Scottish banks were at the heart of the UK economic crisis but financial institutions are intent on restoring the country’s historic reputation for ethical finance – in its broadest sense
When Scottish icons Royal Bank of Scotland and HBOS almost collapsed in 2007-8, rescued only by huge UK state bailouts, much of the pain was psychological. After all, prudence is central to Scotland’s self-image.
But the reckless lending and expansion that nearly brought down these giants – and their involvement in the UK-wide mis-selling scandals – also battered another proud tradition in Scottish banking: that of public responsibility and fair play.
As Professor Charles Munn of the European Financial Planning Association says, in Scotland business used to be seen as a calling, with three aspects: “To gain all you can, to save all you can, and to give all you can.” This switched, he argues, to a mindset of “shareholder interest”.
Five or six years after the storm, it is unclear how much has changed in global banking, structurally or culturally, to avoiding such crises in future.
For its part, RBS insists it has made a “whole raft of changes” for the better, including not just the stronger capitalisation demanded by new legislation but a less top-down management structure and a more open culture, among both staff and stakeholders.
Andrew Cave, head of group sustainability at RBS, says ethical lending considerations form a much bigger part of the group’s activities these days.
“Because of what happened at RBS, we reviewed everything we [did] and, as a result, we take a much closer look at how we do business and who we do business with.”
RBS has recently been reselected for inclusion in the Dow Jones Sustainability Index and the FTSE4Good Index. But the bank is very unlikely to adopt a position of ruling out lending to whole sectors of the UK economy for ethical reasons – because its primary role is to support enterprise and economic growth, Cave says.
An HBOS spokesman says it too has made major changes since the crisis, vindicated by the UK government’s £3bn – profitable – sale in September of part of the stake in Lloyds Banking Group, HBOS’s parent, that had been taken into public ownership in 2008 as the scale of HBOS’s predicament became apparent.
Beyond the traditional big players, though, ethical finance is gaining momentum on various levels in Scotland, ranging from new social impact bonds run by YMCA Scotland to the Grameen micro lending scheme due to be launched in 2014 in Glasgow. The Scottish government is also increasingly active.
It is useful to distinguish between ethical finance in its usual sense of shunning investment in the likes of tobacco or the arms trade – with depositors getting more choice and transparency on where their deposits go – and ethical finance in the broader sense of probity and restraint in both retail and investment banking.
Recently, the Scottish Parliament hosted a roundtable on various aspects of ethical finance, as part of a series of events organised by Tods Murray solicitors and the Islamic Finance Council UK.
Islamic banking is only about 30 years old in its present form. Among the first Islamic banks was Mit Ghamr in Egypt, which followed the savings bank model started in 1810 by the Rev Henry Duncan, a former moderator of the Church of Scotland.
Today the Islamic Finance Council believes an Islamic bond issue – called a sukuk – can help facilitate investment into Scotland. As the payment or receipt of interest is forbidden under Islam, the bond holder owns part or all of an asset and charges the user rent. In this way they tend to have a direct stake in a socially useful project or infrastructure. The Islamic Finance Council estimates that up to £200m could be invested in Scotland in this way.
Omar Shaikh, executive board member of the council, which has offices in Glasgow and London, says he has been encouraged by the level of interest in the growing ethical finance debate but is worried by a lack of urgency.
“People need to see more action: practical debt balancing, more loans to SMEs, which are proportionately higher in number in Scotland than down south; more loans to first time buyers. On top of all that, the people who really need most help are getting ‘Wongafied’,” he says, referring to the controversial payday loans giant Wonga.
Shaikh and his colleagues have proposed to the Scottish government the creation of a Scottish Ethical Finance Hub. This would bring together all the players involved in ethical finance in one forum – credit unions, asset manager such as Scottish Widows Investment Partnership, universities, law firms and the Church of Scotland – to take the sector forward.
“We have formally asked the government to investigate the possibility of establishing a hub and as part of this to conduct a survey to quantify demand for ethical finance specifically in Scotland,” Shaikh says.
He says this move would be apt in Scotland, home not just to the first savings bank but also possibly the first cooperatives – there is evidence these sprung from 18th century weavers’ associations on the west coast rather than in the English town of Rochdale, which is usually claimed as their birthplace.
“In a period of 21st century enlightenment, it’s the underlying principles that we really need to reflect on, like [Scottish economist] Adam Smith did.”
Shaikh blames the ability of financial institutions to create credit without checks and due care, the derivatives market and the power of technology that allows people to gamble at the touch of a button 24/7. “It’s important for Scotland to reignite its historic strengths – Islamic finance is one small way of helping towards that.”
Graham Burnside, partner and chairman at Tods Murray, says the ethical finance hub might include both incubation centres for businessstart-ups and premises for research and collaboration.
“Scotland is as good a place as any, and better than most, to explore and develop alternative financingstructures and a move away from the current fractional reserve banking. Scotland’s fund managers and pension houses have a strong ethical/philanthropic heritage,” he says.
A sukuk issue, for instance, would tie in well with a large renewables project or even a major infrastructure undertakingsuch as the new road crossing over the Firth of Forth, he says, because such a bond has to be connected with real assets and also provide social benefit.
Colin Beattie, a Scottish National Party member of the Scottish Parliament and a former investment banker, argues that an independent Scotland – a referendum on Scottish independence from the UK is due in September 2014 – could play a significant part in improving the system and fighting for tougher international regulations.
The country needs a mixture of more responsible banking and a healthy investment environment, so that the community benefits as well as shareholders, he says. Over time it could recover some of its “remarkable” reputation for financial acumen and probity.
However, the question of how independence might affect Scotland’s willingness or ability to change its banking and financial system is far from straightforward.
Big banks move?
Depending on how an independence settlement is reached, banking regulation may continue to be based in London, and both Lloyds, and therefore HBOS, and RBS would not necessarily keep their headquarters in Scotland in the event of independence, according to one Edinburgh bank executive who declined to be named. “We don’t even know if Scotland would keep the pound,” he points out.
Nor are the values and attitudes of senior financiers at RBS and Lloyds distinctly Scottish anyway – the chief executives are from New Zealand and Portugal respectively.
The old Scottish culture was damaged by the disgraced former RBS chief executive Fred Goodwin, and then swept away by the financial crisis, the bank executive says. “What is emerging is still not yet clear. But independence would be a double-edged sword: it might allow the banks to do some things differently but maybe they would no longer remain as big banks.”
Craig Mackenzie, head of sustainability at Scottish Widows Investment Partnership, which is also part of Lloyds Banking Group, says there are about 12 investment funds in Scotland, totalling between £3bn and £4bn, most of which already run specific ethical investment funds. However, only a small portion of the total sum is invested in Scottish projects. The rest is global.
“There’s a pretty big community up here but there’s a lot to be said for increasing our visibility and profile. Much of our activity is in renewables.”
‘Saudi Arabia of renewables’
Indeed, Alex Salmond, the first minister, has spoken of making Scotland “the Saudi Arabia of renewables”.
Seonaid Vass, director for renewables and low carbon technology at Scottish Enterprise (SE), says: “Supporting this sector is a key aspect of our business and one we intend to maintain a strong focus on into the future. Overall, our focus on the economic impact of our intervention and on low carbon and renewable initiatives sits well with the principles of ethical investment.”
Through its investment arm, the Scottish Investment Bank, SE also delivers the renewable energy investment fund, which is intended to promote the use of energy from renewable sources and drive further investment into key areas of the industry.
The Scottish government has set a target to meet 100% of electricity consumption and at least 30% of all energy demand from renewables by 2020.
“As well as offering direct funding support, we work with companies to help them find the right partner agencies and to advise on funding options and development programmes available outside SE,” Vass says.
But one analyst questions whether the recent expansion in offshore wind and tidal power could continue without UK subsidies in the event of independence.
“All this wind power is being financed by subsidies raised on all UK electricity consumers. It is only possible if English consumers are prepared to pay for it. You might question whether that would continue – if, say, after being bruised in an election by UKIP, a future government wanted to walk away from carbon targets, Scotland might not get subsidies. We just don’t know.”
Roddy Gow, chairman of the Asia Scotland Institute, which promotes trade and cultural links, as well as supporting Scotland’s Asian community, says ethical banking and investment are “very important and central” to its activities.
He too cites Adam Smith’s Theory of Moral Sentiments, published in 1759, and says engagement with Islamic finance, particularly among Glasgow’s large Muslim population, is a key part of the institute’s work.
“We can see that the Scottish government is determined to rebuild confidence in the formerly well respected financial community after the RBS disaster,” Gow says.
Ethical finance is playing a growing role in that. But there is undoubtedly a long way to go.
Micro-lending, Scottish style
The Grameen micro lending system, which has helped lift millions of people out of poverty worldwide, is to be launched in Scotland in 2014, for the first time in western Europe. “We are starting with one branch in Glasgow and hoping to expand fairly rapidly,” says Kevin Cadman, chief executive of Grameen in the UK.
An initial pilot will serve Glasgow, North Ayrshire, West Dunbartonshire and Inverclyde.
The original Grameen bank was founded by Nobel Prize winner Prof Muhammad Yunus in Bangladesh in the 1970s.
“The Glasgow area has extremes of wealth and poverty side by side,” says Cadman, a former RBS regional director for central Scotland. “Everyone should have the right to credit and the chance to improve their lives. We aim to help people start businesses, help them off welfare and out of debt.
“With Grameen, there is no collateral and no credit scoring. But it’s not just a question of granting loans and they’re never just for consumption – we [oversee] the whole process by having regular meetings with our clients.”
The Grameen Scotland Foundation has already won backing from various sources including Tesco Bank, which has provided £500,000 in loan capital.
Yunus will be installed as chancellor of Glasgow Caledonian University in October.
Social impact bonds, down at the YMCA
Perth and District YMCA has started Scotland’s first social impact bond, Living Balance, to help unemployed young people. It says the bonds are a constructive and cost effective way of involving local businesses and investors.
Living Balance, supported by the UK government, targets young people aged 14 to 17 who may be having difficulty with formal education, and those who have already left school and are struggling to access education, training or employment.
Local businesses partner with the YMCA to help the young people achieve clearly defined goals and outcomes, ranging from qualifications to employment. If these targets are met, the UK’s Department for Work and Pensions (Innovation Fund), which runs the contract through an intermediary, Indigo Project Solutions, will fund the costs in retrospect, and the money will be channelled back to the investors and Indigo with interest. If outcomes are not reached, on the other hand, the investors lose their money.
The scheme, set up in 2012 with two more years to run, focuses on progress in five key developmental areas: core skills, motivation, personal and social skills, support networks and self-esteem.
Jill McGrath, CEO of Perth and District YMCA, says 180 young people were on Living Balance, including across 10 schools. It also features a shop and film production facilities. More than 50 young people have been helped into employment so far.
“The scheme looks carefully at young people’s individual needs and supports them in the long term,” McGrath says. “We engage with local businesses that have an active interest in these people’s futures. And the social investment return for the government – in the form of tax revenue, lower benefits costs [etc] – is clearly worthwhile.”
The YMCA has published template rules to help other charities set up similar bonds.HBOS rbs scotland Sustainable finance UK Government