BoV CEO Kenneth Farrugia: "The importance of sustainable finance"

An interview featuring Bank of Valletta's CEO Kenneth Farrugia on how the bank is embedding sustainable finance into its operations.

We look back at an interview between Vanessa MacDonald and Bank of Valletta (BoV) Chief Executive Officer Kenneth Farrugia during the FinanceMalta 16^th Annual Conference in 2023. In the interview, Kenneth discusses how BoV is embedding ESG principles into its operations.  

Vanessa: Kenneth, one of the great themes today that we've had has been sustainable finance. What does it mean to a big legacy bank like you, and how are you going to tie that into the future? 

Kenneth: Sustainable finance has become a very important strategic priority for the banking sector and for Bank of Valletta, given that we have a leadership position in the market. Apart from our obligations towards the wider community within which we operate, we have embarked on a program to identify which are the operations that are polluting the environment and launching initiatives to try to reduce that. Some of these would revolve around the use of paper, such as postages when we mail to clients.  

Vanessa: Yes, when you think about how many clients you have, reducing paper will make a difference.  

Kenneth: We're rapid users of technology, so our servers and the heat emission emitted by the servers. So, these would be typically the drivers of carbon emissions. And clearly, we have set up a number of initiatives to reduce that from an organization perspective. Clearly our responsibility when it comes to sustainable finance going forward is to ensure that we're embedding ESG principles within our pricing of credit financing, and this is something that the bank is doing as I speak. We are embedding ESG considerations when it comes, for example, to the construction sector. If you're developing a building that is via more LEED certified that will reflect itself in an incentive by way of a reduction in the applicable interest rates for that specific financing.  

Vanessa: So, it's a carrot rather than a stick but it's a very important carrot. 

Kenneth: I firmly believe that clearly, we are all driven by the need to greenify our economy, and there have been a number of incentives and initiatives at European Commission level around this, and those are being permeated within the member states. Banks are gatekeepers that can significantly influence the behavior of their clients to become greener. And today it's translated into metrics as well. We look at the extent to which we have green loans as a percentage of our loan book as well as a treasury book where we manage the excess liquidity of the bank, and again, we are looking at exiting those sectors which are polluting the environment and going towards green assurances.  

Kenneth: We need to give consideration as well to sustainable preferences when it comes to the investment side as well, because there are two dimensions and the way that these will impact customers. We have green loans within our product catalogue. We've launched a very interesting one last December, which is a 10-year product at 0% interest, which is a product that we've structured with the EIF, because it is an incentive for those businesses that have energy efficient initiatives, and we want to make it attractive for them to invest in these in these initiatives. But equally on the on the investment side, we want to start shifting our customers’ focus towards giving due consideration to investment products which are green in nature.  

Vanessa: People are actually demanding this now. Companies are being squeezed, not just by the customers demanding more accountability, but also by the banks, leading, by example.  

Kenneth: Absolutely and customers are requesting from the banks a product catalogue which has green solutions, which they would normally favour. On the business side, it’s addressing and killing two birds with one stone. You need to satisfy the commercial nature of investing in green, and the rationale for that. There needs to be business case for why you are investing in green, but at the same time, you're also fulfilling your obligations from a CSR perspective that you are shifting towards operations that have a lower impact on the planet.  

Vanessa: ESG is no longer a voluntary thing. People don’t do it just to feel good. It's actually mandatory for regulated companies and listed companies for example.  

Kenneth: There are reporting requirements, but this goes beyond reporting. It’s amazing the take up we're seeing. This product, the 10-year product at 0% interest is also applicable for personal loans, and particularly, we're seeing, you know, strong interest for customers to shift from fuel driven cars to electric cars because there is a financing product which is attractive for them as well. So, the proposition ticks their boxes, and at the same time, they're reducing the use of fuel or eliminating it completely and going completely electric.  

Vanessa: We've spoken about sustainable financing, but can we sort of look towards the future as well. How do you see FinTech being absorbed into your business model?  

Kenneth: Clearly, technology plays a significant role in the digitalization of the way that we service customers. If you look back over these last two decades, banks were driven by the presence of branches in different towns and cities. And the same goes, obviously, for banks abroad. But with the onset of technology, we've moved, I remember, from telephone banking way back in the 80s to internet banking and mobile banking. We’re now shifting towards a nominal channel experience whereby whether you prefer to be serviced over the counter, you have the ability to self-service your requirements over digital because of the instantaneous nature of it.  

Vanessa: At our last interview we spoke about even onboarding online.  

Kenneth: I mean, it's not just onboarding of customers, but equally, if you're applying for a personal loan or a home loan. Today, technology, and the proliferation of AI is enabling customers to self-service their requirements instantaneously. Because even when it comes to the credit risk assessment of the customers, it need not be undertaken by a human so it will look at your income flows, your expenses. It will compute your profile in terms of income and expenses, and then tell you yes, you are given the loan, and the money automatically flows to your account. In fact, on average, a personal loan abroad, which is fully digitalised, takes just ten minutes. The same applies for all other products.  

Vanessa: But what happened to all of these stories we used to hear about? The fact that, you know, it used to take up to a year to open a bank account in Malta. Is that true anymore? 

Kenneth: That has changed markedly. Clearly, given the strong focus on AML and financial crime, there was a focus as well to strengthen the coalition of information and documentation on the basis of which you assess the risk profile of the customer, you understand the nature of the transactions that the customer will process through the account. And on that basis, then you can service the relationship with a degree of ease that's becoming more digitalized today. So, you know, we’ve just launched a digital channel whereby you can upload your sort of your ID cards, you can populate the transactions you expect to process through your accounts without needing to go to the bank.  

Kenneth: Now, clearly, if you have a transaction which is in excess of what you ordinarily would process through your account, that will be flagged and the bank will contact you, but again, you can process and upload that document supporting the transactions through the digital channel. So, these are the ease of banking which banks are introducing in the way that they service customers.  

Vanessa: It's going to be a brave new world, Kenneth. It's been very exciting talking to you, thank you so much for being with us.  

The video interview from the FinanceMalta 16^th Annual Conference can be accessed here.