Abstract
The 2008 financial crisis has changed the structure of banking, generating public distrust in the conventional financial system. An alternative has emerged as a result of this lack of confidence. This alternative is known as ethical banking. A growing number of investors, asset managers, and financial intermediaries have incorporated sustainability considerations into their business practices. This paper discusses the origins of ethical banking and describes its primary characteristics. The goal is to determine whether ethical banking can be as profitable as conventional banking despite only investing in projects based on social values. A comparative analysis is performed to identify differences between an ethical bank (Triodos Bank) and a conventional bank (Banco Santander). The analysis was conducted to study the financial activity of both banks over a four-year period (2012–2015). The balance sheets, profit and loss accounts, liquidity ratios, indebtedness, and returns provided by both banks were analyzed. The results indicate that ethical banking is less profitable than conventional banking. Nevertheless, customers are attracted to the social investments and financial transparency that characterize ethical banking. Over the study period, Triodos Bank experienced a greater increase in the number of employees and the volume of loans and deposits than did Banco Santander. Triodos Bank invests in social and environmental projects. This investment approach makes it less profitable than Banco Santander.
Highlights
Several factors have led to heightened interest in socially responsible finance
Costs at Triodos Bank increased by 30%, whereas costs at Banco Santander fell by 12%
Based on the available information, the analysis indicates that ethical banking is less profitable because of its focus on social investment
Summary
Several factors have led to heightened interest in socially responsible finance. Such factors include the recent financial crisis and its attendant bailouts, as well as the ecological damage caused by economic growth. Movement toward greater social and environmental responsibility has increased awareness of the influence that banks can exert through their lending policies This greater awareness has placed pressure on banks to extend their operations beyond the boundaries of traditional business management [16]. Banks have adopted efficient mechanisms to assess the nature and quality of potential debtors These mechanisms provide a comparative advantage because they allow banks to evaluate financial risks, and social and environmental risks that relate to certain projects or corporations. Their analysis failed to provide clear evidence of differences in terms of these variables This raises the question of whether ethical banking can be more profitable than conventional banking while still investing in social values.
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