Erste seeks to re-establish trust through social banking

Erste seeks to re-establish trust through social banking
Erste's CEO rails against regulators but wants to regain the trust of civil society.
By Tim Gosling in Vienna October 13, 2016

Nauseated by the thought of adding to the tonnes of soiled nappies the average child bequeaths to landfills, but unable to find an alternative to disposables in Serbia, Sonia Dakic began making diapers out of bamboo five years ago. Dajdaj products are now found on the shelves of dozens outlets in Serbia, her business boosted by a crucial loan from Erste Bank. And in Vienna in early October she was seeking to help sell the Austrian bank’s commitment to establishing “social banking” across Central and Eastern Europe.

To date, Erste says it has lent out €60mn under the programme. It will now expand the scheme offering banking services for “traditionally unbanked groups” – low-income individuals, first-time entrepreneurs and social organisations – although the bank does not put a figure on its planned investment over the next four year. Peter Surek, who heads the unit, calls it “banking for the unbankable”.

Erste says it’s motivated by its core principle to help spread prosperity in the region; around 16mn people are at risk of poverty in its seven core markets – Austria, Croatia, Czechia, Hungary, Romania, Serbia and Slovakia. Of course, the programme is also being encouraged by tightening regulation, technological challenges and rising populism, which blames the banks for a multitude of sins.

Indeed, “trust” was the biggest single issue identified amongst the 100 representatives of government, banking, academia, NGOs, the start-up sector, and media present at the launch event.

Evil and stupid

The schism between government, banks and society across the globe has produced a vicious circle in CEE. Keen to alleviate the pressures stemming from the financial crisis on voters disillusioned with the political and business elites, states have bashed lenders, in part for questionable lending practices during the boom years, but also to raise funds to fund populist policies.

The banks are fighting back. Erste was instrumental in pushing the Hungarian government into a deal to end several years of punishing taxes. A source at a rival bank says Erste essentially forced Budapest to the negotiating table with a tough approach behind the scenes.

Lenders are also lobbying hard against any further tightening of regulation. Regulators have been busy, raising capital requirements in a bid to prevent the kind of systemic breakdown that necessitated bailouts throughout the last decade from being repeated. European banks are at the forefront of fevered lobbying against the Basel Committee’s new plan to introduce tough new rules on calculating capital requirements.

However, recapturing the trust of the population across CEE requires honey rather than vinegar.  While Erste insists it sees its social banking drive as an investment in a future generation of successful entrepreneurs, the message is clearly meant to get through that the lender is seeking to work with society, rather than solely for its shareholders.

However, CEO Andreas Treichl consistently wandered off message throughout the event. Erste’s longstanding chief spent his time railing against governments and the regulation that he claims prevents the bank from lending to entrepreneurs. “Post crisis regulation to control risk has halted the work that makes banks grow – loans to business,” Triechl told the event. “Social banking doesn’t fit the new regulatory requirements which decree bankers are too evil or stupid to rate risk.”

To be fair, it’s a concern shared by Erste’s peers. Sources at another Austrian bank said regulators have become “too specific” and are intruding on banking strategy, rather than just setting safety limits. They’re even pushing political agendas, the source claims, arguing that regulators have suggested to one bank it should “leave Russia”.

No charity

Czech MEP Ludeek Niedermayer hit back. “Mistakes have not only been made on the side of politics and regulators. We’ve seen huge failures of judgment, and even ethics, at businesses,” he insisted.

Levels of trust are no higher amongst entrepreneurs and NGOs, however. Contributions from the floor echoed those of the bankers in overwhelmingly calling for government to simply stay out of the way to allow banks to develop social banking initiatives. Yet they’re also dubious about the lenders.

With banks facing a rising challenge from technology and the “disruptor” economy to their role as the intermediaries of the financial system, Erste clearly hopes its social banking scheme will hook it into the “new” economy. By 2019, the bank says it aims to have financed 500 social organisations in Austria and CEE, lent to entrepreneurs to create 5,000 jobs, and helped make 25,000 low-income people financially stable.

There is concern, however, that the banks are looking to cut business incubators out of the equation. “I can’t see there’s a lot in it for us,” says Zoltan Bereczki, who heads the Romanian branch of business incubator Nesst. “They’ve put together a full unit including mentoring, so I don’t suppose they’re planning a role for consultants like Nesst.”

Others criticised the banks for being late to arrive at the party. “We’ve been a long time waiting for the banks to approach social entrepreneurship,” said Faisal Rahman from Fair Finance, an NGO from the UK that operates social business financing. “They stood back for a long time waiting for governments to step in.”

Others at the event questioned why the social banking unit will be separated from Erste’s mainstream business. Erste’s Surek said the separation is necessary in order to keep the investment within the programme, rather than see it leak away into the mainstream business. “It’s not a charity – we will need to invest,” he explains. “But we also need to believe that we will get paid back; we won’t provide seed capital. We want to cover costs within a reasonable time, and will keep all profit within the social banking unit in order to grow the business.”

Despite that straightforward approach, scepticism remains deep seated. The banks, it seems, continue to misjudge just how fundamental a change from them is being demanded by people. As one wag responded, to general amusement, “why don’t the banks simply make all their services more ‘social’?”