International Journal of Emerging Markets

Corporate social responsibility of Islamic and conventional banks: The influence of

institutions in emerging countries
Elisa Aracil,
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Elisa Aracil, (2019) "Corporate social responsibility of Islamic and conventional banks: The
influence of institutions in emerging countries", International Journal of Emerging Markets, https://
doi.org/10.1108/IJOEM-12-2017-0533
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Islamic and
Corporate social responsibility of conventional
Islamic and conventional banks banks

The influence of institutions in

emerging countries
Elisa Aracil Received 14 December 2017
Department of Economics, Universidad Pontificia Comillas, Madrid, Spain Revised 3 May 2018
13 August 2018
9 October 2018
Accepted 13 October 2018
Abstract
Purpose – The purpose of this paper is to compare the sustainability practices of Islamic and conventional
banks, with the aim of evaluating whether their Corporate Social Responsibility (CSR) strategies converge or
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diverge in response to formal and informal institutions in an emerging country.

Design/methodology/approach – Drawing on institutional theory, this study contextualizes the
competitive scenario through the National Business System (NBS) framework, and showcases the CSR
strategies employed by large conventional and Islamic banks in Turkey. CSR patterns are examined from
different angles such as motivations, strategy, actions and institutional results.
Findings – Within the same institutional environment, Islamic and non-Islamic banks combine convergent
and divergent models to accommodate institutional realities in their CSR policies. Islamic banks exhibit an
implicit commitment to CSR that is mostly based on informal institutions, whereas conventional banks use
explicit CSR strategies as a means to fill the voids in formal institutions. In addition, philanthropy-oriented
CSR prevails in Islamic banks, as opposed to the CSR actions associated with core business that are followed
by conventional banks.
Social implications – An increased focus on formal institutions and explicit CSR actions by Islamic banks
may further contribute to social well-being in emerging countries.
Originality/value – This study contributes to the paucity of research, from an institutional perspective,
related to CSR practices amongst Islamic and conventional banks in emerging countries.
Keywords CSR, Institutional theory, Emerging markets, Banks/other depository institutions,
Comparative business systems, Financial and industrial structure
Paper type Research paper

1. Introduction
Banks play a major role in tackling social, environmental and developmental challenges
(Belal et al., 2015) and can positively influence communities through the implementation of
Corporate Social Responsibility (CSR) (Durrani, 2016). As a result, the financial industry has
been intensively committed to sustainable strategies (Pérez and Rodríguez del Bosque,
2012), constituting a sector leader in CSR involvement (Forcadell and Aracil, 2017b). CSR
is a multidimensional construct that integrates environmental and social impacts into the
business operations (Dahlsrud, 2008). Furthermore, it addresses the expectations of a society
that are embodied in its institutions (Brammer et al., 2012). Thus, several authors
(e.g. Carnevale and Mazzuca, 2014) suggest that banks’ sustainable strategies vary in the
light of their institutional context. Moreover, emerging countries show unique institutional
settings (Rottig, 2016) that differ from western institutional environments.
The role of institutions in emerging markets has gained attention over recent decades, and
reflective of this, one-third of publications in the International Journal of Emerging Markets
address this term (Newburry et al., 2016). According to the institutional theory (North, 1990),
formal and informal institutions (Puffer et al., 2016; Scott, 1995) constitute the “rules of
the game” (North, 1990) that shape corporate practices in developing countries (Feng et al.,
2017). Formal institutions relate to the functioning of regulatory institutions such as International Journal of Emerging
Markets
constitutions, laws, property rights and governmental regulations (Mair et al., 2012). Formal © Emerald Publishing Limited
1746-8809
institutions may guide institutional mimetic isomorphism (DiMaggio and Powell, 1983) DOI 10.1108/IJOEM-12-2017-0533
 IJOEM or a firms’ emulation of another firm’s best-practice as a means to increase legitimacy
(Monticelli et al., 2018). Therefore, isomorphism may lead to convergent CSR behavior from
companies sharing the same business context, whether they are conventional or Islamic
organizations. In contrast, informal institutional values relate to ethics, codes of conduct and
religion (Brammer et al., 2009) and also have a strong legacy in companies’ strategies,
including the CSR conception. Some authors (e.g. Farook, 2007) propose that Islamic banks are
socially responsible because they fulfill a collective religious obligation. Moreover, and
because Islam guides economic and private aspects of life (Rice, 1999); Islamic banks show a
more comprehensive business orientation than western companies. Thus, CSR policies that
are mostly guided by informal institutions may lead to divergent strategies when Islamic and
conventional banks are compared, even in the same institutional environment.
The CSR activity of conventional banks in emerging markets has deserved little
academic attention to date (Hu and Scholtens, 2014; Forcadell and Aracil, 2017b; Jain, 2017)
and there is an even greater lack of investigations related to Islamic banks’ CSR (Aliyu et al.,
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2017). In addition, there is a shortage of research that aims to compare the CSR practices of
conventional and Islamic banks with a few exceptions (Aribi and Gao, 2010; Durrani, 2016;
Nobanee and Ellili, 2016). Finally, and to the best of our knowledge, this is the first study
that investigates the institutional motivations for CSR within Islamic banks. However, there
is a growing and global interest in Islamic financial institutions, as this industry nearly
doubled in size over the period 2007 to 2010 and has grown faster than conventional banks
since then (Abedifar et al., 2015).
Thus, we are concerned about the different modes of CSR exhibited by conventional and
Islamic banks in developing countries. This study attempts to advance existing knowledge
on how, and to what degree, the CSR of conventional and Islamic banks responds to local
demands based on the institutional context and how those practices may differ or converge.
For that purpose we analyze the main differences in CSR actions, drivers, motivations and
outcomes within Islamic and conventional banks through the institutional theory lens, to
finally provide social and managerial implications.

2. The concept of CSR in Islamic and conventional banks

CSR practices emerging from religion at Islamic banks
Religion can influence the CSR understanding (Goby and Nickerson, 2016). The Shariah is
the sacred law of Islam derived from the Holy Qur’an and the Prophet’s hadith. This system
of principles and values guides the basic beliefs of Islam from a holistic approach, including
personal, social, political and economic domains (Dusuki and Abdullah, 2007a). The
influence of Islam and its integration into all aspects of private and economic life is well
documented in the Holy Qur’an, which proposes an organization for society (Aribi and Gao,
2010). Moreover, the Shariah “is a canon of law whose purpose is moral as well as legal,
unlike most western codes of law” (Williams and Zinkin, 2010, p. 525).
Basah and Yusuf (2013) link the concept of Islamic CSR to the Islamic principles of
Maqasid-Al-Shariah and maslahah, which may sometimes involve the same meaning
(Dusuki and Abdullah, 2007a). Maslahah implies public good or public benefit, whereas
Maqasid constitutes the main goal of the Shariah, which is to promote well-being and
human development through education, the eradication of poverty (Sairally, 2007) and
justice establishment (Amin et al., 2015; Antonio et al., 2012; Shamsudin and Mohammed,
2015). Thus, Islamic banks, as any other Islamic institution, have a sense of social
responsibility (Farook, 2007), being urged to respect Maqasid, which may serve as an
adequate guide for Islamic CSR (Dusuki and Abdullah, 2007a; Yusuf, 2012). In this manner,
the unique and complex context of Islamic banks and their need to comply with the Shariah
(Safieddine, 2009) determines that business should be beneficial for both a company and
society, in accordance with Maqasid and maslahah. This is in line with Aliyu et al. (2017)
 who suggest a complementarity between sustainability and Islamic banks due to the ethical Islamic and
nature of Islamic finance. Thus, ethical values within Islamic banks should lead to conventional
sustainability and well-being (Myers and Hassanzadeh, 2013). banks
Philosophy of Islamic banking as opposed to conventional banks
Islamic banks’ business model differs widely from interest-based conventional finance in
three main aspects: ethical foundations, products and governance. Shariah law constitutes
the distinct underlying ethical principle (Abedifar et al., 2015; Belal et al., 2015) that
integrates moral values within the business context. Thus, Islamic banking rests on a
moral framework provided by the Shariah as opposed to conventional banks that are not
subject to religious obligations (Basah and Yusuf, 2013). As discussed above, invoking the
maslahah ideal implies that Islamic banks should encourage the interests of the
community (Dusuki and Abdullah, 2007a). Actually, the first Islamic bank, “Mit Ghamr
Local Savings Bank in Egypt,” which was founded in 1963, was established as a social
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bank to promote social welfare (Belal et al., 2015; Nor and Hashim, 2015). Operational
differences include the prohibition of both riba (interest) and haram (unlawful) operations,
understood as the funding of activities potentially detrimental to society (Dusuki and
Abdullah, 2007b). By contrast, in the interest-free system banks allocate funds under the
method of profit-loss participation (Gün, 2016) without limitations in their investment
philosophy, with some notable exceptions such as the socially responsible investment
funds. These ethical funds managed by conventional banks abstain from investing in
companies engaged in unhealthy or polluting activities, which may resemble to the Islamic
banking investment philosophy (Saiti and Noordin, 2018). Besides, Islamic firms are
obliged to pay the religious tax Zaqat. This entails a compulsory payment so that wealth is
redistributed for the welfare of the community (Aribi and Arun, 2015). Finally, concerning
governance, the Shariah Board, or religion-based supervisory board, constitutes the most
important difference between the two types of banks (Farook et al., 2011). Islamic banks
are obliged to respond to a board of Islamic scholars who monitor whether their operations
are Shariah-compliant, thus ensuring the credibility of these organizations (Quttainah and
Almutairi, 2017). Shariah boards can follow a centralized model (Shariah Supervisory
Board), which is compulsory at national level, or a voluntary model (Shariah Advisory
Board) created by the Islamic institution (Gün, 2016). Therefore, Islamic banks operations
and governance must comply with both the existing regulatory framework and the
Shariah, as opposed to their conventional counterparts which are not subject to those
additional religious restrictions (Basah and Yusuf, 2013). In conclusion, Islamic finance
has evolved from an alternative to conventional banks to a “demanding” financial system
(Rashid and Paltrinieri, 2018) that provides financial services to a growing customer base
in compliance with Islamic principles.

Confluent approaches of CSR in Islamic and conventional banks

Against this backdrop, Islamic and conventional banks may resemble each other in specific
CSR dimensions such as human resources and environmental care (Farook, 2007; Khurshid
et al., 2014). Those particular dimensions are listed in the European Commission’s definition
of CSR as “the responsibility of enterprises for their impacts on society […]. At least covers
human rights, labor and employment practices such as training, diversity, gender equality
and employee health and well-being, and environmental issues.” Concerning the relationship
with employees, CSR has been found to be a tool for attracting and retaining talent
(Glavas and Kelley, 2014) for both Islamic and conventional banks. In turn, environmental
concerns may not seem relevant for the non-polluting banking industry. However, because
banks allocate funds, they can indirectly promote environmental care amongst borrowers
through their pro-environmental behavior (Rice, 2006). By complying with maslahah,
 IJOEM Islamic banks are expected to show clear funding guidelines that prohibit activities deemed
harmful to society, such as environmental degradation (Dusuki and Abdullah, 2007a).
There are numerous verses in the Holy Qur’an encouraging environmental preservation as a
means of protecting God’s creation (Khurshid et al., 2014). This reflects the Islamic sense of
responsibility toward the environment (Yusuf, 2012) and the ethical basis that underlies
environmental concerns. In turn, some conventional banks are pre-empting environmental
regulation by self-abstaining from funding polluting industries. This constitutes an element
of their CSR activities that extend beyond the current regulatory framework and complies
with the UN’s Global Compact, which encompasses human and labor rights and
environmental care. In this vein, Williams and Zinkin (2010) found no divergence between
Islamic principles and the UN’s Global Compact. Accordingly, Islamic and conventional
banks may play a leading role in promoting social welfare and environmental care through
their CSR policies.
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Motivations for CSR of Islamic and conventional banks

The intermediary role of banks is crucial for economic development (Bencivenga and Smith,
1991) exerting relevant social impacts. The financial sector has been intensively involved in
the adoption of CSR policies (Pérez and Rodríguez del Bosque, 2012), despite the voluntary
nature of CSR. However, Jackson and Apostolakou (2010) highlight the different
understandings and practices of CSR across companies as it is built upon a “social
construction.” In this vein, “although banks exist on their core banking functions, which are
solely economic, they strive to construct their identities on non-economic concerns in order
to be perceived as trustworthy corporate citizens that exist for the benefit of society”
(Ozdora-Aksak and Atakan-Duman, 2015, p. 126). Thus, the motivation for engaging in CSR
is twofold, normative and instrumental ( Jackson and Apostolakou, 2010), which is
associated, respectively, with the outcome of CSR on society and on the company.
Instrumental motives comprise company-specific forces that justify CSR engagement as
a strategic tool that enhances economic and financial performance for both conventional
(Forcadell and Aracil, 2017a; Margolis et al., 2009) and Islamic banks (Platonova et al., 2018).
In addition, CSR may provide a signal to stakeholders that marks a reputation (Doh et al.,
2017), which is particularly relevant within the services industry (Borda et al., 2017), and,
more specifically, for banks operating in emerging markets (Amaeshi et al., 2016) where
poverty, corruption and inequality are widespread. For these reasons, the instrumental
motives refer to the business case for CSR (Smith, 2003).
The ethical or normative motivations to engage in CSR try to explain why firms follow
certain strategies that benefit society (Melé et al., 2006). In this field, there is an important
diversity of approaches as CSR is identified as “the right thing to do” (Smith, 2003). In the
particular scenario of emerging countries there is a growing amount of literature that
emphasizes the role of companies’ CSR in contributing to their development (Doh et al., 2017;
Khan, 2013). A stream of literature focusing on banks’ CSR identifies these ethical motivations
with a welfarist approach (Aliyu et al., 2017; Nor and Hashim, 2015; Weber, 2005) that promote
social well-being. Thus, the normative case for CSR lies on the moral obligations of a firm
toward a wide variety of stakeholders, beyond the interests of the shareholders.
In this manner, Islamic finance is fueled by ethical considerations, since the foundation of
this business model is closely attached to religion (Haniffa and Hudaib, 2007) which is a
major source of morality and ethical behavior (Kanagaretnam et al., 2015). Moreover, Islamic
banks regard themselves as CSR-based organizations (Khan, 2016) given that the Shariah
provides the best guidelines for the implementation of their CSR policies (Durrani, 2016).
Therefore, CSR in Islamic banking is endogenous and etho-religious based (Khan, 2013), as
their ethical motivations derived from the Shariah dominate business (Rice, 1999).
In contrast, conventional banks do not show a specific ethical identity as western culture
 separates the economic and ethical domains, and the religious dimension is not integrated Islamic and
into business practice (Quttainah and Almutairi, 2017). Thus, a priori, ethical motivations conventional
may prevail in Islamic banks’ CSR, whereas their conventional counterparts may show a banks
higher inclination toward instrumental motives. However, although both Islamic and
conventional banks can derive their CSR strategies from instrumental or ethical drivers, the
two motivations may also coexist, leading to “win-win” situations that benefit companies
and society (Forcadell and Aracil, 2017b; Schreck et al., 2013).

Formal and informal institutions as determinants of Islamic and conventional CSR

Corporate practices, including CSR, tend to vary at the country level (Arya and Zhang,
2009; Brammer et al., 2012) as a reflection of multiple institutional conditions (Campbell,
2007). As company actions, and in particular CSR strategies, do not happen in a vacuum
but are embedded within a specific institutional context, firms need to adapt their CSR
practices to the particular institutional scenario in which they operate, which may prove to
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be complex and diverse (Amaeshi et al., 2016; Jamali and Karam, 2018). Lim and Tsutsui
(2012) found that social forces, and not just company-specific motivations, constitute key
drivers of firms’ CSR approaches. In the same vein, Joutsenvirta and Vaara (2015) argue
that it is necessary to place responsible business practices within the specific institutional
context in which they are intended.
The institutional theory (North, 1990) provides a suitable lens for analyzing the
particular local requirements that arise from specific, external, political–economic
dimensions and cultural-cognition factors. Institutional voids are referred to by Khanna
and Palepu (1997) as the absence or malfunctioning of institutions that impedes or creates
barriers to business activity. Although institutional voids may appear in both developed
and developing nations, they constitute a key characteristic of emerging markets
(Rottig, 2016), which very often display less well-developed institutions. Consequently, the
present comparative study of the CSR strategies of conventional and Islamic banks focuses
on the specific particularities of emerging markets where institutional voids are more
pervasive (Boddewyn and Doh, 2011). In this context, the CSR effectiveness lies on local
receptivity (Lim and Tsutsui, 2012), which depends on whether it fits in with the local
institutions, be they formal or informal. Accordingly, banks may adapt their CSR to fill
institutional voids in emerging markets (Zhao et al., 2014) by focusing on local expectations
related to their extra-financial obligations.
In particular, we characterize the institutional context by using country institutional
profiles within the National Business System (NBS) (Forcadell and Aracil, 2017b; Jamali and
Karam, 2018). The NBS classifies institutional forces into different categories such as the
financial, political, educational, labor and cultural systems. This categorization is suitable
for the purposes of this research, as Matten and Moon (2008) suggest that distinct CSR
conceptions may be attributed to differences in political, financial, educational and labor
systems in addition to cultural beliefs. Thus, the NBS has been proposed as a means to
analyze the links between the specific institutional context and a company’s CSR
(Baughn and McIntosh, 2007; Ioannou and Serafeim, 2012).
As an institutional environment is an assembly of both formal rules and informal
norms (Mair et al., 2012), informal institutions that rule behavior and mental models such
as cultural heritage and religious beliefs (Brammer et al., 2012) need to be assessed in order
to gain a complete perspective of the business context in which CSR policies are
embedded. In this respect, the NBS configuration incorporates informal institutions within
the cultural system that affect the development of identities and have an impact on
managerial decisions regarding CSR (Ioannou and Serafeim, 2012). Prior studies have
found divergent CSR patterns due to the cultural and religious characteristics of a
country’s informal institutions (Chapple and Moon, 2005; Ramasamy et al., 2010).
 IJOEM Conversely, some authors (e.g. Marquis et al., 2007) argue that companies sharing a
common institutional environment will tend to present convergent behaviors due to
mimetic isomorphism (Deephouse and Suchman, 2008). That is, within the same country,
institutional forces may lead companies to behave similarly, particularly regarding CSR
actions. For this reason, it may be possible to identify convergent CSR actions for firms
present in countries with similar institutional environments as they follow institutional
forces and local receptivity.
In summary, this study builds on the idea that in emerging countries the institutional
environment in which firms operate constitutes an external driver for CSR (Amaeshi et al.,
2016; Campbell, 2007). As discussed above, when sharing the same institutional
environment, Islamic and conventional banks’ CSR strategies are influenced by the
prevailing formal and informal institutions. It follows that both types of banks present
different philosophical orientations of their businesses based on a particular informal
institution (ethical values and religion). By contrast, conventional and Islamic banks may
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resemble in how they respond to specific formal institutions or in the motivations

underlying the pursuit of specific CSR policies. Thus, the aim of this paper is to test the
hypothesis of convergence vs divergence of CSR models across Islamic and conventional
banks in developing countries by proposing the following research questions:
RQ1. Do formal institutions support CSR actions in developing countries and lead to
convergent strategies between Islamic and conventional banks?
RQ2. Do informal institutions support CSR actions in developing countries and lead to
divergent strategies between Islamic and conventional banks?

3. Research design
Methodology
To examine differences in CSR within conventional and Islamic banks driven by
institutional forces this investigation focuses on qualitative in-depth case studies (Yin, 2003)
which is an appropriate methodology for intricate social conditions (Ullah et al., 2014).
Qualitative research aims to describe, interpret and gain a deep knowledge of a social reality
in a particular context (Pérez and Rodríguez del Bosque, 2012). Moreover, the multiple-case
investigation presented here brings more robustness than a single-case study (Yin, 2003).
Comparing and contrasting are key qualitative analysis techniques (Tesch, 2013) that are
applied “within case” and “cross case” (Eisenhardt, 1989; Miles and Huberman, 1994). The
two banks analyzed have similar characteristics but also different ways of understanding
and implementing CSR in a developing county, resulting in two cases that are suitable for
comparing and contrasting as they present both maximum and minimum variance
(Hamel, 1991). The firms in the study are important players within the Turkish banking
sector, which minimizes inter-case differences, and at the same time they provide potentially
significant differences as they deliver conventional and Islamic banking services,
respectively. A purposive sampling technique (Eisenhardt, 1989) was employed for data
collection, including primary and secondary sources (Table I).
Semi-structured in-depth interviews were conducted with senior sustainability managers
at both banks. The interviewees were selected on the basis of their position in the respective
banks, which ensured their involvement in CSR policies (Aribi and Arun, 2015). To avoid
biased answers, the interviews were triangulated with secondary sources of data such as
sustainability, annual and integrated reports, stock market indices, corporate
communications and academic publications. The main objective of the interviews was to
examine the role that formal and informal institutions exert on banks’ CSR motivations,
practices and outcomes (Table I).
 Primary data: structured interviews Secondary data
Islamic and
conventional
1. CSR philosophy and specific actions Bank C 2010 to 2017 Annual Reports banks
How CSR is conceived within the bank and through which Bank C 2016 Sustainability Report
specific actions
2. Instrumental and/or ethical motives to engage in CSR Bank C. Social and Environmental Policy
Expected CSR implications for the bank and for the local Bank C. Human Rights Policy
society and communities
3. Salient institutional dimensions and their influence in CSR Bank C. General Code of Conduct
strategies
Perceptions of prevailing institutional characteristics, both Bank I (and parent company). Executive
formal and informal Summary 2016
Specific institutional voids expected to fill through CSR Bank I (and parent company) Responsible
strategies Banking Report 2016
4. Explicit and/or implicit CSR actions
CSR actions implicit in religious mandates or explicit and Bank I (and parent company) 2010 to 2017 Table I.
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deliberate forms of CSR related to core business Annual Reports Research design

Context
This study empirically explores the CSR strategies of leading conventional and Islamic
banking institutions in Turkey, which is an emerging country that offers a dual banking
system. This scenario is suitable for the research purpose of this paper as it offers the
unique possibility of comparing firms that share the same institutional setting but differ in
their internal principles and ethical identities. Turkey is home to a number of dedicated
Islamic banks, which are referred to as participation banks, as well as to Islamic window
operations offered through conventional banks. Participation banks are allowed to conduct
banking activities in Turkey in compliance with the Shariah, have enjoyed an impressive
asset growth of 27 percent since 2005 and have doubled their share of the total banking
sector assets between 2005 and 2016 (Islamic Financial Services Board, 2017). Banking in
Turkey is particularly interesting because of the business opportunity offered in a region
with GDP per capita above $10,000[1] nearly 44 percent unbanked population and a total
loans to GDP 20 percent below the Eurozone levels (World Bank, 2016). Thus, it is an
underpenetrated market with strong growth potential, backed by attractive demographics
(as the median age of the 80million people residing in Turkey is 31 years old). Despite recent
political instability, the Turkish financial industry has continued to provide uninterrupted
service and has become the second largest in emerging Europe by asset size, behind Russia
(The Banks Association in Turkey, 2017).
Thus, Turkey presents an interesting context to test the hypotheses of this paper,
because of the size of its economy, the dual banking system that it offers and its key position
in participation banking as highlighted by the annual growth rate of this segment.

Sample
This research examines two retail banks, a conventional bank and an Islamic bank, referred
to as Bank C and Bank I, respectively. Table II shows specific internal characteristics and
key indicators that make the two cases suitable for comparison. Interestingly enough, none
of the bank provides the total amount of CSR expenses over the period, as these tend to be
distributed internally across different divisions, especially when these CSR actions are
related to the core business.
Founded in 1946, Bank C is the second largest bank in Turkey by asset size. Its main
shareholder is the second largest Spanish financial institution. This leading European bank
bought an initial stake in 2010 and since then has increased its participation to reach a
 IJOEM Key indicators Conventional bank Islamic bank

Assets (bn $) 95.8 10.09

Branches 942 286
Employees 19,000 3,989
Net profits (m $) 1,350 1.138
Parent company stake (%) 49.85 67.03
Rank (by asset size) No. 2 (among Turkey’s No. 2 (among Turkey’s participation
Table II. private banks) banks)
Banks’ descriptive Free float (Istanbul stock exchange) 50.07% nm
indicators Source: Company data, 2017

controlling stake. Its distinctive and superior CSR characteristics were highlighted by
Ozdora-Aksak and Atakan-Duman (2015) in their comparative study of CSR communication
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within the eight largest Turkish banks. In turn, Bank I, established in 1985, provides
Shariah-compliant services. Since 2008 it is a controlling subsidiary of the first and largest
bank of Saudi Arabia. Bank I ranks second in terms of assets within Islamic financials in
Turkey and holds a 30 percent market share in its segment. The bank has been reckoned as
“Best Islamic Bank in Turkey”[2] for three consecutive years.

4. Findings
Institutional voids in Turkey
Table III presents the analysis of the institutional context in Turkey between 1990 and 2016
based on the NBS to identify the major institutional deficits.
Within the educational dimension, the low educational quality, and the implications in the
labor market constitute a major institutional void. In Turkey, the PISA (Program for
International Student Assessment, Organization for Economic Cooperation and Development
(OECD), 2015) results stand below the OECD average performance in all competencies. PISA
tests are a good indicator of institutional failures related to educational quality (Forcadell and
Aracil, 2017b). The quality perspective allows considering the challenge of weak education in
emerging markets from a different angle beyond the more common measures related to illiteracy

1990 2000 2010 2016

Finance
Account at financial institution (% population aged 15+) na na 57,6 56,7
Saved at a financial institution (% population aged 15+) na na 4 9
Domestic credit provided by financial sector (% of GDP) 19.5 37.0 68.0 80.6
Education
Primary completion rate, total (% of relevant age group) 93 na 99 99
Student skills (PISA ranking over 72 countries) na na 41 49
Economy
GDP growth (annual %) 9.3 6.6 8.5 3.2
Income share held by lowest 20% 5.9 5.8 5.9 5.8
Environment
Energy use (kg of oil equivalent per capita) 978 1,201 1,475 1,657
Table III. CO2 emissions (metric tons per capita) 2.71 3.42 4.12 4.49
Institutional analysis Electric power consumption (kWh per capita) 930 1,653 2,492 2,855
within NBS categories Source: World Bank, except PISA tests (OECD)
 and school enrollment. A failure in specific skills leads to institutional voids in the labor markets Islamic and
of emerging countries (Farrell et al., 2006) including gender diversity issues. Within the political conventional
dimension, environmental care constitutes a key issue in Turkey, as carbon emissions, energy banks
and electricity consumption have increased above GDP trends. As far as the financial dimension
is concerned, the major weakness relates to the stagnant financial inclusion levels. This is shown
by the 56.7 percent of adults holding a current account and the scant 9 percent that saved at a
financial institution in 2016 (World Bank). The institutional framework plays a critical role in
enhancing financial inclusion in developing countries (i.e. Bongomin et al., 2018) because low
financial access is associated with social exclusion and poverty (Rojas-Suarez, 2010). As a result,
financial inclusion is not an end in itself, yet it is a means to contribute to the end of poverty (UN,
2015). In this respect, financial inclusion constitutes a private sector solution for a global
challenge. Bank penetration, financial education and capital markets development definitely
helps in the advancement of financial inclusion. Turkey shows an accelerated growth in these
areas over the last decade (Table IV). However, conventional and Islamic banks are contributing
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to this phenomenon at a different pace. For example, Islamic banks, despite doubling their asset
size, lag behind the industry that has multiplied its assets by six.

Findings from interviews

This section captures experiences and behaviors that are relevant to the research questions
and are summarized in Table V. For doing so, banks’ CSR actions were associated with
specific institutional voids grouped in accordance with the NBS framework. From the NBS
analysis above, the major institutional deficits in Turkey encompass low educational quality
and its potential gender diversity implications, financial exclusion and pollution.
Concerning educational weaknesses, Bank C develops country-specific educational programs
related to general education for children and adults and financial literacy. In this respect:
The Teachers Academy Foundation consists in enhancing teachers’ abilities and capabilities in
order to improve educational levels in Turkey.
In turn, Bank I states:
We engage in educational projects as a means to generate value to customers and employees. In the
specific case of individual clients, we are involved in educational initiatives aimed at low income
social segments.
This addresses an important institutional void within education, as the institutional failure
in Turkey is not related to educational enrollment, which is complete at secondary level

2005 2016
a
Automated Teller Machines (ATM) 21,970 48,421
Bank assets (bn TL) 407 2731
Total assets to GDP (%) 63 105
Share of participation banks in banking
sector assets (%) 2.4 4.9
Consumer loans (bn TL) 49 418
Net asset value of mutual funds (bn TL) 29,203 43,755
Borsa Istanbul 2016 (bn USD) No. of companies listed Trading volume to market value
405 200% Table IV.
Note: aThis figure corresponds to 2008 Bank penetration
Sources: Investment, support and promotion agency (Government of Turkey) and banking regulatory and and capital
supervisory agency in Turkey (2017) markets in Turkey
 IJOEM OECD, 2015), but to the quality of education (Turkey ranks in the third quartile in PISA
tests). Moreover:
We support the entrepreneurial development of corporate clients through seminars and training.
As regards our employees and clients, we have a number of practices, such as the Customer
Operations Service Transformation Project, aimed at cultural transformation within our company,
to ensure that they easily adapt to the new non-branch banking that we envisage.
Regarding labor and human resources, which are related to education, both banks employ more
women than men across the total labor force (54.9 percent in Bank I and 57.3 percent in Bank C
according to their Annual Reports). However, no information is released regarding gender
distribution at senior management level. For the overall workforce, 85 and 89 percent of the
women employed by Bank I and Bank C, respectively, are graduates (The Bank Association in
Turkey, 2017), which may limit the access of women to high responsibility positions.
In terms of financial inclusion, Bank C considers that low banking access is a key issue in
the country:
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In addition to our efforts in the microfinance area, a major pillar of our CSR plan is the TCR
strategy (Transparent, Clear and Responsible) which allows focusing on client needs. This
philosophy is applied to every single banking product to make them easily understandable and
thus reaching a wider audience enhancing financial inclusion.
In turn, bank I understands financial inclusion as “conducting our business based on Shariah
mandates such as helping the disadvantaged” although no specific initiative is reported.
As regards environmental issues, bank C states that its engagement extends to the
projects it funds:
We are going beyond adhering to specific international agreements such as Equator or UNEP-Fi,
where we are members for a long time.
In this respect, bank C has declared a “Climate change action plan” in Turkey. Globally, the
bank deploys funds through the issuance of green bonds, green loans and other financial
solutions that combat climate change. Furthermore:
From 2018 onwards our funding guidelines will veto industries such as mining and dirty energy.
In turn, bank I is engaged in internal pro-environmental initiatives:
We aim to play a significant role in reducing the consumption of natural resources, particularly
energy and paper and disseminating awareness on environmental protection.
In addition, it states:
As a responsible bank provider we want to reduce the negative impacts of our stakeholders
on the environment.

NBS
dimension Institutional void Conventional bank Islamic bank

Financial Financial exclusion Microfinance, correspondent Riba (based on informal

banks, digital inclusion and TCR institutions: religion)
core Philanthropy
Labor and Low educational Financial literacy education: core
Educational activities:
Table V. Education quality philanthropy
The influence of Gender diversity Not showing substantial progress Not showing substantial progress
institutions on the Environment Environmental Self abstaining from funding Prohibition of funding specific
CSR of conventional contamination polluting industries industries (shaped by informal
and Islamic banks institutions: religion)
 However, how the bank effectively influences the environment through specific products Islamic and
and business practices has not yet been released. Likewise, no explicit restriction on the conventional
financing of polluting companies has been disclosed. banks
Finally, bank I highlights:
Non-lucrative social projects and sponsorships such as the Kirkpinar Oil Wrestling Tournament
show our commitment towards sustainability. These are means to support and transfer our
cultural heritage.
Bank C is also involved in philanthropic sponsorships, but these are regarded internally as
“advertising expenditure.” In contrast, “CSR is a core value within our bank.”
Besides, the specific case of Bank I shows some evidence of sustainable strategies as a
means to respond to normative foundations and informal institutions such as ethical beliefs:
We conduct our sustainable banking strategies based on the principles of good banking and good
corporate citizenship. This approach describes our corporate culture. Moreover.
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We voluntarily audit the accomplishment of our business with these ethical principles through the
Shariah Audit Board.

5. Discussion
This study compares the CSR strategies of an Islamic and a conventional bank in the
context of an emerging country from different levels of analysis as shows Table VI. The
institutional analysis presents salient institutional voids (Khanna and Palepu, 1997) in
formal institutions that the banks aim to fill through their CSR actions. Specific dimensions
of formal institutions, such as education, environmental care and gender diversity result in
convergent strategies from both bank I and bank C. In particular, this analysis provides
support for homogeneous strategies when dealing with education, as both banks support
educational initiatives for different stakeholders. Besides, the findings show uniform
patterns for gender diversity, although in both cases these policies could be improved by
enhancing women’s access to senior management level. Finally, the pro-environmental
policies show a very similar approach from the two entities. Internally, they are consciously
reducing resource consumption at their offices, and yet, both banks aim to contribute more
to combat climate change by restricting their funding of polluting industries. In this respect,
bank C just released new funding guidelines that may pre-empt future environmental
regulation. Bank I holds similar concerns based on the Shariah mandate of environmental
care (Rice, 2006), although no explicit policy was released. Thus, the convergent CSR
strategies in specific institutional areas such as education, gender and the environment
support the first research question.
Nevertheless, the results obtained clearly reveal that there is a significant distinction
between the Islamic and the conventional bank in other specific institutional dimensions.
Particularly, financial exclusion is not addressed in the same way by the two banks.

Conventional bank Islamic bank

Explicit or implicit Core business: financial inclusion Philanthropy; Core business: Zaqat, riba,
CSR actions education and environmental care education and environmental care based
through restrictive funding guidelines on Shariah mandates
beyond existing regulation Table VI.
Prevailing Formal institutions (political, financial, Informal institutions (religion, culture, CSR at Islamic
institutional drivers educational) beliefs) and conventional
Main motivations Instrumental Normative (ethical identity) banks at different
Outcomes for the bank Legitimacy and reputation enhancement Shariah Audit Board compliance levels of analysis
 IJOEM This constitutes a crucial area, where banks present a unique position to contribute to
sustainability since their allocation of resources enhances economic development,
prosperity and poverty alleviation (BIS, 2007). Bank C increases financial access through
specific CSR plans attached to its core business while bank I is orientated toward
pure-philanthropy, based on its ethical foundations and the maslahah principle.
Philanthropic actions do serve the community but their impact on social well-being is
more limited as they tend to be more volatile than the long-lasting CSR initiatives related
to the core business ( Jain and Jamali, 2015). This CSR divergence between bank C and I
may be even more salient when considering their governance differences. Following the
voluntary Shariah board system in Turkey, the Shariah Audit Board supervises bank I to
determine whether its management practices are compatible with Islamic concepts
(Gün, 2016). Thus, bank I undertakes some of its CSR action through Islam-dictated forms
of philanthropy ( Jamali and Neville, 2011) and governance. Therefore, the divergence
comes from a specific informal institution, namely, cultural values and religion, that
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derives in heterogeneous practices. These CSR strategies markedly influenced by a strong

informal institution such as ethical beliefs and religion diverge from bank C’s CSR policies
that lack a specific ethical identity or normative affiliation.
The findings reveal that the adoption of sustainable practices by these banks is rooted in
explicit and implicit conceptions of CSR (Matten and Moon, 2008). Implicit CSR is assessed
by implicit social or religious requirements, whereas explicit CSR denotes discretionary,
deliberate and specific strategies to alleviate social issues. Bank I understands CSR as a
means to address informal institutions, namely, religion. Consequently, Islamic CSR is
implicit in religious mandates, through the prevailing forms of philanthropy such as
sponsorships, or Zaqat ( Jamali and Neville, 2011). Explicit CSR actions associated with the
core business are scant, apart from the overall Shariah obligations of charity (Nor and
Hashim, 2015). In contrast, bank C is concerned about filling the voids in formal institutions,
such as financial inclusion, thus following explicit CSR strategies that are integrated into its
core business. Moreover, the findings suggest an absence of mimetic isomorphic patterns, as
banks I and C clearly differ on how they address informal institutional characteristics.
Therefore, in this area Islamic and conventional banks diverge on the basis of their different
ethical conceptions of CSR, in line with the second research question.
The CSR of Islamic and conventional banks draws upon formal institutional forces and
informal institutions with different intensities. Thus, we may envisage a crossvergence
( Jamali and Neville, 2011) in several aspects, as the convergent or divergent approaches are
not mutually exclusive. For example, within formal institutions, some convergent CSR
patterns in addressing educational, environmental and gender diversity challenges were
discovered. At the same time, the study finds wide divergences in the CSR approach to other
areas, namely, financial inclusion, that may be rooted in informal institutions such as
religion. Similarly, philanthropic actions and implicit forms of CSR found in bank I mark
divergences based on religion as a major institutional antecedent for bank I’s CSR.

6. Conclusions
Focusing on the influence of formal and informal institutions, this investigation draws
several implications regarding CSR motivations, strategies, actions and social outcomes by
conventional and Islamic banks located in the same emerging country but founded under
very different ethical identities. By putting alongside their CSR strategies, the paper
analyzes patterns of convergence – as a result of mimetic isomorphism (DiMaggio and
Powell, 1983) based on the common formal institutional context – or divergence because of
the strength of internal forces and informal institutions. The institutional environment is
contextualized from the NBS perspective (Ioannou and Serafeim, 2012), which allows both
formal and informal institutions to be taken into consideration. The latter are crucial in this
 study, as Islamic and conventional banks differ widely in their ethical and religious Islamic and
foundations (Aribi and Arun, 2015; Basah and Yusuf, 2013), and these shape the informal conventional
institutional context. banks
This study suggests that conventional and Islamic banks integrate institutional factors
in their CSR articulation. Specifically, informal institutions related to ethical foundations
and religion (Ramasamy et al., 2010) result in the likelihood of them endorsing divergent
CSR strategies. By contrast, a greater emphasis on formal institutional conditions, especially
those related to education, gender and the environment, leads to convergent CSR policies
that aim to fulfill local demands and reach legitimacy (Hah and Freeman, 2014).
In addition, the results emphasize differences between the specific CSR actions of banks
in emerging countries, which vary from a philanthropic conception of CSR to its integration
into the core business. Islamic banks are expected to orientate their businesses, including
CSR, in compliance with the Shariah, which suggests a moral dimension associated with
social banking (Nor and Hashim, 2015). However, most of their actions are purely
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philanthropic, which may be taken for image building or reputation (Brammer and
Millington, 2005) but does not facilitate social change ( Jain and Jamali, 2015). In turn,
conventional banks rely on explicit CSR initiatives aligned with their core businesses such
as enhancing financial inclusion (Forcadell and Aracil, 2017b), which is positively correlated
with economic growth (Demirguç-Kunt et al., 2008). One reason for this potentially higher
commitment to CSR within conventional banks may be the fact that they need to gain public
trust by emphasizing actions such as CSR that highlight an ethical approach (Ozdora-Aksak
and Atakan-Duman, 2015), as they are not backed by the strong ethical identity displayed
by Islamic banks (Haniffa and Hudaib, 2007).
The findings of this study suggest that Islamic banks’ sustainable strategies need to be
developed to compete with that of conventional banking. As a result, CSR, which should
by definition be an endogenous part of Islamic finance (Nor and Hashim, 2015), needs to
actively address formal institutional voids such as financial exclusion (Aliyu et al., 2017).
In addition, a move toward explicit forms of CSR attached to their core business and
beyond philanthropy may help these companies to contribute to human well-being
(Nor and Hashim, 2015) consistent with the Shariah. Thus, the present study contributes
to enhance banks’ managers in their understanding of what should be done for the
benefits of customers and the community. This may lead to a “win-win” situation
(Forcadell and Aracil, 2017b; Mishra, 2017) by which the companies end up doing well by
doing good (Margolis et al., 2009).
This research contributes to the literature on CSR in developing countries ( Jamali and
Karam, 2018; Muller and Kolk, 2009; Yin and Zhang, 2012) and more specifically in Turkey
where Islamic banking is a rarely studied topic (Aliyu et al., 2017; Yanīkkaya and
Pabuçcu, 2017). This investigation pioneers in contrasting the CSR of conventional and
Islamic banks from an institutional perspective, given that formal and informal
institutions such as customs, religious credos and social norms (Mair et al., 2012) play an
important role in the conceptualization of CSR policies. Finally, this paper fills the
research gap highlighted by Lewer and Van den Berg (2007) regarding the paucity of
studies devoted to exploring the impact of religion on economic activity. Thus, it amplifies
the more common analysis of company-specific CSR drivers, recognizing the effect of
institutional context on CSR strategies and the areas of convergence and divergence
within conventional and Islamic institutions. Furthermore, in an era in which global
conventional finance prevails (Belal et al., 2015), this investigation aims to shed light on
the role of Islam in business strategies.
This exploratory study is not free of limitations as the examination of a small sample in one
emerging country may be non-generalizable. However, qualitative methods are appropriate
to analyze the specific complexities of developing countries (Teagarden et al., 2018)
 IJOEM and may show greater validity due to their broader scope (Ullah et al., 2014). Nonetheless,
further investigations in other geographical areas are encouraged to complement
these preliminary findings. In addition, future research may further examine how
conventional and Islamic banks’ CSR can foster sustainable development in emerging
countries beyond philanthropy.

Notes
1. Among the countries with a population over 50m, only eight countries have GDP per capita over
$10,000, with Turkey being the eighth, according to the World Bank (2016).
2. According to the “Best Banks” survey conducted by Islamic Finance News (2013, 2014 and 2015)
www.islamicfinancenews.com
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About the author

Elisa Aracil is Professor at ICADE, Universidad Pontificia Comillas and Universidad Rey Juan Carlos in
Madrid, Spain. Her research interests focus on corporate social responsibility, financial inclusion and
developing countries. Her work has been published in scientific journals such as Corporate Social
Responsibility and Environmental Management and Business Ethics: A European Review, amongst others.

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