26 March 2014

Towards ethical finance in Asia and Pacific

"Return on Ethics" should become the new ROE of banks, argues Jayasri Priyalal, UNI Apro's director for finance sector sctivities.

"Return on Ethics" should become the new ROE of banks, argues Jayasri Priyalal, UNI Apro's director for finance sector sctivities, as he examines challenges emerging from the global financial crisis and its impact on banking industry employees and the economy.

UNI Global Union is the voice of 20 million workers from the finance and other service sectors around the world, many of whom have suffered the adverse consequences of unethical behavior which contributed to the global financial crisis.

Workers in the Asia and Pacific region, which is covered by UNI Apro, may have been less affected than their brothers and sisters in other regions. But they are suffering the consequences of the growing informalization and precarity of work in the region, as more and more workers are on short-term, fixed term or irregular work contracts.

Technology and trade are the main drivers of globalization, according to former Harvard University Professor Pankaj Ghemawat. But for those working in Asia's finance industry, new trade patterns and technological progress bring both opportunities and threats. While technology is reducing transactions costs, it is also eliminating many banking jobs. Overall, are customers and workers really benefiting from technology?

The global financial crisis was caused by debt- and consumption-driven economic growth. It has created misery to many people who have lost their jobs, lifelong savings, homes and families. Financiers who were responsible for the crisis were bailed out and got off scot-free.

And innocent poor taxpayers, who financed the rescues, have paid a big price. It is disheartening to observe the unhealthy trend of private debt from the finance industry, becoming sovereign debt, and drying up resources for development and job creation in the economy.

One of the end results has been a further widening of income inequality. This is very serious. The number one risk that businesses are likely to face during the next decade is increased income inequality, according to none other than the World Economic Forum.

Workers' suffering has been exacerbated, in many countries which are grappling with the economic meltdown by austerity measures, backed with shock doctrines. Quantitative easing has been introduced by various governments to provide liquidity and stimulate the economy. But small and medium enterprises, the most vibrant part of the economy which generate growth and create jobs in emerging Asia, are starving because sufficient liquidity and credit is not reaching them.

Financial inclusion

More generally, Asian citizens and SMEs suffer from a lack of access to bank finance. In South Asia, some 612 million adults have no access to formal financial services, and while the figure for East Asia is 876 million adults, according to the International Financial Corporation, the private sector arm of the World Bank. The IFC further reports that 59% of the Micro, Small and Medium Enterprises [MSME] have neither loan nor overdraft facilities from formal financial institutions.

The President of the China SME Association brought to the notice of the Chinese Vice-Premier Ma Kai in June 2013 the problems of Chinese SMEs -- 90% of them cannot obtain loans from China's state-owned banks due to lack of proof of creditworthiness. So to provide a lifeline to them, in July this year the Chinese government scrapped the value-added tax payment by SMEs.

This is critical to China, as SME contribute 60% of GDP, pay half of tax revenues and generate 80% of new jobs. It is lamentable that in the world's 2nd largest economy, the formal banking sector is not serving the most vibrant segment in society.

Germany provides a constructive example of trade union leaders cooperating with SME management through corporate boards. Mid-size family owned export companies in Germany (“Mittlestand” firms) employ some 60% of the nation’s workforce and contribute more than half of the economic output, according to Rana Foroohar in a recent TIME magazine article.

The success of Mittlestand firms is attributed to long-term planning and a long-term business model that works with elected trade union leaders who are represented in the corporate boards with other stakeholders in Germany. Even though the companies’ turnover dropped by more than 40% because of the financial crisis, there has been no layoffs.

Another issue relates to pension and superannuation funds. It doesn't seem fair that the largest pool of the global financial assets consists of workers' pension funds, while SMEs and workers themselves have difficulty obtaining access to finance. At end-2012, global pension funds amounted to $32.8 trillion, compared with just $5.8 trillion for sovereign wealth funds, according to UK City Research. UNI Apro needs to exercise vigilance with respect to these pension funds, and ensure that workers' savings are channeled to responsible investment, which financially empowers marginalized communities, in order to arrest income inequality and trigger organic growth in the real economy.

UNI Apro Finance needs to discover a new approach for stepping up of non-traditional trade union role to strengthen financial inclusion in society. New business models should be built on social orientations to create decent jobs for economy wide welfare, thus, narrowing income gaps to stimulate the real economy.

Bank employees can take the lead in educating and providing proper financial advisory services to SMEs and marginalized groups who can become potential customers for banks. Affiliates also need to forge alliances with like-minded organizations such as consumer groups and community organizations to offer financial educational services, initiate campaigns for financial empowerment of marginalized communities and non-standard employees in informal sectors to increase financial inclusion in the region. Trade unions have been engaging in similar activities in the past. One good example is the Japanese Labour Banks [Rokin Banks], and cooperative services.

From Return on Equity to Return on Ethics

In the lead-up to the global financial crisis, short term return on equity (ROE) became the buzz word -- to make profits through excessive leverage and devil derivatives. There was excessive greed by CEOs for big bonuses, disregarding the interests of all other stake holders, including customers and loyal employees.

Shareholder value driven business models have contributed heavily since 2008 to wiping out $30 trillion created by global companies, and booked losses of about $5 trillion. These are merely indicative estimates of the impact of the ongoing financial crisis.

The finance industry is undergoing a drastic change following the global financial crisis. It now faces stiff competition from non-banking enterprises with the advent of modern ICT service delivery platforms. In order to remain competitive, banking and finance companies are stepping up innovative profit-engineering methods.

Has the banking industry made gains at the expense of community and society? Will the reforms and restructures proposed to re-regulate the industry provide solutions to the existing gaps?

Perhaps the Return on Ethics should be the new ROE of banks to drive the sustainable growth for effective financial intermediation for economy wide welfare.

UNI Apro -- the way forward

UNI's mission is to improve the working conditions and lives of workers in the services and allied sectors. It has signed 43 Global Agreements with multinational companies to agree to workers’ rights standards for all of these companies’ workers in Africa, the Americas, Asia Pacific and Europe.

But UNI Apro Finance has a big agenda before it to ensure ethical and inclusive finance. At the 4th UNI Apro Finance Sector Conference, held in Bangkok on 29-30 August 2013, delegates agreed on the following key objectives for 2013-2017:

(1) to build strong trade union alliances, and initiate campaigns & organize, with like-minded organizations such as consumer groups, and community organizations.

(2) to lobby for campaigns to engage in social dialogues to influence and introduce best practices and effective regulations;

(3) to initiate research & mapping studies that empower affiliates to negotiate for better terms, such as a research study on the deployment of pension and superannuation funds.

(4) to address the widening the income inequality in the finance industry and increase financial inclusion in society, by engaging in financial education and introducing new trade union services to attract and financially empower all categories of employees working in the industry.
Tags: asia, global financial crisis, ethical finance, financial inclusion, UNI, UNI Apro

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