The Role of Banks in Sustainable Finance: Evidence from Nigeria

EXECUTIVE SUMMARY Sustainable finance in banking has been a major discuss in recent years as it is generally agreed that the exercise of entrenching social and economic considerations into project finance, going beyond the traditional way of banking that reflects only a sole consideration for financial returns to its shareholders. Hence, the objective of the dissertation will be to understand the responsibilities of banks in sustainable finance development in view of their lending options, decisions, implementation and how it impacts the socioeconomic environment. The dissertation will also showcase the problems faced and the applicable solutions according to literature and research. The theoretical framework used for this exercise was Freeman’s (1984) stakeholder theory applied from a normative approach. The research seeks to answer three fundamental questions which are (i) How sustainable finance impacts the lending rationale of financial institutions? (ii) Why should financial institutions consider long term impact investments over short lasting ones? and (iii) How can financial institutions align their interests with smart green investments? The methodology employed for data collection was through a qualitative approach using interviews. The interviews were carried out on eight experienced bankers who are part of management in their respective organizations. The data was collected and interpreted in a narrative form. Their opinions and understanding about sustainable finance and banking was given and explored to show the current state of adherence by banks, the importance of recognizing sustainability as significant when taking lending decisions and the challenges faced by banks which hinders their role effectively. Carrying along all stakeholders including the role of the regulator was effectively explored and it was observed that the regulators must do more in propagating the concept rather than leaving the primary responsibility alone to banks. The role of banks in sustainable finance is unequivocal, as such it is recommended that banks are supported through additional capital to make funds available for green banking whilst the regulators are also encouraged to amend their policies to ensure banks do not place a major portion of their funds in risk free investments hence starving green banking and hence denying sustainability in the socioeconomic environment.

TABLE OF CONTENTS……………………………..…………………………………......2

 TABLE OF FIGURE………………………………………………………………………...4 TABLES ……………………………………………………………………………………..5 APPENDICIES………………………………………………………………………………5 AKNOWLEDGEMENTS……………………………………………………………………6 EXUCUTVE SUMMARY……………………………………………………………………7 

KEY TO ABBREVIATIONS………………………………………………………………..8 CHAPTER 1: INTRODUCTION……………………………………………………………9 

1.1           INTRODUCTION………………………………………………………………...9

 1.2           BACKGROUND…………………………………………………………………..9 

1.3           A BRIEF REVIEW OF CORPORATE GOVERNANCE…………………….10 

1.3.1          Corporate Governance in Nigeria…………………………………………..10

 1.3.2          Corporate Governance in other Countries………………………………...11

 1.4          SUSTAINABLE FINANCE DEVELOPMENT IN NIGERIA……………….…

1.5          RESEARCH PURPOSE, OBJECTIVES AND APPLIED FRAMEWORK…12

 1.6          SIGNIFICANCE OF THE RESEARCH……………………………….……….13 

1.6.1     DISSERTATION STRUCTURE……………………….………...……………..13 

1.6.2     CONCLUSION………………………...…………………………....……………13 

CHAPTER 2 – LITERATURE REVIEW AND THEORY………………………………14 

2.1         INTRODUCTION………………………………………………………………..14

 2.2         THEORETICAL FRAMEWORK………………………………………………..14 

2.2.1            Stakeholder Theory………………………………………………...……….14 

2.2.2            The Input Out Put Model………………………………………….………..16 

2.2.3            The Stakeholder Model………………………………………….………….17

 2.4         LINK TO RESEACH QUESTIONS…………………………………...………..18 

3  2.5         EMPIRICAL REVIEW…………………………………..…………………….…19 

2.5.1            Issues affecting Sustainable Banking………………………………..……19 

2.5.2            The Role of Banks in Sustainable Finance Banking………………….…19 

2.5.3            The Sustainable Finance Concept………………………………………...23

 2.5.4            Lending Rationale of Financial Institutions………………………….……25

 2.5.5            Long and Short-Term Investment Lending……………………………….25 

2.5.6             Smart Green Investments……………………………………………...….26

 2.5.7             Sustainable Banking Practice………………………………………….….27 

2.6         CONCLUSION…………………………………………………..……………….29 

CHAPTER 3 DATA AND METHODS……………………………………………………30

 3.1         INTRODUCTION…………………………………………………..……….……30 

3.2         METHODOLOGICAL APPROACH……………………………………………30 

3.3         BACKGROUND…………………………………………………………….……30

 3.4         SELECTION CRITERIA……………………………………………………...…31 

3.5         INTERVIEW AND DATA GENERATION METHODS………………….……31 

3.6         DATA ANALYSIS METHODS………………………………………………….33 

3.7         CONCLUSION………………………………………………………………..….33 

CHAPTER 4 ANALYSIS AND RESULTS………………………………………………35 

4.1         INTRODUCTION……………………………………………………………...…35

 4.2         SUSTAINABLE FINANCE: FACTORS, IMPLICATIONS & IMPLEMENTATION...35 

4.2.1            Awareness, Adherence and Dissemination……………………………...35 

4.2.2            Loan Tenor and Ethical Lending…………………………………..………40 

4.2.3            Sustainable Finance Issues and Implementation…………..……………44 

4  4.3         CONCLUSION…………………………………………………………...………48 

CHAPTER 5 DISCUSSION AND CONCLUSION…………………………………...…50 

5.1         INTRODUCTION………………………………………………………….…..…50

 5.2         SUMMARY OF FIDINGS…………………………………………………….…50 

5.2.1            Awareness, Adherence and Dissemination…………………..……….…50

 5.2.2            Loan Tenor and Ethical Lending………………………….…………….…52

 5.2.3            Sustainable Finance and Implementation……………………….……….53

 5.3         THEORETICAL IMPLICATIONS………………………………………………54 

5.4         PRACTICAL IMPLICATIONS…………………………………………..………56

 5.5         LIMITATIONS………………………………………………………………..…..56

 5.6         SUGGESTIONS FOR FUTURE RESEARCH……………………….……….57 

5.7         REFLECTIONS…………………………………………………………………..57 

5.8         

CONCLUSION……………………………………………………………...……58 REFERENCES……………………………………………………………………………..59 APPENDICES…………………………………………………………...…………………69

TABLE OF FIGURES

FIGURE 1: Stakeholder composition…………………………………………………….14

FIGURE 2: Aspects of stakeholder theory………………………………………………16 FIGURE 3: Contrasting Models of the Corporation, Input-Output Model…………….17 FIGURE 4: Contrasting Models of the Corporation: The Stakeholder Model…….....17 FIGURE 5: Rise of Sustainability Awareness through Newspaper Articles………..22 FIGURE 6: A Typology of Banking and Sustainable Development…………………22 FIGURE 7: Sustainable Banking Model for Implementation of the Nigerian………..29 

5  TABLES TABLE 1: Comparison of Participating Banks – All Currencies in Naira ……………32 TABLE 2: Categorization of Potential E&S Risks for Lending Purposes…………….37 TABLE 3: Loan Tenor and Potential Level of Exposure To E&S Risk…………….…43 TABLE 4: Sample of E&S checklist template…………………………………………..46

APPENDICES  APPENDIX I:  Participation Information Sheet………………………………………....69

APPENDIX II:  Participant Informed Consent Form…………………………………....71

APPENDIX III: Organization Informed Consent Form ………………………………...72

APPENDIX IV:  Interview Guide ………………………………………………………....73

APPENDIX V: Sample Transcript ……………………………………………………….75             

6