Discontent is on the rise among Western banking customers faced with abuses such as Libor rigging, mis-selling of financial products, hidden trading losses and sloppy anti-money laundering, writes Paul McNamara
As the conventional financial system takes blows to its credibility, the question arises whether there is a better financial system waiting to be found.
Many believe the answer lies in some form of ethical finance with a philosophy that is underpinned by moral tenets or religious beliefs. While Islamic finance scores highest in this area in terms of the number of headlines it secures, other religious groups can find themselves in lockstep with these same views.
Ethical finance encompasses a wide range of issues from sustainability to firearms, exploitation of people and resources to environmental concerns. Investors who require an ethical overlay to their money management want to look after the world they live in and this can mean investing in companies which have business models that are sustainable in an ecological, social, economic and political way.
Islamic finance, through its investment filters, provides one means of doing so. In 2009, the Vatican's official voice piece, the newspaper L'Osservatore Romano, came out in favour of Sharia financing saying: "The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service."
In the UK, there has been a push towards ethical finance. Campaigns, such as Move Your Money, launched last year urging consumers to shift funds from mainstream banks to ethical alternatives.
Graham Burnside, partner and chairman of law firm Tods Murray and a board member of the Islamic Finance Council UK, points to the growth of the Co-operative Bank, which saw primary current accounts increase 8.2 per cent last year, as a sign that things are moving in an ethical direction.
The emergence of Triodos Bank, the self-proclaimed "world's leading sustainable bank", may also hint at what the future holds in store. Triodos posted a 31 per cent rise in 2012 net profits and a 23 per cent rise in its customer base in the year. Such growth may be impressive, but it is coming off a very low base.
Mr Burnside suggests that while there is some "thought and discussion around other faith-based finance initiatives" in the UK - the Church of Scotland has a committee devoted to it, for instance - "it is still some way from turning into an offering in the market".
For ethical finance to take firm root, it must appear to be as competitive as conventional finance.
Customers, after all, may not be willing to pay a premium for their beliefs. However, for investors cynical about the cash value of "doing the right thing", a quick look at the DAXglobal Sarasin Sustainability Germany Index, which tracks German and Swiss companies that meet sustainability criteria, should give pause for thought. The index has been known to outperform the DAX index by 100 per cent over extended periods.
In many markets, Islamic banks are very keen to promote that they are open to non-Muslims and Muslims alike. Indeed, in Malaysia it is not uncommon for an Islamic retail bank to have more Chinese non-Muslim customers than Muslims.
Throughout the Gulf, many Islamic banks focus their promotional message on the fact that their roots are in ethical finance first and foremost. "The ethos of Islamic finance is universal and is really coming to the fore of how people want to conduct business," says Saadat Khan, chief executive of Sharia-compliant firm Ethical Asset Management. "If we take away the Islamic finance label and present it as ethical financing, which is what it is, there is a lot of demand."
This article was originally featured in Raconteur's special report on 'Islamic Finance' which published in The Times newspaper on April 16, 2013.
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