Critically Analyse the Current State of Research on the Impact of Ethical Banking on the Commercial Banking Sector
PREAMBLE TO THE STUDY
Banking plays a significant function in civilization in the twenty-first century, and it permits activities and transactions between individuals, companies, and other entities in an economy via its functions (Fatma and Rahman, 2016). The current banking facilities are necessary for achieving basic expectations such as acquiring a property or even receiving a salary from companies. A shift in the way people deal with money has been influenced by the banking account, where individuals are asked to store their money in a bank account instead of storing it under a mattress (Chokprajakchat, 2017).
Ethics is founded on proper judgments, fair work procedures, and doing what is right (Saha et al., 2020). It includes broad principles and perspectives on the excellent conduct/behavior of people, groups, and organizations. Ethics and ethical dilemmas have become a hot subject for corporates and scholars globally. Ethics and ethical procedures are all the more crucial in the banking business since the prosperity of a nation are exclusively reliant on this sector (Saha et al., 2020).
Ethical banking entails knowledge of how banking operations influence society and the environment. Financial firms that prioritize ethical conduct seek profit like any other financial institution. However, they endeavor to create revenue without abandoning values or creating damage (Nizam et al., 2019). The phrase is a rather broad one, which implies it encompasses a large variety of ideas and concepts within its roof. Many items are covered, ranging from banks supplying loans and financial aid to start-ups that are ecologically friendly to those that serve suffering communities or help persons searching for affordable homes. The cornerstone of ethical banking is a fundamental set of ideas and beliefs. Ethical banks keep faithful to their primary behavior model, even if it does not significantly help them generate a profit (Fatma and Rahman, 2016).
Literature review
The current research on ethical banking in the commercial banking sector
It has been more common in recent years to find innovative ways of doing business in the financial sector that are both profitable and considerate of people’s rights and the environment (Aramburu and Pescador, 2019). Among these is ethical banking, a corporation that exclusively invests in initiatives that have a positive impact on society from a cultural, educational, environmental, and/or social standpoint. When used in this way, ethics is seen as a scientific discipline that aims to guide human behavior in a reasonable path (Saha et al., 2020). One of the most prominent studies on ethical banking shows that it serves a vital function as an independent, distinct financing activity.
Ethical standards in the financial sector must ensure that all agents have equitable access to the full range of products and services available in the market (Olmos et al., 2020). If this goal is to be met, the financial system must work toward and effectively contribute to the attainment of monetary and financial stability, in line with its stated purpose to maximize the use of financial resources, through the transfer of surplus spending units to borrowers or deficit spending units. Fundamental to financial ethics is that it should promote a society’s total well-being, rather than merely the well-being of its individual members.
Existing ethical banks and socially responsible investment (SRI) funds, which invest in accordance with social ideals such as environmental stewardship and human well-being, have emerged in response to the growing need for a more ethical financial system (risk-return) (Aramburu and Pescador, 2019). As an alternative to purely profit-driven investments, ethical banks use the money their customers entrust to them to fund investments and projects that meet environmental, social, and governance (ESG) criteria with the goal of creating something of value for the surrounding community in addition to maximizing shareholder returns.
Method
Research design
A researcher’s approach to discovering new information or deepening their understanding of a topic is referred to as their research methodology (Browne et al., 2019). This study relied on a qualitative research method, which adopted literature review technique to obtain the most important facts on the impact of ethical banking on the commercial banking sector. Due to the nature of this research, a secondary technique of data collecting was used.
Sources of data
Research gate and other web sources are used to download articles from ProQuest and Google Scholar
Discussion
The relationship between Intermediation theory of banking and the banking sector
Financial intermediation refers to borrowing by deficit units from financial institutions rather than directly from the surplus units themselves (Molnár, 2018). Financial intermediation thus involves surplus units depositing cash with financial institutions that in turn lend to deficit units.
Buckle and Thompson (2020) definition of banks as financial intermediaries should hold true more than ever, because he staked any distinctions between banks and non-bank financial intermediaries on interest rate limits and reserve requirements in many nations, such as the UK.
Summary of key findings
According to the review, ethical banks’ deposit growth outpaces the growth of the loans they provide. At first sight, this result raises two questions about the sector’s long-term health and whether or not it will fit more closely to the conventional banking business model in the near future.
However, if ethical banks are devoting the funds they acquire from deposits to the same corporate goals as conventional banks, the current difference between deposits and loans may be justified. As a sector that generates employment and capital investment, it would make economic sense if it were to be included in this category. Keeping this in mind, it’s important to remember that the primary function of this type of banking is to facilitate the financing of social and solidarity economy projects that aim to create stable, high-quality jobs as well as promote sustainable development, food and energy sovereignty, the social inclusion and employment of vulnerable groups and international cooperation and fair trade.
Consequently, it would continue to ensure the sustainability and social purposes characteristic of its ideology, resulting in an improvement in people’s quality of life and better use of the available environmental resources, in addition to increasing the economic bottom line, as traditional banking does, by creating jobs and wealth through the acquisition or leasing of office space.
Conclusion and suggestion for further studies
Conclusion
According to the notion of financial intermediation, banks serve as financial intermediaries, both individually and collectively, and their behavior, particularly in the deposit and lending industries, is almost identical to that of other non-bank financial firms. As with other financial intermediaries, banks accept deposits and then lend them out, according to the current financial intermediation theory of banking.
Banking ethics are all about honesty, loyalty, and taking responsibility for one’s actions, regardless of the consequences. A bank’s primary function is to transfer huge sums of money across the economy in accordance with the ideals of honesty, openness and accountability. Banking activities are required to be guided by high ethical standards. Even while India’s banking sector has been well-regulated, it is not enough to keep the business in check on its own. Ethics, it has been claimed, starts where law stops. In order to avoid social and economic harm and friction in the economy, banks should endeavor to be ethical in their operations. All parties’ interests are jeopardized when banks fail to uphold the highest ethical standards. When it comes to making business decisions, ethics is tasked with minimizing power abuses and mitigating their negative effects on the economy at large. As a result, banks should place a high importance on ethical behavior while while seeking to maximize their own bottom lines.
Suggestion for further research
Many more studies are needed to fully understand and formulate a clear and definite framework for preventing unethical behavior in the banking industry, while remaining objective, even though the research has identified the factors that influence employee behavior and the frameworks of prevention used in the banking industry. Because each business has its own unique characteristics, further research might be inspired by this study to find the elements that influence employee behavior in other industries as well.
REFERENCES
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- Aramburu, I.A. and Pescador, I.G., 2019. The effects of corporate social responsibility on customer loyalty: The mediating effect of reputation in cooperative banks versus commercial banks in the Basque country. Journal of business ethics, 154(3), pp.701-719.
- Buckle, M. and Thompson, J., 2020. The UK financial system: Theory and Practice. In The UK financial system (fifth edition). Manchester University Press.
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