Ethics in Banking – Principles | Challenges | Impact on the Financial Sector

Ethics in banking refers to the principles and moral guidelines that govern the conduct of individuals and institutions in the financial sector. It involves making decisions that are fair, transparent, and responsible, ensuring that actions align with legal standards and societal expectations. Ethical banking emphasizes customer trust, responsible lending, financial integrity, and compliance with regulations to prevent fraud, money laundering, and other unethical practices. By upholding ethical values, banks contribute to financial stability, protect stakeholders' interests, and maintain a positive reputation within the community and the economy.

Table of Contents

1. Learning Objective
2. Concept and Evolution of Ethics
3. Dimensions of Ethics – Personal, Professional, and Managerial

Checkout IIBF X Taxmann's Ethics in Banking which discusses the essential role of ethics in banking, emphasising the importance of integrity, transparency, and accountability as the pillars of trust and reputation in financial institutions. It covers individual, organisational, and market ethics, highlighting the impact of ethical leadership, corporate governance, and social responsibility. It addresses challenges like ESG integration, digital transformation, and data privacy. Featuring practical case studies, including the Equifax Data Breach and LIBOR Scandal, this book provides actionable insights and guidance for navigating ethical dilemmas.

1. Learning Objective

In this article, we will try to understand the meaning and concept of ethics and how ethics became an inevitable part of our social system. To maintain good governance in a social system, ethics builds and promotes trust amongst citizens. Ethical code of conduct and individual moral principles help in differentiating good from bad, which encourages ethical practices at personal, professional and managerial levels. Various theories suggest that ethics helps in finding solution to dilemma like “What should I do?” both in work and life situations. We also discuss how ethics lays the foundation of welfare state, which plays a vital role in building a society by focusing on the wellbeing of its citizens. Although religion inculcates morals and values at individual level, however, there is a difference between being ethical and being religious. Also, we see how and why laws are formulated in a society or a country by keeping in mind right and wrong behaviors.

2. Concept and Evolution of Ethics

While going to office in the morning, should we stop to help a stranger who seems to be in trouble? Should we tell the billing boy at the shop that he has given us more change than was due? Should we submit an academic paper at the university that a friend who specializes in the subject has written to get better grades in the final examination? Should we donate a little portion of our hard earned money to educate one or two children from the poor families? Should we ignore or tell our supervisor if we suddenly come to know about a colleague who is indulging in some fraudulent activity at the workplace and is a good friend? Should we report the matter to higher-ups in case we come across in our office someone doing misappropriation of the organization’s money? Should we escalate to the higher-ups that your immediate superior is pressurizing you to sanction poor quality loans in order to achieve the budgetary targets? We all face such ethical choices every day of our life. Ethics examines the various ways in which we try to answer those questions in our own lives. Ethics tells us what it means to be a good or bad person and how should we decide as to which actions are right or wrong?

Meaning of Ethics: The word ‘Ethics’ is derived from the ancient Greek word ‘ethikos’ meaning ‘relating to character’. ‘Ethikos’ has its roots in ‘ethos’, a term that refers to character or moral nature. In this sense, at a broad level, ethics deals with the study and practice of the standards of human behaviour, specifically the determination of right and wrong behaviours. In other words, ethics involves principles of human conduct or human actions. These human actions must serve a purpose, which constitute part or whole of the moral agent’s intention in doing what he or she does. As discussed in the opening para, we all know that at the individual level, at the level of a family, community, religion, society and the international fraternity, each day, there are dozens or even hundreds of issues that make one think whether the situation, one gets to know through the media or personal encounter, is (ethically) acceptable or otherwise. Likewise, should we remain indifferent, if we come across a nearby clinic conducting gender-detection tests on pregnant women and resorting to termination of one gender as per the liking of the customers? Or for that matter, should we use too much of air-conditioning and excessive use of motor cars using fuels like petrol/diesel if we can afford? Let us also take certain broader purposes of life that are related to the issues as raised above:

• Why should we live having born on this planet?
• How should we lead our lives?
• Should we pursue our personal pleasures or happiness or is there any other thing/s we require to care for?
• Is it acceptable to us if we have abundant money and wealth whereas several persons in our neighbourhood starve each day?

Can we escape such questions, if we reflect on how we should live? Perhaps not, as these are fundamental and vital questions. At the same time, it is also important what answers we come up with for these questions, for it matters what we intend to do with our lives on this planet. Ethics attempts to address such concerns of human life both conceptually and practically. Citing the words of the English moral philosopher Bernard Williams, ‘ethics is an autonomous concept and addresses the very broad question, how one should live?’ According to Thomas J Higgins, the author of ‘Man As Man: The Science and Art of Ethics’-‘Ethics is the art of human living and its results should be ease in being good men in every circumstances.’ If we think over all these expressions, we shall find their genesis in the famous argument of Aristotle that ‘a life lived in line with the virtues is the best life for any human being. This is the happy and fulfilled life, the life that allows us to flourish and realize all our capacities.’ Setting down the same meaning in terms of means and ends, Thomas Garrett, the ethicist, also defines ethics is the science of judging specifically human ends and relationship of means of those ends. In some way, it is also the art of controlling means so that they will serve specifically human needs.

Thus, it can be stated that ethics continuously makes a systematic enquiry to learn:

• What are the standards of morality of people?
• Why those are the standards of morality?
• How people practice these standards?

This means that ethics is not simply an emotional expression such as “be good” and “do good”. It is a rational analysis and conclusion about the fundamental element, that decides good or bad and right or wrong behaviour. For that very reason, ethics grows into a discipline that examines our standards of behaviour or the standards of collective behaviors of a society. In the words of renowned ethicist, Manuel G. Velasquez, ‘‘It asks how these standards apply to your life and whether these standards are reasonable or unreasonable – that is, whether they are supported by good reasons or poor ones. What do these standards imply for the situations in which I find myself? Do these standards really make sense? What are the reasons for or against these standards? Why should I continue to believe in them? What can be said in their favor and what can be said against them? Are they really reasonable for me to hold? Are their implications in this or that particular situation reasonable?”

When we start out asking such kind of questions about our own behavior or the behavior of our group or society, we begin thinking ethically. Most errors in ethics come from ignoring one or more of these questions. Deepak Parekh, the Chairman of HDFC, puts the whole idea in a very simple way when he says that ethics is simply to ‘not do something that one would be ashamed of, if it becomes public.’ What Mr Deepak Parekh is stating is being echoed since thousands of years as we can observe in the definition of ethics given by Epicuras, a famous Greek philosopher, who says that ethics is the one which deals with ‘the things to be sought and things to be avoided with ways of life and with the telos (Telos means the chief aim of life).

2.1 The Objectives of Ethics

The word ethics has a broad-spectrum and individual ethics cannot be completely isolated from ethics in society or a country. The evolution of society led to evolution of individual morals and a certain code of conduct. That is, how an individual should behave and is able to distinguish between the good behavior and bad behavior. The moral system of a society prescribes that certain behaviors like helping others, speaking truth, keeping one’s promises, etc. are good. At the same time, it proscribes certain behaviors such as lying, cheating, stealing, harming others, etc. as bad. Such common standards of behavior or conduct are not only necessary but also required for continued survival and well-being of a society. As such, morality deals with right and wrong conduct along with good or bad character while ethics clarifies the concept of right and wrong with fitting justifications. Ethics provides reasons to define and distinguish what is right, what is wrong and what ought to be. Thus, ethics is moral values in action. To put it differently, ethics is a system of moral principles and attitudes that guides us to live our lives according to a standard of “right” or “wrong” behavior – in a morally correct, fair and just way. For example, we all play a number of roles in our lives: son or daughter, brother or sister, husband or wife, parent, employee or employer, student, friend, neighbor, citizen and so on. Each of these role places certain expectations on us and obligations towards those who relate to us in that particular role. A student has an obligation to attend class, to study and not to cheat; an employee has an obligation do her job well; a spouse has an obligation to be loyal and supportive and likewise. Most of the times, we keep on navigating these roles successfully but sometimes situations occur which cause conflicts between our different obligations. When this happens, it becomes hard to decide what the right thing to do is. To take the case of one student who is expected to attend classes and hand in assignments on time, but a family emergency comes up and he is required to support the family member in need. If he cannot do the both at the same time, how should he decide which has a priority. In such situations of conflict, ethics helps us evaluate different obligations and make a decision that is fair, just and the morally correct. The below-given box plots the objectives of ethics:

Ethical Objectives

• Study of human behaviour: Makes evaluative assessment about that as moral or immoral (a diagnostic goal)
• Establishes moral standards/norms of behaviour
• Makes judgement upon human behaviour based on these standards and norms
• Prescribes moral behaviour; makes recommendations about how to or now not to behave (therapeutic goal)
• Expresses an opinion or attitude about human conduct in general

Ethics in Business: The purpose of business is to make money, if it does not, it will have failed in its primary objective. If it does make money but does it in an unethical fashion, it will be in breach of social system that permits and fosters its commercial activity. It is the aim of teaching ethics to constantly make the point that the purpose of business is to make money and to make it without compromising on principles. Thus, ethics is equally pertinent for individuals, as well as business. Integration of ethics with business is essential as every business operates within the society and it cannot disassociate itself from the people working within and outside the organization. We all might be familiar with the 18th Century economist Adam Smith’s parable that market is an “invisible hand” which moves goods and services to those individuals who value them more. For example, a farmer ‘who has harvested more corn than he can possibly eat sells some of the corn for money that he then uses to buy a much-needed pair of shoes. On the other hand, the shoemaker, who has manufactured more shoes that he can possibly wear, sells a pair to the farmer for money he can then use to buy some of farmer’s corn for dinner. Both the farmer and shoemaker have made money and both feel they have been left better off. The world is a better place for their self-interested exchange. Each party has not only benefitted himself, but someone else as well.’ In this way, ‘ethics in business ensures that business is doing well by doing good, rather than doing well by doing harm.’ Still, the biggest barrier in the introduction of ethics in the business is that it is sometimes considered as a luxury, which a business may find it difficult to adhere to on account of intensifying competitive pressures in the short run. It is normal to think how one can compete against others successfully when one obeys the rules of the game while the others don’t? However, history has shown that, acting ethically, far from being some sort of costly luxury, is actually a powerful source of long term competitive advantage. When a business is perceived as being ethical, it earns trust of not only the customers but also that of other stakeholders such as employees, regulators, government authorities and the society at large. Trust builds strong relationships all around, and these relationships bring tremendous commercial value. To put simply, ethical business is good business and, in turn, profitable and sustainable too.

2.2 Evolution of Ethics

All humans as rational beings attempt to grow. If the individuals are allowed to practice whatever they believe, then there could be violence. Hence, a set of norms have evolved over centuries to bring orderly growth in the society. For achieving the growth, the society requires peace and coexistence, which is not very easy to achieve by itself.

Frequent fights, conflicts and even full-fledged wars gave people of most countries in the world the realization that we need to be civilized. Only then peace is possible. Peace ensures us to plan and utilize our energies and ideas in the desired manner, which alone will give us lasting prosperity.

Instead of kings or emperors in the olden days, a democratically elected government as a political institution, which remains accountable to its judiciary through a Constitution and to its people for greater acceptability and appreciation of governance and also for better chances to win elections, is considered a better form of political system.

States started encouraging certain behaviours of individuals in their jurisdiction and discouraged or punished some other behaviours which were broadly agreed in a given period of time as unacceptable and was believed that these actions will not help the society at large.

India’s society, for example is one of the most complex ones in the world even for a seasoned sociologist to fully comprehend, leave aside persons with science, engineering, pharmacy, biotechnology, IT, etc. branches. Some of the salient features of India’s society are:

• Patriarchal and strongly
• Dominant caste system (especially in rural India) has made Indians very rank and status oriented.
• The people of India can be found in traditional (even orthodox), modern and almost Western segments. Value systems, among the people in the three segments, also vary accordingly.
• India is a pluralistic (multi-religious, multi-ethnic, multi-lingual)
• Social events (like marriage, child-birth, death) are accorded extreme

With the democracy, the following features are pursued. These become the characteristics of a typical democratic society:

• Democratic governance
• Citizens can freely elect the government of their choice through secret ballot without any threats or coercion.
• Political system allowing fair political competition (overseen by a constitutional body like the Election Commission) and tolerance among the political parties.
• Press and media have freedom to report (expose and criticize) government actions.
• Respect for the fundamental rights and all basic human
• Respect for the Rule of
• Citizen participation and citizen-oriented

With a political party (or a coalition of parties) in power, Cabinet prepares some Acts and get them passed by the Parliament. Administrative rules are formulated by the various departments. Besides these, there can be a regulatory body created to supervise and guide some critical areas like banking, insurance, capital markets, civil aviation, telecommunications, pension funds, etc. These regulatory bodies can also have their own sector-specific Acts and guidelines, circulars, standards, etc.

These Acts, rules and guidelines are never static but are amended as per the changes witnessed in the society from time-to-time.

Dynamic and rapid changes in the society are taken care by the systems created by the society in which State plays a prime role. Changes in the society can be on account of various changes in education, beliefs, technology, accessibility of information through the Internet, etc.

Citizens influence their elected representatives in formulating and getting enacted the laws that are consistent with their value or importance they attach to something. All of us value something or the other. We value that certain basic education is must whether or not a child’s parents are able to afford for the same. Likewise, primary health, a pollution-free environment, silent surroundings during some hours of the night till dawn, etc. There would be laws formulated suiting the mood of the citizens in a particular context, which may be enacted. If need be, after some years of implementing these laws, there can be amendments in the existing law or a new law may be formulated by incorporating necessary changes.

These Acts and administrative rules (like eligibility and qualifications to a post, pay, benefits, confirmation, promotion, retirement or termination, etc.) help society to utilise its human, financial and material resources efficiently with some intended manner ensured by the authority.

Ethics theories begin with ancient Greek philosophers (Sophists, Socrates, Socratic schools, Plato, Aristotle, Epicurus, Stoics) and after recovered by early English positivists, has been the main topic of discussions in the medieval times in Europe. As the scholastic doctrines are bypassed (therefore Christian Ethics is not a scientific term anymore), we come to the illuminated times after the Medieval, and continue with Hobbes, the Father of Modern Ethics. This type of ethics is known by two logical methods; criticism and comparison.

After Hobbes, English and German schools of ethics have been differentiated. These led to English Intuitionist (naturalists) followed by Utilitarian against Kantian ethics. Throughout the 19th Century these ideas have been discussed very fiercely throughout Europe. Then Comte, Darwin, and finally Spencer followed by Green came in, who set the evolution concept into physical sciences as well as the development of ethics. So, at the beginning of 20th century Ethics was more with evolutionary concepts but still divided between Utilitarians (teleology) and Kantians (deontology).

3. Dimensions of Ethics – Personal, Professional, and Managerial

Personal Dimension: Ethics provides the guiding principles, which affect the behaviour of an individual. Certain predetermined code of conduct helps an individual in determining how to behave in a particular situation. The following are few such situations:

• Doing personal work during office hours (such as searching on the Internet for deciding brand of a mobile phone for self or family member, etc.)
• Taking credit for others’ work
• Doing homework of the children at office as a routine
• Claiming the medical reimbursement even through medicines were never purchased
• Using office photocopying for personal works
• Using the personal details of bank customers for personal benefit and mileage

The decisions taken by an individual in the above situation reflect his/her personal ethics. An individual may or may not be aware of this fact but every decision that is made embeds a moral element. It is important for individuals to realize that how everyday choices can shape their personal ethics in the long term. Here, it is to be understood that personal values have a significant influence on decision-making, ethical or otherwise. People act in accordance with what is important to them or what do they value most.

3.1 Professional Dimension

The idea of ‘profession’ originated in the medieval period. At that time, only three occupations viz. law, medicine and divinity were recognized as professions because these occupations required formal, standardized and intellectual training. Over the years, the idea has become more inclusive and today professions are those occupations that ‘offers effective expert assistance to society’ which:

1. require extensive training,
2. have a significant intellectual component,
3. provides an important service to society,
4. are organized into associations and
5. articulate technical and ethical standards of competent professional practice.

Being professional, thus, means one is required to follow certain pre-defined standards or principles or a code of conduct in one’s practice.

Certain values that are essential for a professional are – responsibility, respect, fairness and honesty.

Professionals need to be Responsible; that is, they should take ownership of decisions made or actions taken or inability to make decisions or take actions.

Professional must Respect themselves and show a high regard to resources entrusted to them, which includes people, money, reputation, the safety of others, and natural or environmental resources. Respect engenders trust, confidence, and performance excellence by fostering mutual cooperation environment where diverse perspectives and views are encouraged and valued.

Professionals must practice Fairness, and be transparent in decision-making and act impartially and objectively. A professional’s conduct must be free from favouritism, prejudice, and competing self-interest. Professional must practice equality in providing access to vital information and providing equal opportunities to qualifying ones.

Lastly, Honesty is non-negotiable for professionals. Honesty aids understanding truth and acting truthfully in communicating and conduct. Professionals must engage with all stakeholders truthfully and timely at all times. Only then they can become trustworthy by developing the trust of those whom they serve. Trust is not only fundamental to effective and successful professional practice but also an obligation to honor the fiduciary commitments attached with the particular profession. Thus, a professional is expected to exhibit ‘an intrinsic knowledge of the difference between right and wrong, show the courage to act upon that knowledge with empathy and respect for others, and the environment.’

Let’s try to understand the professional ethics through one practical scenario. Imagine that you are a lecturer at a central university. You are very popular amongst your students. They adore you as you are very helpful and friendly. You personally know all of your students. One day, during an examination, you see that one of your favorite students is cheating and you feel upset. He is a good student, inquisitive and bright and keeps on coming to you for guidance on the subject. You know that he has lost his father recently and, as a result, he is distracted from studies. You can stop him from cheating but then he would fail in the exam. You can also ignore his cheating. However, the university’s policy against cheating is very strict and categorical. It has zero tolerance for cheating. It also prescribes that the faculty members can exercise no discretion in case of cheating. The Dean is very firm on that the cheating cases should be dealt with ruthlessly and must result either in suspension for a semester or in expulsion.

Now, the questions for reflection are:

• What should you do as a professional?
• What considerations should form the basis of a decision in the given situation?
• In case you decide to ignore the cheating, whether that would be a responsible action on your part as a lecturer? Would that be fair and free from favoritism?
• Does the fact of death of the father of the student mitigate the wrong of his cheating? Would that be a right thing to do as a professional?

If we think through the various ethical questions underpinning the given scenario in an objective manner, we could arrive at adequate clarity on what a professional is truly expected to be.

Cost of Healthcare is Hidden Here!

Healthcare may be understood as the maintenance or improvement of health via the prevention, diagnosis, and treatment of disease, illness, injury, and other physical and mental impairments in human beings. General Practitioners, Clinics, Hospitals are engaged in taking care of the health of people on a continuous basis. Medicine is a valuable profession and societies, world over, offer a great reverence to medical practitioners for their tireless and humane efforts in treating the patients throughout their long careers.

Let us examine a recent incident in some prominent city of India in the healthcare sector, which is relevant to our comprehension of the professional ethics.

A girl child under the age of 10 was admitted to a private hospital in an Indian city for treatment of ordinary viral infection and fever. The hospital stay was for about for two weeks. The child could not survive. Doctors or hospitals may only try their best to treat the patient, they will not guarantee recovery of all patients. Some complications may arise and patient may not get cured or worse, patient may not survive. But the doctors and hospitals must act ethically with all patients at all times.

The lengthy medical bill, provided at the time of leaving the hospital, contained all details of the medicines used, cost of consulting by several specialist doctors, etc. which was prohibitively high. Though the parents cleared the bill, there is a serious doubt for any person in this country that an ordinary viral infection and associated treatment cost so much. The total bill was close to 14 years of per capita income of an average Indian.

While the Union Government and the State Government where the hospital was located ordered for an enquiry, there are some ethical issues and some serious governance issues of the hospital under discussion here.

Firstly, why is there no transparency in the cost of the treatment? The patient’s parents were not indicated anything at the likely bill that they may have to clear for the treatment. Secondly, medicines that were available outside the hospital premises in the pharmacy outlets were not allowed for the patient, and the same medicines with exactly same ingredients were used costing 700 to 800% more per dose. Thirdly, the statement by the hospital was that high-end or state-of-the-art equipment was used as a life-support system to the patient. But the parents of the patient were never informed of the expenses they require to shell out towards the treatment. Are services like healthcare, in the private sector, being misused to the extent of making unjustifiable amount of profits? This is certainly an ethical issue. Also, it is not known whether or not hospitals of repute have in place medically qualified Boards of Directors to oversee such matters, and how is it that they are not taking corrective steps to curb such unethical practices that seriously impair the reputation of the hospital.

Managerial Dimension – In business, ethics deals with the question whether specific business practices are acceptable. In case of managers, business ethics helps in arriving at ethical decision during complex situations. For example: in a sales presentation to a client, should a sales person omit facts about a product’s poor safety records? While auditing a company, should an accountant report inaccuracies discovered by him or her? Such situations put professionals in dilemma, since there is no universally accepted approach to resolve these issues.

In a business environment with intense competition, ethical attitude of managers is of vital importance for a successful organization. Managers must acknowledge their role in shaping organizational ethics and seize this opportunity to create a climate that can strengthen the relationship and reputations on which their companies’ success depends. It is difficult to separate ethics from competition.