Purpose-Driven Banking: What hope for the UK?

Our new discussion paper Barriers to Growing the Purpose-Driven Banking Sector in the UK by Senior Fellow Dr Gemma Bone Dodds sets out how deeper social and environmental purpose can be hard-wired into the banking system, and what’s stopping this from happening on the scale required. In this blog, Gemma shares key findings from her research.

What is the purpose of the banking system? Does it exist only to make money for shareholders, or should it also serve the urgent and pressing needs of society and the environment? At the Lab we believe that we need a financial system that is democratic, sustainable, just and resilient, and a vital part of achieving this will be through the growth of purpose-driven financial institutions.

In our new discussion paper, Barriers to Growing the Purpose-Driven Banking Sector in the UKwe explore the purpose-driven banking ecosystem and the different ways that financial institutions are carving out space for banking with purpose. We identify five different types of institutions offering banking services: credit unions, community development financial institutions (CDFIs), building societies, ethical banks and mutual banks (which are not yet trading). We argue that there is space for all of the players in this ecosystem to grow and that there are opportunities to collaborate and strengthen the collective impact of purpose-driven banking.

Each sector and organisation embed purpose in different ways, but we identify four key drivers of purpose:

Mission: the key driver of purpose is usually found in the organisation’s mission or mandate. The missions that drive organisations are diverse, with themes including economic development/resilience in communities, delivering benefit for members and environmental sustainability.

Ownership: the majority of purpose-driven banks have a co-operative or mutual structure. Ownership is important because it provides an opportunity for different conceptions of who the bank is set up to serve, and this is embedded within their legal structure.

Governance: purpose-driven banks embrace forms of governance that help them achieve their underlying missions and that fit with their particular ownership model.

Culture and Leadership: the landscape in which behaviour, practices and operational drivers are created is shaped by culture, which is in turn shaped and driven by leadership. There is a strong link with governance, and there is a role for more participatory forms of leadership in purpose-driven banking.

Whilst this report shows that there are some good examples of purpose-driven banking in the UK, it is still very small in comparison to mainstream banking and to equivalent sectors in other European countries. Drawing on interviews with key players in purpose-driven banking, the report highlights some of the barriers faced by different institutions. Some of these are sector specific: for example, many credit unions feel old, archaic IT systems and the lack of budgets to update them are a key barrier to their growth. There are also several barriers that are common to several parts of the ecosystem, such as access to capital and lack of tax incentives for green and ethical investments.

A key barrier faced by many of the institutions interviewed is the lack of awareness and understanding about purpose-driven finance, due to the underdevelopment of the ecosystem and the dominance and strength of status quo banking. This leads to slow customer-acquisition, confusion from the regulator, and even barriers to collaborating with each other. There is therefore a need to better understand and define the ecosystem to make it more visible and intelligible to the wider financial system and society at large, and to enable cross-sector collaboration.

This paper shows that better banking is possible, but there is a long way to go. The Lab looks forward to working with our community to build on this preliminary research, encourage and support collaboration across the ecosystem to overcome the barriers identified, and grow purpose-driven banking to help build a financial system that serves people and planet.

Read the discussion paper here. Early next year, the Lab will bring together credit unions, CDFIs, building societies, ethical banks, and mutual banks to explore and discuss these findings, further identify shared barriers and explore how different ecosystem actors can work together to grow purpose-driven finance. If you work for a purpose-driven banking organisation and would like to join the conversation, please contact us.