“It is an axiom nowadays that no bank fails for lack of capital; unprofitable lending is always the underlying cause.” — James Grant, author of Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken
Last week, we looked at how some loan officers are put under pressure to grant some types of loans. Loan defaults continue to be a major challenge that confronts financial institutions in developing countries and this impedes their potential role in sustainable development.
Given the enormity of loan defaults: potential of collapsing financial institutions, reducing investment and retarding economic growth among others, several strategies and policies have been implemented to improve the situation but the results seem not to be satisfactory.
Bank loans are a financial product offered by banks to individuals and businesses. They provide a way for people to borrow money for various purposes, such as buying a house, starting a business, or paying for education. The process of obtaining a bank loan typically involves several steps:
- Application: The first step is to submit an application to the bank. This usually requires providing personal and financial information, such as income, employment history, and credit score.
- Review: Once the application is submitted, the bank will review the information provided. They will assess the applicant’s creditworthiness and determine whether they meet the bank’s lending criteria.
- Approval: If the application is approved, the bank will offer a loan amount, interest rate, and repayment terms. The terms of the loan will vary depending on factors such as the borrower’s credit history, income, and the purpose of the loan.
- Documentation: After the loan is approved, the borrower will need to provide additional documentation, such as proof of income, identification, and collateral (if required). This documentation is necessary to finalize the loan agreement.
- Disbursement: Once all the necessary documentation is provided, the bank will disburse the loan amount to the borrower. The funds can be used for the intended purpose, such as buying a house or starting a business.
- Repayment: The borrower is then responsible for repaying the loan according to the agreed-upon terms. This typically involves making regular payments, which may include both principal and interest
What is Ethical Banking?
Ethical banking involves consciousness of how banking practices affect society and the environment. Financial institutions that emphasize ethical practices seek profit like any other financial institution. However, they strive to generate earnings without sacrificing principles or causing harm.
- Ethical banking is a fairly broad term used to describe banks that operate around a set of principles and ideals that are used to govern how they interact with their clients, their community, and the world in general.
- While each bank is left to determine what principles will sit at its core, most have a few characteristics in common, which include community involvement, client screening, and consistency of internal and external ethics.
- Ethical banking can help to build strong, financially capable communities. The reality, though, is that being held to a rigid set of principles can often prove difficult to implement from a purely practical point of view.
Banks are expected to operate with responsibility, reliability, honesty and most of all banks should operate ethically. Unfortunately, ethical policies are sometimes not firmly followed in the banking system. Some officials of banks accept bribes in return for loans, still lend to cheating customers and occasionally convicted for money laundering. Nowadays the banking business is becoming more complex and the borderline between what is legitimate and illegitimate becomes more indistinct. Therefore, banks have to stick to a strong set of ethics which will help them to get though all the ethical choices they face in their career.
Managing bad loans is crucial in banking. Even though banks are under pressure to give loans, these should also be granted in a way that will facilitate their repayment. Banks use various methods to recover bad loans. The credit risk management system should be robust to include a thorough credit analysis of borrower’s financial position, credit history and ability to pay. The policy on loan recovery should be clear with timely actions. One of the most common methods is to file a lawsuit against the borrower. If the borrower is unable to repay the loan, the bank may seize the collateral that was put up for the loan. The bank may also sell the collateral to recover the funds lost. In some cases, the bank may work with the borrower to restructure the loan or offer a payment plan.
Bracing the ethical dilemma
Banks following ethical principles are typically eager to interact with their local communities and foster a healthy and prosperous local environment. Their guidelines may include programs like financing affordable housing, sponsoring some good events which projects their corporate social responsibility in the community, educational scholarships, etc. It is important for any bank to screen its clients, though the most common reason is to be certain that the client is financially sound. With ethical banking, however, screening clients is additionally important so that a bank does not end up working with companies and individuals who do not maintain ethical practices.
Food for Thought
Whatever role you are playing in your organization, the deciding factor for your success may not be your accolades and titles, but rather how you apply the God factor in your work, which ultimately reflects in your ethical behaviour. It is hard to work for God, but posterity will judge you in whatever decisions you take as you face the pressures of the work. The pressures, both internal and external, are meant to polish you to withstand the shocks of the nature of the banking business.
- Decline any unhealthy advances from customers and seniors with professionalism. It is commonly human but must be handled with diplomacy and tact, and you will always be friends. Do not take it personally.
- If you have to review a loan application, think twice. Are you working for the customer, or for the bank, or even for your boss? Sometimes a few words of prayer can do the magic. In five years’ time, will you be blamed for obeying your boss instead of the bank’s policy?
- If you start witnessing your customer’s diversion of funds meant for his business, into other events, will you pull the trigger or look the other way quietly because you are related to him or her?
- Are the PEPs demanding too many favours from your bank to help this and that person with a loan, at whatever cost? Use your spiritual intelligence on them. Work harder… genuine customers will come as you make service delivery your priority.
Above all this, do you think the pressure will kill you? Of course not. It is part of the journey of life.
Words from the Wise
Here are a few thoughts that I would like to end this chapter with, to accompany you on your ethical journey.
- Juanita Kidd Stout: A person educated in mind and not morals is a menace to society.
- Zig Ziglar: The most important persuasion tool you have in your entire arsenal is integrity.
- James MacGregor Burns: Divorced from ethics, leadership is reduced to management and politics to mere technique.
I hope that your journey to improve your business ethics is just beginning. Take a moment to review and update your action plan. This will be a key tool to guide your progress in the days, weeks, months and years to come.
For more insights on this topic, please book a copy of my new book, “THE MODERN BRANCH MANAGER’S COMPANION” which involves the adoption of a multi-disciplinary approach in the practice of today’s branch management. It also shares invaluable insights on the mindset needed to navigate and make a difference in the changing dynamics of the banking industry. Call 0244333051 for your copy.
ABOUT THE AUTHOR
Alberta Quarcoopome is a Fellow of the Institute of Bankers, and CEO of ALKAN Business Consult Ltd. She is the Author of Three books: “The 21st Century Bank Teller: A Strategic Partner” and “My Front Desk Experience: A Young Banker’s Story” and “The Modern Branch Manager’s Companion”. She uses her experience and practical case studies, training young bankers in operational risk management, sales, customer service, banking operations and fraud.