Ethical Leadership in Banking Sector

  6 min 11 sec to read
Ethical Leadership in Banking Sector

BY Roshan Pant

Ethical leadership is about guiding and inspiring people through principled actions and values that consistently align with what is perceived as right. It means that business leaders should exhibit ethical behaviour in all their professional and personal lives which are based on shared principles and ethics. This style of leadership approach is derived from a deep understanding of the importance of adhering to specific moral standards.

In the banking industry, ethical leadership is highly significant for several reasons. First, trust forms the basis for this because banks look after people’s finances and future safety. Leaders have to make ethical choices in order to ensure fair treatment, transparency, as well as responsible risk management. If trust breaks down it can have devastating consequences both at individual level and to the wider financial system. Secondly, the banking sector operates within a framework of strict rules and regulations with an aim to uphold ethical conduct and to avert financial crises. Ethical leaders ensure adherence to these regulations which reduce legal pitfalls while promoting stability in the financial landscape.

Third, the public, media and customers are constantly questioning the activities of banks. Ethical leaders play a crucial role in reducing scandals by promoting a positive image of ethical banking and creating belief in the stakeholders. Fourth, ethical leaders are also role models for their employees. By prioritising ethics, they foster a culture of integrity which reduces the likelihood of fraudulent or unethical behaviour within the organisation.

Lastly, ethical leadership benefits the customer as well. It nurtures trustworthiness, faithfulness and conviction by ensuring equity, openness and prudent risk management. This makes clients feel more secure and helps promote strong relationships and brand loyalty. In times of difficulties, banks led by ethical leaders can overcome such challenges while rebuilding trust and minimising damages. In essence, ethical leadership is about upholding high levels of integrity through adherence to regulations, prioritising wellbeing of customers, responsible risk management as well as making positive contributions to society.

Nepal lacks specific laws and regulations solely focused on ethical leadership. The principles, however, are ingrained within the constitutional framework and various legal statutes. The preamble of the Constitution of Nepal, 2015, underscores the importance of public accountability and transparency, while provisions within fundamental rights foster an environment supportive of ethical leadership. Sector-specific legislations, such as the Civil Service Act and Good Governance Act, have laid down standards for public servants and governmental operations. The Commission for the Investigation of Abuse of Authority (CIAA) Act serves as a deterrent against corrupt practices. Moreover, Nepal's adherence to international agreements like the UN Convention against Corruption further promotes ethical conduct.

Ethical leadership is about upholding high levels of integrity through adherence to regulations, prioritising wellbeing of customers, responsible risk management as well as making positive contributions to society.

The Companies Act, 2006, serves as the foundation for corporate governance in Nepal, emphasising ethical standards and the protection of stakeholder interests. Additionally, the Civil Contract Act, 2020, guides financial transactions by emphasising principles of good faith and equitable dealing. Sector-specific regulations such as the Bank and Financial Institutions Act, Anti-Money Laundering Act, and Banking Offences and Punishment Act, play a vital role in ensuring sound corporate governance, fair banking practices, and effective risk management. Nepal Rastra Bank (NRB) issues directives about crucial aspects such as Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols on a regular basis. NRB’s supervisory actions, legal remedies for aggrieved parties against defaulters in banking sector as well as professional sanctions against errant bankers are some of the enforcement mechanisms

In Nepal, there are growing concerns about ethical leadership in the banking sector because of issues like corruption and fraud. Instances of loan scandals and opacity in loan processes have amplified public dissatisfaction. In this climate, ethical leaders within Nepali banking sector must tackle these hurdles by advocating for transparent practices and adherence to regulatory standards.

Core tenets of ethical leadership in banking:

Integrity: Demonstrating honesty and truthfulness in all interactions, whether internal or external.

Fairness: Treating customers, employees, and stakeholders with dignity and justice.

Transparency: Maintaining openness and clarity regarding the bank's operations, policies, and risks.

Accountability: Assuming responsibility for one's actions and decisions.

Sustainability: Evaluating the long-term ramifications of the bank's operations on both the environment and society.

Why is ethical leadership crucial?

The banking sector relies heavily on trust which can be swiftly undermined by unethical conduct, including fraud or insider trading. Ethical leadership is therefore indispensable for preserving public trust in the banking industry. Moreover, it offers numerous additional advantages, including:

● Combating Fraud and corruption.

● Promoting financial inclusion, ensuring equitable access to financial services across all societal segments without exploitation.

● Establishing and sustaining trust with customers through fair lending practices, transparent fee structures, and candid communication.

● Boosting employee morale and engagement.

● Mitigating the risk of legal and regulatory issues by adhering to regulatory standards and ethical guidelines.

● Enhancing brand reputation.

● Achieving stronger financial performance.

Challenges of implementing ethical leadership:

● Managing conflict of interest among stakeholders effectively.

● Limited significance of ethical leadership at the top management level.

● Transitioning from a profit-centric mindset to one centred on ethical conduct and unwavering leadership commitment to underscore the importance of ethical practices.

● Rebuilding public confidence in the banking sector post previous scandals.

● External pressures from politicians or influential figures to partake in unethical behaviours.

● Traditional business customs in Nepal, such as nepotism and favouritism, may contradict ethical leadership principles.

How can Banks foster ethical leadership?

Banks can undertake various initiatives to cultivate ethical leadership, including:

● Formulating and enforcing robust ethical codes, adhering to existing regulations, and furnishing concise directives for ethical decision-making.

● Establishing a comprehensive code of ethics and ensuring all staff members are well-versed in its principles.

● Providing ethics training for employees.

● Cultivating a culture of open communication, encouraging staff to voice any concerns regarding unethical conduct.

● Holding leaders accountable for their actions and choices.

● Cultivating a workplace environment that acknowledges and rewards ethical behaviour, advocating for fairness and transparency in all operations.

In conclusion, ethical leadership moves beyond virtue in the banking sector as a strong force for success. By putting ethical behaviour at the forefront, banks can promote an atmosphere of trust among workers and confidence among clients as well, ensuring the long-term development and stability of both the institution and the broader financial system. It serves as a win-win situation for not only banks but also individuals and society in general. A concerted effort from regulators, banking institutions, and individual leaders alike are a must to addressing these aforementioned issues and challenges. By prioritising ethical conduct and establishing a strong ethical culture, the Nepali banking sector can fortify trust, bolster its reputation, and actively contribute to sustainable economic development. 

(Pant is an Assistant Manager at Rastriya Banijya Bank.)

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