Ethical Banking in the UK - Research Proposal Example

Proposal for Dissertation Ethical Banking in UK: An InvestigationInto Its Performance As Measure of Its Rightness for Clients And Soundness as a Business Practice 1. Introduction The proposed dissertation shall examine the activities of the sizable number of ethical banks in UK for the purpose of determining whether such a business can be as profitable and sustainable as conventional banks, which are perceived to be capable of throwing ethics out the window in exchange for maximising profits. To accomplish this research objective, the dissertation will measure the performance of ethical banks using the benchmarks applied to mainstream banks. Once we decided to choose ethical banks as topic, we made a cursory scan of the banking industry in UK and noticed that there is no company projecting itself as ethical bank that has ever been in apparent financial trouble. This is interesting because the financial sector as a whole is reported to be reeling from the aftereffects of the sub-prime mortgage crisis in the US, the continued depreciation of the US dollar and rising global inflation. In fact, major banks and financial institutions around the world were reported to have suffered losses reaching $435 billion in July 2008, with many banks experiencing severe liquidity problems. Is it possible that ethical banking shields its practitioners from negative external factors We aim to find out the answer to this question. Business ethics in general is the application of moral principles in the making of business decisions (Rushton, 2002)), such that it places a premium on social responsibility. This responsibility represents the positive actions or responses that a company takes to fulfill its responsibilities towards its stakeholders, to the environment and to society as a whole. In the view of some economists, however, there is one and only social responsibility of business: to use its resources and engage in activities designed to increase its profits. Thus, when firms experience resource shortages as to threaten their very existence, they attack this problem by cheating on their social responsibility. For example, they may shirk off their responsibility of protecting the environment by acquiring cheap and unreliable anti-pollution devices. That way, the firms give the false impression that they comply with the rules. To address internal resource shortages, such as inadequate capacity and expertise, they overestimate costs, falsify training records, pay excessive compensation and give undeserved promotions. To address external shortages, such as lack of raw materials, they arrange unethical deals with suppliers or service providers. These activities are taboo to ethical banks. 2. Aim & Objectives 2.1 Aim Examine how the operations of ethical banks in UK differ from those of their counterparts in the conventional banking sector to see if the former thrive because of ethical banking or in spite of it. 2.2 Objectives (1) Measure the performance of ethical banks in economic terms to see if it is a feasible or reasonable line of business. (2) Observe how ethical banks compete with conventional banks in terms of profitability, size of clients and quality of service. (3) Discover the reasons that made the owners of ethical banks decide to go into this line of banking. Business ethics in general is the application of moral principles in the making of business decisions (Rushton, 2002)), such that it places a premium on social responsibility. This responsibility represents the positive actions or responses that a company takes to fulfill its responsibilities towards its stakeholders, to the environment and to society as a whole. In the view of some economists, however, there is one and only social responsibility of business: to use its resources and engage in activities designed to increase its profits. Thus, when firms experience resource shortages as to threaten their very existence, they attack this problem by cheating on their social responsibility. For example, they may shirk off their responsibility of protecting the environment by acquiring cheap and unreliable anti-pollution devices. That way, the firms give the false impression that they comply with the rules. To address internal resource shortages, such as inadequate capacity and expertise, they overestimate costs, falsify training records, pay excessive compensation and give undeserved promotions. To address external shortages, such as lack of raw materials, they arrange unethical deals with suppliers or service providers. These activities are taboo to ethical banks. Research for the proposed dissertation shall focus on the performance and viability of ethical banks in both social and business sense. In effect, it will measure the impact of the operations of ethical banks on the entire banking industry and the banking public in UK. This improves upon studies of ethical banking in the existing literature, which mostly discuss business ethics in general and the "strangeness" of ethical banks in particular because of their heavy social emphasis, which is unusual in mainstream banking. The papers dwelling on business ethics as theory are those of Sternberg (1994), Aldrich (1999), Rushton (2002), Hartman (2004), Koehn (1995), Nicholls & Opal (2005), Alderson (1993), Brady (1985), Shanahan & Hyman (2003), Aronson (2001), Cohn & Warwick (2000), Solomon (1983), Enderle (1999) and Rohn (2003). The proposed sources that specifically discuss ethical banks are Walsh (2006), Carse (1999), Rhode (2007), Cowton & Thompson (2000), Seglin (2003), Mackenzie & Lewis (1999), Friends of the Earth (2004), Huntsman (2005), and Guardian Unlimited (2001). 3. Literature Review As a non-traditional business practice, ethical banking is also known variously as social, alternative, civic and sustainable banking because it specifies the socially oriented use of loans and investments, emphasises utmost transparency in the distribution of these banking products, chooses to finance projects that promote and protect the environment, and specialises in micro-credits for the benefit of small entrepreneurs. Thus, while traditional banks are overly concerned with making money and profit, the attention of ethical banks is fastened on such concerns as poverty alleviation, community development, morality and fair dealings, human rights, charity and climate change (Solomon, 1983). The bottom line that is so important to mainstream banks receives only secondary consideration in ethical banking. In fact, ethical banks often generate lower profit margins than traditional banks such that many have few offices and conduct most of their business through the mail, by phone or on the Internet (Cohn & Warwick, 2000). For these reasons, ethical banks differ sharply from traditional banks although they are regulated by the same monetary authorities and abide by the same rules (Cowton & Thompson, 2000). Other than banks and financial institutions, ethical banking also refers to private individuals that commit themselves to the highest standard of ethics when saving and investing their money (Nicholls & Opal, 2005). Ethical banking is a term used for individuals, banks and other firms that commit themselves to a high standard of ethics when saving or investing their money. The organisations' activities are dictated by either humanitarian or environmental concerns and majority refuse as a matter of policy to serve individuals and firms that can be implicated in such moral areas as arms trade, industrial pollution and dictatorial governments (Friends of the Earth, 2004; Thompson & Cowton, 2004). In the case of banks, they provide as much as 6.50 percent monthly interest on savings, including fixed bonuses whereas conventional banks calculate such interest only on a yearly basis and at a much lesser rate at that. Rhode (2007) believes ethical banks are "brave" organisations willing to look beyond greed and profits to see their customers as valuable members and not just another widget. In UK, ethical banks provide a range of banking services that include current accounts, credit cards, personal loans, mortgages, community lending, deposit and business account as well as insurance services such as car, home, life and health insurance. The major banks that set their firms apart as ethical banks are Triodos, Co-operative Bank, Reliance Bank and Shared Interest Society Ltd. There are also a number of building societies and investment groups engaged in socially responsible and ethical investments. The building societies are Derbyshire, Northern Rock, Norwich & Peterborough Building Society, Abbey National, Alliance and Leicester building societies, while the investment groups are Aegon Asset Management, Barchester Green Investment, Ethical Investment Co., Ethical Investors Corp., Christian Ethical Investment Group, Jupiter Ecology Fund and Friends Provident. In addition, there are community development banks considered ethical banks since they serve depressed communities by providing credit, capital and financial services often inaccessible from mainstream financial institutions. Another sub-set of ethical banking is the so-called green banking, in which banks such as Shorebank and New Resource Bank concentrate their services on the development of clean energy sources to address climate change (Thompson & Cowton, 2004). There are even credit and insurance firms in UK that operate in the conventional way but apportion part of their products and services to ethical banking. For example, Barclays maintains a credit card business, 50 percent of the profit from which is donated to projects intended to address climate change, and MBNA donates a percentage of the purchases of its own credit cards to the World Wildlife Fund. There is also Yes Insurance, which provides cheaper insurance policies on hybrid cars, and Legal & General Savings, which invests only in ethical firms listed in the Financial Times Stock Exchange 350 (Guardian Unlimited, 2001). Co-operative Bank Co-operative Bank was founded in 1872 as a regular consumer co-operative bank that provides credit and financial services to industries through retail banking, commercial banking and independent financial advise. In its early years, the bank had no grand ambitions and contented with serving the co-operative movement. Expansion of the bank began when it took on the trade union business and participated in the post-war reconstruction efforts. By the mid-1950s, it had 20 branches and was developing along more conventional lines, which culminated in its membership in the British Bankers Association in 1972. In the process, Co-operative became a "real bank" as a full-fledged member of the banking community. Forthwith, it established a reputation for innovative banking products and services and was credited with the introduction of the free banking system, the interest-bearing current accounts and the links with building societies. By 1981, the account holders of Co-operative Bank had reached 1 million at which time it had reduced its dependence on co-operative societies to only 10 percent. In 1992, however, the bank suddenly changed strategy and decided to revert to its old configuration as a pure co-operative bank when it introduced its ethical policy. Today, the bank refuses to invest in firms that use sweatshop labor, contribute to global warming and deal in the arms trade, genetic engineering and animal testing. It is run like any other bank except that it rejects new business that it feels would compromise its ethical policies. During financial year 2005-06, for example, the bank earned 96.5 million in profits but turned away business of nearly 10 million (Schulz, 2008). One of the businesses turned away was the account of the Christian evangelical group Christian Voice, which was alleged to be anti-gay. According to the bank, this position of the group was "incompatible with the policy of Co-operative Bank, which supports diversity and dignity (Walsh, 2006)." Triodos Bank The Triodos Bank in UK is one of three European branches of the bank that is based in the Netherlands, making the group the equivalent of a universal ethical bank. The other two branches are in Spain and Belgium. Founded in 1980, Triodos is a pioneer in ethical banking, which policy is expressed in its mission statement: "To help create a society that promote people's quality of life with human dignity at its core; to enable individuals, institutions and businesses to use their money more consciously in ways that benefit people and the environment; and promote sustainable development." Although the firm is publicly owned, it is not listed and finances only companies that add cultural value and benefits to both people and the environment. For this purpose Triodos screen loan applications in a process called positive screening, which avoids serving firms judged to be doing harm to the social fabric such as pornography, tobacco and arms dealing. The bank uses the money from nearly 100,000 savers as loans to hundreds of organizations involved in fair trade initiatives, organic farming and socially oriented enterprises. In February 2008, Triodos' net profit grew by 46 percent to Euro 9 million, with total funds entrusted to the bank reaching Euro 3.3 billion for a 17 percent increase over the 2007 figures (Schulz, 2008). Reliance Bank Ltd. The Salvation Army International Trustee founded the Reliance Bank in 1890 when the organisation needed investments to finance the mortgages on property vital to the movement. Thus, it was initially known as the Salvation Army Bank whose earnings were used to underwrite the group's evangelical and charitable work. Towards the years, it expanded to include private individuals and businesses in its target clientele that used to consist of churches and charities. Guided by its motto "mutually rooted in the community," Reliance Bank emphasizes customer care and subject all investments to strict ethical boundaries as its commitment to ethical banking. For this reason, it is the only bank that offers a fixed rate mortgage with no arrangement fees. No arrangement fees are also imposed on tracker mortgages and buy-to-let mortgages while no default fees and repayment charges are imposed on personal loans. Shared Interest Society Ltd Shared Interest Society Ltd. is a fair trade financial co-operative that has provided credit and financial services to fair trade producers, retailers, importers and exporters throughout the world since its founding in 1990. In 2004, it was expanded as a charitable subsidiary to provide training and support services to producers. In 2006, the bank had 8,400 members that invest in withdrawable share capital for use in providing credit facilities to organisations engaged in fair trade. Shared Interest can provide unsecured financing similar to trade credit because its members are prepared to accept the risk of loss or lower returns (Nicholls & Opal, 2005). 4. Methodology The proposed research will measure the performance of ethical banks in terms of sales, market shares and profits relative to those of their counterparts in conventional banking. For this purpose, the research will adopt a holistic approach using both the quantitative and qualitative methods of research to uncover the similarities as well as differences in the banking performance of ethical and conventional banks. Of course, the main objective is to affirm the validity of the hypothesis that ethical banking is a sound business proposition even as it is the righteous thing to do. In effect, the research will seek to generate both the primary and secondary of research such that the study will be conducted in three parts: Part I will consist of a review of opinions expressed by bankers, scholars, researchers and others interested in the field of ethical banking; Part II involves a study of the products and services offered by ethical banks in order to highlight their unique characteristics, which will be conducted through the questionnaire approach; and Part III calls for a person-to-person interview with the management personnel of Co-operative Bank and Triodos Bank, the largest ethical banks in UK. Limiting the interviews to these two banks will enable us tighter control of the research. Whilst Parts I and II are expected to yield the secondary data, Part III will hopefully generate the primary data that will validate the accuracy of the former. Once information on the products and services of ethical banks is collected from the literature review through the Internet and field survey, this will be referred for discussion to officers of ethical banks that will be requested to fill up a relevant questionnaire and those who will be asked for an in-depth, sit-down interview. The respondents for the questionnaire will be asked to assign a score to each product or service on a scale of 1 to 5. If they give a score of 1, this implies that the product or service is totally irrelevant to ethical banking; a score of 2 indicates highly irrelevant; a score of 3 implies marginally relevant; a score of 4 means it is highly relevant; and a score of 5 indicates that the product or service is extremely significant and essential. The contents of the questionnaire and those to be asked in the interviews may run in the following directions: 1) Do you consider your firm an ethical bank If so, what products and services set you apart as an ethical bank 2) What made your management decide to engage in ethical banking 3) Does your company make a socio-economic profile of your target market to ensure that your bank serves the under-served clientele 4) How do you gear your sales and marketing effort to this target market 5) In terms of revenues and profits, would you say that your bank compares with conventional banks 6) Could you say that your bank would be more profitable if it engages in conventional banking 7) Given a choice, would you rather work in a conventional bank than in an ethical bank 8) Is your bank listed in the stock exchange If not, how do you raise capital 9) Were there any occasions when your bank turned down big clients because they were engaged in business activities that you deemed unethical Please cite specific examples. 10) How do you compare the interest rates set by your bank with those of other banks 11) What is the total number of your current depositors and the estimated annual rate of increase in this number 12) What is your bank's position on such issues as climate change, gay rights, human rights, etc. 13) Do you provide unsecured financing on trade credits and non-collateralised loans on personal borrowers 14) When providing loans and credits, how do you promote transparency so that clients clearly understand their rights and obligations 15) How does your bank evaluate the risk factors in lending and financing From Co-operative Bank and Triodos, the research will also request for the annual reports of their board of directors and chairman, financial statements and other company reports that reflect their financial conditions, management and operational strategies and future prospects. Under Part II of the research methodology, the study will also send a questionnaire to a selected rating agency to solicit its views on how ethical banks as a group rates in credit and accountability performance. The information will be ranged against the ratings of conventional banks for comparison. Under Part I, the respondents comprising bankers and scholars will be asked through a questionnaire whether they consider it necessary that ethical banks be rated under a different set of criteria, if ethical banks should be governed by the same banking rules observed by conventional banks, and whether ethical bank can be as profitable as conventional banks. The questionnaire will use the 7-point Likert scale to measure the overall level of perceived similarity in a single data, thus 1 = extremely dissimilar and 7 = extremely similar. In sum, Parts I and II of the research will generate the secondary data of research, which usually come from the observation method. For the study, we shall collect both the primary and secondary data of research through the observation and direct communication methods. The observation method refers to our review of the literature, which gives special attention to ethical banks in UK that put service above profit. As for the direct communication method designed to generate the primary data, we will conduct a Web-based survey of ethical banks that have remained in business at least 10 years after their establishment. The main research activity, however, shall concentrate on Co-operative Bank and Triodos Bank. Although there is greater control in research limited to just two sample firms, there is a risk that two informants may not possess a totally accurate view of the entire organisaton. Thus, to cross-validate the data, the second set of primary data will be gathered from a different set of respondents in the same sample industry. The overall data collection is expected to take one-and-half months or 45 days. In measuring business performance, the study will use subjective measures, which call for a three-item measure reflecting sales trends over the last three years (1 = significantly decreased, 7 = significantly increased), stability of past sales pattern (1 = extremely unstable, 7 = extremely stable), and perception of sales for the next three years (1 = expected to decline significantly, 7 = expected to increase significantly). 5. Research Problems A common experience is starting off well then becoming bored with the subject along the way when what at first seemed interesting becomes laboured and tedious. This could lead the researcher into believing that he has embarked upon the wrong subject and the work that lies ahead might be seen as onerous and ordinary. Meeting the assigned completion date is another potential problem. It is difficult to estimate the time required for research and writing, since there could be an interesting discovery part of the way that might capture the researcher's attention and time. Also, any number of personal issues might crop up to delay production of the work. This includes the possible delays in the mail, the Internet and other modes of communication that we shall extensively to implement all three parts of the research. Research by mail, especially, has been described in the research methodology literature as almost always a lost cause. To avoid these problems, we shall create a realistic timetable or work schedule for the dissertation that we will stick to. However, when such problems arise, we shall renegotiate a new cut-off date with the supervisor. Several other limitations are expected for this study. For example, it focuses only on the management and operational systems at ethical banks since it will take a separate study to study the activities of conventional banks. For this reason, the findings of the study should not be taken at its face value. Moreover, the examination will be based on a cross sectional type of research. New studies in the area could adopt a longitudinal type of research in order to examine similar issues over a far longer period. A fruitful direction could be to investigate the differences and similarities of managerial cognitions in the different stages of the industry life cycle. In addition, given that only UK based participants of firms with some reputation as ethical banks will be examined by this study, new research could investigate their counterparts in the same ethical lines and industry that operate in another country. The exploration of the influence of cross country cultural differences and similarities on managerial perceptions and management practice within the same organisation also need to be fully explored. 6. Reflections of Learning During the interviews, the respondents will be assured that the views expressed during the sessions are absolutely confidential and their names will not be mentioned in any way. Managers especially of firms in an industry like banking where competition is tight are unlikely to speak freely about their management practices if the possibility exists that this information would leak to competitors. Therefore, assurances need to be given to the respondents that their identities and the opinions they volunteered would be treated in utmost confidentiality as part of ethical conduct in research. The greater problem, however, could be the matter of logistics and access in reference to the geographic distance between the headquarters of Co-operative Bank in Manchester and Triodos in London. If the problem proves insurmountable, the interviews for the research will just be conducted through the questionnaire approach for the two ethical banks. The data to be gathered from the research will be extremely valuable and interesting to future studies of ethical banks industry and its continuous search for management and operational concepts that could restore ethics into the banking business. 7. Conclusion Once the content of this proposed dissertation is approved in principle, the researcher will immediately develop the sets of questionnaire to implement Parts I and II of the research. At the same time, a list of e-mail and fax addresses will be prepared on the sample interviewees in Co-operative Bank and Triodos, which could be their CEOs or vice presidents. As previously noted, the questions will be worded so as to elicit information on the actual performance of the case study banks related to all aspects of their operations. At this point, we cannot be sure of the response rate but if one of the two ethical responds, this can serve the purpose of the research. What is important is that one of them accedes to our request for a person-to-person interview. As for the whole process of data collection, it is expected to take 45 days, starting from the approval of the thesis proposal. In this proposal, we have shown that the research aims to uncover why ethical banks differ from conventional banks, how they perform against each other, and whether the operations of an ethical banks can be sustainable over the long term. Bibliography 1. Aldrich, H.E. (1999). "Organisations Evolving." Elsevier. 2. Anderson, E., 1993,Values in Ethics and Economics, Cambridge, MA: Harvard University. 3. 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