15/03/2021 by Ochieng Oloo 0 Comments
A NEW ERA OF RESPONSIBLE BANKING
The push for banks to do business more responsibly has been a long time coming.
The era of CSR (Corporate Social Responsibility) as the most appropriate way of showing concern for the wellbeing of society is long gone.
The concept of ESG (Environmental, Social and Governance) factors, first coined in 2005 – that acknowledged that issues like climate change and human rights, do have an impact on a company’s performance and are therefore important in measuring the sustainability and social impact of an investment – has been revamped by more robust propositions.
Last year, the UN led an initiative referred to as the Principles for Responsible Banking involving 130 banks in 49 countries that set forth six principle that banks globally are expected to adopt that provide a framework for a globally sustainable banking system. Our own KCB was one of the 30 founding banks of this initiative. The initiative has 274 financial institution members globally from the banking, insurance and investment sectors.
“As society’s expectations change, banks must be transparent and clear about how their products and services create value for their customers, clients, investors, as well as society. The Principles for Responsible Banking help any bank – whatever its starting point – to align its business strategy with society’s goals,” the UNEP Finance Initiative, the movers of the project says on their website.
The signatories commit to:
1. Incorporate ESG issues into investment analysis and decision-making processes.
2. Be active owners and incorporate ESG issues into ownership policies and practices.
3. Seek appropriate disclosure on ESG issues by the entities in which they invest.
4. Promote acceptance and implementation of the Principles within the investment industry.
5. Work together to enhance their effectiveness in implementing the Principles.
6. Report on their activities and progress towards implementing the Principles.
In 2013, the Kenya Bankers Association led an initiative that put together what they called a Sustainable Financial Initiative that set out principles for sustainable development that would guide Kenya’s banking sector under Vision 2030. In 2015, the sector adopted the principles and adapted them for an e-learning platform that has been used to train more than 25,000 bankers.
Last year, the Central Bank of Kenya issued a Banking Sector Charter (BSC). It became effective from 1st March 2019 and banks were required to submit their implementation plans by 31st May 2019.
“The Charter represents a commitment from institutions in the banking sector to entrench a responsible and disciplined banking sector cognizant of, and responsive to, the unique socio- economic realities of the Kenyan populace,” says the preamble.
It specifically points out that it seeks to address the concerns of the public regarding the high cost of credit and the poor quality of customer service provided to the public by the banks.
The charter highlights four central pillars upon which it is hinged, that represent the vision of the banking sector in Kenya namely:
1. Adoption of customer-centric business models by banks;
2. Risk-based credit pricing;
3. Enhanced transparency and information disclosure;
4. Entrenching an ethical culture in banks – doing the right thing.
The Banking Sector Charter (BSC) compels banks to use credit scores for pricing risk. No bank in Kenya currently does this and it is likely that it will take several months before it is done.
Responsible banking also dictates that customers should have access to all the necessary information about a bank’s products and services, including the charges, that help them make informed decision. The BSC also commit banks to exercise fairness by ensuring that all products are developed in line with the Risk Management Guideline on Credit Risk Management as well as Prudential Guideline on Consumer Protection.
They are to highlight key features like type of product, costs, target clientele, risks, rights and obligations of the parties and legibility and simplicity. These are to be placed on their websites and available in their branches.
To enhance transparency, all commercial banks are required to upload their respective internal and external fees for all products on the cost of credit website to enable customers make rational financial (product) decisions. Failure to do so, the charter says, will result in administrative sanctions. These measures should help alleviate the information asymmetry in the banking sector, that has completely relegated the consumer to a secondary role.
The charter further acknowledges that banking services and products have become sophisticated, thus there is a need to extend financial literacy programmes to customers in order to ensure proper use of the available banking services and products. Under the charter, banks are therefore required to facilitate technical assistance through appropriate financial literacy programmes to customers in the Micro, Small and Medium Enterprises (MSMEs) sector so as to improve financial knowledge.
As we implement the BSC and entrench responsible banking, we need to ensure that we also deal with the underlying issues afflicting our financial system.