Supporting a sustainable society through ethical finance – United States

In a move designed to bring a simplified and personalized experience to underbanked customers, Algbra is launching a new fintech platform, Shoal, in conjunction with its new strategic partner Standard Chartered.

As a Certified B Corporation, Algbra meets high social and environmental impact standards and brings empowered banking solutions to those who have not been able to make standardized finance work for their unique interests, particularly members of the historically underbanked Muslim community who need their finances to perform according to Sharia law.

Algbra’s Anton Laurens, VP of Engineering, and Marten Möller, Impact & Partnerships Manager, joined the Converge podcast along with Tom Mason, co-founder of Shoal, to discuss the challenges of financial exclusion and ethical investing, the launch of their sustainable savings platform which empowers customers to support causes they believe in, and the role such innovations play in the global fintech scene.

Ethical finance on the rise

Ethical finance is rapidly gaining traction in the financial sector, as institutions increasingly prioritize moral and social responsibility alongside traditional financial goals. This approach involves evaluating the impact of financial decisions on both people and the environment, aiming to create value for stakeholders while contributing to the greater good. Unlike conventional finance, ethical finance is not solely focused on profit; it also seeks to promote financial inclusion, reduce poverty and support sustainable development.

Ethical finance is also — financially — successful. According to the recent Ethical and Value-Based Finance in Europe Report, ethical banks consistently outperform major conventional banks in profitability. Return on equity (ROE) for ethical banks averaged 5.23% compared to 2.21% for conventional banks. Return on assets (ROA) also favored ethical banks with an average of 0.46% against 0.25%.

What is Islamic banking and finance

In the realm of Islamic finance, ethical finance principles are deeply rooted in Islamic law (Sharia), which emphasizes fairness, justice and transparency in financial transactions.

A few of the pillars of Islamic banking are:

• Avoiding prohibited activities, such as interest and uncertainty
• Avoiding dealing in prohibited businesses, such as gambling or alcohol
• Profit and loss sharing
• Risk sharing
• Linked to real economy — transactions are based on tangible assets and real services as opposed to conventional money lending

In many countries, the Islamic finance industry is now mainstream and is expected to continue to grow rapidly. According to the ICD-LSEG Islamic Finance Development Report 2023, the global Islamic finance industry has increased its assets from $2.4 trillion in 2016 to $4.5 trillion in 2022 and is forecast to reach $6.7 trillion by 2027.

The significant growth of Islamic banking assets highlights the expanding Islamic finance industry and its potential for promoting sustainable and ethical financial practices.

In 2022, there were 336 full-fledged Islamic banks and 274 conventional banks with Islamic windows or services. Some commercial banks offer Islamic banking services as a separate section or window, blending conventional and Islamic banking principles.

The World Bank has also been instrumental in promoting Islamic finance as a strategy for reducing poverty and expanding access to finance globally.

Islamic banking rules in particular, and ethical finance in general, ensure that financial or banking activities are conducted in a manner that is not only profitable but also socially responsible and ethically sound. By integrating these principles, financial institutions can foster a more inclusive and sustainable financial sector, ultimately benefiting society as a whole.

Dual approach for financial institutions

Algbra is bifurcated into two distinct tracks, the business-to-consumer Algbra App and the business-to-business Algbra Labs, which operates as a fintech-as-a-service (FaaS) tool for other fintech companies.

The dual approach produces valuable synergy that enables Albra to not only operate efficiently but also gain insights into both sides of the business, which inform decisions and ultimately produces better experiences for all users.

The unique structure allows Algbra management to “get a look at the food before placing the order,” Mason says. “With Algbra, what you get is one team, one contract. It’s much easier, faster and cheaper, candidly, to do that than it has been under the traditional model.”

Delivering financial inclusion to those who need it

The Algbra team focuses on bringing financial services to those who are unbanked or underbanked. The former refers to those who do not have the financial infrastructure around them to access simple things such as credit or digital payment platforms. Underbanked, however, is a much more nuanced and sizeable category, Möller notes.

“Just because you have access to something doesn’t make it meaningful. So, there’s a big distinction that it’s only meaningful if it really actually caters toward your needs,” Möller explains. “For some, it’s more serious than others. If you’ve got a disability, you might have access to a bank account, but it actually doesn’t really work for you because it doesn’t have all the disability requirements that you might need.”

Faith-based communities, particularly those who are Muslim, often fall under these categories, and Algbra is dedicated to helping serve their needs by offering customized solutions, Möller says. Islamic financial institutions have played a significant role in financing development and promoting financial inclusion, particularly in Muslim-majority countries.

“The principles of Sharia finance marry easily with the principles of ESG finance,” Möller says. “By building something that is truly comprehensively ethical and inclusive, you begin to build something that is hyper-personalized for everyone.”

The role of technology in ethical finance and Islamic finance

Technology is a powerful enabler of ethical finance, particularly within the Islamic finance sector. Digital financial services, such as mobile and online banking, have revolutionized access to financial services, making it easier for underserved populations to participate in the financial system. This increased accessibility promotes financial inclusion, allowing more people to benefit from financial services that were previously out of reach.

Technology enhances transparency and accountability in financial transactions, reducing the risk of corruption and fostering ethical practices. For instance, blockchain technology can provide an immutable record of transactions, ensuring that all financial activities are conducted with integrity.

Additionally, technology facilitates the development of Islamic financial products and services, such as sukuk (Islamic bonds) and Islamic banking services, which comply with Islamic law and principles. These innovations adhere to ethical standards and offer viable alternatives to conventional financial products, further promoting ethical finance within the finance sector.

When ethical investments meet conventional banking

Algbra recently partnered with global financial institution Standard Chartered to link the new platform, Shoal, with the bank’s customers, allowing deposits to support causes that align with personal values or broader societal interests.

“Shoal is a sustainable savings platform — fixed-term savings, strong rate of return — but while the money is on deposit, it sits with our partner bank, Standard Chartered, and is referenced exclusively against their sustainable finance portfolio,” Mason says. “Things like renewable energy, clean water production … schools, hospitals, libraries — things that aren’t necessarily green in the traditional sense, but still undeniably of benefit to the community they serve.”

Reshaping the financial sector

Mason says that the app can be simple and accessible, bringing these options to those who’ve never had it before. While Standard Chartered invested significant capital in Albra, Möller says it’s more about the strategic partnership than the money right now.

“I think it’s just that we don’t look at banks as competitors. They’re very much our friends and people or organizations we want to work with as much as possible, which is not always the case in the fintech industry,” Möller says. “Generally, we think we’re much stronger together when fintechs work with these big banks [because] we have our particular strengths that we can leverage.”

Mason notes that the money from Standard Chartered is very significant — but not as significant as the connections and various other resources that the 170-year-old bank can provide.

“Shoal is just the first partnership,” Mason says. “There is much more we can do later on.”

Overcoming challenges in ethical finance

Despite its growing importance, ethical finance faces several challenges that need to be addressed to ensure its successful implementation. One of the primary challenges is the lack of industry-wide guidance on what constitutes ethical finance and how to implement it effectively. Financial institutions may struggle to define ethical finance for their organization and develop a comprehensive framework for ethical practices.

Another significant challenge is the risk of “fake ethics,” such as greenwashing, where companies misrepresent their environmental or social contributions to appear more ethical than they are. To overcome these challenges, financial institutions must prioritize transparency and accountability.

Developing clear policies and procedures for implementing ethical finance practices is crucial. Additionally, investing in employee training and development is essential to ensure that all employees understand the importance of ethical finance and are equipped to make ethical decisions.

By addressing these challenges, financial institutions can build a more ethical and sustainable finance sector, ultimately contributing to a more inclusive and responsible global economy.

The future of ethical investing

The partnership with Standard Charter creates a bright roadmap for the future, Mason adds, particularly in the world of savings accounts. With a robust portfolio of savings within the institution, technologists from Algbra will be able to customize it to the depositors’ preferences, such as funding sustainable or religious initiatives.

The growth and significance of the Islamic finance industry, driven by increased bond issuance and a recovery in financial markets, highlight its potential role in promoting ethical and sustainable finance.

“Algbra has the tech and the experience and the skills to allow us to go beyond that and build out into a fuller service financial services marketplace with sustainability at its core,” Mason says. “We can look at green loans, we can look at green mortgages, potentially pensions. We now know that we can build that roadmap out in the UK with the right partner. And between Algbra and Standard Charter, we can also look overseas as well.”

Want more insights on the topics shaping the future of cross-border payments? Tune in to Converge, with new episodes every Wednesday.

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