Social Banking and the Future of Sustainable Finance

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4 The World Financial Review
World U.S/Americas Africa Asia/China Europe Middle East
Social Banks
and the Future of Sustainable Finance
This article is based on the book ‘Social Banks and the Future of
Sustainable Finance’ by Olaf Weber and Sven Remer (ed.), published
by Routledge, 20111. In addition to the editors, several authors have
contributed individual chapters to this book, namely, Riccardo Milano
discusses the history of social banking, Leonardo Becchetti describes the
role that social banks could have in the economic system, Christina v.
Passavant provides valuable insights in the internal management pro-
cesses of social banks and Antje Toennis introduces gift money and
donations as a social banking product.
What is social banking?
The term ‘social banking’ is used in a very heterogeneous way. First,
since recently, the term social banking (2.0) is increasingly used to
refer to banking based on new ‘social’ media, such as the Internet and
related software. In this context, the ‘social’ part mainly comprises of
establishing a direct connection between lenders and borrowers -
without necessarily aiming for a social impact. Second, particularly
in developing countries, social banking is often understood as (sub-
sidised) government or development banking. Third, and usually also
with respect to developing countries, social banking is very com-
monly associated with microfinance or microcredit. Fourth, the term
is used for banks that mainly or exclusively serve socially oriented or
charitable clients. Finally, especially in the Northern hemisphere, the
term social banking is used for banks that strive for only doing busi-
ness with a “positive impact”. In this sense, ‘social banking’ often is used
interchangeably with ‘sustainable’, ‘ethical’ or ‘alternative’ banking.
For the purpose of this article, we follow this latter notion and de-
fine social banking as banking that aims to have a positive impact on
people and the environment by means of banking.
Using this definition, one finds only a relatively small group of 10-
20 ‘truly’ social banks worldwide, most of which are members of the
Global Alliance for Banking on Values (GABV). This is a worldwide asso-
ciation of social banks, which describes its members as banks whose
“central mission is investment in a society that values human develop-
ment, social cohesion and responsibility for our natural environment”
(www.gabv.org). We present the members of this alliance including
their geographic origin and the size of their assets in Table I. For more
information, the interested reader might refer to the homepages of
these banks, which are also provided in Table I.
Besides the GABV, many social banks that match our definition are
also members of other associations such as the International Asso-
ciation of Social Finance Organisations (www.inaise.org), or the Eu-
ropean Federation of Ethical and Alternative Banks (www.febea.org).
Furthermore, a number of such European social banks founded the
Institute for Social Banking (ISB; www.social-banking.org), an institute
offering training in the field of social banking.
For all these banks the positive social impact comes first in their
missions although they all acknowledge the need for financial viabil-
ity of their activities. Thus most of the banks grow strongly in terms
of their assets, number of clients and financial returns. Some even
achieved an increase in their assets of more than 30% per year over
the last years, while some of their ‘non-social’ peers struggled to keep
afloat during the financial crisis.
Why do we need these social banks? It is increasingly accepted
that business should not operate on the expense of but contribute to
the well-being of the community at large. With the society being ever
more conscious and informed about the behaviour of business orga-
nizations, to stay successful, business organizations will have to take
into account not only the needs and objectives of their stockholders
but also of all their other stakeholders.
Having said this, it is not surprising that even Porter and Kramer
recently published an article on creating shared value as reinvention
of capitalism in the Harvard Business Review2.
By Olaf Weber and Sven Remer
We dene social banking as banking that
aims to have a positive impact on people
and the environment by means of banking.

www.worldnancialreview.com 5
May - June 2011
In this context, social banking can be con-
sidered a successful example of an organiza-
tional model that not only creates economic
but also social and environmental value.
Social banks enable their depositors and in-
vestors to achieve a financial return whilst
simultaneously channelling funds to borrow-
ers or investees who are assumed to have a
positive impact on the society. These banks
usually disclose their loan and investment
portfolio to the wider community in a very
transparent and detailed way. This provides
a sound basis for the bank’s stakeholders to
assess whether or not the banks’ core activi-
ties still meet their expectations. Thus social
banking can be seen as contributing to more
transparency and a democratization of finan-
cial and economic processes.
How did social banks develop?
Contemporary social banking stands in the
tradition of two early predecessors. On the
one hand, these were the ‘Montes di Pietá’, an
early type of social bank initiated by religious
orders of the Dominicans and Franciscans
in 15th century Italy to provide credit to the
poor and combat usury. On the other hand,
these were the savings and cooperative
banks that developed in the 18th century,
first in Germany and Austria. These banks
were founded to serve clients who did not
have access to basic banking services such
as credit or saving facilities. They also had a
strong focus on supporting the local com-
munity and economy.
Social banking today largely builds upon
the philosophy of these banks that, in their
respective times, were able to create a cul-
tural change in the financial business, away
from usury-driven money-lending towards
mutually beneficial financial intermediation
between depositors and borrowers.
However, starting in the 1970s, the es-
tablishment of contemporary social banks
can also be seen as a response to issues per-
ceived problematic at that time, such as the
widening gap between the rich and the poor,
the environmental pollution, the inequality
between genders, and the military confron-
tation between the then superpowers. Thus,
supporting socially and environmentally mo-
tivated projects, modern social banks were
(and still are) driven by the objective to work
for a more sustainable development on vari-
ous levels of the society.
Examples of contemporary
social banks
We now take a more detailed look at these
social banks, including their missions and
products. For this, the GABV is a good start-
ing point. As of 2011, it comprises of 13 banks
and financial institutions from four conti-
nents. Broadly, one can differentiate two
groups of banks, nine social banks from the
Northern hemisphere and four microfinance
institutions. All of them integrate social, ethi-
cal and/or sustainability aspects into their
mission statements, and use the term sus-
tainable, ethical, social, or community based
banking, or microfinance to describe their
activities.
The total combined assets of these banks
are $ 26 billion. The average return on equity
in 2010 was 7.9%. However, the size of social
banks in the GABV varies. The smallest bank
in this group, Cultura Bank from Denmark,
has assets of only $ 66 million, whilst the big-
gest, Vancity from Canada, has assets of $ 14
billion. Clearly though, none of them is com-
parable to the main players in the financial
business in terms of assets, clients or loans
outstanding. Furthermore, most social banks
only operate on a national or even regional
level, and they all concentrate on core bank-
ing activities such as savings and loans.
What are typical social banks’
products and services?
Social banks pioneered a number of innova-
tive products and services, such as borrowing
or lending communities. They also helped to
jump-start a number of sustainably oriented
sectors such as organic agriculture or renew-
able energies. In addition, they initiated the
‘greening’ of traditional banking products
such as socially-responsible or ‘green’ invest-
ment funds. In this latter sense, the majority
of social banking products and services today
can be described as conventional banking
products and services with a social or ethi-
cal ‘twist’ to them. For instance, social banks
often let depositors or savers select from a
range of sustainably oriented sectors into
which the bank then channels the depos-
ited funds or savings. Similarly, social banks
usually apply positive or negative social and
environmental criteria to complement the fi-
nancial credit risk assessment to rate borrow-
ers, shares or investment projects.
Thus, social banks essentially use the
range of core banking products and services
to intermediate between, on the one hand,
those who want to invest their funds so that
they achieve a positive impact on the society,
the community or the environment, and, on
The majority of social banking products and ser-
vices today can be described as conventional bank-
ing products and services with a social or ethical
‘twist’ to them.
Alternative Bank
Banca Etica
Banca Sol
Brac
Cultura Bank
GLS Bank
Merkur Bank
Mibanco
New Resource Bank
One California Bank
Triodos Bank
VanCity
XAC Bank
Sum
Bank Assets in US$ million Country of origin Website
1,377
973
495
1,366
66
1,949
290
1,279
159
99
4,311
13,640
223
26,277
Switzerland
Italy
Bolivia
Bangladesh
Norway
Germany
Denmark
Peru
USA
USA
The Netherlands
Canada
Mongolia
abs.ch
bancaetica.it
bancosol.com.bo
www.bracbank.com
cultura.no
gls.de
merkur.dk
mibanco.com.pe
newresourcebank.com
onecalbank.com
triodos.com
vancity.com
xacbank.mn
Table 1: Members of the Global Alliance for Banking on Values (2011)

6 The World Financial Review
the other hand, those that need funds to realise projects with such a
positive impact. Table II highlights some examples of products con-
sidered characteristic of social banks.
One area of products and services where social banks also stand
out is that of donations and foundations, which play a much more
prominent role in social than in conventional banking. From the per-
spective of some social banks, donations and foundations are attrac-
tive because they are manifestations of a different way to deal with
money, one that is not oriented towards financial return but towards
enabling crucial innovations to shape our economy and society in a
more sustainable way. Consequently, several social banks also offer
services like consultation for affluent people who want to support
non-profit organizations or social businesses to bring about political
and social change in society.
Many of the innovative products and services once introduced
by social banks have now entered mainstream, and are increasingly
popular with both customers and conventional banks. Conventional
banks begin to offer products and services labelled as ‘sustainable’ or
‘socially responsible’ as well.
The main ‘unique selling point’ of social banks therefore is to offer
exclusively sustainable or socially responsible products and services.
This strategy of social banks seems to have served them well. Most
contemporary social banks have managed to grow steadily for most
of their history. They thus proved that a different way of banking in-
deed is possible, one that does not only aim for economic profit but
also for a positive social and ecological impact.
New opportunities and challenges for social
banks
The above not withstanding, it is also fair to say that, until recently,
social banking remained a niche in the shadows of conventional
banking without much recognition and impact in the wider world. In
Germany, the country where contemporary social banking originated
almost 50 years ago, for instance, social banks still serve less than 1%
of the adult population.
This, however, could now change dramatically. The recent finan-
cial crisis, climate change and energy issues might prove decisive
for social banking’s further development. This crisis and other events
resulted in exceptional growth rates (of more than 30%) of several
social banks. Clients of conventional banks suddenly discovered that
social banks did not only do good but also well. This was supported
by the fact that social banking clearly fit nicely into the general trend
of more sustainable and conscious lifestyles that have been observed
for some time.
Thus, the niche for social banks is certainly growing bigger, and
social banking might see itself leaving its niche for good. Indeed, sev-
eral banking industry experts state that social banks could reasonably
expect to increase their outreach from currently less than 1 per cent
to 10 or 15 per cent in the near future in the Northern hemisphere (in
the South the outreach of social banks is likely to grow even bigger).
This spells new opportunities for social banks, who finally might
“capitalize” on their strengths such as their immaculate reputation,
their profound experience and networks in promising and innovative
sectors, and their proven capability to innovate products and services
in response to social and environmental problems. Moreover, based
on their long experience with open and transparent stakeholder en-
gagement, social banks might benefit more than their conventional
peers from the new ‘social’ media.
As a consequence, social banks are likely to increase their outreach
and
indirect
impact way beyond what their limited size would sug-
gest. Moreover, with more and more new deposits coming in, social
banks might also increase their
direct
impact by funding more and
larger projects and initiatives that aim to foster sustainability.
However, notwithstanding the above opportunities, social banks
are not without challenges. Arguably the most obvious challenge for
social banks is the need to comply with the manifold economic and
regulatory requirements whilst not losing sight of their social ideals.
There is no doubt; social banks depend on solid banking exper-
tise, professionalism, and strong customer orientation as necessary
prerequisites for long-term success. However, by itself, this is not suf-
ficient. Social banks’ customers (and often also their employees and
owners) choose their bank not so much for its particular banking ex-
pertise but because of its promise to pursue a strictly ethical mission.
In this situation, credibility is a key aspect, and to stay credible the
bank’s overall, internal and external, business conduct has to be in line
with the ethical promises it makes – and with its various stakeholders’
expectations. For this purpose, almost all social banks follow the three
guiding principles of transparency, communication and participation.
This openness clearly requires good management. Social banks have
to implement and use management principles and management
systems to achieve their targets and to manage their business suc-
cessfully and efficiently. Furthermore, special guidelines for personnel
recruitment, compensation policies and leadership have to be devel-
oped and implemented.
Sustainability loans and
mortgages
Impact investment
Sustainability savings accounts
and certificates of deposits
Microfinance
Product type Example Further Information
Loans for wind and solar energy
project
TRIODOS offers venture capital
investments in climate warming
mitigation projects, organic fruit
and vegetable trading, and
socially responsible fashion
production.
Certificates of deposits that are
connected with loans to
sustainable sectors like
renewable energy
Microcredit
www.gls.de
www.triodos.com
www.abs.ch
www.bracbank.com
Table II: Products and Services of Social Banks
The recent nancial crisis and other
events resulted in exceptional growth
rates (of more than 30%) of several so-
cial banks. Clients of conventional banks
suddenly discovered that social banks did
not only do good but also well.

www.worldnancialreview.com 7
May - June 2011
However, most social banks are still in the process of transforming
from social grass roots projects, usually set up by idealistic and un-
conventional people, to efficient and effective business enterprises.
This makes management and leadership, at times, difficult tasks. And
these tasks don’t get any easier when one takes into account that the
many new clients of the social banks are likely to come with new val-
ue systems and new expectations towards the bank and its service.
With respect to the latter, a weakness of the social banks also is
their still ‘limited range of activities’ in terms of their products, services
and sectors served, as well as their limited pressure to actually prove
their social and ecological impact. So far, they have enjoyed a small
but very loyal customer base, which was happy with receiving core
banking services and easily convinced of the positive impact of their
bank. Therefore, with their client-base expanding, social banks, sooner
or later will have to expand their product portfolio and to prove (and
report on) their actual impact more systematically and convincingly.
At the same time, social banks experience increasing competition
in their own arena from conventional banks starting to discover the
promises of sustainability, at least for marketing purposes. And in this
context, it must be pointed out, a key strength of social banks today
certainly is the current relative ‘weakness of their conventional com-
petitors’ in terms of lost trust and damaged reputation. Yet, this is a
rather ambivalent ‘strength’. And it might not be a sustainable one.
With the memories of the recent financial crisis fading, conventional
banks are likely to regain some lost ground. And if only some ten
thousand clients return to conventional banks, this could have se-
vere consequences for the social banks. Thus, social banks seem well
advised not to be complacent with a situation that currently seems
favourable to them but in fact heavily relies on factors outside their
control.
In sum, to compete successfully and to use the current opportuni-
ty to grow out of their niche for good, Social Banks will have to profes-
sionalize further and will have to attract and keep suitable staff, with
similar values and the relevant professional experience and attitude.
Whether or not, social banks will actually grab the current oppor-
tunity remains to be seen. As of now, social banking seems to be at
a cross-road. Much will depend on how well social banks can utilize
their existing strengths whilst simultaneously working on their ‘weak
spots’.
The future of social banks
To increase the social and environmental impact, social banks have to
keep on growing. But, to do so, they have to advance their products
and services in a way that stresses their social impact and lowers the
financial risk for themselves and for their clients. They have to broaden
their product portfolio to become less dependent on interest rates
as most social banks rely on the lending business. Furthermore, they
have to differentiate themselves from conventional banks that start
to distribute socially responsible products and services as well. To
achieve a bigger positive impact, social banks will have to focus more
on positive impact finance and less on using negative exclusions cri-
teria to exclude non-ethical businesses. In order to address new types
of clients, social banks have to develop products and services on the
one hand, and marketing strategies on the other, that meet the need
of these new clients who are interested in finance with an impact. In
order to show this impact, social banks will have to develop measures
and indicators that demonstrate their positive impact on the society,
communities, the environment and sustainable development in an
objective and transparent way.
About the authors
Olaf Weber holds the Export Development Canada Chair in Envi-
ronmental Finance at the School for Environment, Enterprise and
Development (SEED), University of Waterloo, Canada. Prior to this
appointment he was a managing partner and consultant for sustain-
able banking and head of the Sustainable Finance group at the Swiss
Federal Institute for Technology, Zurich, Switzerland. Dr. Weber’s re-
search interests are in integrating sustainability criteria into the risk
management of banks and financial institutions and in concepts and
indicators to measure the impact of conventional and social banking
on the society.
Sven Remer is a Professor for Social Banking and Social Finance at
the Alanus University in Alfter, Germany, and co-worker at the Insti-
tute for Social Banking in Bochum, Germany. Prior to this, he worked
for several years with KPMG as an Environmental Management Con-
sultant and Auditor in Frankfurt, Germany, and as a researcher and
lecturer in Entrepreneurship and Finance with City University in Lon-
don, UK. His research interests span a range from Social Finance Theo-
ries to Impact of New ‘Social’ Media on (Social) Banking and Finance.
Both authors are editors of and contributors to the book
Social Banks
and the Future of Sustainable Finance.
References
1. Weber, O., & Remer, S. (Eds.). (2011).
Social Banks and the Future of Sustain-
able Finance.
London: Routledge.
2. Porter, M. E., & Kramer, M. R. (2011). Creating Shared Value.
Harvard Business
Review,
89(1/2), 62-77.