‘Ethical Leadership in Nepal’s Banking: A Pillar for Trust, Transparency, and Sustainable Growth’

-Roshan pant-

Ethical leadership means guiding and inspiring people by doing what’s right, following good principles and values.

It’s when business leaders show the right behavior, both at work and in other situations, based on accepted principles and values. This leadership style emerges from understanding the importance of certain moral guidelines.

Ethical leadership is really important in banking for a few key reasons. First, banks handle people’s money and financial futures, so trust is crucial. Leaders need to make ethical decisions to treat everyone fairly, be transparent, and manage risks responsibly.

If trust is broken, it can be really bad for individuals and the entire financial system. Second, there are lots of rules and regulations in banking to make sure things are done ethically and to prevent financial problems. Ethical leaders make sure the bank follows these rules, avoiding legal trouble and keeping the financial environment stable.

Third, banks are always being watched by the public, media, and customers. Ethical leaders help prevent scandals, create a positive image of responsible banking, and build public confidence. Fourth, leaders set the example for employees.

When they prioritize ethics, it creates a culture of integrity, reducing the chances of fraud and unethical practices within the bank.

Finally, ethical leadership is good for customers too. It builds trust, loyalty, and confidence by ensuring fair treatment, transparency, and responsible risk management. Customers feel more secure, leading to stronger relationships and brand loyalty. When problems do arise, banks with ethical leaders can handle them better, repairing trust and minimizing damage.

Ethical leadership in the banking sector thus involves upholding high standards of integrity, compliance with regulations, prioritizing customer well-being, managing risks responsibly, and contributing positively to society.

In Nepal, although there isn’t a dedicated law exclusively addressing ethical leadership, the concept is woven into the constitutional framework and various legal provisions. The Constitution’s preamble emphasizes public accountability and transparency, while fundamental rights articles create an environment conducive to ethical leadership. Sector-specific laws, such as the Civil Service Act and Good Governance Act, establish expectations for public servants and government functioning.

The Commission for the Investigation of Abuse of Authority (CIAA) Act acts as a deterrent against corruption. Additionally, international agreements like the UN Convention against Corruption contribute to ethical conduct.

The  Companies Act, 2063, governs corporate governance, emphasizing ethical standards and stakeholder interests. The Civil Contract Act, 2020, guides financial transactions with principles of good faith and fair dealing.

Sector-specific regulations, such as the Bank and Financial Institutions Act, anti money laundering act,banking offences and punishment act mandate sound corporate governance, fair banking practices, and risk management. Nepal Rastra Bank (NRB) the regulator  issues directives on aspects like Know Your Customer (KYC), Anti-Money Laundering (AML) etc. Enforcement mechanisms include NRB’s supervisory actions, legal proceedings for harmed parties, and professional sanctions against misconduct by banking professionals.

The growing concern for ethical leadership in banking is a global phenomenon, and Nepal is no exception. In Nepal, the banking sector faces a growing concern for ethical leadership, influenced by issues such as corruption, fraud, and varying service level and varying levels of financial inclusion.

Instances of loan scams and lack of transparency in loan procedures have fueled public discontent. In these context ethical leaders in Nepalese banks play a crucial role in addressing these challenges by promoting transparent practices, fair lending, and compliance with regulations.

Core principles of Ethical leadership in banking:

• Integrity: Acting with honesty and truthfulness in all dealings, both internal and external.
• Fairness: Treating customers, employees, and other stakeholders with respect and justice.
• Transparency: Being open and upfront about the bank’s operations, policies, and risks.
• Accountability: Taking responsibility for one’s actions and decisions.
• Sustainability: Considering the long-term impact of the bank’s activities on the environment and society.

 Why is Ethical leadership important in banking?

The banking industry is heavily reliant on trust. This trust can be easily eroded by unethical behavior, such as fraud or insider trading. Ethical leadership is thus essential for maintaining public trust in the banking industry. It can also lead to a number of other benefits, such as:

• To combat Fraud and corruption

• For promoting financial inclusion, ensuring that all segments of society have access to financial services without exploitation.
• For establishing and maintaining trust with customers. This involves fair lending practices, transparent fee structures, and honest communication.
• Improved employee morale and engagement
• Reduced risk of legal and regulatory problems through Adherence to regulatory standards and compliance with ethical guidelines
• Enhanced brand reputation
• Stronger financial performance

Challenges of Ethical leadership practice in Banking sector of Nepal

• Balancing Conflict of interest among stakeholders
• Limited understanding of ethical leadership and its importance among Top level
• Shifting from a profit-driven mindset to one that prioritizes ethical conduct is challenge as it requires ongoing training, awareness campaigns, and leadership commitment to demonstrate the importance of ethical practices.
• Restoring public trust in the banking sector after past scandals
• Striking a balance between ethical behavior and achieving business objectives
• Pressure from external stakeholders, such as politicians or influential individuals, to engage in unethical practices.
• Some traditional business practices in Nepal, such as nepotism and favoritism, can clash with ethical leadership principles. This can make it challenging to implement ethical reforms

How can Banks promote Ethical leadership?

There are a number of things that banks can do to promote ethical leadership, such as:

• Drafting and implementing robust ethical codes, enforcing existing regulations, and offering clear guidance for ethical decision-making.
• Develop a strong code of ethics and ensure that all employees are familiar with it.
• Provide ethics training for employees at all levels.
• Create a culture of open communication and encourage employees to report any concerns about unethical behavior.
• Hold leaders accountable for their actions and decisions.
• Building a workplace environment that recognizes and rewards ethical behavior, promoting fairness and transparency in all operations.

In conclusion, ethical leadership is not just a virtue in the banking sector; it’s a critical driver of success. By prioritizing ethical conduct, banks can foster a culture of trust, build customer confidence, and ensure long-term sustainability for both the institution and the financial system as a whole. It’s a win-win proposition, not just for banks, but for individuals and society as a whole.

Adressing above issues and challenges requires a collective effort from regulators, banking institutions, and individual leaders. By prioritizing ethical conduct and building a strong ethical culture, the Nepalese banking sector can build trust, enhance its reputation, and contribute to sustainable economic development.

(writer is Assistant Manager at Rastriya Banijya Bank)