This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Feb 15 - 21, 2016.
When the global financial crisis wreaked devastation on the world’s economy, a lot of it was blamed on the wrong kind of banking. Now, a growing number of banks are coming together to show that banking can be done another way, for the good of the community and environment, and still be profitable.
The phenomenal growth experienced by values-based banks has come about because of a shift in the mindset of the people in terms of who they want to bank with. “We have been extremely successful in getting investors and also savers,” says Eguiguren.
“In the last 15 years, the deposits at our member banks have been growing at a rate of 20% annually, which is incredible growth. And if you compare that growth with that of the bigger banks, it is almost four to five times more.
“Savers, especially in Europe and Latin America, and in some parts of the US, are rushing to us. They are shifting their accounts from the big banks to our banks because we are gaining visibility.”
Eguiguren says this shift is coming about because values-based banks are safer than the bigger ones and it is in their DNA to bank for good and not just for the sake of making money for shareholders or top executives. After the travails of the past few years, this message is becoming increasingly attractive.
“In some areas, people are literally queuing up to open accounts with us. There have been months where our banks have had huge lines outside their branches with people who wanted to open accounts,” he says.
It is the same for investors. “The institutional investors, the pension funds, the big boys are starting to understand that investing in our sort of banking is relevant to them because we do provide decent, stable returns and it provides stability to their portfolios, which is very appealing to them,” he adds.
“Some of our banks have been very successful at raising capital annually or every other year to improve solvency ratios. In fact, sometimes we have to say, ‘Thank you, that’s enough. We will call for capital again, maybe in two years,’” he laughs.
Like the depositors, the awareness among investors about values-based banks is also rising. “And it really helps a lot because they look at our banks and say, ‘That’s serious stuff; that’s solvent, that’s safe; that’s stable, decent profitability and that’s what we want,’” says Eguiguren.
Triodos Bank
In 1968, a small group of professionals — economist Adriaan Deking Dura, tax law professor Dieter Brüll, management consultant Lex Bos and banker Rudolf Mees — formed a group to try and figure out how money can be managed more sustainably.
Two years later, they established the Triodos Foundation to use gifts and loans to support innovative projects and companies. It was not until 1980, however, that Triodos Bank NV was established with €540,000 in start-up share capital and a full banking licence from the Dutch central bank to start operations in the Netherlands.
From the start, it pioneered new ways to use money positively. For example, it financed the renewable energy industry in its infancy, which was considered at the time to be high risk. Its activities grew to include green, ethical, social and culture-oriented investment funds, dedicated venture capital funds and private banking services. From 1993 onwards, it started opening branches in other parts of Europe — Spain, Belgium, the UK and Germany.
Today, Triodos Bank finances companies, institutions and projects that add cultural value and benefit people and the environment, with the support of depositors and investors who want to encourage corporate social responsibility and a sustainable society.
Over 30,000 individuals hold a large majority of the bank’s equity while financial institutions hold the remainder. No institutions or individuals are alloweed to hold more than 10% of the bank’s issued capital.
Triodos Bank shares are held in trust by the Foundation for the Administration of Triodos Bank Shares (SAAT), a body whose mandate is to safeguard the bank’s mission, its independence and the economic interests of its depository receipt holders. SAAT issues depository receipts (without voting right) for Triodos Bank shares to the public and institutions. The board of SAAT is appointed by the depository receipt holders, each of whom has a maximum 1,000 votes.
Triodos Bank wants to achieve its mission as a sustainable bank in three ways — by acting as a sustainable service provider, product innovator and opinion leader. These three strategic goals are closely connected and are reflected in its activities and products.
The bank’s offerings range from basic lending — loans of US$5,000 to US$40 million per project — to sophisticated investment products. Loans are made to businesses working in the nature and environment sectors such as organic agriculture, wholesale, health food stores and renewable energy; social businesses, from housing associations to social economy projects; culture and society, including the arts and education; and North-South projects such as fair trade and microfinance.
Over 500,000 customers support the mission by providing the necessary funding through dedicated savings products and specific investment funds. They have access to payment services, debit and credit cards, internet banking, investment and private banking services as well as mortgages.
BRAC Bank
BRAC Bank started out as a microfinance programme, which was launched in 1974 to encourage the increase of income among the poor through the setting up and expansion of income-generating activities and micro-enterprises.
BRAC Bank Ltd, established in 2001 with institutional shareholding held by BRAC, International Finance Corp and Shorecap International, was the fastest growing bank in Bangladesh from 2004 to 2007. As a fully operational commercial bank, it focused on pursuing unexplored market niches in the small and medium enterprise (SME) sector, which had remained largely untapped. In just 11 years of operations, it has become the largest SME financier in the country.
Its microfinance programme is part of its approach to development, which comprises interventions in health, education, the environment as well as social and economic development. This, along with its Ultra Poor and Agriculture programmes, makes up BRAC’s Economic Development Programme. BRAC offers additional support services to help its borrowers succeed in their respective enterprises such as training and storage facilities as well as help with marketing their finished products.
The microfinance programme provides collateral-free financing to the poor, especially women, in both rural and urban areas in a simple, efficient and affordable manner. Group-based small loans are particularly designed for the lower-end poor to assist them in undertaking income-generating activities. Micro-enterprise loans are available for small entrepreneurs to offer scope for expanding their business and capital base.
Moreover, BRAC utilises a credit-plus approach where the loans are accompanied by various forms of assistance for the borrowers — an important part of the credit operation in the collection of savings. Savings opportunities with BRAC provide members with funds for consumption, children’s education and other investments. They also provide security for old age and serve as a contingency fund during natural disasters.
ShoreBank
ShoreBank was a community development bank founded and headquartered in Chicago. At the time of its closing, it was the oldest and largest such institution in the US. In 2008, it had US$2.6 billion in assets. It was owned by ShoreBank Corp, a regulated bank holding company.
It traces its origins to 1973, when the South Shore Bank attempted to relocate from 71st Street and Jeffery Boulevard in the economically declining South Shore in Chicago to the Loop. At that time, one-third of all apartment buildings in the South Shore were tax-deliquent and in danger of abandonment by landlords.
A small group from the Hyde Park Bank — Ronald Grzywinski,, Milton Davis, Jim Fletcher and Mary Houghton — had launched a successful urban development division focused on a minority-owned small business loan programme. They purchased the bank after successfully petitioning the federal comptroller of the currency to stop the move after creating the Illinois Neighbourhood Development Corp.
Their vision was simple but radical — the bank would become an “agent of change”, promoting economic redevelopment by supporting viable inner-city businesses that would provide goods, services, jobs and housing. A commercial bank could leverage capital from deposits and make loans to amplify the impact of its shareholder equity.
It was renamed ShoreBank in 2000 and was the first community development bank in the US. During its 37 years of operations, ShoreBank played a critical role in stabilising and rebuilding many of Chicago’s low-income neighbourhoods.
As its range of financial products grew, so did its geographic reach and influence in the banking industry. ShoreBank expanded into low-income communities in Detroit, Cleveland, Michigan’s Upper Peninsula, Arkansas and the Pacific Northwest. In addition, it assisted in the development of the international microfinance industry, working with Muhammad Yunus to help him incorporate Grameen Bank in Bangladesh and later, with BRAC Bank.
ShoreBank was different from traditional banks in what it did and how it did it. These differences created social value for the community, but presented financial challenges for the bank. For instance, it took a decade for banking operations to break even. On the deposit side, lower minimum deposits — designed to make the bank available to all regardless of socioeconomic level — meant smaller account balances than the industry average.
In addition, ShoreBank’s loan business had smaller average transaction sizes than that of traditional banks, which meant that fees collected as a percentage of administering the loan were less than larger loans typical in upper-income markets, although they required the same level of administrative time.
In 2009, the bank faced significant losses and by May 2010, was seeking US$200 million in additional capital from major investors and the US government. It managed to get more than enough private capital commitments but did not receive the requested government support, which was a condition of the private investors.
In August 2010, the bank was declared insolvent, closed by regulators and most of its assets acquired by the Urban Partnership Bank.
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