Ethical Lending for Better Loan Performance: A Case for Utilitarianism in Commercial Banks
DOI:
https://doi.org/10.53819/81018102t2271Abstract
The purpose of this study was to determine the effect of the ethics of credit officers on the level of loan quality and hence the performance loans in a commercial bank at the branch level. The study followed a positivist philosophy and a cross-sectional survey research design. Based on Slovin (1960), the study targeted 310 branches out of 1,384 population branches from 43 licensed commercial banks in Kenya. Lending ethics are measured using a score mimicking the Sustainalytics for Responsible Investment Services (SRIS) criteria for measuring the ethics indices. Loan performance was the five-year average of percentage-performing loans for a branch. Ordinary Least Square results (R=0.211; R-Square =0.044) confirmed a weak, positive relationship between lending ethics and loan performance. The ANOVA of the model was significant and (the coefficient=0.237; significant value=0.000) confirmed the positive relationship, which is statistically significant at 0.05 level of significance. It implies that bank branches or lenders who inculcate ethical lending can achieve higher loan recoverability. The results may not be generalisable in all contexts. Further testing of the relationship is needed in different contexts, including comparative analysis of bank strata and other lending institutions for inferential tests. However, the study provides a sound input on the issue of ethics in lending. The silence in research on the significance of lending ethics, loan quality, and credit market performance is incongruous with the potential damage of financial markets when messaging on the essence of ethics is relaxed. The paper provides implications for lenders to develop mechanisms to raise the bar on the ethics of their credit officers. Lenders should be blamed for internal causes of credit non-performance. But they can overcome the blame by overcoming the clash of the morals of their staffs and agents with the banks concept of ethics. Emphasis on utilitarianism, so that their officers focus is optimal lending by maximizing common good, and not individual gains can help. This paper fills the gap on why ethics at the specific point of lending need to be emphasised and enhanced to increase loan performance for a thriving, sustainable credit markets.
Key Terms: Lending Ethics, Loan Performance, Commercial Bank Branches
References
Agarwal, S., & Ben-David, I. (2018). Loan prospecting and the loss of soft information. Journal of Financial Economics. 107(4), 44-51
Akerlof, J. (1970). The market for 'Lemons': Quality uncertainty and the market mechanism. Quarterly Journal of Economics 84(1), 353–374.
Akerlof, G. Spence, M. & Stiglitz, J. (2001). Markets with asymmetric information. Royal Swedish Academy of Sciences, Stockholm.
Baruch, Y., & Holtom, B. C. (2008). Survey response rate levels and trends in organisational research. Human relations, 61(8), 1139-1160.
Bentham, J. (1996). The collected works of Jeremy Bentham: An introduction to the principles of morals and legislation. Clarendon Press, Oxford.
Berg, T., Puri, M. & Rocholl, J. (2013). Loan officer incentives and the limits of hard information. National Bureau of Economic Research. Washington, DC.
Bermpei, T., Kalyvas, A. N., & Leonida, L. (2021). Local public corruption and bank lending activity in the United States. Journal of Business Ethics, 171(1), 73-98.
Blake, K. (2009). Pleasures of Benthamism: Victorian literature, utility, political economy. OUP Oxford.
CBK (2017). Commercial Banks' Credit Survey April - June 2017. Central Bank of Kenya, Nairobi.
CBK (2018). Directory of licensed commercial banks, mortgage finance institutions and authorised non-operating Holding Companies. Central Bank of Kenya, Nairobi.
Clouser, K. D., & Gert, B. (1990). A critique of principlism. The Journal of Medicine and Philosophy, 15(2), 219-236.
Cole, S., Kanz, M. & Klapper, L. (2015). Incentivising calculated risk‐taking: evidence from an experiment with commercial bank loan officers. The Journal of Finance, 70(2), 537-575.
Cooper, D. R., Schindler, P. S., & Sun, J. (2006). Business research methods (Vol. 9, pp. 1-744). New York: McGraw-Hill.
Cytonn Report (2018). Kenya Listed Banks H1'2018 report & Cytonn weekly 36/2018 updates. Cytonn, Nairobi.
Ertan, A., Loumioti, M., & Wittenberg‐Moerman, R. (2017). Enhancing loan quality through transparency: Evidence from the European Central Bank loan level reporting initiative. Journal of Accounting Research, 55(4), 877-918.
Fan, W., & Yan, Z. (2010). Factors affecting response rates of the web survey: A systematic review. Computers in Human Behavior, 26(2), 132-139.
Heider, F., & Inderst, R. (2012). Loan prospecting. The Review of Financial Studies, 25(8), 2381-2415.
Johnstone, S., Saridakis, G., & Wilkinson, A. (2019). The global financial crisis, work, and employment: Ten years on. Economic and Industrial Democracy, 40(3), 455-468.
Kim, M., Surroca, J., & Tribó, J. A. (2014). Impact of ethical behavior on syndicated loan rates. Journal of Banking & Finance, 38, 122-144.
Kothari, C. R. (2004). Research methodology: Methods and techniques. New Age International.
La Porta, R., Lopez-de-Silanes, F., & Zamarripa, G. (2003). Related Lending. The Quarterly Journal of Economics, 118(1), 231-268.
Mill, J. S. & Bentham, J. (1987). Utilitarianism and other essays. London: Penguin.
Murfin, J. (2012). The supply‐side determinants of loan contract strictness. The Journal of Finance, 67(5), 1565-1601.
Phillips, K. (2009). Bad Money: Reckless Finance, failed politics, and the global crisis of American capitalism. Penguin: London.
Posner, R. A. (1979). Utilitarianism, economics, and legal theory. The Journal of Legal Studies, 8(1), 103-140.
Saunders, M., Lewis, P. & Thornhill, A. (2012). Research methods for business students, 6th edition. Pearson Education Limited: London.
Shah, A. (2013). Global financial crisis. Global Issues. Global Issues: social, political, economic, and environmental issues that affect us all Global Issues.
Schoen, E. J. (2017). The 2007–2009 financial crisis: An erosion of ethics: A case study. Journal of Business Ethics, 146(4), 805-830.
Slovin, E. (1960). Slovin's formula for sampling technique. Retrieved on April 25, 2018.
Tzioumis, K. & Gee, M. (2013). Nonlinear incentives and mortgage officers' decisions. Journal of Financial Economics, 107(2), 436-453.
Yunus, M. (2007). Banker to the poor: Micro-lending and the battle against world poverty. Public Affairs.