The SME sector comprises about 90% of businesses in Malaysia but contributes less than 35% of the country’s GDP.
Rizal Il-Ehzan Fadil Azim, Alliance Islamic BankSMEs emerge as key mechanisms for social upliftment and financial inclusion.
Environmental concerns have dominated the ESG policies of big global banks but regional and local lenders are increasingly turning their attention to urgent social challenges. In many developing economies, second-tier banks are at the forefront of efforts to support and uplift poor communities.
Alliance Bank Malaysia, for example, is running an economic empowerment program that has given funding and training to more than 600 small businesses. Associate firm Alliance Islamic Bank is managing the distribution of zakat contributions (tithes) to support micro enterprises. In Morocco, Bank of Africa has taught 5,000 entrepreneurs how to better manage their businesses while Odeabank in Turkey is helping a variety of SMEs improve their energy efficiency. All of these banks have identified SMEs as a key mechanism for social upliftment and financial inclusion.
The rise of purpose-driven banking, which promotes social well-being as well as the interests of traditional stakeholders, is shaping the development of financial services across much of the world. And it’s prompting banks in many countries to take another look at their ESG strategies and their business objectives.
“What we do is not purely for commercial reasons. It’s also for humanistic reasons, to improve society, to improve income levels, and to improve the general welfare and wellbeing of the community,” says Rizal Il-Ehzan Fadil Azim, CEO at Alliance Islamic Bank.
In Morocco, 40% of people who are 15 to 25 years old are not in employment, training or school.
Mamoun Tahri-Joutei, Bank of AfricaAzim is responsible for sustainability initiatives at Alliance Islamic Bank and its associate Alliance Bank Malaysia. He was one of four bank executives who shared their insights into recent developments in purpose-driven banking at an online event organized by Qorus’ ESG Community. The others were Roy Heong, head of strategic partnerships and innovation at Alliance Bank Malaysia, Mamoun Tahri-Joutei, head of business intelligence and sustainability at Bank of Africa, and Burcu Akin Öztemel, head of financial inclusion, funding and sustainability at Odeabank.
All the key speakers at the Qorus event stressed their company’s growing commitment to purpose-driven banking. And their enthusiasm for purpose-driven banking was matched by many of the other banking executives who participated in the online event. When polled about what bold steps financial institutions could take to drive their social impact and bolster long-term sustainability, most participants backed a radical rethink of banking models to prioritize financial inclusion over profitability. That’s a substantial shift from the perspective of leaders in the banking industry just a few years ago and it indicates a growing concern about the economic inequality that is entrenched across much of the world. Greater commitment to carbon-neutral objectives and sustainable finance was the second choice in the poll.
Social concerns appear to be eclipsing environmental issues on many banks’ ESG agendas. A further poll showed that 81% of bank executives doubt that the global financial system will reach its 2050 Net Zero goals. The remainder were somewhat confident. None were very confident.
Azim says concerns for community wellbeing have only become integrated into the core business strategies of the Alliance Bank group (which comprises Alliance Islamic Bank and Alliance Bank Malaysia) in the past three years. Before then, the bank’s approach, like that of many of its peers, was to confine such concerns to corporate social responsibility programs on the fringes of the organization.
“We were running a business that was our mainstream activity while on the periphery we were doing work within the community that might, or might not, have related back to the business.”
In Turkey, banks are in the driving seat. They are driving companies’ compliance with the rules set by the local regulator and they’re driving the transformation businesses need to undertake to be exporters to Europe.
Burcu Akin Öztemel, OdeabankAzim points to five drivers that moved Alliance Bank away from addressing social needs through corporate social responsibility programs to instead integrating such initiatives in a purpose-driven banking strategy that advances its ESG goals.
• Increased accountability – ESG provides more transparent and measurable metrics.
• Investor demands – Investors want clearer insight into a company’s social and environmental impact.
• Regulatory pressure – Governments and regulators are mandating ESG disclosures.
• Business integration – ESG metrics require companies to integrate environmental, social and governance concerns into their core operations and strategic planning.
• Financial performance – ESG initiatives can improve a company’s long-term financial performance by reducing its exposure to environmental, social and governance risk.
Most of the social initiatives launched by Alliance Bank as part of its purpose-driven banking strategy support small businesses and entrepreneurs.
“Our business is mostly focused on SMEs. The SME sector comprises about 90% of businesses in Malaysia but contributes less than 35% of the country’s GDP. Our goal is to help increase this contribution and encourage a wider and much fairer distribution of wealth.”
Bank of Africa and Odeabank have adopted a similar approach. They are supporting SMEs and microbusinesses in an effort to improve the economic wellbeing of previously underserved members of the community and to increase access to financial services.
Tahri-Joutei at Bank of Africa adds that in countries such as Morocco, which have high employment, SMEs are also a vital mechanism for job creation.
“In Morocco, 40% of people who are 15 to 25 years old are not in employment, training or school.”
Bank of Africa runs an incubator for early-stage SMEs, promotes competitions that encourage emerging entrepreneurs and plans to launch a training program this year that will equip up to 300 young people with the skills they need to secure employment.
“In Turkey, banks are in the driving seat. They are driving companies’ compliance with the rules set by the local regulator and they’re driving the transformation businesses need to undertake to be exporters to Europe.” -
While social concerns feature prominently in the purpose-driven banking strategies of Alliance Bank, Bank of Africa and Odeabank, all three institutions are also engaged in extensive environmental initiatives. Again, they’re all using SMEs to spearhead many of these endeavors. Alliance Bank, for example, is working with the UN Global Compact Network to help SMEs improve their sustainability, Bank of Africa is setting up advisory services that will help small businesses reduce their carbon output and Odeabank offers a variety of green finance products that encourage SMEs to become more sustainable.
Many businesses in Morocco and Turkey are under pressure to improve their environmental sustainability because they export to the EU. Odeabank’s Öztemel points out that banks have a key role in helping exporters comply with the EU’s ESG requirements.
Öztemel expects greater co-operation between banks and government agencies in Turkey to help local companies comply with domestic and international ESG regulations.
Partnerships between the private and public sectors looks set to become a key feature of purpose-driven banking initiatives across many parts of the world. Alliance Bank, Bank of Africa and Odeabank are already working closely with local government agencies.
Throughout much of the world, banks are recognizing their responsibilities to uplift the social and environmental contexts in which they operate. And their efforts to improve the wellbeing of local communities and their surroundings are often at the heart of their businesses rather than affixed to fringes. Through their support of SMEs, in particular, purpose-driven banking initiatives have already improved the wellbeing of many people previously excluded from financial services and helped numerous small businesses start to become more environmentally aware and sustainable. Closer ties with local government agencies, especially in developing economies, will enable institutions to further improve the effectiveness of their purpose-driven banking programs and allow them to make greater strides in their quests to support communities, increase financial inclusion and fuel economic growth.
