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A review of UNEP-FI’s Principles for Responsible Banking

May 29, 2019
Mohamed Agrebi , Senior Operations Officer

This article was first published in Islamic Finance news Volume 16 Issue 20 dated the 22nd May 2019

Following the 2008 financial crisis, the worst economic disaster since the Great Depression, the economic powers around the globe have unveiled several types of ‘super plans’ to salvage their respective financial systems from potential ruin and reduce the risk of future financial crises and collapse. Ten years later, the financial systems are still struggling to regain the trust they lost then, especially in the banking industry, where trust is the pillar of doing business. While several launched initiatives were based on adjusting regulatory requirements, among others, the United Nations Environment Program Financial Inclusion (UNEP-FI) initiative was focused on strengthening trust and customer engagement, by acting responsibly and making societal goals an integral part of a bank’ strategic objectives. MOHAMED A AGREBI explains. 

This UNEP-FI initiative is based on the Principles for Responsible Banking (PRB). What are these principles? What role could they play to support positive changes in the economy? What are the challenges facing the implementation of these principles? How are these principles aligned with the Islamic finance industry?

In a nutshell, the six key principles, constituting the PRB, touch on all levels within a bank, be it the transactional level, the portfolio and/or the strategic level. The PRB are aspired to align and combine banks’ business development with society’s goals, thus creating enabling conditions for economic and social changes, and focusing on the areas where there is the most significant impact on society (as per the Paris Climate Agreement, the UN Sustainable Development Goals (SDGs) and other relevant national frameworks). The PRB are also aimed at providing a strategic framework toward sustainability; creating values for its shareholders, clients and employees; and engaging transparently with civil society stakeholders.  

The PRB also provide practical implementation guidance for every principle to be implemented, measured and assessed (its impact). As of today, several banks around the globe have committed to these principles, which will be officially released in September 2019, believing that responsible banking is the future of banking, and endorsing the PRB will give them a competitive advantage. 

There is a general agreement among financial regulators and analysts that the PRB may act as a catalyst to accelerate the journey of the banking sector toward a sustainable business model. It is in fact a new way of doing business framed by values. In the world today, not everyone understands how institutional investors are working and, as a result, most people interact through banks for finance. Thus, banks can either ‘blindly’ reply to the demand they receive or they can help infl uence the way people think about that demand, by changing the incentives and consequently making their role crucial in supporting the fundamental changes in the economy. 

By endorsing the PRB, banks will continuously review the impact their portfolios are making. The focus will not only be on delivering a high financial performance, but also to show how banks make a positive contribution to society. Banks will commit to assessing and being transparent about their impact, positive and negative, and commit to continuously decreasing their negative impact while increasing their positive impact, through the nature of the business, for example, by shifting their portfolio exposure from carbon-intensive to low-carbon technologies. 

Furthermore, through the PRB, banks will incentivize and encourage sustainable practices, and actively support their clients and customers by encouraging them to adopt more sustainable technologies, business models and lifestyles, such as addressing climate change, empowering vulnerable groups and preserving cultural heritage. By doing so, banks will be creating values for its shareholders, clients and employees. 

Endorsing the PRB requires banks to be committed to implementing these principles transparently by deciding on targets, and reporting on their progress. This could be achieved only by fostering a culture of responsible banking within the financial institution. According to Simone Dettling, the banking team leader of the UNEP-FI initiative: “Only through a culture change we will get to a stage where every decision and every action of every staff  intrinsically takes into account the responsibility toward society”. Implementation requires an ethical conduct and integrity mechanism that sets out very clearly that the bank has social responsibility. Setting targets is also important as this exercise helps the bank to set clear directions and a course of action. Targets also ensure internal commitment and accountability from top-level management to the working level, with a strong focus on what matters most. The impact will happen in the end through the customers. 

Additionally, to successfully implement the PRB, there is a need for collaboration between existing banks in the same country, backed by a strong political will. If only one bank endorses the PRB and, for example, includes green requirements into its lending program, while other banks refuse to endorse the PRB, there might be a risk that the signatory bank will lose clients/deals. Clients will go to other banks that do not use the PRB to look for easy loan applications since there will be fewer requirements. All banks need to work together toward adopting the PRB in order to act responsibly and assume the PRB’s defining goal in creating a sustainable future. 

From a practical point of view, a transitory phase is obligatory. Whether one likes it or not, it is not now that we will stop using fossil energy. The world today still needs this type of energy. Also, less coal means more gas. Thus, it is important to think of a transition phase which will focus, for example, on the reduction in coal. During this phase, the existing deals/projects that are not sustainable but profitable can get to the end of the phase, and then gradually be combined with profitable businesses with a positive impact. It is also true that the transition could be costly and capital intensive. 

Sustainable development is very much aligned with Islamic finance. The PRB share many similarities with Islamic finance. On the social aspect as an example, while the PRB recommend aligning the strategic objectives with the goals of society, Islamic finance is founded on the goals of Islam which is to realize and maintain greater justice in society.  

Islamic  microfinance, for instance, tends to provide economic empowerment to the most vulnerable. Unlike conventional microfinance which is based on high interest, Islamic microfinance uses financial instruments which can be adapted to the needs of the client, bearing the risk for him and sharing the profit at the same time. Islamic finance revolutionizes the philosophy of banking. In Islamic finance, the relationship is built on mutual trust. Both the client and the bank share the profit and the risk. It is indeed a ‘win-win’ relationship and indeed responsible banking.

Additionally, the principles of Islamic finance have several restrictions on excessive uncertainty and speculation. The industry is based on asset-backed and asset-based finance. Furthermore, the principles of Islamic finance forbid transactions on products described as unlawful such as alcohol and gambling. Both Islamic finance and the PRB are alternative ways of doing business ‘framed by values’. Both work toward attaining the UN SDGs and toward attaining the objectives of the Paris Climate Agreement. 

While the PRB focus on climate change and invite banks to include ‘green requirements’ into their financing programs, the Islamic finance industry provides practical solutions to work on climate change through the issuance of green Sukuk, Shariah compliant investments in renewable energy and other environmental assets. 

Another argument that the PRB and Islamic finance are very much aligned is the focus of Islamic finance on governance. In addition to corporate governance, it is a must for Islamic banks to have special Shariah governance. A board of scholars will supervise and ensure that all activities of the institution are in accordance with Shariah principles. 


Finally, Islamic finance and the PRB are really two parallel lines, progressing toward the same objective: creating a better future for the next generation.


Mohamed Agrebi is the Senior Operations Officer at Making Finance Work for Africa. He can be contacted at m.o.agrebi@afdb.org. 

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