1 It's an urban legend
Donald Duck was never banned in Finland. According to Wikipedia, this is one of the urban legends created by the Finnish people.
2 The fictional reason for the banning
The circulating story, which is not a true story, says that the Finnish government banned Donald Duck because he doesn't wear pants.
3 Where the story came from
In 1977, Helsinki councilman, Markku Holopainen, proposed discontinuing the funds to youth centers to buy the comic magazine Aku Ankka, which featured Disney characters, because of the city's financial problems.
4 The man who banned Donald Duck
Markku Holopaine got a reputation as the man who banned Donald Duck since he wanted to reduce the funds going to buying the comic magazine that featured Donald. (See Why game of Thrones should be banned?)
5 The media exaggerated the stories
Both foreign and local media added a bit of exaggeration to the stories and this made it seem like it was a real incident.
6 The jokes by Matti Holopainen
The vice chairman of the Youth Board in Helsinki, who attended a meeting with the city's youth department, said that during the board meeting, Mr Matti Holopainen kept making jokes about Donald Duck including the pants joke. While the man was joking, the news was spread out as if it was real.
7 Donald Duck wasn't banned in Kemi
In another similar incident in Kemi, the newspapers exaggerated the news and made it seem like Donald Duck was banned because of his unclear relationship with Daisy Duck. (See Why some Games are banned?)