Three Ways Financial Institutions Can Stay Ethical

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Central Bank of Kenya Governor Patrick Njoroge Photographer: Luis Tato/Bloomberg

Central Bank of Kenya Governor Patrick Njoroge Photographer: Luis Tato/Bloomberg

Ethics is not a financial term and conjures up different images and responses by for different people and different responses. Some in the audience may be thinking: of course, my institution is highly ethical—we have rules! Our legal team always ensures that we comply with all laws and regulations! We won a governance award the other day!

Our values are printed and displayed in our headquarters! Our email signature tells the world that we are guided by good principles! Even more, we are renowned for training our staff rigorously on our code of conduct!

While all these may be related to the core message of raising our ethical standards, I believe there is a need to think deeper, dig deeper, and be more earnest on this matter.

While the business of defining ethics can be left to philosophers, we can agree on the more pedestrian description given by the renowned American humanist Aldo Leopold: “Ethical behavior is doing the right thing when no one else is watching even when doing the wrong thing is legal.”

Many of you may be wondering why laws cannot be put in place to prevent unethical behaviour once and for all. Wonder no more—life is more complex than rules. Misconduct happens first and laws are passed later—as we have seen elsewhere, innovation generally goes ahead of regulation.

There is, therefore, a need for something else besides a set of rules to control the behaviour of people and institutions: we need to understand
and pursue ethical values. A lot has been said about this in the aftermath of the global financial crisis.1 Let me touch on three areas for your reflection.


First, institutions need to develop a responsible corporate culture that entrenches proper market conduct.

A culture that goes beyond neat slogans to actually being the guiding force that leads to ethical behaviour and ethical outcomes.
You may say the right thing on your corporate culture statements and governance code of conduct declarations, but if your employees know and are told day after day that profit is the only motive, they will behave accordingly.

If they notice that customer needs to take second place to corporate profit, nothing stops them from treating customers in a similar fashion—badly—in pursuit of expanding the bottom line.

If they see rules bent, and notice that the most ruthless are the ones who get the pat on the back, the promotion and, ultimately, the corner office, they will behave in ways that show the greatest rule-breaking and ruthlessness.

The banking sector’s role in economic development calls for a balance between the pursuit of economic profit and serving the community in an environment of shared prosperity.

When financial institutions start to embrace excessive risk and questionable practices, they stop performing their ethical-social function, which is necessary for society’s prosperity.

Codes of Conduct by players or industry associations should include relevant aspects of the ethical behaviour of all stakeholders including employees, customers, suppliers and competitors, local communities, and owners. Each of these stakeholders plays a role in the success or failure of their institutions.


Second, transparency is at the centre of ethical behaviour.

All relevant information must be explained even if it is more than what is required by law.

Over the years, customers have complained about the lack of transparency in the pricing of products and services by banks. I acknowledge you are making positive steps in this area, but much more remains to be done.

This is particularly in the area of credit risk pricing. Customers need to be clear on what their credit reference record means for them in the pricing of credit.

Beyond product pricing, you need to be transparent on your governance, business models and risk and reward trade-offs particularly in respect to compensation policies. And this cannot be driven by enforcement by the regulator. You, the people in this room, must be the ones to go above and beyond the strict interpretation of transparency rules.


Third, compliance without integrity is futile.

Compliance with codes of conduct and other means of self-regulation are good. But this is only useful when the focus is on a shared mentality of integrity that goes beyond mere compliance.

The mentality of “we comply” for compliance’s sake cannot sustain a business for long. I remind you of another anniversary, but this one of a much more recent event. Two weeks ago yesterday, we informed the Kenyan people of the action we took against some of you because of non-compliance with integrity laws.

Make no mistake – it was not easy. We considered all the possible negative outcomes that could be triggered by those actions. Ultimately, however, we did not hesitate, and would not hesitate to do it again, under similar circumstances. Banks must steer away from being used as conduits for ill-gotten funds. The Kenyan people – Wanjiku – demand that of us, and will treat us very unkindly, were we to look the other way.

The reason why there is such palpable disappointment – I dare say it extends to anger – from the ordinary citizen to you in this room is exactly that. Wanjiku feels that her banker prefers expediency to empathy. She feels that her banker would rather hunt for a loophole than show leadership. Would rather seek supernormal profit than search for solutions.

The old adage about the banker asking for their umbrella back when it starts raining may have been funny once, but not when the rain is this heavy, and when Wanjiku already has a flu.

So I ask you to reflect on your work, and your conduct. As Kenyans, we would rather watch with pride, and gasp in admiration, when Eliud Kipchoge becomes the fastest marathoner in history than wonder anxiously whether our banker will be with us in the long haul. We would rather spend our energy thinking of ways to increase and share our prosperity than despairing about whether we are all in this together.

We must do better. We must be the guiding light for the banking and financial sector and for this great country we all call home. This would be very easy if we all insist on ethical practices and putting Wanjiku before anything else.

I want to finish with an idea that is attributed to the philosopher Immanuel Kant: “May you act so that the principle of action might safely be made a law for the whole world.” Had this advice been heeded in the run-up to 2007, the Global Financial crisis would have been averted.

The Queen of England would also not have asked the professors at the London School of Economics in November 2008: “If the [antecedent of the global financial crisis] was this bad, why did nobody notice it?

Dr. Patrick Njoroge, Governor, Central Bank of Kenya. Part of his Keynote Address when he officially opened the7th KBA Annual Banking Conference.

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