Circular Economy, Banks, and Other Financial Institutions: What’s in It for Them?

Abstract

The circular economy agenda is widely seen as a response to climate change and is forcing societies to re-evaluate how resources are used towards creating a sustainable economy that is free of waste. Financial institutions are being pressured to finance circular projects and investment. But for financial institutions to participate in the circular economy, there must be a clear benefit to financial institutions. In this paper, I highlight the benefit of the circular economy to banks and other financial institutions. The paper uses discourse analysis methodology to present an overview of the circular economy concept and the benefit of the circular economy to banks and other financial institutions. The findings show that some benefits of the circular economy to banks include the following: (i) greater loan diversification opportunities, (ii) promotes responsible and sustainable banking, (iii) increased lending to circular clients and the recycling sector which means more profit for banks, and (iv) correcting the bad perception about banks in society. Some benefits of the circular economy to other financial institutions include the following: (i) issuance of special insurance policies for reused products; (ii) greater sustainability-adjusted return on investment; (iii) greater funding to microfinance institutions; and (iv) more opportunities for collaborative funding to circular businesses. This study contributes to the scant literature that examines the role of the finance industry in the circular economy.

Circular Economy and Central Bank Digital Currency

“…A circular economy is an economic system, or economic philosophy, that preserves the value of resources and raw materials by minimizing raw materials or resources waste and promoting the reuse and recycling of resources and raw materials [ 16 , 17 ],and [ 15 ]. 3 , p.7) define the circular economy as “a regenerative system in which resource input, waste, emission, and energy leakage are minimised by slowing, closing, and narrowing material and energy loops.”…”

“…They suggest that banks should: develop a common understanding of the circular economy,issue widely accepted and recognized guidelines on circular economy finance; adapt existing finance models to fit into a circular economy model; offer credit lines to circular businesses; create a green bank; train bank staff; promote a strong culture of waste reduction and material re-use; ensure that the board risk committee is competent in circular risk management and control. Also, Ozili [ 15 ] shows that the circular economy offers some benefits to banks such as greater loan diversification opportunities, increased lending to circular clients in the recycling sector, and promoting responsible and sustainable banking. Some benefits to non-bank financial institutions include greater sustainability-adjusted return on investment for investment companies, greater funding to microfinance institutions; and more opportunities for collaborative funding to circular businesses [ 15 ].…”

“…Also, Ozili [ 15 ] shows that the circular economy offers some benefits to banks such as greater loan diversification opportunities, increased lending to circular clients in the recycling sector, and promoting responsible and sustainable banking. Some benefits to non-bank financial institutions include greater sustainability-adjusted return on investment for investment companies, greater funding to microfinance institutions; and more opportunities for collaborative funding to circular businesses [ 15 ].…”

“…Secondly, this study contributes to the literature that examine circular finance. Some studies in this literature include Dewick et al [ 13 ], Aranda-Usón et al [ 14 ], Ozili [ 15 ], etc. The present study contributes to the circular finance literature by showing that a central bank digital currency can act as a reliable low-cost payment solution to facilitate circular economy financial transactions.…”

Circular Economy and Central Bank Digital Currency

“…They suggest that banks should: develop a common understanding of the circular economy; issue widely accepted and recognized guidelines on circular economy finance; adapt existing finance models to fit into a circular economy model; offer credit lines to circular businesses; create a green bank; train bank staff; promote a strong culture of waste reduction and material re-use; ensure that the board risk committee is competent in circular risk management and control. Also, Ozili (2021) shows that the circular economy offers some benefits to banks such as greater loan diversification opportunities, increased lending to circular clients in the recycling sector, and promoting responsible and sustainable banking. Some benefits to non-bank financial institutions include greater sustainability-adjusted return on investment for investment companies, greater funding to microfinance institutions; and more opportunities for collaborative funding to circular businesses (Ozili, 2021).…”