (1993) the banking industry play a significant role in the existence of markets through which it carries out its activities. Through lending, a community is developed. However, the bank is supposed to take part in in supporting the initiatives within a community where it operates. Notably, many banks and other financial institutions are involved in the development of various communities across the globe (Lyne et al, 2009). The concern arises when a bank deliberately neglects its target community while it is a fact that it gains directly from the resources of the community.
Banks have been involved in usurious practices. It is a fact that the banking business is about guarding and enabling the growth of people’s resources. This basically implies that, one of its agenda is to enhance creation of wealth which is shown through the financial returns for the customers (Fisher and Lovell, 2009). In order to do so, banks usually charge some interest rates on loans and financial services they offer to their clients. However, when a bank chargers exorbitant interests rates, high rates of commissions and abusive credit charges that surpass the normal standards then this is termed as usury. According to Hitt et al (1998) usury simply implies charging more money above the set standards by a financial institution. Banks have been guilty of such practices for many years. Sometimes they even allow their clients to take huge loans that end them in huge debts thus losing their property that was placed as security. The middle class individuals are always a victim of marketing strategies that pressure them into taking credit that is far beyond the normal market rates (Mohamma and Jolis, 2001).
Additionally, there have been instances where banks have financed, given donations and scholarships which work against the good of the family. This is especially where they give finances to organisations that promote agendas that devalue families or promote anti-family values (Jeuken, 2002). As financial institutions are charged with taking care of large sums of money, their influence in terms of sponsorship and grants can be great and the resources can easily have dire magnitudes to the family. Such activities that demean the most basic and vital unit of the family is activism against family values.
The support of totalitarian regimes has been another major concern. In most cases, banks provide credit facilities to companies which carry out their activities in countries governed by regimes that are authoritarian in nature, for instance, North Korea, Sudan and Burma (Lyne et al, 2009). These companies in turn use the monies they get from these banks to enter markets. As noted in many cases, since such countries are being led by dictatorial leaders who require such companies to part with substantial monies in form of bribes. Therefore by financing these companies, the banks are allowing monies to floe to these dictators who are known for violation of human rights (Shleifer, 2000). These leaders then use monies they get from bribes to strengthen their positions in their respective countries.
In addition, banks also engage in speculative banking. Generally it’s expected that whatever the bank lends or invests in a client should be well taken care of. This is purely based on the fact that whatever is lent or invested is actually other clients’ money (Davis, 2001). This therefore implies the engagement in excessive speculation and investment or irresponsible credit lending practices is unethical and many a times bad business. According to Artigas, (2006) it is important for banks and professional in the financial sector to take appropriate actions as far as all investment and lending operations are concerned. Even in situations where there are high risks as well as high levels of returns, a bank remains the ultimate entity that makes decisions on behalf of clients. Therefore, practices that involve speculation and are risky, need to be cautiously handled, especially due to the massive loss of wealth that was recently witnessed during the past financial crisis (Taleb & Mark, 2009). The argument is that there is usually an ethical component in all these high risk ventures which most banks and other financial institutions ignore (Badi & Badi, 2009). The financial crisis that was experienced from the year 2008 is evidence of how investment in financial securities of questionable value is it collateral or mortgage could result in clients’ wealth destruction (Benedikter, 2011).
Last but not least is the financing of arms manufacture and trade is another unethical practice that banks have been involved in. While it’s true that it’s the responsibility of countries to protect their own citizens, investing in manufacture of arms and weapons promotes the excess violations of human rights. This is especially of what Brennan (2003) calls cluster munitions that characterise indiscriminative destruction, overly damaging weapons and their manufacturers. According to Dobson (1993) over 60 financial institutions have been selected to take part in the process of financing the companies. Over £10 billion have been directed to six major manufactures cluster munitions. These are GenCopr, Lockheed, EADS, Thales, Textron and Lochheed Martin. All these cluster-munitions companies openly produce weapons that have been used in several conflicts in the world such as the Iraqi war which was led by the US army in 2001, and the attack of Syria, Lebanon among others (Brennan, 2003). And while this is the case some of these companies have manged to obtain credit facilities in terms of billions of dollars so as to finance their ventures. It’s impossible to argue that the banks that offered these loans were not aware of the kind of activities these companies are involved in.
Even though from the above discussion it appears that banks can promote evil in society by financing individuals and organisation, there is still a chance that financial institutions can adopt practices that minimise the wrong impact of money. As aforementioned money is not just any commodity but one which can create and promote actions that may be harmful to the larger society. Hence, ethically responsible and respectful banking and financial institutions can be termed as not just possible but quite desirable. Documented research shows that such institutions are beginning to emerge. Some small banks in the developed countries have started to realise the significance attached to being above and beyond the basic ethical values. It is beyond paper and what is found within the confines of their operations (Berg, 1993). However, it is essential to point out that individual investors have an important role in in ensuring that there is adequate pressure on the banks as well as the regulators. They need to know that banking services cannot be left in isolation from the established ethical values. The relevance of what banks do with people’s money is of essence. Moreover a number of organisations around the world have also developed key interest in how money is being used and the resultant moral effects. A number of important institutional investors are becoming a little more concerned with the ethical considerations on how their resources are being handled. For example in Norway there is we have the Pension Fund of Norway, one of the largest single holder of securities has taken part in the implementation of ethical criteria. (Berg, 1993). In summary, a world where investments and loans are made on the basis of returns minus ethical implications is should not be acceptable.
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