Your Money: If there's no muck, is there any brass?

Three 'ethical' financial institutions claim to be going strong. But what do they offer? Steve Lodge finds out; HOW TO SAVE IT, HOW TO SPEND IT, HOW TO MAKE IT GROW

Ethical banks may seem a contradiction in terms. But they do exist, at least in terms of where they will put savers' money. Loans are only made to borrowers who clear certain moral and green hurdles. And as with ethical stock market investments and personal equity plans, which also restrict the shares into which they put your money, ethical banks seem to be gaining ground.

Three institutions are flying the ethical flag: the Co-operative Bank, which is by far the largest and best-known, the much smaller Ecology building society and Triodos Bank - both of which have just one branch each and operate overwhelmingly by post.

The Co-op will not lend to oppressive regimes, the arms industry or businesses and organisations involved in unnecessary cruelty to animals or harming the environment. The Ecology and Triodos go one step further, actually targeting "ethical" borrowers - lending on environmentally friendly properties or to "green" energy projects, for example.

Sixty thousand new personal customers have come to the Co-op in the past year, says the bank, and new account openings are running at double the rate of last year. It describes its typical recruit as "concerned but not a fanatic" - the sort of person who would prefer to buy ecological washing powder.

The Ecology - which claims to have the fastest-growing business of any building society - has in fact suspended new account openings because it cannot lend deposits out quickly enough. A typical Ecology mortgage might be for a house being restored using recycled timber and stone, or one that helps in the regeneration of a community. The society hopes to reopen its doors to new savings account openings later this year.

The youngest of the three institutions, Bristol-based Triodos Bank, has recently joined forces with Friends of the Earth to launch an account called Earth Saver, deposits in which will only be lent to "green" energy projects such as wind farms. So far, 300 savers have signed up. The bank is also planning to launch a savings account that will fund "microcredit" in the Third World - lending sums as small as a few pounds for several months to individuals; and a fund that will invest in land given over to organic agriculture.

A warm feeling about where your money goes is only part of the story, of course. As a Co-op spokesman says: "Ethics alone don't sell bank accounts. People want rates and service." But here customers cannot be as sure of getting better treatment from the "ethical" banks.

All three institutions offer a range of savings accounts, including tax-free Tessas. The Co-op has fuller banking services including a current account and a clutch of affinity credit cards variously supporting Amnesty, Oxfam, the Labour Party and the Liberal Democrats.

Some deals are better than others. Co-op's Pathfinder pays a competitive 4.75 per cent and can be operated through cashpoints; Triodos's Earth Saver - operated by post - looks less lucrative. The Co-op's student package falls some way short of that offered by other mainstream institutions - which is perhaps surprising given that students might be expected to be a natural market for ethical banks.

Triodos, by comparison, offers savers the option of forgoing some or all of the interest on offer - which is nothing spectacular - to allow the bank to charge borrowers lower loan rates.

The Co-op's ethics extend to offering an automatic pounds 10 payment to current account holders if the bank should, for example, make any financial error on a statement or a mistake in a direct debit. It pays out around 600 times a month at present - an admission that may not be wholly reassuring.

The Co-op has also been criticised for not being straightforward with some of its advertising. Last month, for example, it was asked by the Advertising Standards Authority to change an ad for credit cards which the ASA felt could mislead.

Moreover, with just 150 branches or kiosks - primarily in the North-west and South-east - and 250 outlets in Co-op shops, the bank does not by any means have a presence on every high street. But, says the bank, it has the biggest telephone banking operation in the country and Co-op customers also get free use of Link cashpoint machines.

And from next month the bank will pilot a scheme allowing account holders to pay in and withdraw money from post office branches in the North-west. Alternatively, cheques can be deposited by Freepost.

Co-operative Bank

An ethical policy launched in 1992 bans lending to a range of borrowers including countries that deny people human rights and companies that test cosmetics on animals. Also, unusually, the bank offers service guarantees to customers that, if broken, trigger a pounds 10 payment. It claims to be the largest telephone banking operation in the UK and offers a range of savings accounts - including Pathfinder, paying 4.75 per cent on pounds 5,000 minimum - and charity-linked credit cards. It has 800,000 individual customers, 150 branches and kiosk outlets, and 250 outlets in Co-op shops. Customers have free use of Link cash machines. Phone 0800 905090.

Ecology Building Society

Britain's youngest building society, founded in 1981, gives mortgages only on properties that are environmentally friendly, for example those constructed with old-bricks or used timber, or derelict properties being renovated. It says it will not widen profit margins by cutting savings rates before borrowing rates. It offers a "one size fits all" 6.99 per cent variable-rate mortgage with no discounts and a range of postal savings accounts, including a tax-free Tessa (5.85 per cent), although it is not allowing new account openings at present. It has 5,000 savers and 450 borrowers and one branch in Keighley, West Yorkshire. Phone 01535 635933.

Triodos Bank

The Dutch "social" bank founded in 1983 will only lend to organisations and businesses with social and environmental aims. It offers a range of savings accounts, some allowing savers to target specific projects to which money will be lent, and one that is endorsed by environmental group Friends of the Earth. Accounts are postal: Earth Saver (endorsed by FoE) pays 3.5 per cent on pounds 5,000. The bank has 1,500 savers and 200 loans. Borrowers include Cafedirect, which buys coffee at a "fair price" from Third World producers. There is one branch in Bristol. Phone 0117 973 9339.