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    How NGOs should choose their banks

    What should NGOs and charities consider when choosing who to bank with? We spoke with bank officials and organizations' chief financial officers to find out.

    By Helen Castell // 25 May 2015
    With many charities and nongovernmental organizations in the United Kingdom expressing concern that the Conservative Party’s May 7 general election win will see grants and state aid recede, there is arguably more pressure than ever for the sector to get proactive about its finances. Choosing the right bank, negotiating with bank managers, and shopping around for the best rates and services are all important steps in this direction. Regardless whether your charity or NGO is based in the U.K. or elsewhere, before you pick a bank to work with, ask yourself the following five questions: 1. How strong are their ethical credentials? One key criterion for most NGOs is whether a bank’s values align with their own. For this reason, many opt for so-called ethical banks. “A first question for any charity to ask themselves is what sort of bank do they want, and where do the trustees feel happy banking in terms of the ethics of the organization,” said Peter Kelley, business development and marketing manager at Unity Trust, which evolved over 30 years ago out of the trade union movement. “It may be that they could get a better interest rate somewhere — although our rates are competitive — but it’s an issue of how the bank wants to use their money,” Kelley said. “We’ve got a very strong social purpose embedded into the way we do business — for us, social returns are as important as financial returns and we refer to that as our double bottom line.” Choosing a bank whose activities sit well with your charitable objectives means not only that your deposits are used to achieve social, environmental or cultural benefit, but that you’ll work with “like-minded people around the table,” said Neil Hewitt, social and cultural team manager at Triodos. Ethical banks are nearly always the first choice for a charity, according to Abdurahman Sharif, executive director at the Muslim Charities Forum. They understand better the challenges charities face and their values are often a better fit. Many Muslim charities, for example, tend to veer naturally toward Al Rayan Bank — formerly known as Islamic Bank of Britain — because of its adherence to Sharia principles such as not earning interest, Sharif explained. However, big high-street banks tend to offer more services — from online donation tools to payroll systems — and this becomes a bigger draw as charities grow, he noted. NGOs and charities that choose Al Rayan Bank are attracted by its ethical record, said Tim Sinclair, senior head of marketing and retail sales at the bank. An independent ethics committee monitors its activities and approves all products. It only invests in activities in keeping with Islam, meaning customer deposits are never invested in industries or projects involving alcohol, tobacco, pornography, arms or gambling. As an offshoot of the Charities Aid Foundation, CAF Bank’s mission is to “help charities make a better society,” said CEO Peter Ostacchini. Any profits are gifted back to CAF to support the sector. Peace building charity International Alert, meanwhile, strives to maintain ethical integrity in all its activities. This extends to who the charity banks with, Chief Financial Officer Mohsin Baluch said. It would be an onerous task however to monitor the ethics of any bank’s entire investment portfolio, especially for small organizations, meaning NGOs have to rely to an extent on how banks market themselves and on data that is readily available. The importance of whether a bank is branded ethical or not differs from one NGO to another, but be careful not to make ethics your sole priority. “The prime issue should be ‘can the bank execute the business in the country where you’re working?’” said Michael Wright, director of communications and membership at Bond. Working with ethical banks can indeed involve a “trade-off” in terms of services, according to Tim Boyes-Watson, director at Mango, an NGO that trains other nonprofits on financial management and accountability around the world. Mango itself uses CAF Bank but finds that “none of the ethical banks are really geared up for international transfers” and foreign exchange. One solution is to use an ethical bank for your day-to-day U.K. banking, but another bank or broker for FX, he said. 2. Do they specialize in the sector? Banks that specialize in the development sector tend to have a more in-depth understanding of NGOs and how they are funded. Some mainstream banks however also have strong propositions, plus the size and product suite to cater for bigger organizations. The needs of a charity are different from a corporate, especially when it comes to borrowing money, noted Kelley at Unity Trust, which specializes in small and midsize charities and offers all customers a relationship manager. Small specialists are also able to offer a more personalized service, he said. “Because we’re a small organization we’re quite bespoke, and we can go and sit down with a customer at their premises. Once you move to [one of the big four], you are just another banking customer,” Kelley explained. For telephone enquiries, Unity Trust’s customer services center in Birmingham eschews interactive voice response technology in favor of real people. “If you want to speak to Maggie, you can speak to Maggie,” he said. CAF Bank too prides itself on the personal touch its client services team offers. “We’ll hold their hand through any transaction,” Ostacchini said. Customers at the bank are also given access to experts from the wider CAF Group, providing consultancy and advice to charities covering everything from governance to online fundraising. Charities occasionally struggle to open a current account with mainstream banks and often find it hard to access affordable finance, “either because charities are not well understood — particularly their sources of funding — or some of the banks consider them high risk,” Ostacchini explained. “We think we understand them better than most.” The bank’s 18,000 charity customers represent around 10 percent of the U.K. charity market, most of them at the smaller end with turnover below 100,000 pounds ($156,500). The income of many NGOs is donation led, so it’s important that they engage with lenders that understand that, Hewitt said. Strong sector understanding means that Triodos can “have those very open conversations with trustees at the outset” and therefore finds it easier to make lending decisions than other banks. The bespoke nature of Triodos’ products also means that lending can be tailored to meet a charity’s needs. If an organization had a legacy due to come through in the next five years, for example, Triodos could put a funding package together that allowed prepayments to be made at no cost, or that included an interest-only period — meaning the charity could get its project off the ground without dipping into funds to make capital repayments, he said. Specialist banks can also help charities stay up to date with fast-changing funding mechanisms, Hewitt said. With big donors like the U.K. Department for International Development moving more toward contracting and payment by results, the financing of NGOs is “going to get more tricky and organizations will have to be more financially literate,” he said. “The danger for smaller organizations is that they can easily get left behind because of lack of capital and lack of expertise.” Some mainstream banks apply a “cookie cutter” approach, offering similar services and placing similar demands on charities as on regular corporates, Baluch said. Many insist, for example, that charities maintain a minimum balance even in their overseas accounts. Keeping a million rupees in an Indian account however is not feasible for a charity like International Alert, whose in country operations wait for headquarters to transfer donor money for a specific purpose, spend it and then may have to wait some time before the account is replenished, he said. Although a high-street bank, NatWest has more of the top 5,000 U.K. charities among its customer base than any other bank, said Richard Stacey, senior relationship manager at parent Royal Bank of Scotland Group. It has sector-trained relationship managers across the country supporting charities and — together with partner Mentor — provides HR support, payroll and energy audits for the sector. “For the smallest charities, we recognize the use of volunteers, regular mandate changes and the less common structures seen in larger organizations, so we have set up a central team for charities,” he says. “We continue to work at making our processes simpler, more user friendly and efficient for these customers.” 3. Does their global reach match yours? Before choosing a bank, look at your banking needs and research what some of the challenges might be in terms of transferring money in and out of certain countries, said Dougal Freeman, CFO at the Global Alliance for Improved Nutrition. For example, are there exchange controls in place? Charities with overseas operations or beneficiaries need a bank whose network of branches or correspondent banks covers the countries where they work. This requires research, said Wright at Bond. Check how efficient that network is and how long it will take in country correspondent banks to process payments. “Timing is absolutely critical and programs depend on money arriving at the right place at the right time,” he noted. “Although a lot of banks say they’re global, most of them are better in some regions than in others and you have to do your homework,” Boyes-Watson at Mango added. Charities working in Asia or Africa, for example, may benefit from choosing a bigger bank like Standard Chartered or Standard Bank that has operations on the ground and U.K. staff with a good understanding of how to move money, facilitate payments and handle trading issues within the region, said Freeman. Be aware that as you grow, your banking needs will change, said Roy Wilson, CFO at CDP, an NGO that collects and distributes environmental and climate change data. CDP used to use Unity Trust for all its banking but later realized it “needed to have a much larger banking group that had global reach.” “We try as far as possible to make sure that all our offices in all countries operate through HSBC, because that enables us to use their global treasury management system, to be able to view online all balances in all places,” he said. With accounts in countries and regions, including the United Kingdom, Europe, the United States, China, Australia, India and Brazil, CDP “needed to be able to make payments and receive payments from around the world smoothly, quickly and easily.” If you do opt for a smaller U.K. bank that does not have correspondent banks in a country where you work, consider opening an account with a local bank there — but conduct due diligence to ensure that they are reputable, said Baluch at International Alert. 4. What products do they offer? Check that the bank can provide you with a current account without requiring that you also buy a loan or other investment products, even though these products may also be a draw, Ostacchini at CAF Bank said. Virtually all banks now offer Internet banking, but some provide features that are tailor-made for charities. Unity Trust, for example, offers triple authority, where a charity could specify that its bookkeeper is authorized to make payments under 1,000 pounds, but that any payments over that amount must be double-signed by its finance director, with payments over 10,000 pounds triple-signed by its CEO. If the bookkeeper initiated a payment of 15,000 pounds via online banking, Unity would automatically send an alert to the finance director and CEO. They would then need to log in and authorize. It helps charities “maintain full control over their banking,” Kelley said. CAF Bank too offers dual authorization and has recently refreshed its online banking platform, Ostacchini said. If you need to borrow, for example to buy or refurbish your premises, check the bank’s mortgage availability and rates. “Some charities are pessimistic about the outlook for grants and government support and inevitably dip into their reserves in order to maintain support for their charitable aims,” Ostacchini said. “So a sensible overdraft or long-term loan can be very useful.” CAF Bank offers “affordable finance” to charities, including overdrafts as well as up to 25-year term loans from 50,000 to 5 million pounds. Although it has only been lending to charities for the past three years it has “virtually no bad debt record.” For small charities that have a strong income stream but not enough money to cover a deposit, CAF Bank can put them in touch with organizations that are prepared to cover part or all of this. “What we can offer in these sort of lending scenarios is the ability to take a more flexible approach,” he said. “That’s not to say it’s a more risky approach.” NGOs wanting to borrow from any bank should first prepare a set of accounts or trading figures that factor in a worst case scenario, he advised. For example, “what if they lost 20 percent of the donations or a contract, or if interest rates go up?” Unity Trust’s strong base of depositors — its lending is covered almost four times by deposits — mean it has deep pockets. It extends loans above 150,000 pounds and for anything less than that, refers customers to community development finance institutions. Some banks, such as Triodos, are happy to lend to charities that don’t hold a current account with the bank. When making lending decisions, it also takes into account the social benefit that a project delivers. Of course, “we have to ensure, as any bank would, that the financials stack up,” Hewitt said. “But we’re coming at it from a starting point of a willingness to help.” 5. How competitive are their fees and rates? There are a number of fees and rates NGOs should consider when choosing a bank and it’s important to shop around. Check how much a bank charges to offer a current account. Some, such as CAF Bank, charge nothing at all. Also look at its transfer fees, including those levied by counterpart banks in other countries, at its foreign exchange rates and, if needed, at how competitive its interest rates and arrangement fees are for mortgages and loans. Although these hopefully won’t affect you, also check the charges for unauthorized overdrafts or bounced payments. There are also hidden costs. For example, many banks encourage you to contact them on a toll-free number before you open an account, but once you are a customer all inquiries are routed through more expensive channels, noted Baluch at International Alert. Similarly, some banks charge a fee to investigate when a transfer fails to arrive on time, only reimbursing the fee if they accept the fault was theirs, he said. Do you have more tips on how NGOs should choose their bank? Have your say by adding a comment below. Check out more insights and analysis for global development leaders like you, and sign up as an Executive Member to receive the information you need for your organization to thrive.

    With many charities and nongovernmental organizations in the United Kingdom expressing concern that the Conservative Party’s May 7 general election win will see grants and state aid recede, there is arguably more pressure than ever for the sector to get proactive about its finances.

    Choosing the right bank, negotiating with bank managers, and shopping around for the best rates and services are all important steps in this direction.

    Regardless whether your charity or NGO is based in the U.K. or elsewhere, before you pick a bank to work with, ask yourself the following five questions:

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    About the author

    • Helen Castell

      Helen Castell@flippinowl

      Helen Castell is a London-based financial journalist with nearly 20 years’ experience covering trade, energy and risk for TXF, Shares Magazine, Global Trade Review, Newsbase, Trade Finance Magazine and other Euromoney publications. At Devex, she writes about development banking, private sector engagement and funding trends. She studied English Literature at Sheffield University and International Journalism at London’s City University, and speaks English, Spanish and Japanese.

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