About ethical banking system

An eminent World Bank economist says a parliament that follows the principles of ethics is critical for the growth of an ethical banking system in a country. Only an ethical political system can ensure an ethical banking and financial system, he opined.

If there is no ethical parliament, there cannot be an ethical financial or banking system, he said at a lecture session in the city this week. In this regard, self regulation of any industry is very important. The risk of not having self regulation in the banking system is dangerous, he said.

A symbiotic relationship is likely to emerge between ethics and competitive advantage. Through pursuit of ethical practices, banks can acquire brand reputation. This should help them expand customer base and increase income. On the other hand, the brand name reputation may also attract ethically conscious clients. As a result, the banks will be greatly relieved of the problem of non-performing loans.

The banks well-known for ethical conduct should be able to attract and retain bright and honest employees. In this way, they will be relatively free from the problems created by quick employee turnover or inability to hire smart and honest employees. Human resource management will be easier, internal governance will improve and operational efficiency would increase.

While the responsibility for implementation of ethical principles lies primarily with the banks, certain elements in the external environment confronting them will be helpful in generating necessary inspiration or compulsion.

An independent, honest and competent judiciary is of utmost importance in this regard. If the banks are convinced that they would get a fair treatment in legal disputes, they are unlikely to indulge in unethical practices. Moreover, the judiciary can play an important deterrent role against violation of ethical principles.

Most importantly, the regulatory authority must play an all-important role to ensure real time monitoring and surveillance over the banking operations. It should have the competence to promptly identify violation of ethical norms and initiate remedial measures, including legal actions, without being influenced by political pressure or any other extraneous consideration.

It is also necessary to strengthen the independence and capacity of the central bank for safeguarding the banking system with due emphasis on ethics in the financial system which is critical for earning public trust.

There is no denying that ethics offers a way to look at the connection of the political economy, public policy and banking system if anybody is ready to ask the critical question how to bring ethics to the forefront in the functioning of the parliamentary system.

The parliamentary committee on the banking and finance should thus function based on ethical principles to protect the citizens and ensure a transparent and competitive financial sector. The central bank can play a role of creating a system rather than policing if something goes wrong, influence the parliamentary machinery and bring citizens' watchdogs or ombudsmen to oversee the financial sector. There should be institutions that can initiate dialogues among parliamentarians, citizens, academia and civil society members on banking ethics.

The people need to accept that banking has been perceived from its inception as a business which largely depends on mutual trust and personal integrity. Banks deal with countless depositors and borrowers whose interest, if threatened, will bring the economy to a halt.

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