Comparison of Performance Between Social and Conventional Banks : An Empirical Study of Banks in Europe

Abstract

Banks as financial institutions play an important role in the lives of people by facilitating the flow of funds and ensuring the stability of the global economy. Recently, the world economy witnessed various financial shocks that escalated into a financial crisis between 2007 and 2009. Moral hazard, scandals, and collapses of financial institutions caused many to lose their trust on the current financial system that emphasizes profit maximization and high risk taking instead of working to keep the economy stable and healthy. This has caused many researchers to search for new alternative ways of managing the financial system, and one such alternative is social banking. Social banks are financial institutions that differ from conventional banks by emphasizing social responsibility values instead of only focusing on profitability. There are several key differences between social and conventional banks, such as differences in asset allocation, the involvement of stakeholders in decision-making, higher levels of transparency, and additional social screening of loan applicants and investment opportunities. The purpose of social banks is to channel funds from socially-minded investors to borrowers with the right motivations. The main purpose of this research paper is to investigate whether social banks differ from conventional banks in terms of their financial performance overall and during the financial crisis. In order to achieve this, we have adopted a quantitative strategy and gathered data from ten social and ten conventional banks from various European countries. We have used several financial ratios to measure their profitability, liquidity, and default risk, and performed linear regression to estimate the coefficients to test whether being social or conventional has an effect on these bank performance measures. The results of our analysis reveal that, while conventional banks were able to achieve higher profitability than social banks both overall and during the financial crisis, social banks managed to maintain better liquidity than conventional banks on both occasions. Our results also reveal that social banks overall had lower risk of default than conventional banks. Based on our results we cannot conclude that the social banking system is inherently better in all aspects than the conventional banking system. We can, however, note that social banks do have certain advantages such as better liquidity, and this suggests that the overall stability of the financial system could potentially be improved by conventional banks adopting some of the more successful practices of social banks, such as more careful screening of loan applicants and investment opportunities.