Ethical Considerations in the Business of Banking
[A Brief and Stray Account of the Summary of the Original Bengali Version]
It is in many cases an elusive proposition to ascertain conclusively what is good, and, what is not, in human conditions at a given place in a particular point of time. For, those human conditions are continuously changing; and an act of piety or of noble intent may in the end lead to dichotomous or thorny issues to cause more harm that good in the society at large. Individual well-beings also give way to multiple options, fraught with uncertainties, not all of them leading to satisfactory outcomes. To give an emphatic verdict is, therefore, almost impossibility.
Despite this predicament, or, may be, because of this, we probe very seriously into practical happenings and try to workout or analyse the paths of consequences- hypothetical or actual- to thrive for attaining the best possible options for the present to explore the uncertainties in the future in order that we may move on a track for optimal development, even though that optimality remains a subject of continuous dispute. This has a distinct bearing on the study of banking, which, though a very old practice in its primitive form with a static circular flow of production, causing the charge of interest an act of unethical extortion, has assumed a pivotal character in a developing economy where money itself becomes a commodity which facilitates not only exchange of goods and services, but also the expansion of production activities with the spread and transformation of values from the present into the future through the operations of the market. This entails the creation of expectations which are also absorbed in the functioning of money. It is thus characterized by a multiplicity of interests, each ascribing an impact of its own. Even standardized money as a result, does no more remain unique while its face value at a moment of time does not change. Banking activities, by the very nature of their practices, have to take care of these diverse issues to make the ethical questions relating to them all the more intriguing.
It is to be understood in this context that there is nothing eternal in the attributes of virtue or piety. They are basically related to the time and place of occurrence and are expected to have a spill over into the future, a possibility which in a changing world remains highly problematic. The legendary Rani Bhavani of Natore, for example, gifted away vast blocks of land in the name of God to the people belonging to the superior caste as an act to comply with spiritual obligation. This was in the eighteenth century, even prior to the rule by the East India Company. Natore had under its jurisdiction nearly one-third of the whole of Bengal. Such acts, irrespective of religious denomination and the groups of beneficieries were widely spread in other parts of the region as well and were considered of great merit and special virtue. But it had an inherent contradiction. The land owners did not till the soil as they were not sanctioned to do so because of their superior caste position or of their aristocratic ruling status in the society. They farmed out their properties to actual cultivators and extracted from then the surplus to live quite comfortably, often luxuriously on that. A cleavage was created in the society; it was even widened with the enactment of the Permanent Settlement in 1793. The consequences have not been to the good of the people. Had there been a common cause made by the cultivators to fight exploitation, the situation could have turned for a better social transformation. But the collective consciousness of the people did not respond that way, and remained rooted on the whole in the old values as dictated in the scriptures, 1500 to 2000 years old, with corresponding vested interests, that might have been suitable for societies, emerging from areas of intellectual darkness. Sectarian ideas based on faiths, as a consequence, got an opportunity to flourish and led to the tumultous events of the 20th century. The down-trodden and the under-privileged remained the worst sufferers all over this period, even though spectacular achievements took place.
This has a bearing on our thoughts here, as we are yet to shun off dead woods or wastes of older rituals and habits that run contrary to, or, sometimes cohabiting with modern knowledge, based on the achievements in science and technology and also on the aspirations for growth, accommodating and benefitting every section of people in the society. If the banking institutions show a bias in favour of old beliefs and work in special categories, then however much they are successful, as we examine the balance sheets of their track-records, they encourage people to remain intellectually and morally stunted and also create incoherence in the society. In the context of the present day demands on our thoughts and actions, this can not be called ethically fair.
As we all know, the banks deal in money. The instrument is credit. Deposit accumulation from private beings or social bodies, and, deposit creation through the disbursement of loans from its accumulated account of funds are their basic functions. There is a time-tag attached to each deal. The greater the time-scale, the more is the risk or liability which demands to be compensated accordingly. This is how the rate of interest – multiple values for multiple levels in time and quantity – enters into the game and keeps it in motion. The difference between what the bank earns on the loans it creates and what it gives on deposits it accumulates is its profit. The object of the bank is to maximise it in the given circumstances. So long as it remains transparent and consistent with the laws, as enshrined on the basis of the will of the people, that is reflected in a democratic choice, there is nothing wrong in it. In addition – and this is of critical importance- by way of credit creation, it creates money, which helps expand the operation of the market in the matter of buying and selling of goods and services which contribute to production and consumption, and also to saving and subsequent capability to invest in the process. This remains at the heart of the operations of a modern economy, and should not be said to hurt any-body’s conscience. Interest payments, one way or the other, are prices of risks involved. As a practice, they should not be treated as unfair.
But if a bank, or, a pseudo-bank, like a micro-credit organization, even if of high international repute, takes advantage of market inelasticities as also of existing institutional rigidities, and play on the interest rates to earn supernormal profit at an exorbitant rate, which may attract foreign investors as well to join in, it may not be said to be appropriate or ethical, despite its success creating waves all over the world. Jagat Seth House in the eighteenth century was, on record, recognized as the biggest banker on earth, but it can not absolve them of the mischief, they committed in their conspiratorial role in the battle of Plassey in 1757. Their power and influence was the result of their success as a banker. Banking ethics thus transcends the boundary of market operations for profit only. Even as recent as during the period of Pakistan rule, the banking operations, though on the surface impeccable, were instrumental in draining out the surplus the then East Pakistan peasants earned through their exports and using it to build up the industrial base in West Pakistan. The banking and industrial houses collaborated and joined in the power clique of that state. This can not be called ethically fair, although it was found to comply with all the provisions of the laws then in operation in the land. It could also be defended on grounds of a kind of text-book prescriptions.
However, for banks, to optimize under the prompting of two opposing motivations, liquidity and profitability, is a necessary objective for functioning in a market which is open to future expectations. The actual outcomes, as it happens with any venture under risk and uncertainty, may be different from predictions, but the market conditions demand to be transparent and subject to the set of regulations which are equally applicable to all the operators in the business. Any underhand deal or illicit practices for personal ends of one or a gang is grossly unfair and should be treated as a criminal act to be dealt with accordingly. This does not come in the purview of right or wrong to be pursued by a bank. Notwithstanding this, the social functionings may at times bring that into the fore. This has to be dealt with on a wider perspective taking many other socio-economic parameters into consideration.
But in this conceptual framework profit is understood as accruing to an individual or a group of individuals forming a company. Social benefit is indirect, and in its calculation of profit, the bank is not obliged to take that into account. Herein comes a problem of delivering ‘fair justice’in the process. John Rawls in his book, A Theory of Justice (1971) to make feasible the condition of equal rights to every man and woman, introduces his ‘difference principle’ suggesting that the less advantaged people be given more benefits in order that in the end the distribution of wellbeing among the entire population tends to be equalised. If we take a broader view of profit from this point of view, taking the entire society into consideration, then the relative good to the less privileged ones as a result of policy initiatives is also counted in the determination of the resultant. ‘Profit’ in the aggregate for the society as a whole is then to have a broader perspective.
Keeping this in view, we look at the new initiatives of the Bangladesh Bank. In order to implement a policy of ‘inclusive growth’, as spelt out by its Governor, Atiur Rahman, it has given special emphasis on the member banks giving out loans for small and medium scale enterprises to the people belonging to the lower strata in the society, particularly in rural areas with women getting special attention in the arrangement. The share croppers with little means to provide collateral are also brought under the scheme for productive loans with a provision for recycling them for longer term benefits. Apparently these do not maximise ‘profit’ as we understand it. But they are surely in the direction of optimizing social benefit, which, no-doubt, contributes to enhancing long term profit in a broad sense of the term. This, to my mind, is an act in the right direction to raise the ethical standard of our banking system.
However, the importance of trust and responsibility in the behavioral pattern of every member in the business can not be softened or wished away. Fairness in policies and actions become meaningful only if they are allowed to operate in a congenial atmosphere with little to worry about relating to these basic habits in the development of social relationships on a macro-level in the population. Any kind of sectarianism stands in the way and frustrates the move towards better ethical conduct in the business of banking. Simultaneously it can not be made to operate without a regulatory authority either. It would be too risky to make it free for all, where resources and opportunities are limited, and allurements are many. The regulatory authority has, therefore, to work as the watch-dog, to see that the evils of imperfect competition are contained and the norms of the forward-looking ethical conduct are maintained; and if possible, improved upon as time brings about inevitable transformations in social relationships. The governments in a democratic set up and the central bank, both have a role to play in this direction.