Banking on principle

A Bank that allows you to choose how much interest you receive on savings? It's not quite as good as it sounds. But for altruistic customers, saving with Triodos Bank does allow you to support worthy causes and - if you forgo some or all of your interest - for those causes to borrow money at cheaper rates than they could otherwise.

The bank, based in Bristol, does not offer particularly inspiring interest rates, so even if you choose the maximum interest on offer this is not a case of being guaranteed to profit more while having principles.

Triodos describes itself as a social bank. This means that while it will collect deposits from anybody who cares to open an account, it will only lend to organisations and businesses with social and environmental objectives. Most recently, it has linked up with Friends of the Earth to offer an account whose deposits will be lent only to sustainable energy projects.

Triodos's borrowers have included Neal's Yard Remedies, a company that supplies natural medicines and cosmetics, Windcluster, the UK's leading developer of windfarms, and Cafe- direct, a brand that buys coffee at a "fair price" from Third World producers but still manages to sell at competitive prices through supermarket chains.

Glen Saunders, managing director of Triodos in the UK, says Cafedirect is a classic example of the type of business the bank wants to encourage. "It's set up as a proper business, it is profitable, but it operates with values that are more than commer- cial," he says.

Triodos advanced Cafedirect pounds 450,000 in the autumn of 1994 when it wanted to enter the freeze-dried coffee market.

Ian Lepper, managing director of Cafedirect, says: "We tried a number of high-street banks but weren't able to get the amount of money that we needed. British banks are very conservative, and incapable of understanding what we are doing. Triodos [which is Dutch in origin] was happy to help because the bank was keen to support fair trade."

The introduction of freeze-dried coffee has been a huge success for the brand, expanding its business to 3 per cent of the roast and ground-coffee market in the UK. The company says this enables it to buy more coffee at a fair price from producers in Africa and South America.

Fiona Kam, at the Stroud-based development agency Rural Investment Overseas, has experienced Triodos both from a business point of view and as an investor. Her agency has worked with Triodos to secure funding for overseas projects, while as a personal saver she has recently opened a tax-free Tessa account at the bank, which pays 6.5 per cent interest, with the eventual aim of benefiting her four-month-old son.

Triodos operates several different savings accounts, enabling customers to give focus to how their money is used. The Earth Saver Account, launched in conjunction with Friends of the Earth, invests in sustainable energy projects. Windcluster, for example, used money from Triodos to set up a 1.1MW wind energy project in Cumbria. This generates enough "clean" energy to provide power for more than 500 homes.

Earth Saver, which is operated by post, offers investors different rates according to whether they choose instant access, 33 days' notice of withdrawals, or 180 days. Its interest rates are not particularly high, ranging from 0.5 per cent for pounds 10 on instant access to 5.5 per cent for pounds 100,000 on 180 days. That is on a par with rates offered by high-street banks, if not the best of the building societies and the likes of Direct Line.

In common with the other accounts on offer from Triodos, investors can elect to surrender some or all of their interest for the good of society. Interest earned on the Earth Saver account can be accumulated in the account, paid out half yearly, or donated to Friends of the Earth Trust to support research into energy issues.

The bank's Social Target Account takes the idea of directing how your money is used one step further. Triodos provides a list of projects and sectors of work, and the saver chooses where his or her money is to be used. The saver can also select an interest rate up to a maximum of 3.5 per cent gross. When a lower rate is chosen, the targeted project benefits from a correspondingly lower loan rate.

Plenty of Triodos's customers are choosing to be altruistic - 8 per cent of the bank's depositsreceive no interest. Mr Saunders says the borrowers who benefit from these situations would have to pay only between 2 per cent and 5 per cent interest to cover the administration costs of the bank.

So far Triodos is tiny - a factor that may deter potential investors. The bank was founded in The Netherlands in 1983 to lend money on a social and environmental basis. Last year, it merged with Mercury Provident, a social bank active in the UK since 1974, and has now settled its UK operation in Bristol. Despite the merger, and the opening of a third branch in Belgium, the entire bank has just pounds 112m under management in 15,000 accounts. It has 1.3 million loans on its books. The UK branch is responsible for 187 of these, worth pounds 5.6m, with deposits of pounds 11.3m in just 1,358 accounts so far. That may give the jitters to those who are used to dealing with the likes of NatWest, which handles deposits of pounds 88bn in 13 million accounts, and loans worth pounds 88bn.

That said, Mr Saunders points out that Triodos is subject to the Deposit Protection Scheme (for deposits up to pounds 20,000) run by the Bank of England, and is tightly supervised by its own regulator, the Dutch Central Bank.