Islamic Banking gif
by not lending to or investing in pollut- ing industries; • Combating social and financial exclu- sion by allowing access to its services by all groups in society; • Operating on the basis of mutual trust and transparency; and • Combating fraudulent and dubious ac- tivities.
Other authors like Hodgson and Ogrizek at- tributed to financial institutions the social responsibility of ‘know the customer’. Knowl- edge of the customer is believed to reduce the information asymmetry problem inher- ent in lending as well as the likelihood of fraud and money laundering transactions.
Douglas et. al. further noted that the soci- etal expectations of financial institutions in- clude ‘strengthening corporate governance, fighting money laundering, preventing tax evasion, protecting financial privacy, equal opportunity employment, and promoting environmental awareness’. Decker men- tioned such issues like ‘secure products … appropriate for the lifestyle of a cross sec- tion of society’, ‘trust, customer knowledge, prudent management of funds, proximity and accessibility’, ‘channelling funds from savers to productive uses’ and ‘promoting social cohesion’.
Inevitably, these social responsibilities could be argued to represent a challenging task for financial institutions to undertake. Spe- cifically, it is noted that the literature does not attribute philanthropic responsibilities per se to financial institutions–for example, in terms of donations and charities.
Rather, the emphasis appears to be on the need for developing responsible corporate behaviour, professional and ethical busi- ness practices, customer responsibility, and developing social responsibility in project financing. These have in turn been encour- aged through the establishment of voluntary CSR codes of conduct relating to financial institutions which seek to promote respon- sible corporate behaviour. Examples of such global CSR guidelines are as follows:
• Caux Principles (Issued in 1994). Rec- ommendations which promote ethical and responsible corporate behaviour, especially addressing the social impact of company operations on the local community. • Principles for Global Corporate Respon- sibility: Benchmarks for Measuring Business Performance (Endorsed in 1999, Revised 2003). Include over 100 principles, 129 criteria and 118 bench- marks that could be used as a model framework to assess corporate social performance.
• Global Sullivan Principles (Proposed in 1999). Standards which address so- cial, economic and political justice is- sues such as human rights and equal opportunities in employment for en- dorsement by multinational companies and their business partners. • UN Global Compact (Launched in 2000). Advances ten principles in four key fields, namely labour standards, hu- man rights, the environment and anti- corruption. • Global Reporting Initiative (Revised in 2000). An international voluntary re- porting standard promoting the report- ing of the economic, environmental and social dimension of an organisation’s activities, products and services. • The Forge Group. Relates to a group of major financial services providers which published its “Guidance on Corporate Social Responsibility Management and Reporting for the Financial Services Sector” in 2002. This was meant to provide a practical toolkit to financial institutions to understand and address CSR issues relevant to the financial services sector such as financial inclu- sion, involvement and investment in the community, labour standards and other ethical issues. • The Equator Principles (Launched in 2003). Voluntary guidelines relating to credit risk management when as- sessing environmental and social risk in project financing by financial insitu- tions, especially for infrastructure and industrial projects in emerging markets with total project capital costs exceed- ing US$10 million. Currently 73 finan- cial institutions in 27 countries have adopted the principles. • Principles for Responsible Investment (Launched in 2006). Set of voluntary guidelines for investors addressing environmental, social and corporate governance issues. There are over 950 signatories to the principles. • OECD Guidelines for Multinational En- terprises (First adopted in 1976. Up- dated in 2011). Recommendations for voluntary responsible business conduct that 42 adhering governments encour- age their multinational enterprises to observe wherever they operate.
THE PRACTICE OF CSR BY FINANCIAL IN- STITUTIONS As a business practice, CSR is impacting on the operations of all types of businesses, including financial services providers. This section discusses the CSR practices of two types of financial institutions:
• high street banks in the UK, and • socially responsible financial institu- tions
These financial instituiotns are mainly prominent in the USA and Europe, in particu- lar the UK.
The Case of High Street Banks in the UK Some of the above voluntary codes of con- duct have been endorsed by even commer- cially-oriented high street banks such as the Hong Kong and Shanghai Banking Corpora- tion (HSBC) which since the mid-1990s has been seen to publicise its CSR initiatives.
In its CSR Report, the bank states ‘For HSBC, good CSR is good business’ and is thus ob- served to perceive CSR as a long term busi- ness practice for addressing the needs of its stakeholders. In recognition of its leadership and innovation in integrating ESG objectives into its operations, it is noted that HSBC (UK) had been nominated in the runner-up category of ‘Sustainable Bank of the Year’ for the Financial Times Sustainable Banking Awards 2010.
The practice of CSR by high street banks in the UK has been much influenced by the moral suasion used by government to ad- dress CSR issues and make retail banks comply with government schemes. The gov- ernment, for instance, instituted a universal banking programme whereby it required ‘banks to either set up basic bank accounts as part of their existing product range or par- ticipate in the Post Office’s “universal bank” scheme’.
The UK government’s expectations for banks to ‘meet their social obligations’ as well as ‘discharge financial exclusion obliga- tions’ were also incorporated into the Bank- ing Code – which is reported to have largely influenced the behaviour and strategies of banks to demonstrate appropriate CSR poli- cies.
EIRIS reported on the following non-financial performance of thirteen leading UK high street banks on issues such as: their hold- ing of third world debt, publication of ethi- cal lending policies, operations in countries under oppressive regimes, publication of policies addressing financial and social ex- clusion, environmental policy, equal employ- ment policy, and community involvement commitment.
It was observed that banks like Barclays, Lloyds TSB, Northern Rock, Royal Bank of Scotland and the Co-operative Bank were the best performers in terms of their ESG screening, with the Co-operative bank being judged as the best overall performer. The Co- operative Bank, in particular, is considered one of the main UK high street banks with a clear commitment to social responsibility. The bank developed its ethical policy out of a survey conducted in 1991 wherein it found
2012 April Global Islamic Finance 49
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