Fintechs are, by nature, challengers to the status quo – bringing change to the role of finance in people’s lives, promoting financial education and making banking accessible and paper-free.
The role of fintech is still being defined, and it is in this changing and fluid environment that the leaders in the industry get to set a precedent for what the future of fintech will be. This is why it is vital that leaders in the fintech industry incorporate Environmental, Social and Governance (ESG) strategy into their broader company blueprint early on.
ESG strategy and communication are all about proving that an organisation acts ethically. This needs to be measurable, provable and understandable for all stakeholders. Clients, staff and investors are now more conscious than ever of the ESG impacts of the businesses they deal with, so it’s vital that not only are you putting that strategy in place, but you are also communicating your strategy and results.
To learn about what we can put into place to create a more ethical banking system, it’s worth looking at the history, which means looking at how religion has impacted the evolution of banking worldwide. I’m going to be diving into the three main monotheistic religions and explaining a little about how their ethics and morality have affected banking across the world – and what we can learn from what that can teach us about banking ethically.
The foundations of the three main monotheist religions (Judaism, Christianity and Islam) all agree that ethics and morality cannot be separated from everyday life. However, in Christian-majority societies, we have generally treated investing and finance as a purely commercial interests – often contradicting Christian values. There are a number of reasons for this, such as the separation of church/private sectors and state, and in recent years the goal of making banking more inclusive to other religions and cultures as societies have diversified.
Usury (the lending of money with exorbitant interest rates) was forbidden in the Book of Deuteronomy. Banking in Jewish society was historically based on partnership – one party would invest, and the other would manage the capital. Losses and gains would be shared. This is based in Halacha Law, and some banks in Israel still offer it – although Jewish Law and State Law are now separate. Whilst this ethical, religious approach to banking does still exist – it is at the discretion of the individual citizens.
Ogen, a social lender in Israel, has provided more than 65,000 interest-free loans totalling more than $350million – with a default rate of less than 1%. Their focus is on helping low- and middle-income people buy their first homes and set up businesses through affordable credit.
Usury is also forbidden in Chapter 2 of the Q’ran. Shariah-compliant banking is similar to partnership-based lending in Jewish cultures; as speculating and charging interest is strictly forbidden, the banks and borrowers go into partnership. This means that any profits the businesses make are shared with the bank, but if the business is not profit-making the bank also doesn’t make anything. Certain activities are also prohibited – alcohol, pork and gambling, for example.
Shariah-compliant banking is a growing industry. It resurfaced in the 1960s, and since then, more banks have been opening both in Muslim-majority countries and also in Western Europe. Since the turn of the 21st Century, the growth has become exponential – between 2012 and 2019, Islamic financial assets grew from $1.7 trillion to $2.8 trillion and are projected to grow to nearly $3.7 trillion by 2024.
Whilst I am not necessarily advocating for banks and fintechs to go back to the Torah, Bible, and Q’ran for guidance, this long history of a more ethical way to bank does prove that it is possible – to bank in a way that positively impacts the vulnerable in society, that promotes social inclusion and that encourages partnership between the lenders and the borrowers. Building that feeling of collaboration can help the financially excluded in society gain a financial education and understand what happens with their money. It can boost economies through more low- and middle- income citizens setting up thriving businesses. It can improve the bank’s bottom line by lowering default rates.
Customers are increasingly looking to show where they stand on the world’s social and environmental issues through their choice of bank. So, this is an opportunity for the leaders in the fintech industry to embed ESG strategy and communications into the way they do business, taking lessons from the past to shape the future of finance.
You don’t have to stop charging interest or radically alter your organisation’s blueprint. Still, there are lessons here that can be good for your bottom line – creating a community for your stakeholders, boosting the economy through loans for low- and middle- income clients to set up businesses and choosing who you invest in to fit with your customer demands could all make you a leader in your industry.