THE IMPACT OF ETHICS AND

PROFESSIONALISM IN BANKING
INDUSTRY
Mar 6, 2016
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ABSTRACT

Ethics is concerned with the code of values and principles that

enables a person to choose between right and wrong, and therefore,
select from alternative courses of action. In recent past the banking
industry specifically the deposit money banks have witnessed
insider abuse, frauds, greed, poor internal controls etc and has led
to CB intervention. These acts resulted from unethical behviour from
employees and management. The focus of this study is to
investigate the impact of ethics and professionalism in the banking
sector  .

This study was basically  performed  on Nigerian

Banks,  however   from my persoanl expereince i have to agree it
applies on most  banks in the middle east as well .
It was found that unethical behaviour is responsible for distress in
banks. The sanctions for unethical/unprofessional conducts appear
to be too weak. therefore is  it recommend the need to promote
greater awareness of Ethics and the Code of Ethics in the  Banking
Industry, as this is the best way of promoting ethical behaviour. To
curb distress in banks, the Regulatory Authorities should ensure that
penalties and stiff sanctions are imposed on banks for unethical
practices and for outright violation of rules and regulations sufficient
to deter such violations and discourage unethical behaviors in
future. Key words: Deposit, transfer , money , banks, Ethics,
Professionalism

1.1 BACKGROUND TO THE STUDY

Banks play multifarious roles which include acting as financial
intermediary between the surplus generating units and the deficit
spending ones. As Oghojafor et al. (2010) explained, “The banking
industry plays a major intermediation role in an economy by
mobilizing savings from surplus units and channeling these funds to
the deficit units, in particular private enterprises, for the purpose of
expanding their production capacities”. It is important to note that
through the intermediation function that banks not only earn the
volume of their income by way of interest margin but also pay out
returns to savers, compensating them for the opportunity cost of
their money. Therefore, if any bank is unable to recover the funds it
lends out, its own existence as a going concern would be
undermined. This will also impair a bank‟s ability to meet the
withdrawal needs of depositors. Consequently for any bank to
perform very well in its operation, certain issue need to be
addressed especially in the areas of ethics and professionalism.
According to Haslinda et al (2009) “Business ethics is a study of
business activities, decisions and situations where the rights and
wrongs are addressed; it is a form of applied ethics that studies
rules and principles within a commercial context and any obligations
that apply to persons who are involved in commerce”.
Professionalism is an important part of managing any business.
Professional employees enhance the image of the business, help
employees deal well with customers, and will help the business grow
and succeed. In the banking industry, professionalism becomes
even more important due to the complex aspects of the business.
Promoting professionalism in banking involves training and coaching
employees on the various areas important to the industry. The
Chartered Institute of bankers  and Central Banks  play important
roles in training and re-training of employees in the  Banking
Industry. The question often asked is whether training of employees
has led to the desired impact on the  banking industry. . However,
the phenomenal increase in the number of banks heightened
competition amongst the banks. The stiff competition for customers
and deposits led to sharp unethical practices leading to the distress
in some of the banks. “fraudulent financial practices seem to be part
of an „enterprise culture‟ that persuades many to believe that
„bending the rules‟ for personal gain is evidence of business
acumen”. This attitude has led to the distress of banks in , which
brought about the desire to introduce a Code of Ethics and
Professionalism in the industry to stop the detracting menace and
also to sanitize the industry. Banks are not only expected to operate
professionally but ethically so that the general public would have
confidence in the system It is generally acceptable that any
organization either charitable or non charitable must have set down
rules and regulations guiding her operations otherwise anarchy will
be the order of the organization‟s operations. The problem is that
banking business is becoming more complex and the borderline
between what is legitimate and illegitimate becomes more blurred.
This adds to the need for banks to adhere to a strong set of values
to guide them when they are faced with decisions regarding ethical
issues. Hortacsu and Ozkan-Gunay (2004) however argued that
“ethical and professional values are still not firmly entrenched and
followed in the banking system. Many banks are associated with
accepting bribes in return for loans, lending to connected parties
and cheating customers”. More so, an ordinary bank customer does
not have the opportunity and adequate knowledge to understand
banking transactions, which is a requirement of the ethics of
disclosure in banking business (Freckle and Lurie, 2003). According
to Ahmad (2004), “The mad rush by banks to meet the  capital base
requirements  created a series of unethical and sharp practices in
the industry . Banks  are engaged in the unethical and
unprofessional behavior of de-marketing other banks through false
information and unfounded rumor. The publication is a further
confirmation of the unscrupulous, unprofessional and unethical
behaviors and attitude that had bedeviled the  banking sector in the
recent years. 

2.1 REVIEW OF RELATED LITERATURE/THEORETICAL FRAMEWORK

Francis (2010) analyzed the functions of the banking system to
include but not limited to: the development, administration and
implementation of monetary policies that ensure stability in the
economy; the provision and management of financial resources and
services to the society in order to drive economic activities; the
provision, management and storage of instruments of negotiation
and exchange; the mobilization of financial resources from locations
where they are least needed to where they are most needed; and
the provision of information technology driven systems and
platforms to support economic activities within and beyond the
borders that if these functions are efficiently carried out, the
economy would be able to mobilize meaningful level of savings and
channel these funds in an efficient and effective manner to ensure
that no viable project is frustrated due to lack of funds ,

Smith and Smith, (2002) defines

, which evaluates the values, norms and rules that constitute the
base for individual and social relationships, from a moral
perspective. Kumar (2007) explained that “Ethics is concerned with
the code of values and principles that enables a person to choose
between right and wrong, and therefore, select from alternative
courses of action”. The Webster Dictionary (1913) defines ethics as
“The science of human duty; the body of rules of duty drawn from
this science; a particular system of principles and rules concerning
duty, whether true or false; rules of practice in respect to a single
class of human actions; as political or social ethics; medical ethics”.
Erondu et al (2004) hold that the study of “ethics” focuses on issues
of practical decision making, including the nature of ultimate value,
and standards by which a human action can be judged right or
wrong, good or bad.

Erondu et al (2004) hold that the study of ethics focuses on issues of

practical decision making, including the nature of ultimate value,
and standards by which a human action can be judged right or
wrong, good or bad. For Nnadi (2006), ethics applies to any system
or theory of moral values or principles. For Beauchamp and Bowie
(2001), ethics is the general term referring to both moral beliefs and
ethical theory on human conduct. Jelena (2007) posited that the
subject of business ethics (collective or business /ethics) is the effect
of the social nature of morality, and the feedback effect of business
morality on the business environment. Business ethics helps us to
identify benefits and problems associated with ethical issues within
the firm and business ethics is important as it gives us a new light
into present and traditional view of ethics (Crane and Matten, 2007).
Nilsson and Westerberg (1997) hold that ethics and business not
only can, but must go together, for to do business without concern
to ethics is the surest way to fail.

Bowie (2001) and Egels-Zandén et al (2010) attest to the necessity

of ethics in business communities and practices. For them, business
ethics is about how the nature of business is understood as a
morally compelling domain of human activity. Given that business
activities (e.g. banking) play major roles in any society, people
within a society expect that organizations and firms (businesses) will
accept their roles as “citizens” and that these businesses will
behave as good citizens, i.e. they will behave ethically. Bowie (2001)
emphasizes this when he says, “if business ethics is a fad, it is a fad
that has lasted for over thirty years and one that continues to have
resilience”. To Ahmed (2003), business ethics is a form of applied
ethics that examines rules and principles within a commercial
context; the various moral or ethical problems that can arise in a
business setting; and any special duties or obligations that apply to
persons who are engaged in commerce. Technically, philosophers
would divide ethics into branches: meta-ethics, normative ethics and
applied ethics. Normative ethics is the branch concerned with the
issues which largely have to do with the notion of moral obligation.
Meta-ethics is the most amorphous of the areas of ethics. Meta-
ethics is a branch of analytic philosophy that explores the status,
foundations, and scope of moral values, properties, and words.
Meta-ethics focuses on what morality itself is, meta-ethical positions
may be divided according to the way we respond to questions such
as, what exactly are people doing when they use moral words such
as “good” and “right”?. This branch of ethics tries to apply ethical
theories to “real situations‟ it is sub categorized into -Professional
Ethics which is generally a branch of applied ethics that focuses on
the actions of people within a certain profession.

Profession and Professional

According to Ali (2005), professional ethics are the moral standards,
principles and regulations that guide the course of professional
behaviour. Professional ethics are both individual and institutional in
nature and it can be learned during the course of study of the
profession. Professional ethics also rely upon one‟s own personal
sense of moral behaviour and judgment. It goes on to state that a
professional strives to exceed the level of excellence required by
law or commercial interests. Business professionalism isn't just
about making money and impressing people. It also involves
fundamental values of integrity, commitment and respect for
oneself and the wider community. Idolohor (2010) points out that
Professional ethics are the moral standards, principles, and
regulations that guide the course of professional behaviour.
Professional ethics are both individual and institutional in nature.
Professional ethics can be learnt during the course of study of the
profession. Professional ethics also rely upon one‟s personal moral
behaviour and judgment According to Sanusi (2003), the
professional character has at least two components which are to
master and practice the expertise of the profession to the highest
level of competence the individual can manage. The external
standards require minimum or adequate competence. The internal
standards of a professional aspire to the highest possible level of
competence. And a commitment to use these high levels of
competence to serve others. In the first instance, the duty of service
runs to the client, but it can run to fellow professionals, to others
who stand in some relationship to the client. McDowell (2000)
further points out that one can aspire to professional status, but
achieving it depends on acceptance and admittance by others. This
social acceptance proceeds through a series of steps which includes,
being admitted to a professional school, passing the courses, which
signifies that adequate competence in various “types and levels” of
technical expertise has been attained, passing the state certification
examination. Being licensed, and locating or establishing a position
of employment or service within the profession,

The banking profession is not strictly restricted but banks are

expected to obtain good reference from schoolmasters / previous
employers and other reputable individuals in the society before new
entrants are offered jobs. However, the Banks and Financial
Institutions Act (BOFIA), 1991 Section 43 (4) provides that “Any
person whose appointment with a bank has been terminated or who
has been dismissed for reason of fraud, dishonesty or conviction for
an offence involving dishonesty or fraud shall not be employed by
any bank ”. The restriction is to ensure that persons with bad
character and all those involved in dubious activities harmful to the
industry and the public are not given the opportunity to perpetrate
their nefarious acts. Denying persons who lack morality and ethics
entry into the noble banking profession aims at sanitizing the
industry from the outset. This should  be  is facilitated by circulating
the names of all dismissed / terminated bank staff amongst all the
banks int the region by the Central Bank . However, it is difficult, if
not impossible to detect fraudsters from the poll of fresh graduates
being considered for employment by a bank.

Theoretical Framework
Three important theories that underpin this study will now be
discussed. They are Shareholder theory, Stakeholder Theory Model
and Systems Theory Model.
Shareholder theory
This states that a person is acting ethically if they act in a way to
maximize profit for their shareholders. The shareholders are simply
anyone that owns a piece of the company and therefore profits on
the company gaining revenue. Nilsson and Westerberg (1997)
postulates that there are some benefits to belief in shareholder
theory. A good result of shareholder theory is that it tends to
maximize productivity.When the only thing that is worried about is
generating revenue, then the business tends to find the most
efficient way to utilize resources to generate the greatest level of
revenue possible. This efficiency can be deemed important because
it means that there is little wasteful spending and wasted resources
which are important as they are limited on this earth. One major
problem is that it doesn‟t take people like customers, the
environment, or employees into account, so it could potentially hurt
them. If a business decides to maximize profits, randomly fire
employees, sell defective products to customers, and pollute the
environment, they might still be considered ethically good as long
as resources are being used efficiently. If they are committing “off-
balance-sheet” transactions that are considered within the realms of
the law in order to maximize profit, then they might seem ethical
under shareholder theory.

Stakeholder Theory Model

Ethical Behaviors in business practices lead to business success, and
a stable financial system. Stakeholder theory attempts to address
the question “what is the purpose of the corporation and in whose
interest should it be run?” From a theoretical standpoint, it is
generally held in business ethics circles that the Stakeholder Theory,
by Ed Freeman, arose as an alternative theory to the traditional
notion of the function of business that emphasized shareholders
onlyFreeman, however, points out that the general ideas of the
stakeholder theory predate his postulation (Jones, Wicks and
Freeman, 2001). Pondar et al (2006) also allude to Freeman‟s
position when they opined that, within the stakeholder theory
framework, companies are seen as involved in the social system and
forced to enter into a „new social contract‟. This „new social
contract‟ presents a mix of reciprocal expectations of the role and
responsibilities of each of the involved parties in a corporate and
social environment This contract also demands that companies
perform social, ethical and environmental responsibilities. Jones,
Wicks and Freeman (2001) criticize the traditional notion of the firm
put forward by the Nobel Prize winner Milton Friedman that the
ethical obligation of business managers is to seek profits for the
stockholders only, a single set of stakeholders. For Jones, Wicks and
Freeman, this traditional notion (seeking profits for stockholders
only) of the firm or business organization is myopic as it places too
much emphasis on shareholders to the exclusion of other
stakeholders. As such, they hold the position that, business
managers must go beyond a simplistic and narrow perspective of
the objectives of the firm to include other stakeholders other than
the shareholders. Acting ethically here would thus entail business
managers fulfilling responsibilities to the firm and its wide array of
stakeholders. For Donaldson and Preston (1995) the stakeholder
theory requires of anyone managing or affecting corporate policies
to possess, as a key management attribute, the simultaneous
attention to the legitimate interests of all appropriate stakeholders,
both in the establishment of organizational structures and general
policies and in case-by-case decision making. As seen in Jones,
Wicks and Freeman (2001) or in Pondar et al (2006), or yet still
Donaldson and Preston (1995), the central argument of the
Stakeholder Theory is based on two premises: first, that to perform
well, business organizations and their managers need to pay
attention to a wide array of stakeholders and secondly, managers
have obligations to stakeholders which include but extend beyond
shareholders (Jones et al, 2001). In other words, the stakeholder
theory holds that making profits for the firm and its shareholders, as
well as fulfilling other duties to other groups associated with the firm
are the essence for which a firm exists.

 Systems Theory Model

The regulator in a financial system must first be ethical in character
and action in order to exercise its mandate as a banking
ombudsman. Closely related to the stakeholder theory of business
ethics is the systems theory approach. As an ethical theory, systems
theory also attempts to connect business and ethics (Nilsson and
Westerberg, 1997). According to the systems theory ethicists, social
phenomena cannot be fully understood in isolation. Rather they
must be viewed as parts of the larger system within which they
interact with other elements of the system that is, within the
systems theory framework, the optimization of the goals of
individual components (subsystem goals) is to be pursued only to
the extent compatible with the pursuit of overall system goals. For
Ackoff (1987), ethical judgment should be based not on rules that
are to be applied to the outcomes of decisions or end product, but to
the decisionmaking process involving stakeholders‟. That is to say,
the actions of a part of the system could have consequences on the
rest of the system, as such the system in its essence or in search of
its ultimate goal will constantly seek to balance itself or maintain
equilibrium. As such, it can be said that the system theory places
emphasis on maintaining balance of the overall system and that
subsystem interests are subordinate to the overall system interests.

Unethical Practices in Banking industry .

The First Professional seminar series to discuss “Ethics and
Professionalism in the Banking Industry”. Some of the major
highlights were as follows: “Greed was identified as one of the
causative agents for the high incidence of fraud and other
unprofessional conduct in the banking industry. . Some of the
reasons for unethical practices  are conflict of interest, greed, fraud
and insider abuse, internal control, regulation, supervision and
surveillance.

Conflict of interest The Professional Banker,

like any other professional is usually faced with role conflicts on
daily basis in discharging the professional duties in the society.
McDowell (1991) provides that different relationships exist between
the professional and others. Kultgen (1998) clearly states that under
the principle of role responsibilities, professionals primarily serve
clients, employers, and special sectors of the public who come to
them for aid. A profession is part of the larger social system. It is
complemented by other action- systems, professional and non-
professional. Guy (1990) and McDowell (1991) on the other hand
states that there is the formal ethical prescription that a
professional must prefer the interest of the client, as well as the
currently accepted primary goal of all economic or business activity,
which is to make as much profit as 11 possible. Professionals should
not be greedy and lose sight of their professional duties to their
clients.

Greed
According to Gup (1990) “Greed is the motive for bank crimes”.
Dishonest and greedy loans have been the bane in the banking
industry, which has accentuated the distress syndrome in the
industry by weakening the deposit base of banks. This happens
when bankers disregard laid down policies and the tenants of
banking and connive with customers to obtain questionableloans
and other facilities from a bank.

Frauds and Insider Abuse

Gup (1990) defines insider abuse as a technical term that “refers to
a wide range of misconduct by officers, directors and insiders of
financial institutions committed with the intent to enrich themselves
without regard for the safety and soundness of the institutions they
control, in violation of civil banking laws and regulations and
perhaps also in violation of criminal banking laws. Owualah (1996)
states “poor quality staff has also been blamed for the weak internal
controls, frequent contravention of statutory regulations and the
growing spate of frauds in the system”. He further states, “It is trite
to say that frauds now constitute one of the most worrisome
problems cutting across all banks   and inflicting huge financial
losses on their victims.

Unethical practices in banks still manifest themselves in various

forms. This is because the entire economy has been pervaded with
corruption. The banking sector of the economy has not been spared.
Unethical practices creep into  banks right from the point of entry
when staffs are being recruited. This is what is called “Relationship
Employment”. It means employment not based on merit but based
on beneficial relationships the bank will derive by offering a job to
someone who is a relation to a wealthy customer or potential
customer. The bank expects the new employee to attract huge
deposits from his relation to the bank. Ethics and good conduct are
therefore sacrificed for the deposits and professionalism is thrown
overboard.

Another similar and peculiar unethical practice in the  banking

industry is the acheiving of s  pre-set targets ,investigations
reported that the institutions involved in such unethical practices
encourage the young staff  to meet their targets by “any means”. it
was reported in  the questionnaires sent out by the Osibodu
Committee confirmed that many have been harassed by their
employers for failing to meet their targets and have been
threatened with job losses.

Internal Controls
Gup (1990) points out that management is responsible for devising
and maintaining internal controls. According to him, internal controls
can be defined as the plan of organization, method, and measures
used to safeguard assets, to ensure the accuracy and reliability of
data, to ensure compliance with policies and applicable laws and
regulations, and to promote management efficiency Therefore lack
of corporate culture manifests in the following situations: “absence
of code of ethics; absence of a clear policy on conflicts of interest;
lack of oversight by the bank‟s board of directors, particularly
outside directors; absence of planning, training, hiring, and
organizational policies; absence of clearly defined authorities and
lack of definition of the responsibilities that go along with
authorities; and lack of independence of management in acting on
recommended corrections”

Regulation, Supervision and Surveillance

Nwankwo (2001) defines banking regulation as “a body of specific
rules or agreed behaviour either imposed by some government or
external agency, or imposed by the explicit or implied agreement
within the industry that constraints the activities and business
operations of the institutions in the industry to achieve defined
objectives and act prudently.” Most of the regulations governing the
operation of banks are codified by legislation. The focus of
regulation has  been to reduce the risk of bank insolvency and the
potential cost of bank failures to depositors, Sanusi (2003). Laws
and regulations are promulgated to ensure discipline and
compliance with specified standards. Enforcement of banking laws is
therefore necessary for the banking industry in order to avoid
distortions in the system.

Contraventions, Sanctions and Penalties

McDowell (1991) writes that the present structure of professions
leaves a large area of autonomy or discretion to individual
professionals, and it is within that area of professional freedom that
abuse occurs. He opines that there are three possibilities, Complete
and unregulated autonomy with the hope that internalized notions
of competence and ethics will assure that autonomy is exercised
wisely. Since 1952, there have been many governmental regulations
put in place, which invariably affect banking operations and the way
banking businesses are conducted. These regulations have been
enacted to check criminal and unethical conducts, certain conduct
and practices are considered unprofessional / unethical which
include but are not limited to: Conflict of Interest: Engaging in
extraneous activities, which constrain a bank‟s primary
responsibility and also Colluding with third parties to inflate
contracts. Abuse of Trust / Office: Abuse of position and taking
advantage of the institution to enrich oneself and Collusion with the
bank‟s customer to divert credit facilities for unauthorized purposes.
Full Disclosure: This is simply a lack of appropriate disclosure in
dealing with other players and customers in the market place. It also
includes imposition of previously undisclosed charges on customer‟s
accounts. And failure to submit report on dismissed / terminated
staff to Central Bank and other relevant agencies. Full disclosure
could also be Concealment of fraudulent acts perpetuated by
employees.
Misuse of Information: Misuse, manipulation or non- disclosure of
material information on operation supplied to regulatory authorities
with intent to mislead. Misuse of confidential information gained
through banking operations. Running down competitors through
deliberate misinformation.
Insider Abuse: The improper granting of loan to Directors, insiders
and political interests and other misdemeanor ,insiders conversion
of bank‟s recourses to purposes other than the bank‟s business
interest. Granting of unsecured credit facilities to internal / external
customers in contravention of the provisions of banks & other
Financial Institutions Act (BOFIA). Granting of waivers on non-
performing credit 
Offer and Acceptance of Gratification: Offering / Acceptance of
gratification to / from customers and potential customers to do
business, applying unequal standards and finally imposing unfair
penalties by the regulator with the intention to induce gratification.
Non Compliance with Standards and Guidelines: This includes Non-
conformity with the Accounting Standards.  regulations thereby
resulting in incomplete or false information, and also refusal to
recognize inherent risks in the portfolio of contingent liabilities.
Aiding and Abetting: Aiding and abetting the failure of a new staff to
meet the financial obligation of the previous employer and aiding
and abetting within and outside the organization, an example of this
is employing new staff without obtaining suitable references.
 

Conclusion
Since banking is based on trust, transparency and confidential
behaving ethically is in the best interest of businesses as well as in
the interest of other stakeholders in the system. To behave
unethically has dire consequences for all stakeholders and for the
system. It is therefore not sufficient to have a code of ethics. The
Code must be readily available to all bankers to promote ethical
awareness; it must also be able address all ethical issues and
problems for proper professional guidance; the code should be
evaluated frequently to ensure that it is current and not stale and
must be enforceable to ensure conformity by all professional
bankers; and finally it must be readily adopted by all banks. All
banks must therefore see ethics as part of their core management
functions and provide ethics training in their organizations. All banks
should have corporate cultures for guidance of employees and this
should be built and sustained for the benefit of the banks and their
employees. Ethical practices will certainly eliminate distress in the
banking industry, restore confidence in the payment system and
bank failures in the economy.
 Disclaimer :BY IKPEFAN, OCHEI AILEMEN Ph.D (Banking &
Finance), ACA, ACIB Department of Banking & Finance, Covenant
University, Ota, Ogun State E-mail ochei_Ikpefan@yahoo.co.uk; Tel:
08053013418 AND AYENI, OLUWATOB1 Department of Banking
and Finance, Covenant University, Ota Ogun State E-mail:
topsyqueentreal@yahoo.com Tel:08034926364