Consumer trust in traditional finance (TradFi) is dropping sharply. Following the collapse of Silicon Valley Bank, an AP-NORC poll revealed that only 10% of US adults have strong confidence in the country's financial institutions, down from 22% in 2020. With a series of banking failures following SVB in recent months, consumers are questioning the ethics of traditional finance; an industry primarily responsible for the 2007-2008 global financial crisis.
As finance continues to go digital, a new movement led by fintech startups may make the banking world more sustainable, transparent, and socially responsible. Ethical digital finance is here, and knowing what it is and how it differs from traditional finance, will become increasingly important.
Ethical Digital Finance, in a Nutshell
Ethical digital finance is a movement poised to transform the current financial landscape into an industry where market players take into account ethical factors for financial decisions. Simply put, it's an approach to finance that emphasizes responsible decision-making, consumer protection, and long-term sustainability.
Unlike traditional banks, ethical digital finance is also transparent: a socially-responsible bank publishes information about its investment policies and makes its terms and conditions clear.
At first glance, ethical digital finance may seem like a compromise between revenue and sustainability, but that's not necessarily the case. In the UK, ethical markets increased by nearly 35% in 2021, exceeding the 24% year-over-year growth recorded between 2019 and 2020. In the meantime, the value of assets in Islamic finance - the most high-profile example of ethical banking principles' real-world application - is expected to surge from $3.96 trillion in 2021 to $5.9 trillion by 2026.
Ethical digital finance providers act in the borrower's best interest and offer affordable rates, invest only in assets that fulfill ESG criteria, and provide financial services to communities that conventional banks would otherwise reject.
What Represents Ethical Digital Finance Today?
Here are the key trends of the modern ethical digital finance industry and how they are trying to make the financial industry a better place.
ESG Investing
Environmental, Social, and Governance investing refers to prioritizing non-financial factors when investing in different companies, projects, or assets.
At its core, ESG investing puts an emphasis on the securities of organizations that contribute to society's development. 80% of investors in a PwC survey considered sustainability an important factor in their investment decision-making. PwC expects ESG-focused institutional investments to make up over 20% of assets under management (est. value $33.9 trillion) by 2026.
Islamic Finance
Islamic finance encourages complete transparency and fairness. Traditional banks often pass financial risks to the consumer, but Islamic finance fund managers and investors share those risks. It is illegal to charge or pay interest, as it is generally viewed as an unethical practice. These projects use charitable acts to create value for the whole Muslim community, not just a small group of shareholders.
Islamic Coin (ISLM) is a new cryptocurrency that combines an ethics-first Shariah-compliant financial ecosystem with blockchain technology and social responsibility to benefit users. They have received a Fatwa from some leading Islamic finance authorities and dedicate 10% of each digital asset issuance to an Evergreen DAO. The DAO invests these funds to support Muslim charities or Islam-related projects.
Yoosr is another excellent example of Islamic Finance initiatives. It is an interest-free financial app that offers fair and ethical mobile banking solutions that comply with Shariah law.
Green Fintech
Fintechs are going green to build sustainable digital finance brands that fit into a more ecological state of mind. Green fintech solutions offer a consumer-friendly alternative to traditional banking while prioritizing 'planet over profits.' In many cases, green fintechs leverage AI, blockchain technology, and sophisticated data analytics to build sustainable financial products.
Regenerative Finance
Regenerative finance (ReFi) is a sector within the broader cryptocurrency industry that prioritizes accessibility, cost-efficiency, and democratized finance. It addresses the lack of liquidity, transparency, and aggregation in traditional markets, aiming to positively impact the environment via carbon offset credits.
The other example of ReFi is multiple DAOs (Decentralized Autonomous Organizations) that organize individuals to drive capital or time toward a tangible impact in the real world. Such organizations aggregate the voice and influence of its members with basic blockchain-based infrastructure support.
The Road to an Ethical Financial Industry
Ethical digital finance reimagines the financial system by taking a sustainable and socially-responsible approach. ESG, Islamic finance, green fintech, and ReFi are gaining acceptance through innovative technologies and ethical considerations that address TradFi's current shortcomings.
In a paradigm shift, ethical digital finance is paving the way for a more sustainable and responsible financial ecosystem. It's time to prioritize the well-being of our planet and its people over profits while also fulfilling modern economic needs.
