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March 11, 2009

Crisis what crisis?

As the fortunes of the world’s biggest banks continue to unravel, another part of the banking sector, driven by a different set of values seems to be coming into its own. Only lending what depositors have given them, these ethical banks specialise in making loans to our sector

Simon Birch, The Guardian

Meltdown? The ill wind is bringing ethical banks nothing but good

The UK’s ethical banking sector is not only surviving the meltdown, it is experiencing new levels of consumer confidence and investment. At Bristol-based Triodos Bank, profits are up more than 50%, inflows into its cash Isa are up 25%, and the amount of money deposited by savers is up by 15% – nearly four times the mainstream bank saving rate of 4%.

So why are Triodos, and other ethical institutions, bucking the trend? “We operate a transparent and easy-to-understand business model,” explains UK managing director, Charles Middleton.

“We raise money from individual savers to fund projects that benefit people and the environment. We don’t invest in any of the complicated bundled investments, such as derivatives, that aren’t connected to the real economy, and we show exactly what we are investing in.”

But people nervous about banks with overseas parent companies following the collapse of Icesave, should be aware that Triodos is a subsidiary of a Dutch banking group. If it were to go bust, savers would have to apply to the Dutch deposit guarantee scheme. However, this recently raised its maximum payout threshold to ?100,000 (£77,700) – significantly more than the £50,000 offered to UK savers.

The Ecology Building Society, which only provides mortgages for properties that have a positive environmental benefit, has seen the amount deposited this year already exceed amount for the whole of 2007.

“We are witnessing a flight to safety, with people increasingly recognising that the mutual model is less affected by the current volatile market,” says Paul Ellis, its chief executive.

The Co-operative Bank has also been able to weather the storm, thanks to “a historically prudent approach to lending and a strong reputation for trust”. It says: “Our lending capital is generated from customers’ investments and savings, leaving us a good deal less exposed to the markets … we actually increased mortgage business during the first half of 2008.”

The Co-op Bank says people’s money will never be used to support regimes that abuse human rights, and that on the positive side, “it will always be invested according to sound environmental principles”.

It has also seen significant increases in savings balances during the first six months of the year; retail savings have grown by more than 11%.

But there is a price to be paid for this prudence, and for knowing your money is not supporting unethical practices such as the arms trade or tobacco, and this often takes the form of lower rates. With a rate of 3.85%, Triodos’s online cash Isa isn’t the best return you can get. At the Ecology, you will get 5.1% if you take out its Earthwise cash Isa; this rate includes a 1% annual interest bonus payable if no more than one withdrawal is made during the tax year. The Co-op Bank, meanwhile, has some good deals, including a one-year fixed-rate savings bond paying 6.5% gross, and two- and three-year bonds paying 6.59% (the minimum deposit is £2,000).

However, a recent poll for Triodos found that 38% of consumers would be prepared to take a lower rate in return for a sound ethical and environmental policy.

So what lessons do these banks think their battered and bruised high street competitors need to learn from the whole experience?

Paul Ellis believes that the fundamental problem at the root of the crisis “is a lack of transparency surrounding the complex financial products that have caused so much damage”.

Charles Middleton agrees: “The credit crunch is making people think hard about what their money is doing and what their bank is using it for.”