Corporate Social Responsibility in Banks; What Does It Mean?

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Corporate Social Responsibility in Banks;
What does it mean?

By Hany Abou-El-Fotouh
Chief of Staff
CI Capital Holding.

Over the past few years, a rising emphasis has been placed on companies and financial institutions’ Corporate Social Responsibility. But what does Corporate Social Responsibility (CSR)" mean anyway? This is indeed one of the most frequently asked questions for all those dealing with CSR matters.

CSR is also known as corporate responsibility, corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate social performance. Different organizations have developed different definitions and there is large common ground between them.

A simple definition refers to CSR as how companies and financial institutions take into consideration the impact on society of their operational activities. Consequently, it requires a built-in, self-regulating mechanism whereby businesses would monitor and ensure their adherence to law, ethical standards, and international norms to produce an overall positive impact on society.

It is not surprising to see that CSR is subject to considerable amount of debate and criticism. Advocates argue that businesses benefit in many ways by operating with a perception broader and longer than their own immediate, short-term profits. Opponents argue that CSR diverts from the basic economic role of business; others argue that it is nothing more than superficial window-dressing;

Largely, the banking industry in the Middle East does not realize the central importance of having a defined CSR policy. Many banks do not fully understand the worth of CSR.

There are obvious and real gains on hand for banks which have well-designed and successful CSR strategies. They can promote their profile in the community they serve, enhance local, and cross-border economic performance, and enable community development, at the same time strengthening their profitability.

CSR focuses more on how companies and financial institutions can contribute through their core business, in addition to traditional charitable donations.

CSR and Project Finance

CSR practices are often implemented in banks’ core business, which are credit and investments. Project finance is one of the methods to get capital for investment opportunities.

Banks consider how to fairly balance the risk and interests of the various participating parties, including protecting the interest of those who are directly and indirectly affected - specifically the local community that reside within or close to the area impacted by the project.

It is recommended that banks recognize their responsibility to prevent or limit social and environmental harm that may have been caused by activities financed by them; they need to adopt appropriate analysis and verification procedures.

Banks have impact on the environment directly and indirectly. Lending and investments activities have an indirect impact on the environment. Therefore, banks should be encouraged to consider environmentally-friendly purposes in their credit decisions. To this end, banks may offer incentives to credit facilities for “green” investments such as improving a buildings’ insulation or more efficient lighting systems which use alternative energy sources. The bank may apply less stringent rules in relation to collaterals or offer discounted loans to such clients for these types of investments.

There are approaches that explore how banks are linking the traditional credit risk assessment with the borrower’s environmental risk assessment. In other words a bank can assess the environmental credit risk of the borrowing customer and then factor in the results of this assessment at some stage of the creditworthy assessment process.

Community involvement

Community involvement is the basis of all accomplished CSR policy initiatives and extends far beyond the standard charitable measures. Banks should introduce...
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