Mallin 2014

Accepted Manuscript
Title: Corporate Social Responsibility and Financial

Performance in Islamic Banks
Author: Hisham Farag Christine Mallin Kean Ow-Yong
PII: S0167-2681(14)00070-5
DOI: http://dx.doi.org/doi:10.1016/j.jebo.2014.03.001
Reference: JEBO 3312
To appear in: Journal of Economic Behavior & Organization
Received date: 17-11-2012

Revised date: 28-2-2014
Accepted date: 3-3-2014
Please cite this article as: Farag, H., Mallin, C., Ow-Yong, K.,Corporate Social
Responsibility and Financial Performance in Islamic Banks, Journal of Economic
Behavior and Organization (2014), http://dx.doi.org/10.1016/j.jebo.2014.03.001
This is a PDF file of an unedited manuscript that has been accepted for publication.
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*Manuscript
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Corporate Social Responsibility and Financial Performance in
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Islamic Banks
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13 Abstract
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15 This paper examines the relationship between corporate social responsibility (CSR) and financial
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performance in Islamic banks. Using a comprehensive CSR index covering ten dimensions, we
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18 analyse the CSR disclosures in a sample of 90 Islamic banks across 13 countries. The CSR
19 disclosure index shows that Islamic banks engage across the range of social activities, both as
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20 individual banks and as countries. However Islamic banks seem to show more commitment to
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the vision and mission, the board and top management, and the financial product/services
23 dimensions, whilst least attention is paid to the environment dimension. Islamic banks also show
24 a considerable awareness of the mandatory disclosure recommendations of the Accounting and
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25 Auditing Organization for Islamic Financial Institutions (AAOIFI) however, they pay less
26 attention to the voluntary CSR disclosure. Moreover, we find a pronounced emphasis in Islamic
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28 banks strategy towards more universal disclosures, suggesting the legitimacy of these banks is
reinforced through disclosure to the wider stakeholder community . The empirical analysis
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30 highlights a positive association between CSR disclosure and financial performance. We also
31 find a positive and highly significant association between the Shari‟ah supervisory board (SSB)
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size and CSR disclosure index. Finally, the results of the three-stage least squares estimation
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34 show that the causality between the two endogenous variables runs from financial performance
35 to CSR disclosure. Thus CSR disclosure is determined by financial performance.
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38 Keywords: Corporate social responsibility (CSR); Islamic banks; Social reporting; Shari’ah
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40 Supervisory Board.
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42 JEL Classification: G21

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Authors. and their affiliation
Dr Hisham Farag
Birmingham Business School
University of Birmingham
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Birmingham B15 2TT
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UK
Email: h.farag@bham.ac.uk
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Professor Christine Mallin
Norwich Business School
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University of East Anglia
Norwich NR4 7TJ
UK
Email: c.mallin@uea.ac.uk
Mr Kean Ow-Yong
Birmingham Business School
University of Birmingham an
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Birmingham B15 2TT
UK
Email: k.h.ow-yong@bham.ac.uk
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5 Corporate Social Responsibility and Financial Performance in
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7 Islamic Banks
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9 1. Introduction
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12 Islamic banking has grown unabated since its inception in the mid-1970s. The industry has
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14 increasingly carved out a significant slice of the global financial market. According to figures
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16 released by the Banker 1 , global Islamic assets held by commercial banks exceeded US $1.8
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trillion in 2013. All financial institutions, both conventional and Islamic, play a central role in
19 society. Hence they are expected to be responsive to the different needs of stakeholders. Due to
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21 their religious identity, Islamic banks are expected to be more socially responsible than their
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23 conventional counterparts whose operations and functions are primarily based on profit
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25 maximisation.
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30 Islamic banking, from a theoretical perspective, is based on the principle of profit and loss
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32 sharing in place of the interest based deposit/lending found in conventional banks. Two
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34 conflicting juristic views have emerged in contemporary Islamic banking. Progressive Islamic
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36 scholars argue that there is no need to reinvent products offered by conventional banks in a
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38 globally competitive banking industry. Instead, Islamic banks should adopt the minimal
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39 necessary modifications to these conventional products to ensure Shari‟ah compliance. This

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41 tendency to emphasise „form over substance‟ (Warde, 2013 cited in Belal et al, 2014) is
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43 symptomatic of „big businesses‟ driven by the profit making maxim. In contrast, those scholars
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45 who oppose conventional financial practice feel that the Islamic banking system needs to
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47 reconstruct pre-modern contracts by strictly embedding Shari‟ah and social responsibility into
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49 the banks‟ business practices (El-Gamal, 2006). According to this view, Islamic banks are
50 expected to perform the role of redistributing wealth (through profit and loss sharing) to selective
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52 investments that contribute to the improvement and well-being of society (Farook, 2008). These
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54 Islamic banks practice the „moral economy‟ philosophy expounded for religious or secular
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56 ethical reasons and support the inclusion of social and environmental aims in their investment
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58 policies (Belal et al, 2014). Islamic banks, according to this view, should strive to achieve a
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The Banker, March 2013.
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4 balance between providing sufficient returns to their shareholders and depositors while at the
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6 same time not neglecting their social responsibilities and commitments to their various
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8 stakeholders (Ahmad, 2000). Recent studies suggest that Islamic banks have failed to put the
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10 profit-loss principle into practice (Dar and Presley, 2000; Chong and Liu, 2009). Thus their
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12 findings point to the close similarity between Islamic and conventional banking practices and
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suggest that the alleged benefits of Islamic banking exist only in theory.
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17 Concerning their social role, Islamic banks are expected to bring about economic and social
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19 benefits to their stakeholders; and to fulfil their Corporate Social Responsibility (CSR) including
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21 its disclosure. Farook (2008) argues that disclosure provides evidence of the Islamic banks
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23 involvement in social activities and hence earns legitimacy for their existence.
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26 Islamic Financial Institutions (IFIs) may not be disclosing their social responsibility publicly,
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28 even though they are carrying out these activities. Therefore, to encourage disclosure, the
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30 international regulatory authorities such as the Accounting and Auditing Organisation for Islamic
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32 Financial Institutions (AAOIFI) developed reporting standards for Islamic banks. In particular, it
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34 issued Standard No.7 on Governance Standards for Islamic banks in relation to Corporate Social
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Responsibility (CSR) conduct and disclosure in 20102. In the Standard, CSR for (IFIs) is defined
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37 as „all activities carried out by an IFI to fulfil its religious, economic, legal, ethical and
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39 discretionary responsibilities as financial intermediaries for individuals and institutions.‟

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41 Therefore, in complying with these standards, Islamic banks report aspects of their business
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43 activities and results differently from those of their conventional bank counterparts3.
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46 The existing body of the literature on CSR in Islamic banks can be grouped into two broad
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48 strands. The first strand uses content analysis to explore the disclosure of CSR as described in the
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50 Islamic banks‟ annual reports ( Maali et al, 2006, Haniffa and Hudaib, 2007; Abdul Rahman et
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53 This Standard provides both mandatory and recommended guidelines on CSR disclosure by Islamic banks.
54 AAOIFI standards are compulsory for IBs operating in Bahrain and Qatar but voluntarily applied to IBs in other
55 countries.
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For example, Islamic banks might be expected to include within their annual reports or within a separate report of
57 the SSB, a section about the role and function of their Shari’ah Supervisory Board (SSB), the sources and uses of
58 zakah and charity funds and the unrestricted investment accounts held. Disclosing these activities will reveal the
59 extent to which Islamic banks fulfil their socio-economic objectives for the benefit of the Islamic community.
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4 al, 2010; Hassan and Harahap, 2010; Aribi and Gao, 2012). The second strand investigates the
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6 determinants of CSR disclosure (e.g. Farook et al, 2011). This second strand is in the early
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8 research stage as - to the best of our knowledge - there is only one empirical study namely
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10 Farook et al, (2011). However, other possible determinants of CSR like financial performance
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12 (FP) have not yet been investigated empirically in Islamic banks.
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14 Our paper is motivated to bridge a perceived gap between the two broad strands on CSR
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16 disclosure. We integrate Maali et al. (2006) and Haniffa and Hudaib (2007) benchmark CSR
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18 indices with AAOIFI Standard No.7 recommendations on mandatory and voluntary CSR
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disclosure to produce a more comprehensive index covering ten dimensions to identify the type
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22 and the extent of CSR disclosure for a sample of Islamic banks over the period 2010-2011.
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Furthermore, motivated by the study of Belal et al., (2014), we split the CSR index into two
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25 strands namely; „Particular‟ reporting practices relating to Shari‟ah compliance issues and
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27 „Universal‟ reporting practices which are more relevant to conventional banks and the wider
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29 stakeholder groups such as community, employees and customers. Secondly, we investigate the
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31 impact of financial performance on CSR disclosure in Islamic banks which has not been
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33 empirically researched before; and finally, the paper investigates the direction of causality
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between financial performance and the CSR disclosure. Our data set covers a large sample of
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36 Islamic banks (90 Islamic banks4) and the CSR disclosure data is collected not only from the
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38 annual reports but also from the information posted on the Islamic banks‟ websites.5
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41 This paper makes two incremental contributions to the literature on CSR and Islamic banks. First,
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43 although there have been a few empirical studies investigating the link between CSR and
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financial performance in the banking sector, as far as we are aware, this is the first study to
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46 empirically investigate this relationship in Islamic banks using a more comprehensive CSR
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48 disclosure index which distinguishes between mandatory and voluntary disclosures as
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50 recommended in AAOIFI Standard No.7. Secondly, we also classify the CSR index items into
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52 two main categories. The first includes items expected to be found in Islamic banks and the
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54 second category includes those expected to be found in banks in general.
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Maali et al (2006) and Farook et al (2011) pointed out that further research with a larger sample of Islamic banks
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Previous studies covered a much smaller sample and collected data only from annual reports.
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4 The paper is structured as follows. Section 2 discusses the literature review and hypotheses
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6 development. The sample selection and research methodology are presented in Sections 3 and 4
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8 respectively. Section 5 presents the results and discussion of the findings, whilst section 6
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10 summarises and concludes.
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13 2. Literature review and hypotheses development.
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16 2.1 Previous research on CSR disclosure
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17 A number of studies have investigated the level of CSR disclosure in IFIs. Maali et al. (2006)
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19 investigated the extent of social activities disclosed by Islamic banks. They compared the
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21 disclosures of such activities with social practices that Islamic banks are expected to adopt that
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23 are particularly relevant to society. The expected social practices were then combined into a
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25 benchmark for social reporting by Islamic banks6. Using content analysis, they found that the
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27 level of social disclosure by the sample banks was well below their benchmark index. They
28 concluded that banks complying with mandated matters such as paying Zakah and adopting
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30 AAOIFI standards tend to provide more disclosures than non-compliant banks. Also, Islamic
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32 banks tend to accentuate disclosures that construct a positive Islamic image such as charitable
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34 activities. Haniffa and Hudaib (2007) investigated the disclosure of information deemed crucial
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36 to Islamic ethics in business. They designed an ideal ethical disclosure benchmark based on the
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five features7 that distinguish Islamic banks from conventional banks. Using content analysis of
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39 annual reports to determine the extent of CSR disclosure, they found a significant gap between
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41 the communicated and ideal ethical disclosure in the annual reports of a sample of seven Islamic
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43 banks over a three year period. They surmised that this expectations gap could arise from an
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45 indifferent attitude by stakeholders or an underlying secretive culture in the Arabian Gulf region
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47 where the sample banks were based. They concluded that for Islamic banks to remain
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competitive, they need to communicate more effectively to enhance their image and reputation in
50 society.
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Their social disclosure benchmark index, containing thirty items, covered the reporting of Shari‟ah Supervisory
55 Board opinion; unlawful transactions; the payment of Zakah; payment for Quad Hassan, charity and other social
56 activities; policies on employees; policies on late repayment and insolvent clients; protecting the environment; and
57 other aspects of community involvement.
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These five features, discussed in detail in their paper, are the bank‟s underlying philosophy and values; provision
59 of interest-free products and services; restriction to Islamic acceptable deals; focus on development and social goals;
60 and reviews by the Shari‟ah Supervisory Board.
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6 Using a longitudinal case study approach, Abdul Rahman et al. (2010) examined the CSR
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8 disclosure of a Malaysian Islamic bank. They found that the volume and quality of CSR
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10 disclosure improved over the fourteen year study period. Belal et al (2014) also adopted a
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12 longitudinal study but with two notably significant exceptions. First, using a longer time frame of
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28 years, they noted trends in CSR disclosure of a Bangladeshi Islamic bank over three
15 distinguishing phases of the Islamic banking industry: pre 1990, 1990-2001 and post 2001.
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17 Secondly, they split ethical reporting requirements into two strands; „Particular‟ reporting
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19 practices relating to the nature of Islamic banks and especially to Shari‟ah compliance issues and
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21 „Universal‟ reporting practices which are more relevant to the wider stakeholder groups such as
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23 community, employees and customers. They found an overall increase in both „Particular‟ and
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„Universal‟ disclosures over the study period with a shift towards more „Universal‟ disclosures
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26 after 2006. They interpret their findings as being the bank‟s adherence to the minimalist
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28 approach without explicitly contravening the wider perspective of Shari‟ah.
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31 Hassan and Harahap (2010) carried out a similar study to Haniffa and Hudaib (2007) focussing
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33 on the disclosure of social activities in the annual reports of seven Islamic banks. They found a
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significant expectations gap in all but one of the seven Islamic banks, and surmised that CSR
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36 issues are not the main concern for most Islamic banks. They concluded that some Islamic banks
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38 pay scant attention to disclosing their social activities and thus argued for a standard on CSR
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40 disclosure relevant to IFIs. Farook et al (2011) provided an a priori basis for CSR disclosure in
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42 Islamic banks. They empirically analysed the level of social disclosure in forty-seven Islamic
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44 banks‟ annual reports based on a CSR benchmark derived from the Maali et al (2006) index.
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They found substantial variation in CSR disclosures and this variation is best explained by the
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47 presence of Shari‟ah supervisory board (SSB) governance and the preponderance of Muslims in
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49 their sample countries. They concluded that the regulatory bodies in Islamic banking should
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51 consider the SSB as being compulsory for all Islamic banks.
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54 Aribi and Gao (2012) analysed the narrative disclosures of CSR in 21 IFIs operating in the Gulf
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countries. They found that the main CSR disclosures were contained in the SSB reports with less
57 disclosure in the annual reports on other Islamic based information such as Zakah, interest free
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4 loans and charitable donations. Table 1 presents the main studies on CSR disclosure in Islamic
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6 banks.
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9 [Insert Table 1 about here]
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12 The CSR literature on Islamic banks is largely qualitative based studies that measure the volume
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of narrative CSR disclosures against an ideal benchmark drawn from Shari‟ah based CSR
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15 objectives and AAOIFI standards. They generally find an expectations gap between
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17 actual/communicated disclosures and ideal disclosures. However, the main limitations of these
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19 studies are their reliance on data collected from the annual reports to infer CSR disclosure. The
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21 annual report itself will not provide the true picture of CSR disclosure as Islamic banks may
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23 disclose some of their CSR separately in other reports e.g. SSB report, corporate governance
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report and on their websites. We collect data from the annual reports and all the other available
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26 reports as well as the Islamic banks websites. Secondly, the number of sample banks used in the
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28 literature was limited as acknowledged by Maali et al, (2006) and Haniffa and Hudaib, (2007).
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30 Our sample of Islamic banks is not only relatively large (90) compared to the largest study so far
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32 (47 in Farook et al, 2011) but also more recent data in 2011. The most recent year investigated
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34 was 2007 (Farook et al, 2011). Thirdly, although a number of studies referred to AAOIFI
35 standards (Hassan and Harahap, 2010), none of them included AAOIFI Standard No.7 on CSR
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37 conduct in which CSR disclosure classification distinguishes mandatory from voluntary CSR
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39 disclosure requirements.
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42 2.2 Corporate social responsibility (CSR) and financial performance (FP)

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Numerous theoretical and empirical studies have long investigated CSR impact measured by
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46 social performance and its relationship to FP. However there is a controversy in the results due
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48 to the discrepancies in the theoretical and methodological frameworks (see for instance, Preston
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50 and O‟Bannon, 1997; Griffin and Mahon, 1997; and Waddock and Graves, 1997). A limited
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52 number of studies focussed on the banking industry (Simpson and Kohers, 2002; Soana, 2011,
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54 Ahmed et al, 2012)). However, there is no previous study that examines empirically the CSR-FP
55 relationship specifically in the Islamic banking industry. Therefore a better understanding of this
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57 link would be invaluable, directly or indirectly, to all stakeholders including management,
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59 shareholders and the Islamic community. Various hypotheses sought to explain the link between
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4 CSR and FP. The main findings of these studies are controversial as they offer conceptual
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6 interpretations for a positive, neutral and negative relationship between social and financial
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8 performance. See for example Preston and O‟Bannon (1997) and Waddock and Graves (1997).
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11 Neoclassical economists are the proponents of the negative association between social and
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13 financial performance (e.g. Simpson and Kohers, 2002).They argue that firms which meet the
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14 social needs of their stakeholders will incur a competitive disadvantage resulting in reduced
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16 profits because such social costs could be avoided or borne by others (e.g. the government). It
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18 could be argued from an Islamic bank perspective, that assisting to develop large scale
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environmental and community projects may have an adverse impact on its profitability.
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Stakeholder theory assumes that there might be a positive relationship between social and
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25 financial performance. Waddock and Graves (1997) argue that the benefits from CSR are greater
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27 in comparison with its costs. Therefore, there should be a positive association between CSR and
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29 FP. Preston and O‟Bannon (1997) argue that meeting the needs of various corporate stakeholders
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31 enhances a firm‟s reputation in a way that will have a positive impact on its FP. The empirical
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33 findings of Simpson and Kohers (2002), based on data from a sample of US commercial banks,
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support the notion of a positive social - financial performance link.
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38 The central role played by Islamic banks within their communities suggest that being actively
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40 engaged in social and ethical activities enhances their reputation leading to an expected higher
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42 FP. Finally, the empirical finding of a simply neutral (non-existent) relationship between social
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44 and financial performance might be due to the complex relationship between society and the firm
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which cannot be captured through a simple direct relationship. Islamic banks following Shari‟ah
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47 principles are expected to offer profit and loss sharing schemes for Investment Account Holders
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49 and depending on their policies may pay Zakah on behalf of their customers as well as
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51 dispensing discretionary benevolent loans (Qard Hassan) to the community. The effect of such
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53 business activities could be varied and complex resulting in a neutral relationship between CSR
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55 and FP. Based on the above discussion, we formulate our first hypothesis as follows:
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58 H1: There is a relationship between an Islamic bank’s CSR activities disclosure and its financial
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60 performance.
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4 2.3 The direction of causality between CSR and FP
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7 Two perspectives can be contrasted and tested empirically. Waddock and Graves (1997) coined
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9 the first as the „slack resources theory‟ and the second „good management theory'. Firms which
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11 have superior FP will then have slack resources available to spend on investing in socially
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13 responsible activities such as improving employee and community relations. Investing in these
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14 social domains would result in better social performance. It suggests that the surpluses generated
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16 by Islamic banks from strong FP will be invested in Shari‟ah compliant socially responsible
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18 activities. As Shari‟ah objectives place emphasis on promoting justice and welfare in society,
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Islamic banks which perform well financially are expected to do good through undertaking
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22 socially responsible activities which benefit all stakeholders including the community. To sum
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up, under the “slack resources theory”, the CSR- FP relationship runs from FP to CSR. This
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25 suggests that CSR is determined by FP (Waddock and Graves, 1997).
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29 Conversely, Waddock and Graves (1997) surmise that firms with good management who pay
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31 attention to socially responsible activities such as employee training and relations may expect to
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33 reap better FP later. So, publicity through disclosure by Islamic banks of their investment in
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activities that comply with Shari’ah such as sponsoring Islamic educational events and
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36 supporting employees fulfilling their Haj may lead to more growth and profitability. The “social
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38 impact hypothesis” of Cornell and Shapiro (1987) provides a consistent view with the good
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40 management theory as it suggests that satisfying the different needs of stakeholders will improve
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42 the reputation of the company and lead to better FP. However, the trade-off hypothesis of Vance
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44 (1975) provides a consistent interpretation with the views of the neoclassical economists8. Under
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good management theory, social impact and the trade-off hypotheses, CSR would be a predictor
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47 of FP. Therefore we formulate our second hypothesis as follows:
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51 H2: The relationship between CSR and financial performance of Islamic banks is bi-directional.
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54 3. The sample and data
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The trade-off hypothesis of Vance (1975) implies that companies engaging in CSR activities unnecessarily incur
59 costs that may reduce their profitability measured by earnings per share (EPS). Therefore, the trade-off hypothesis
60 supports the negative association between CSR and FP.
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4 Our dataset is a cross-sectional analysis of the relationship between CSR disclosure and Islamic
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6 banks financial performance over the period 2010- 20119. We use Bankscope and the Bankers
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8 databases for the sample selection. The Bankers magazine published a survey in November 2011
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10 of the top Islamic financial institutions by country. There are 160 Islamic banks with 100%
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12 Shari‟ah compliant assets listed in this study. For the sake of consistency in our sample, we
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excluded Islamic banks in both Iran (18 Islamic banks) and Turkey (4 Islamic banks) as they do
15 not have the SSB. We also excluded Islamic banks which provide only financial statements (37
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17 banks). In addition, we excluded subsidiaries from our sample (11 Islamic banks). Therefore, we
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19 collect data for 90 Islamic banks from 13 countries namely Bahrain, Bangladesh, Indonesia,
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21 Jordan, Kuwait, Malaysia, Pakistan, Qatar, Saudi Arabia, Sudan, Syria, United Arab Emirates
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23 (UAE), and United Kingdom (UK). The dataset is hand collected from the annual reports and the
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websites of the respective banks. Data were collected from several sources including Bankscope,
26 the Banker database, Perfect Information Navigator, and Companies House10, in addition to the
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28 annual reports and websites. Financial information was collected from Thomson One Banker and
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30 Bankscope in addition to the annual reports.
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34 3.1 Dependent variable

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Our dependent variable is the CSR index. The CSR disclosure index incorporates items from the
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37 Maali et al, (2006) and Haniffa and Hudaib, (2007) studies. In addition, we reclassify the index
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39 items into two main categories namely mandatory and voluntary aspects based on AAOIFI
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41 Standard No. 711. As a further study, and following Belal et al., (2014) we reclassify the index
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43 items into two categories namely particular and universal, the first category consisting of CSR
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45 items relating purely to Shari‟ah principles and the second category consists of CSR items
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46 generally expected in conventional banks. Our CSR disclosure index covers a broad range of
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48 activities (e.g. compliance with Shari‟ah principles, provision of interest free products, treatment
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50 of Zakah, maintaining good relations with employees and involvement in charity, social
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52 activities and protecting the environment). The index consists of 10 dimensions. Our checklist
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56 9
We use cross –section regression rather than panel data analysis as the vast majority of Islamic banks disclosed
57 CSR in their annual reports in both 2010 and 2011. We could not find enough data on IBs pre 2010.
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This source is used to collect data on Islamic banks in the UK.
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We thank our anonymous referee for the comments and suggestions regarding the classification of the index based
60 on AAOIFI Standard No.7.
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4 consisting of 84 items12 also includes items from AAOFI Standard No.713. We checked each
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6 item across the 90 annual reports and then we dealt with each item as a dummy variable which
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8 takes the value of one if the item was found in the annual reports/websites and zero otherwise.
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10 Our index is equally weighted to avoid any potential scoring and scaling biases following
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12 Haniffa and Hudaib (2007) and Maali et al. (2006) as shown in equation 1.
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15 n
16 X
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i
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CSRI i  t 1
(1)
n
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22 Where: CSRI i is corporate social disclosure index 0  CSRI i  1 , ni is the number of items
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24 expected for bank i n  84 and X i is a dummy variable which takes the value of 1 if the item is
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27 disclosed and 0 otherwise. We took precautionary measures to enhance the validity and the
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reliability of our analysis. We checked that the index items generated from the classification
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30 procedures represented what we intended to represent. The authors examined the items of the
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32 index and decided what that specific item was intended to measure (Beattie et al. 2004). In
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34 addition, we made sure that each item and the overall index are closely related to CSR in Islamic
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36 banks as we carefully chose and developed the 10 dimensions of our CSR index based on the
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38 previous literature and the CSR Conduct and Disclosure for IFIs issued by AAOIFI. To enhance
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39 the reliability, the index items are coded and checked twice and we discussed any potential
40
41
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discrepancies. It is worth mentioning that each bank is coded by two different authors to ensure
42
43 consistency. We made sure that the same coder is consistent over time when coding the same
44
45 item of the index (stability), the coders produce the same results when coding the same item
Ac
46
47 (reproducibility) and accuracy as well (Beattie et al. 2004). We then rank each bank based on its
48
49
50
12
51 For a full exposition of the 84 items please refer to Haniffa and Hudaib (2007) and Maali et al. (2006).
52 13
The CSR responsibilities expected from IFIs fall into two categories, namely mandatory and voluntary. The
53 mandatory category relates to IFI activities that are imperatives and bound by the command of God. These
54 mandatory activities relate to screening and dealing responsibly with clients; action on earnings and expenditure
55 prohibited by Shar‟iah; paying due attention to employees welfare and establishing terms and conditions for Zakah.
56 The recommended category relates to desirable activities that IFIs are encouraged to pursue and support from an
57 Islamic perspective. These are policies relating to implementing Qard Hasan, reduction of adverse impact on the
58 environment; investing in social, development and environment based projects; commitment to par excellence
59 customer service; assisting micro and small businesses; establishing and supporting charitable activities; and
60 managing properties dedicated to Muslim societies (Waqf).
61
62 11
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64 Page 12 of 42
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1
2
3
4 CSR index score. In addition we rank each country based on the weighted average dimensions of
5
6 the CSR index.
7
8
9
10 3.2 Independent variables
11
12 Return on assets and return on equity are widely used measures of bank performance and
t
13
ip
14
sustainable growth. However, during a period of financial uncertainty and low profitability,
15 discretionary social responsibility expenditure has less priority compared to economic demands.
16
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17 Roberts (1992) argues that a satisfactory level of FP has a direct impact on the decisions by the
18
19 board of directors and their commitment to future CSR activities and expenditures. Based on the
us
20
21 theoretical framework and the discussion presented in the hypotheses development section, we
22
23 expect an association between CSR and FP. A considerable strand of the CSR literature uses
24
an
25
either the contemporaneous or one-year lagged return on equity (ROE) and /or return on assets
26 (ROA) as a measure of bank performance (for example, Mallin and Michelon, 2011, McWilliams
27
28 and Siegel, 2001, Balabanis et. a.,l 1998 and Waddock and Graves, 1997). Therefore, to avoid
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29
30 any endogeneity problems we use lagged in addition to contemporaneous measures of
31
32 performance. On the other hand, we argue that using a one year lagged ROE /ROA might not be
33
d
34 the optimal choice. This may lay the estimation open to performance bias in a particular year
35
(2009 and 2010 in our case). Following the seminal paper of Roberts (1992), we use the average
te
36
37 annual change in ROE/ROA over the period 2006-201014 as a measure of bank performance15.
38
p
39
40
41 The SSB has social influence and authority in monitoring the IB‟s compliance with Shari’ah
ce
42
43 principles, and provides the confidence to stakeholders about the legitimacy of the business
44
45 transactions. Disclosure by the SSB may be seen as a key aspect of accountability by the IB to its
Ac
46 stakeholders. However, the degree to which social activities are disclosed depends on the
47
48 underlying rationale of the SSB monitoring role on behalf of the Islamic bank‟s investors.
49
50 Moreover, the degree to which the SSB influences the level of CSR disclosure may depend on
51
52 characteristics such as its board size. Therefore, SSB size is expected to have a positive impact on
53
54
55
56
57 14
We also used average annual change on ROE and ROA over the period 2006-2009 as a measure of lagged bank
58 performance and obtained similar results.
59 15
As not all the IBs in our sample are listed in the stock exchanges we could not use Tobin‟s Q ratio as a measure of
60 bank performance.
61
62 12
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64 Page 13 of 42
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1
2
3
4 CSR disclosure16 (Farook et al. 2011). The governance literature indicates the level of disclosures
5
6 could increase or decrease depending on whether mechanisms substitute or complement each
7
8 other (Ho and Wong, 2001). When governance mechanisms substitute each other, firms may not
9
10 provide additional disclosures since the multiple governance mechanisms should have increased
11
12 the level of monitoring. Therefore, the SSB may see no need to urge for additional CSR
t
13
disclosure if investors are already assured of the Islamic bank‟s compliance in the Shari‟ah
ip
14
15 compliance report (Maali et al, 2006). Alternatively, if the governance mechanisms are
16
cr
17 complementary, agency theory suggests that a higher level of disclosures is expected as more
18
19 governance mechanisms will strengthen the monitoring aspect leading to a reduction in
us
20
21 information asymmetry and opportunistic behaviour. The SSB in its role as an additional
22
23 governance body would pressure Islamic bank to disclose more CSR activities in order to assure
24
its investors that it is following Shari‟ah laws and principles. Notwithstanding the ambiguity
an
25
26 raised, it is expected that the SSB acts as a complementary mechanism because compliance with
27
28 Islamic laws and principles should not only be generally inferred within the Shari‟ah report but
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29
30 also reinforced with disclosures of specific CSR activities. Hence, it is generally expected that
31
32 the SSB in an IB would lead to higher disclosure levels of CSR activities.
33
d
34
35
We also control for board size and the proportion of non-executive directors (NEDs) to capture
te
36
37 the effect of board structure and board independence on CSR disclosure17. Pfeffer (1973) and
38
p
39 Pfeffer and Salancik (1978) highlight the role of board size as an important indicator of a
40
41 company‟s need to link itself with the external environment. They argue that larger boards may
ce
42
43 form a greater number of committees e.g. governance and CSR committees. In terms of resource
44
45 dependence theory, outside shareholders may bring managerial know-how and hence help
Ac
46 improve banks disclosure. Zahra et al. (1993) find that the proportion of NEDs leads to racial,
47
48 ethnic and gender diversity of the board and this in turn results in better impact on CSR
49
50 disclosure. Pfeffer and Salancik (1978) and Johnson and Greening (1999) argue that NEDs may
51
52
53
54 16
The minimum number of any SSB is three according to AAOIFI standards (2008) and this is a common
55 requirement in many Islamic banks. AAOIFI recommends professionals other than religious scholars to sit on the
56 SSB. These other professionals include bankers and economists. For this to happen, the size of the SSB would have
57 to be large to accommodate the diversity of its members. The inclusion of business professionals with less religious
58 standing may increase the need for more CSR activities disclosure to convince the investors that the Islamic bank‟s
59 adherence to Shari‟ah principles has not been compromised.
60 17
Chair/CEO role duality is included in the CSR index.
61
62 13
63
64 Page 14 of 42
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1
2
3
4 enhance the reputation and credibility of the company and help to establish and maintain its
5
6 legitimacy. Therefore, we may expect that there is a positive relationship between CSR and both
7
8 board size and SSB size in addition to the proportion of NEDs.
9
10
11
12 Moreover, we use other control variables namely the natural logarithm of total assets as a proxy
t
13
ip
14
for bank size and bank age; it is argued that bank size has an impact on the level of corporate
15 social activities. Big banks, we believe, being more in the public eye, are highly likely to monitor
16
cr
17 their activities towards wider society. A large strand of the literature on CSR finds an association
18
19 between size and CSR activities (see for example, Mallin and Michelon, 2011, Al-Tuwaijri et al.,
us
20
21 2004, Brammer et al., 2006, McWilliams and Siegel, 2001, and Roberts, 1992). Roberts (1992)
22
23 finds a positive relationship between age and CSR; she argues that the older the company the
24
an
25
more involvement there will be in CSR activities which have a positive impact on its reputation.
26 We also control for the macro-economic factors by using the natural logarithm of country‟s
27
28 GDP18. In addition we use the ratio of total finances / total assets to control for the differences in
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29
30 IBs operating business efficiency 19 (Andres and Vallelado, 2008). Different stock exchanges
31
32 impose constraints on listed companies with regard to disclosure, therefore we control for
33
d
34 whether the bank is private or listed on a stock exchange. Finally, country dummies are used to
35
capture country heterogeneity and to control for country specific effects.
te
36
37
38
p
39 4. Research methodology
40
41
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To empirically investigate the relationship between CSR and FP in Islamic banks, we use the
42
43 following OLS regression as in equation 2:
44
45
Ac
46
47 CSRI i   i  1 FPi   2 SSB.Sizei   3 B.Sizei   4 NEDi   5 ln Agei   6 ln TAi   7 Fin / TAi   8 privatei 
48 n (2)
49  9 LnGDPi  i 
C 1
10 Di  i
50
51 Where: CSRI i : is corporate social responsibility disclosure index for bank i. FPi is the average
52
53
54
annual change in ROE/ROA over 2006-2010 determined as follows:
55
56 18
We also used the ratio of deposits /GDP following Andres and Vallelado (2008) and obtained similar results.
57 19
We also used three other control variables namely the cross directorship in SSB, the proportion of Muslim
58 population following Farook et al (2011) and Tier 1 capital expressed as a percentage of total risk weighted assets to
59 control for IBs risk. However the results show that these three variables are highly insignificant and correlate with
60 the other independent variables. Results are not presented but available from the authors upon request.
61
62 14
63
64 Page 15 of 42
65
1
2
3
4 N
5  ( FP  FP
t t 1 )
6 FPi  n 1
...... N : 2006  2010, SSB.Size is the number of Shari‟ah supervisory board
7 N
8
9 members for bank i, B.Size is the number of board members for bank i,NED: is the percentage of
10
11 non-executive directors in the board for bank i, lnAge is the natural logarithm of bank age since
12 foundation, lnTA is the natural logarithm of bank‟s total assets in US$ as a proxy for bank size,
t
13
ip
14 Fin/TA is the ratio of total bank finances/ total assets20 for bank i, Private is a dummy variable
15
16 which takes the value of 1 if the bank is listed in a stock exchange of the respective country and
cr
17
18 0 otherwise21, lnGDP is the natural logarithm of the gross domestic product of country i as a
19
n
D
us
20
21
proxy for country macroeconomic factors, i are country dummy variables take the value of
C 1
22
23
24
1 for the respective country and zero otherwise and  i is the white noise error term. We use the
an
25
26 first-order Taylor-series linearization method to control for heteroskedasticity and to produce
27 robust standard errors. In addition we use both lagged and contemporaneous independent
28
M
29 variables in equation 2. Finally we use the Ramsey RESET test for omitted variables and model
30
31 mis-specification, we also use the variance inflation factors (VIF) to examine whether the
32
33 independent variables are perfectly collinear.
d
34
35
te
36
37
To explore the interrelationship between CSR and FP, we formulate the following system of
38 simultaneous equations that address the potential endogeneity issues in the estimation.
p
39
40
41
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42 CSR  f1 ( FP, Z1 ,  1 ) (3a)

43
44 FP  f1 (CSR, Z 2 ,  2 ) (3b)
45
Ac
46 Where Z i are the vector of control variables and instruments influencing the dependent variables;
47
48 and  i are the white noise error terms associated with the unobservable effects resulting from
49
50 firm heterogeneity i.e. unobservable features of managerial behaviour that explain heterogeneity
51
52 in CSR and FP.
53
54
55
56
57 20
Includes all IBs‟ financing activities.
58 21
We also use bank visibility defined as a dummy variable that takes the value of 1 if the bank is one of the main
59 index constituents for the respective stock exchange and 0 otherwise. We will discuss this variable in the next
60 section as a valid instrument.
61
62 15
63
64 Page 16 of 42
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1
2
3
4 Two concerns may arise regarding endogeneity when examining the relationship between CSR
5
6 and financial performance. First, our findings may simply reflect some underlying omitted
7
8 variable that influences both endogenous variable (CSR and FP) (Nikolaev and Van Lent, 2005).
9
10 The second concern is the potential reverse causality between the two endogenous variables. We
11
12 estimate the instrumental variable two-stage least squares (2SLS) and the three-stage least
t
13
squares (3SLS)22 using a system of two simultaneous equations to investigate this bi-directional
ip
14
15 relationship using the pooled sample over 2010-2011 as in equations 3a and 3b. Equation 3a
16
cr
17 estimates the impact of bank financial performance measured by both ROA and ROE on the CSR
18
19 disclosure index while equation 3b estimates the influence of CSR on the bank financial
us
20
21 performance.
22
23
24
an
25
The choice of instrumental variables is critical to a consistent estimation. The choice of our
26 instruments is motivated by the extant literature. A valid instrument should reasonably predict
27
28 the endogenous variable and not be correlated with error terms. Previous studies have used
M
29
30 stakeholders‟ characteristics (power and legitimacy), corporate governance characteristics (board
31
32 structure and independence) and company visibility as valid instruments for CSR; see for
33
d
34 example Brammer and Millington (2006); Eesley and Lenox (2006); Mitchell et al. (1997);
35
Rehbein et al. (2004) and Garcia-Castro et al. (2010). Garcia-Castro et al. (2010) define
te
36
37 company visibility as whether the company is listed in the Standard & Poor‟s 500 (S&P 500) or
38
p
39 not. They argue that listed companies in the S&P 500 have more exposure to investors, media,
40
41 and thus higher visibility.
ce
42
43
44
45 Due to the data limitations, we are unable to use the stakeholders‟ characteristics as an
Ac
46 instrumental variable for the CSR. Moreover, although corporate governance characteristics may
47
48 have an influence on CSR (Brammer and Millington, 2006), they are likely to be correlated with
49
50 financial performance (Bhagat and Bolton, 2008). Therefore we use, following Garcia-Castro et
51
52 al. (2010), bank visibility as our instrument for CSR. However, we redefine bank visibility as a
53
54 dummy variable that takes the value of 1 if the bank is listed in the main market index
55
56 (constituent) of the respective country and 0 otherwise. We assume that index constituents are
57
58 22
The essential advantage of 3SLS estimation techniques is that it allows, not only for simultaneity among the CSR
59 and FP, but also for correlations among the error components. Thus, it is believed that 3SLS estimators are
60 asymptotically more efficient than two-stage least square (2SLS) estimators.
61
62 16
63
64 Page 17 of 42
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1
2
3
4 more visible to investors and media and are likely to adopt consistent policies with stakeholders
5
6 such as engaging in CSR. Therefore, we expect that our instrumental variable is likely to be
7
8 correlated with CSR and not with financial performance. We believe that this variable satisfies
9
10 the necessary conditions for valid instruments assuming that the disturbance is not
11
12 autocorrelated23 (Kennedy, 2003). Furthermore, we use the Breusch-Pagan (1980) test of
t
13
ip
14
independence to investigate whether cross-equation disturbances are indeed correlated and if the
15 equations need to be estimated simultaneously. Beiner et al., (2006) argue that the advantages of
16
cr
17 3SLS depend on instrument validity and the correct specification of the system. To test the
18
19 instrument validity, we use the Sargan (1964) mis-specification test with the null hypothesis of
us
20
21 “No mis-specification”. If the null hypothesis is rejected then the model is likely to be either
22
23 incorrectly specified and/or some of the instruments are invalid. In addition, to test for the
24
an
25
correct specification of the system of simultaneous equations, we apply the Hausman
26 specification test (Hausman, 1978) to compare between 2SLS and 3SLS estimates. The null
27
28 hypothesis of the Hausman test is “the 3SLS results are consistent and efficient while the 2SLS
M
29
30 results are also consistent but inefficient”.
31
32
33
d
34 5. Results and discussion

35
te
36 In this section, we analyse the results of the CSR disclosure index of the 90 Islamic banks over
37
38 the period 2010-2011. Table 2 presents the descriptive statistics of the CSR Index scores across
p
39 counties. The results show that the average CSR index increases from 43.5% in 2010 to 44.3% in
40
41
ce
2011 with standard deviation 12% on average. Thus, there is no significant annual variation in
42
43 CSR index scores between 2010 and 2011; however the index scores show that the extent of
44
45 disclosure across countries varies considerably. Indonesia has the highest CSR index score of
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46
47 53.8%, followed by Malaysia at 51.5% and Bahrain at 51.2% in 2011. The lowest scores are
48
49
achieved by Pakistan and the Sudan, 30.4% and 31.4% in 2011 respectively. Figure 1 shows the
50 CSR Index scores by country in 2011.
51
52
53
55
56
57 [Insert Figure 1 about here]
58
59 23
We test for the serial correlation in residuals using both the Breusch-Godfrey- Lagrange Multiplier and Durbin-
60 Watson tests. The results of the two tests show that the residuals are not serially correlated.
61
62 17
63
64 Page 18 of 42
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1
2
3
4 Table 3 presents the weighted average24 CSR index scores in 2011. As reflected in the analysis of
5
6 the country‟s CSR disclosures, we find that the vision and mission statement dimension generally
7
8 scores highly across all countries whilst the environment generally scores the lowest. The highest
9
10 disclosure score relates to the vision and mission statement dimension (D1) which is 69.75%
11
12 followed by the scores of board of directors (D2) and financial products/services (D3)
t
13
ip
14
dimensions (62.82 % and 60.44% respectively). On the other hand, the lowest disclosure score
15 relates to environment (D9) which has a weighted average score of 3.33%. This finding is
16
cr
17 consistent with the perception that Islamic banks pay relatively little attention to CSR activities
18
19 relating to the environment whereas the board and top management are areas that successful
us
20
21 banks which want to comply with best practice corporate governance would place significant
22
23 emphasis on. Our findings are also consistent with those of Kamla (2007) who found very low
24
an
25
levels of environmental related disclosures by Arab companies including Islamic banks. We
26 notice that the weighted average index scores indicate that Indonesia has the highest score of
27
28 59.64% followed by Malaysia and Bahrain 57.09% and 56.74% in 2011 respectively. Figure 2
M
29
30 presents the weighted average CSR index scores by country and dimension in 201125.
31
32
33
d

35
[Insert Figure 2 about here]
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36
37
38
p
39 To summarise, the results of the CSR disclosure index show that Islamic banks engage across the
40
41 range of CSR activities, both as individual banks and as countries. However Islamic banks seem
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42
43 to show more commitment to the vision and mission statement, the board and top management,
44
45 and the financial product/services dimensions, whilst least attention is paid to the environment
Ac
46 dimension. Islamic banks also show a considerable awareness of the mandatory disclosures
47
48 stated by the AAOIFI however, they pay less attention to the voluntary CSR disclosures. We
49
50 interpret these results empirically in the following section.
51
52
53
54
55
56 24
We are grateful to our anonymous referees; we weight the CSR index by the number of items within each
57 dimension and the number of banks within each country. For more details on the number of items included in each
58 dimension see Haniffa and Hudiab (2007) and Maali et al. (2003).
59 25
There is no significant annual change in the weighted average index scores between 2010 and 2011. The results of
60 2010 are not presented but available from the authors upon request.
61
62 18
63
64 Page 19 of 42
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1
2
3
4 We also reclassify the CSR index into two main categories namely mandatory and voluntary
5
6 disclosure based on the Standard No. 7 on CSR issued by AAOIFI in 2010. Table 4 presents the
7
8 CSR index scores classified by mandatory versus voluntary disclosures in 2011. The results
9
10 show that the average mandatory CSR index increased from 60.27% in 201026 to 61.2% in 2011,
11
12 however the average voluntary disclosure index increased from 34.3% in 2010 to 35.4% in 2011.
t
13
ip
14
Figure 3 presents the weighted average CSR mandatory and voluntary disclosure index by
15 country in 2011. It is clear from Figure 3 that Malaysia has the highest mandatory CSR index
16
cr
17 scores in 2011 (76%) followed by Bahrain, UK and Indonesia (70%, 68% and 64% respectively).
18
19 However, Pakistan has the lowest mandatory CSR index scores in 2011 (42%) followed by Qatar
us
20
21 and Jordan (46 and 48% respectively). On the other hand, Indonesia has the highest voluntary
22
23 CSR disclosure index in 2011 (48%) followed by Saudi Arabia (43%); whereas the Sudan has the
24
an
25
lowest voluntary CSR index score of 22% in 2011 followed by Pakistan and Syria (24.6% and
26 25% respectively).
27
28 [Insert Figure 3 about here]
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29
30
31
32 Following Belal et al., 2014 we reclassify our CSR index into two main categories namely
33
d
34 particular and universal, the first category consists of CSR items relating purely to the nature of
35
Islamic banks and in particular Shari‟ah principles and the second category consists of CSR
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36
37 items generally expected in conventional banks. Figure 4 presents the average CSR index
38
classified into “Particular” and “Universal” disclosures by country in 2011. It is clear from
p
39
40
41 Figure 4 that the average “Particular” CSR index (40.62%) is lower than the average “Universal”
ce
42
43 CSR index (47.98%). This result is consistent with Belal et al., (2014). They argue that there is a
44
45 shift towards more universal disclosures over time especially after 2006. This shift is more
Ac
46 relevant to the wider stakeholder groups such as community, employees and customers. They
47
48 also argue that Islamic banks adhere to the minimalist approach without explicitly contravening
49
50 Shari‟ah principles. The CSR index scores are further analysed by country, the results show that
51
52 the average “Universal” CSR index scores are higher compared to “Particular” CSR index scores
53
54 in all countries except for Syria. We agree with Belal et al., (2014) that Islamic banks firstly
55
56 established their reputation based on Shari‟ah compliance that distinguished them from the
57 conventional banks; however, there is a remarkable shift in Islamic banks strategy towards more
58
59
60 26
2010 figures are not presented in Table 4.
61
62 19
63
64 Page 20 of 42
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1
2
3
4 universal disclosures which are more relevant to the wider stakeholder groups. Table 4 presents
5
6 the CSR index scores classified by Particular versus Universal disclosures and mandatory versus
7
8 voluntary disclosures in 2011.
9
10
11 [Insert Table 4 and Figure 4 about here]
12
t
13
ip
14 In this section we present the empirical findings of the econometrics modelling. Table 5 presents
15
16 the descriptive statistics of the covariates in 2011. The sample size is 90 Islamic banks and the
cr
17
18 average CSR disclosure index ranges from 13.1% to 70.2% with an average of 44.3%. The
19
average return on equity (ROE) ranges from -52.7% to 39.3% with mean value of 5.71%,
us
20
21
22 whereas, the average return on assets (ROA) ranges from -29.5% to 21.8% with mean value of
23
24
0.47%. Table 5 also reports that SSB size ranges from 2 to 9 members with mean value of 4.17,
an
25 whereas the average board size is 9.03 members with standard deviation 3.31, in addition the
26
27 proportion of NEDs is 65.2% on average. The average age of Islamic banks included in our
28
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29 sample ranges from 6 to 36 years with an average age of 12.3 years. The average finance to total
30
31 assets ratio and the percentage of private Islamic banks are 42.6% and 44.4% respectively.
32
33 Finally, the average natural logarithm of bank size is 14.22 (US$ 4.5 million) whereas the
d
34
35
average natural logarithm of GDP is 25.67. Table 6 reports the outputs of the correlation matrix
te
36 of the covariates used in the analysis. It is clear that there are no significant correlation
37
38 coefficients greater than 50%, therefore our estimation is not subject to multicollinearity
p
39
40 problem.
41
ce

43
44
45
[Insert Table 6 about here]
Ac
46
47 Table 7 presents the outputs of equation 2 in which we investigate the main determinants of CSR
48
49 disclosure in particular financial performance using cross sectional analysis in both 2010 and
50
51 2011 in addition to the pooled sample over the period 2010-2011. Panels A and B report the
52
53 estimation outputs using the average annual change in ROA and ROE respectively over the
54
55 previous 5 years as a proxy for Islamic banks financial performance. Results show that there is a
56 positive and highly significant relationship between FP and CSR disclosure index in both 2010
57
58 and 2011 in addition to the pooled sample in Panels A and B. This result supports the slack
59
60 resources theory as better financial performance encourages banks to engage more in social
61
62 20
63
64 Page 21 of 42
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1
2
3
4 activities. This result is consistent with Mallin and Michelon (2011), McWilliams and Siegel
5
6 (2001), Balabanis et. al (1998), Waddock and Graves (1997) and Roberts (1992). However, this
7
8 result does not confirm the direction of causality and any potential endogeneity between CSR
9
10 disclosure and FP. We investigate that using the 3SLS estimation.
11
12
t
13
ip
14
Interestingly, we find a positive and highly significant association between the SSB size and CSR
15 disclosure index in Panels A and B. However, board size is found to be insignificantly related to
16
cr
17 the CSR disclosure index. This implies the essential role of the SSB in supporting Islamic banks
18
19 social activities. This result is consistent with Farook et al. (2011) as they argue that larger SSB
us
20
21 size may lead to higher levels of CSR disclosure as the capacity of the monitoring role of the SSB
22
23 increases. As a result the SSB may efficiently allocate the designated tasks amongst larger group
24
an
25
of members and hence achieve a greater level of compliance. Moreover, the proportion of NEDs
26 is positive in sign and marginally significant implying a positive association with the CSR
27
28 disclosure index. This suggests the positive impact of board independence on CSR disclosure
M
29
30 and, in terms of resource dependence theory, NEDs may bring managerial know-how and hence
31
32 help improve firm disclosure. This result is consistent with Pfeffer and Salancik (1978) and
33
d
34 Johnson and Greening (1999) as they argue that NEDs may enhance the reputation and
35
credibility of the company and help to establish and maintain its legitimacy.
te
36
37
38
p
39 Table 7 also reports - as expected- that lnTA (our proxy for bank size) and bank age are positive
40
41 in sign and marginally significant; this suggests that there is a positive relationship between both
ce
42
43 bank size and bank age, and their CSR disclosure. This result is consistent with Roberts (1992) as
44
45
she argues that the older the company the more involvement in CSR activities as these relate to
Ac
46 its reputation. This result is also consistent with Mallin and Michelon (2011), Al-Tuwaijri et al.
47
48 (2004), Brammer et al. (2006) and McWilliams and Siegel (2001) as they argue that big banks
49
50 are highly likely to monitor their activities towards wider society. In addition, a well-established
51
52 bank may have a slightly different set of stakeholders who may impose more constraints on
53
54 financial institutions to disclose, communicate and to reflect their corporate social responsibility
55
56
and ethical behaviour to their related parties. This result is consistent with the “social impact
57 hypothesis” of Cornell and Shapiro (1987) in which they suggest that satisfying different needs
58
59 of stakeholders will improve the reputation of the company and lead to better FP. We notice that
60
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62 21
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64 Page 22 of 42
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1
2
3
4 the “Private” variable is insignificant implying that the CSR disclosure is not determined by
5
6 whether the bank is listed in the stock exchange or not. This may suggest that CSR disclosure
7
8 regulations are less mandatory for Islamic financial institutions in some of the countries included
9
10 in our sample. However interestingly, when we control for the Visibility dummy, it turns out to
11
12 be positive and significant at the 5% level. This may imply that companies included in index
t
13
constituents may have a better CSR profile27. The models presented in Panels A and B are well
ip
14
15 specified; the average R squared in Panels A and B are 38.7% and 40.1% respectively. The F
16
cr
17 statistics are highly significant and reject the null that the coefficients are insignificantly different
18
19 from zero28. The variance inflation factor (VIF) is well below 10; this suggests that our models
us
20
21 are not subject to multicollinearity. Finally, the Ramsey RESET test for omitted variables and
22
23 model mis-specification fails to reject the null that the model is not mis-specified and concludes
24
an
25
that there is no omitted variables bias and our models are well specified. However, the question
26 on which dimension(s) of the CSR disclosure index derive and impact the CSR-FP link remains
27
28 unanswered; we try to answer this question in the following section.
M
29
30
31
33
d
34
35
Motivated by the study of Brown and Caylor (2006), we re-estimate equation 2 using the
te
36
37 individual dimensions of the CSR disclosure index separately as a dependent variable (one at a
38
time). Table 8 presents the results of the cross –sectional regression in 2011 using the annual
p
39
40
41 average change in ROA as a measure of FP29. Results show that there is a positive and significant
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42
43 association between FP and CSR dimensions except for dimension 9 (environment). This
44
45 suggests that the better the FP the less disclosure on environmental activities. Therefore most of
Ac
46 the Islamic banks included in our sample may not spend on environmental activities regardless of
47
48 their FP. This result is consistent with Preston and O‟Bannon, (1997) and Waddock and Graves,
49
50 (1997) as they argue that these costs might be avoided or that they should be borne by
51
52 governments or other stakeholders (i.e. investments in pollution control equipment). Therefore
53
54
55 27
Results are not presented in Table 4 as Visibility dummy is correlated with Private dummy variable.
56 28
We also test the country effect (heterogeneity) and whether the country coefficients are jointly different from 0
57 with the null that country dummies have no effect on the CSR disclosure index. We find no significant country effect
58 and the results presented in Table 6 do not change if we control for country heterogeneity.
59 29
We also estimate these models using the average annual change on ROE in 2010 and 2011 in addition to the
60 pooled sample and obtained similar results. Results are available from the authors upon request.
61
62 22
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64 Page 23 of 42
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1
2
3
4 spending on environmental activities exceeds their potential benefits and this may explain the
5
6 low scores of the environment dimension of the CSR disclosure index. Interestingly, SSB size is
7
8 found to be positive and significant with financial product/services, zakah, and benevolent loans,
9
10 community, charitable and social activities dimensions. However, the main board and the
11
12 proportion of NEDs are positively and significantly associated with vision and mission, board of
t
13
ip
14
directors and top management and employees dimensions. We also find that listed banks disclose
15 more on the environmental activities compared with private banks. The models presented in
16
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17 Table 8 are well specified; the F statistics are highly significant and reject the null that the
18
19 coefficients are insignificantly different from zero.
us
20
21
22
24
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25 Table 9 presents the estimation results of the relationship between Islamic banks FP and both
26
27 mandatory and voluntary disclosure requirements in the light of the Standard No.7 issued by
28
AAOIFI in 2010. We re-estimate equation 2 by classifying the CSR index items into two main
M
29
30 categories namely mandatory and voluntary CSR disclosure in 201130. Overall we find similar
31
32 results to those presented in Table 7. The results presented in Table 9 confirm the positive and
33
d
34 significant association between both mandatory and voluntary CSR disclosure and Islamic banks
35
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36 FP. However, this relationship is less significant for the voluntary disclosure. Interestingly, we
37
38 notice that SSB size is marginally significant in Panel A (mandatory disclosure), however it is
p
39
40 highly significant in Panel B (voluntary disclosure). This suggests the fundamental role of the
41
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SSB in encouraging social and charitable activities. Moreover, board size is marginally
42
43 significant within the mandatory disclosure Panel and insignificant within the voluntary
44
45 disclosure Panel. The models are well specified; the F statistics are highly significant and reject
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46
47 the null that the coefficients are insignificantly different from zero. To sum up, the results
48
49 presented in tables 7, 8 and 9 suggest that there is a positive and significant relationship between
50
51
Islamic banks FP and CSR disclosure31. Moreover, our results highlight the essential role and the
52 positive impact of the SSB size on the CSR disclosure. Based on the above discussion we cannot
53
54 reject our first hypothesis. However, the question on the direction of causality between CSR
55
56
57 30
We also estimate this link using 2010 and the pooled sample and obtained similar results to those presented in
58 Table 7. Results are available from the authors upon request.
59 31
As robustness check we re-estimate equation 2 excluding IBs from Malaysia and Bahrain as both countries
60 represent 40% (36 banks) of our sample size. Our empirical results remain qualitatively unchanged.
61
62 23
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64 Page 24 of 42
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2
3
4 disclosure and the FP of Islamic banks remains unanswered; we try to answer this question in the
5
6 following section32.
7
9
10
11
12 In this section we investigate the bi-directional relationship between CSR and Islamic bank FP.
t
13
ip
14
To account for a potential endogeneity between CSR and FP we use Durbin-Wu-Hausman test
15 (e.g., Hausman, 1978). The result the Durbin-Wu-Hausman test rejects the null hypothesis of no
16
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17 endogeneity at the 10% level. Therefore, we conclude that OLS may lead to biased and
18
19 inconsistent estimates in our sample. To this end, we estimate equations 3a and 3b jointly using
us
20
21 three -stage least squares regression33 to deal with any potential endogeneity between CSR and
22
23 FP. The 3SLS estimation results for the simultaneous system are summarised in Table 10. Panel
24
an
25
A presents the results of the impact of FP on CSR as in equation 3a whilst Panel B presents the
26 impact of CSR on the FP as in equation 3b. The coefficient on  ROA in the CSR equation
27
28 remains positive and significant at the 1% level. However, the coefficient on CSR in the FP
M
29
30 equation turns out to be statistically insignificant. This suggests that the causality between the
31
32 two endogenous variables runs from FP to CSR. It is clear that replacing  ROE with  ROA as
33
d
34 a FP measure does not alter our findings. The performance equation also shows that there is a
35
positive and significant relationship between SSB size and the proportion of NEDs and FP.
te
36
37
38
p
39 The result of the Breusch-Pagan test shows that cross-equation residuals were not independent
40
41 (p.value = 0.02) and, hence, the test rejects the null hypothesis of independence errors and
ce
42
43 indicates, therefore, that the equations need to be estimated simultaneously. The system
44
45 presented in Panel A is well specified as the Chi squared is highly significant. On the other hand,
Ac
46 the system presented in Panel B is not well specified as the Chi squared is insignificant. The
47
48 result of the Sargan mis-specification test shows that we cannot reject the null hypothesis of “no
49
50 mis-specification”, indicating that the instruments of our system are orthogonal to the error terms
51
52 of the respective equations. We also report the results of the Hausman test; the results show that
53
54 we cannot reject the null hypothesis of “the 3SLS results are consistent and efficient while the
55
56 32
We re-estimate equation 2 by classifying the CSR index items into other two categories namely Particular and
57 Universal CSR disclosures in 2011. We obtained consistent results confirming the positive and significant
58 association between both Universal and Particular CSR disclosure and Islamic banks FP.
59 33
We use the 2SLS estimation as a robustness check following Al-Tuwaijri et al.,(2004). The 2SLS estimation
60 provides similar results to those obtained from 3SLS regarding the direction of causality between CSR and FP.
61
62 24
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64 Page 25 of 42
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1
2
3
4 2SLS results are also consistent but inefficient”. Hence, under the assumption that at least one of
5
6 the equations of our system is correctly specified, the specification of the entire system cannot be
7
8 rejected and the most efficient estimates are obtained by applying 3SLS. To sum up, the 3SLS
9
10 results strongly suggest that the CSR disclosure index of the Islamic banks is determined by their
11
12 FP and the opposite is not true. Therefore we can reject our second hypothesis. We interpret this
t
13
ip
14
result in the light of the slack resources theory which assumes that available slack resources
15 might be allocated into the social domain. The higher profitability provides more opportunities
16
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17 for Islamic banks to subsequently promote and disclose their surplus resources invested into
18
19 socially responsible activities in line with their religious values and beliefs. We argue that the
us
20
21 slack resources theory has been developed from the base of general and wider applicability and
22
23 thus may also be applicable to IFI. However, as the distinctive governance feature of IFI is the
24
Shari’ah governance system and the presence of the SSB, we believe that the Shari’ah
an
25
26 priniciplesunderlying IFI result in unique agency relationships.
27
28
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30
31
32 6. Summary and conclusions
33
d
34 Islamic banking and CSR are both areas which have seen significant growth in recent years. In
35
te
36 this paper we investigate the type and the extent of CSR disclosure made by a sample of 90
37
38 Islamic across 13 countries over the period 2010-2011. Our paper revises and constructs a
p
39
40 comprehensive index created from CSR disclosure studies of Islamic banks and
41
ce
42 recommendations from the AAOIFI Standard No.7. We investigate empirically the link between
43 Islamic banks FP and CSR highlighting the impact of SSB size on the level of CSR disclosure
44
45 and the direction of causality between FP and the CSR. The CSR index scores show that the
Ac
46
47 extent of disclosure across countries varies considerably. Indonesia has the highest CSR index
48
49 score of 53.8%, followed by Malaysia (51.5%) and Bahrain (51.2%) in 2011. The lowest scores
50
51 are shown by Pakistan(30.4%) and the Sudan (31.4%) . We also find that the vision and mission
52
53
dimension generally scores highly across all countries whilst the environment generally scores
54 the lowest. Our findings are consistent with those of Kamla (2007) who found very low levels of
55
56 environmental related disclosures by Arab companies including Islamic banks. We also find that
57
58 Malaysia has the highest mandatory CSR index scores (76%) whereas Pakistan has the lowest
59
60 mandatory CSR index score (42%) in 2011. On the other hand, Indonesia has the highest
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64 Page 26 of 42
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2
3
4 voluntary CSR disclosure index (48%) whereas the Sudan has the lowest voluntary CSR index
5
6 score of 22% in 2011. Moreover, we find consistent results with Belal et al., (2014) as we find
7
8 that Particular” CSR index (40.62%) is lower than the average “Universal” CSR index (47.98%).
9
10 In addition, the CSR index scores are further analysed by country, the results show that the
11
12 average “Universal” CSR index scores are higher compared to “Particular” CSR index scores in
t
13
ip
14
all countries except for Syria. Hence, there is a remarkable shift in Islamic banks strategy
15 towards more universal disclosures which represent the wider perspective of Shari‟ah and are
16
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17 more relevant to the wider stakeholder groups.
18
19
us
20
21 The empirical analysis highlighted a positive association between CSR disclosure index and
22
23 banks‟ performance. This result supports the slack resources theory as better FP encourages
24
an
25
banks to engage more in social activities. We also find that there is a positive and significant
26 association between FP and CSR dimensions except for the environment dimension. This result
27
28 is consistent with Preston and O‟Bannon, (1997) and Waddock and Graves, (1997) as they argue
M
29
30 that these costs might be avoided or that they should be borne by governments or other
31
32 stakeholders (i.e. investments in pollution control equipment). Therefore spending on
33
d
34 environmental activities exceeds their potential benefits which contradicts the wider perspective
35
of Shari‟ah compliance. Interestingly, we find a positive and highly significant association
te
36
37 between the SSB size and CSR disclosure index. This implies the essential role of the SSB in
38
p
39 supporting Islamic banks social activities. This result is consistent with Farook et al. (2011) as
40
41 they argue that larger SSB size may lead to higher levels of CSR disclosure as the capacity of the
ce
42
43 monitoring role of the SSB increases. As a result, the SSB may efficiently allocate the designated
44
45 tasks amongst larger group of members and hence achieve a greater level of compliance. The
Ac
46 3SLS results strongly suggest that the CSR disclosure index of the Islamic banks is determined
47
48 by their FP and the opposite is not true. This suggests that the causality between the two
49
50 endogenous variables runs from FP to CSR.
51
52
53
54 The findings have a number of policy implications. Firstly, the empirical evidence indicates that
55
56 the level of CSR disclosure was relatively low even though AAOIFI Standard No.7 provides a
57 template for Islamic banks to adopt in terms of CSR conduct and disclosure. Therefore
58
59 policymakers might, in future, be more active in encouraging Islamic banks to adopt AAOIFI
60
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62 26
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64 Page 27 of 42
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1
2
3
4 Standard No.7 as a benchmark. Secondly, our empirical evidence suggests that an Islamic bank‟s
5
6 involvement in CSR tends to increase as its SSB size grows larger. Therefore, policymakers
7
8 should be encouraged to introduce policies to help increase the number of eligible SSB members
9
10 as a larger SSB may encourage disclosure of the Islamic Bank‟s CSR and such disclosure
11
12 provides evidence to the public that it is pursuing its social goals. Such policies might include
t
13
more professional training programmes which help increase the supply of Shari‟ah scholars.
ip
14
15 Additionally, policy makers should be encouraged to introduce specialist training for SSB
16
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17 members on the wider perspective of Shari‟ah compliance that include universal CSR of
18
19 environmental, social and governance issues. Hopefully a larger pool of Shari‟ah scholars may
us
20
21 help Islamic banks to appoint more members onto their SSBs. Larger SSBs may approve more
22
23 Islamic based products, thus contributing to higher profits which may then encourage these
24
banks to participate in more social activities in line with the Islamic Bank‟s objectives in
an
25
26 bringing social and economic benefits to all its stakeholders. Future research may consider other
27
28 factors like an updated set of national culture scores adapted from Hofstede's (2001) model
M
29
30 (Taras et al ,2012) to try and explain the effects of a society's culture on CSR activities.
31
32 Furthermore, future research may study the determinants on social activities by collecting data
33
d
34 through detailed interviews with management and other stakeholders. This might substantiate the
35
findings from the CSR disclosure studies.
te
36
37
38
p
39 Acknowledgements
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The authors would like to express their appreciation to the paper discussant, participants and reviewers at
42 the Islamic Finance Conference, 29th September 2012, Aston University, Birmingham, UK.
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*Table
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Table 1
Overview of corporate social responsibility disclosure studies in Islamic banks
an
Sample size and
Authors Year Institution type and countries in sample Measure of CSR
year
Disclosure index containing
Maali et al. (2006) Islamic banks around the world 29 (2000)
30 items
M
Ethical Identity Index
Haniffa and Hudaib (2007) Islamic banks in Gulf countries 7 (2002-2004)
containing 78 items
Abdul Rahman et al. (2010) Islamic banks in Malaysia 1 (1992-2005) Adapted Maali index
Islamic banks in Bahrain, Bangladesh,
Adapted Haniffa and
ed
Hassan and Harahap (2010) Indonesia, Malaysia, Saudi Arabia, Kuwait, 7 (2006)
Hudaib index
UAE
Farook et al. (2011) Islamic banks around the world 47 (2007) Adapted Maali index
Aribi and Gao (2012) Islamic banks in Gulf countries 21 (2004) Narrative disclosures
pt
Disclosure index containing
Belal et al. (2014) Islamic banks in Bangladesh 1 (1983-2010) 149 items across 16
categories.
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Page 32 of 42
Table 2
Descriptive Statistics of the CSR Index by Country
Year Mean SD Min Max Obs
2010 0.4356 0.1263 0.1309 0.7024 90
Aggregate CSR Index
2011 0.4439 0.1248 0.1310 0.7024 90
2010 0.5054 0.0893 0.2857 0.6190 20
Bahrain
2011 0.5125 0.0860 0.3095 0.6429 20
t
2010 0.4246 0.0975 0.2500 0.5238 6
Bangladesh
ip
2011 0.4345 0.1090 0.2500 0.5595 6
2010 0.5387 0.0393 0.4881 0.5833 4
Indonesia
2011 0.5387 0.0393 0.4881 0.5833 4
cr
2010 0.3929 0.0000 0.3929 0.3929 3
Jordan
2011 0.4008 0.0137 0.3929 0.4167 3
2010 0.3929 0.0491 0.3333 0.4286 5
us
Kuwait
2011 0.3952 0.0515 0.3333 0.4405 5
2010 0.5082 0.0982 0.3571 0.7024 16
Malaysia
2011 0.5156 0.0934 0.4048 0.7024 16
2010 0.3000 0.1089 0.1667 0.4167 5
an
Pakistan
2011 0.3048 0.1125 0.1667 0.4167 5
2010 0.3738 0.1367 0.2381 0.5714 5
Qatar
2011 0.3738 0.1367 0.2381 0.5714 5
2010 0.4762 0.1124 0.3571 0.6190 6
M
Saudi Arabia
2011 0.4960 0.1129 0.3574 0.6190 6
2010 0.3146 0.0356 0.2738 0.3690 7
Sudan
2011 0.3146 0.0394 0.2738 0.3810 7
2010 0.3333 0.2862 0.1310 0.5357 2
d
Syria
2011 0.3571 0.2525 0.1786 0.5357 2
2010 0.3027 0.2166 0.1309 0.6190 7
te
UAE
2011 0.3486 0.1818 0.1310 0.6190 7
2010 0.4256 0.0791 0.3571 0.5357 4
UK
2011 0.4464 0.0731 0.3810 0.5357 4
p
ce
Ac
Page 33 of 42
Table 3
Weighted Average CSR Index by Dimension in 2011
Weighted
D1 D2 D3 D4 D5 D6 D7 D8 D9 D10
Index (%)
Average
69.75 62.82 60.44 17.41 43.21 39.17 23.17 45.09 3.33 54.44 41.88
Dimension
Bahrain 83.33 76.15 75.00 18.00 37.78 31.25 33.57 53.33 0.00 68.33 56.74
t
Bangladesh 70.37 64.10 58.33 11.11 68.52 50.00 11.90 33.33 0.00 44.44 48.11
ip
Indonesia 69.44 67.31 57.50 31.67 63.89 62.50 50.00 47.92 0.00 75.00 59.64
Jordan 33.33 84.62 36.67 8.89 37.04 50.00 19.05 50.00 0.00 66.67 44.37
Kuwait 55.56 55.38 50.00 16.00 48.89 50.00 5.71 48.33 0.00 33.33 43.76
cr
Malaysia 79.86 66.83 78.13 24.17 53.47 29.69 22.32 53.13 9.38 62.50 57.09
Pakistan 33.33 56.92 44.00 5.33 22.22 40.00 11.43 35.00 0.00 46.67 33.74
Qatar 80.00 43.08 52.00 1.33 31.11 40.00 34.29 35.00 20.00 60.00 41.39
us
Saudi Arabia 83.33 66.67 63.33 22.22 57.41 45.83 40.48 31.94 8.33 66.67 54.92
Sudan 47.62 46.15 40.00 17.14 22.22 50.00 4.08 41.67 0.00 9.52 34.83
Syria 50.00 53.85 40.00 16.67 38.89 37.50 0.00 50.00 0.00 33.33 39.54
UAE 66.67 39.56 42.86 15.24 38.10 42.86 16.33 34.52 0.00 38.10 38.60
an
UK 72.22 67.31 57.50 23.33 36.11 18.75 21.43 45.83 0.00 66.67 49.43
D1,…….D10 are vision and mission statement; board of directors and top management; product/services; zakah, and
benevolent loans; employees; debtors; community; shari’ah supervisory board (SSB); environment and charitable and
social activities dimensions respectively.
M
Table 4
Classifications of the CSR Index by Country in 2011
Aggregate
d
Particular Universal Mandatory Voluntary
Index
Aggregate CSR Index 0.4439 0.4062 0.4798 0.6127 0.3542
te
Bahrain 0.5125 0.4805 0.5430 0.6982 0.4116

Bangladesh 0.4345 0.3211 0.5426 0.5595 0.3690
Indonesia 0.5387 0.4451 0.6279 0.6429 0.4821
p
Jordan 0.4008 0.2764 0.5194 0.4762 0.3631

Kuwait 0.3952 0.3659 0.4233 0.5786 0.3036
ce
Malaysia 0.5156 0.4959 0.5058 0.7589 0.3884

Pakistan 0.3048 0.2293 0.3767 0.4214 0.2464
Qatar 0.3738 0.3073 0.4372 0.4643 0.3214
Saudi Arabia 0.496 0.4146 0.5736 0.5893 0.4315
Ac
Sudan 0.3146 0.2962 0.3322 0.5051 0.2194

Syria 0.3571 0.3902 0.3256 0.5714 0.2500
UAE 0.3486 0.3275 0.3688 0.4898 0.2730
UK 0.4464 0.4634 0.4902 0.6786 0.3259
The Table presents the classifications of the CSR Index into two main classifications namely particular and
universal, and mandatory and voluntary CSR disclosures. The first classification consists of CSR items relating
purely to Shari’ah principles (particular) and the items generally expected in conventional banks (universal). The
second classification is based on the Standard No. 7 on CSR issued by AAOIFI .
Page 34 of 42
Table 5
Descriptive statistics
Mean S.D Min Max Skewness kurtosis Obs.
CSR Index 0.4439 0.1248 0.1310 0.7024 -0.4025 2.7585 90
ROE 0.0571 0.1369 -0.5271 0.3927 -1.3026 6.3265 90
ROA 0.0047 0.0541 -0. 2955 0.2178 - 1.8238 9.2167 90
SSB. size 4.1666 1.3759 2.0000 9.0000 1.1812 4.0995 90
t
B. size 9.0333 3.3198 5.0000 23.000 1.9569 7.4666 90
ip
NED 0.6519 0.2800 0.0935 0.7125 -0.8411 2.1695 90
ln TA 14.2159 1.6635 9.6881 17.9035 -0.2772 2.7799 90
Age 12.3222 11.3848 6.0000 36.000 1.4990 4.9247 90
cr
Fin./TA 0.4265 0.2289 0.3358 0.9632 -0.2631 2.2159 90
lnGDP 25.6743 1.2658 23.9813 28.5185 0.1667 2.3172 90
Private 0.4444 0.4997 0.0000 1.0000 0.2236 2.0500 90
us
The table presents the descriptive statistics of the sample in 2011. CSR Index: corporate social responsibility index;
ROE: return on equity before tax; ROA: return on assets before tax; SSB.size: the number of Shari’ah supervisory board
members; B.Size the number of board members; NED: the percentage of non-executive directors in the board of
directors; lnTA: the natural logarithm of bank’s total assets in US$ as a proxy for bank size; Age: bank age since
an
foundation; Fin./TA: the ratio of total bank finances/ total assets; Private: dummy variable takes the value of 1 if the
bank is listed in a stock exchange of the respective country and 0 otherwise; lnGDP: natural logarithm of the gross
domestic product of country i as a proxy for country macroeconomic factors; Private: dummy variable takes the value of
1 if the bank is listed in a stock exchange of the respective country and 0 otherwise.
M
d
p te
ce
Ac
Page 35 of 42
t
ip
cr
Table 6
Correlation Matrix
us
CSR Index  ROA  ROE lnTA lnAge SSB. size B. size NED Fin./TA lnGDP Private
CSR Index 1.0000
 ROA 0.0481 1.0000
an
 ROE 0.0391 0.9531 1.0000
***
lnTA 0.2725 -0.2285** -0.2285** 1.0000
lnAge 0.2114** 0.0614 0.0614 0.1775* 1.0000
SSB. size 0.2402** -0.0763 -0.0763 0.2986*** 0.1808* 1.0000
M
B. size 0.0485 -0.0975 -0.0975 0.1530 0.2505** 0.4617*** 1.0000
NED 0.2246** -0.0576 -0.0576 0.1524 -0.2854*** -0.1592 -0.4471*** 1.0000
Fin./TA -0.1754* -0.0253 -0.0253 0.1468 -0.0401 0.3054*** 0.0693 -0.2534** 1.0000
lnGDP -0.0079 -0.1430 -0.1430 0.3522*** -0.1559 0.0106 -0.2278** 0.0134 0.3742*** 1.0000
ed
Private -0.0612 -0.0950 -0.0950 0.1009 0.1105 0.2369** 0.3499*** -0.2319** 0.0806 -0.1233 1.0000
The table presents the correlation matrix for the covariates in 2011. CSR Index: corporate social responsibility index; AROA: average annual change in ROA over
2006-2010; AROE: average annual change in ROE over 2006-2010; lnTA: natural logarithm of bank’s total assets in US$ as a proxy for bank size; lnAge: the
natural logarithm of bank age since foundation; SSB.size: number of Shari’ah supervisory board members; B.Size: number of board members; NED: percentage of
pt
non-executive directors in the board of directors;, Fin./TA: ratio of total bank finances/ total assets; Private: dummy variable takes the value of 1 if the bank is
listed in a stock exchange of the respective country and 0 otherwise; lnGDP: natural logarithm of the gross domestic product of country i as a proxy for country
macroeconomic factors.
ce
Ac
Page 36 of 42
Table 7
Determinants of CSR Disclosure
Panel A Panel B
CSR Index 2010 2011 Pooled 2010 2011 Pooled
0.0003*** 0.0004*** 0.0002**
 ROA (0.0001) (0.0001) (0.0001)
t
0.0004*** 0.0002** 0.0003***
 ROE
ip
(0.0001) (0.0001) (0.0001)
0.0275*** 0.0235** 0.0256*** 0.0298*** 0.0249** 0.0277***
SSB. size
(0.0099) (0.0103) (0.0064) (0.0096) (0.0101) (0.0072)
cr
0.0006 0.0008 0.0013 0.0003 0.0006 0.0011
B. size
(0.0047) (0.0051) (0.0031) (0.0073) (0.0051) (0.0054)
0.1085* 0.1057* 0.1249** 0.1184** 0.1066* 0.1141**
NED
us
(0.0615) (0.0588) (0.0637) (0.0542) (0.0588) (0.0589)
0.0148* 0.0121* 0.0065* 0.0149* 0.0127* 0.0061*
lnTA
(0.0083) (0.0069) (0.0038) (0.0081) (0.0071) (0.0035)
0.0274* 0.0272* 0.0241* 0.0269* 0.0275* 0.0239**
an
lnAge
(0.0161) (0.0161) (0.0121) (0.0159) (0.0157) (0.0118)
-0.0901 -0.1249 -0.1197 -0.0907 -0.1254 -0.1196
Fin./TA
(0.0736) (0.0923) (0.0820) (0.0731) (0.0924) (0.0967)
-0.0048 0.0054 0.0089 -0.0034 0.0067 0.0081
M
LnGDP
(0.0126) (0.0113) (0.0079) (0.0145) (0.0122) (0.0086)
-0.0390 -0.0205 -0.0236 -0.0399 -0.0207 -0.0241
Private
(0.0312) (0.0283) (0.0203) (0.0335) (0.0298) (0.0216)
0.2141 -0.0323 -0.0551 0.2136 -0.0328 -0.0556
d
Cons
(0.3283) (0.2985) (0.2051) (0.3283) (0.2986) (0.2051)
Country Dummy No No No No No No
te
Ramsey RESET test (p value) 0.157 0.257 0.324 0.168 0.213 0.297
Mean VIF 1.48 1.61 1.59 1.53 1.52 1.36
6.85*** 5.78*** 11.21*** 6.91*** 5.83*** 11.31***
p
F.stat
(0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
R2 0.3601 0.4075 0.3934 0.3902 0.4276 0.3839
ce
Obs. 90 90 180 90 90 180

CSR Index: corporate social responsibility index;  ROA: average annual change in ROA over 2006-2010; 
ROE: average annual change in ROE over 2006-2010 SSB. size: number of Shari’ah supervisory board
members; B.Size: number of board members; NED: percentage of non-executive directors in the board of
Ac
directors; lnAge: natural logarithm of bank age since foundation; lnTA natural logarithm of bank’s total assets in
US$ as a proxy for bank size; Fin./TA: ratio of total bank finances/ total assets; lnGDP: natural logarithm of the
gross domestic product of country i as a proxy for country macroeconomic factors; Private: dummy variable
takes the value of 1 if the bank is listed in a stock exchange and 0 otherwise.***, **, * indicates significance at
the 1%, 5% and 10% levels. Robust standard error between parentheses.
Page 37 of 42
t
ip
cr
Table 8
CSR Disclosure Dimensions and Financial Performance of Islamic banks
D1 D2 D3 D4 D5 D6 D7 D8 D9 D 10
us
0.0010*** 0.0006*** 0.0003* 0.0003*** 0.0009*** 0.0004*** 0.0008*** 0.0002* -0.0002* 0.0012***
 ROA (0.0000) (0.0001) (0.0002) (0.0001) (0.0002) (0.0001) (0.0002) (0.0001) (0.0001) (0.0003)
0.0126 0.0043 0.0283** 0.0184* 0.0217 0.0016 0.0483** 0.0030 0.0033 0.0675**
SSB. size
an
(0.0163) (0.0170) (0.0118) (0.0101) (0.0228) (0.0135) (0.0205) (0.0134) (0.0101) (0.0336)
0.0558*** 0.0247*** -0.0016 -0.0052 0.0293** -0.0008 -0.0039 0.0016 0.0003 0.0035
B. size
(0.0112) (0.0085) (0.0112) (0.0055) (0.0114) (0.0060) (0.0123) (0.0097) (0.0069) (0.0196)
0.2746** 0.2901*** 0.2877** 0.0061 0.5013*** -0.0559 0.1878 0.0369 -0.0520 0.2943
NED
M
(0.1355) (0.0923) (0.1261) (0.0663) (0.1246) (0.0760) (0.1262) (0.0844) (0.0770) (0.2339)
0.0246* 0.0038 0.0366** 0.0073 0.0532** 0.0282** 0.0086 -0.0019 0.0147* -0.0302
lnTA
(0.0142) (0.0144) (0.0172) (0.0118) (0.0227) (0.0140) (0.0244) (0.0098) (0.0085) (0.0330)
0.0079 0.0440* 0.0588* 0.0060 0.0647* -0.0174 -0.0328 0.0146 0.0376** -0.0301
lnAge
(0.0325) (0.0258) (0.0358) (0.0176) (0.0349) (0.0195) (0.0351) (0.0242) (0.0172) (0.0550)
d
0.1313 0.0466 0.2182* 0.0694 0.1973 0.0784 0.0058 0.0699 0.0229 -0.0523
Fin./TA
(0.1109) (0.1132) (0.1123) (0.0796) (0.1188) (0.1017) (0.1261) (0.0884) (0.0339) (0.2386)
lnGDP
0.0260
(0.0249)
0.0732
te
0.0161
(0.0199)
0.0430
0.0228
(0.0242)
0.0376
-0.0090
(0.0164)
-0.0189
-0.0024
(0.0347)
0.0612
0.0554***
(0.0204)
0.0098
0.0156
(0.0281)
-0.0418
0.0047
(0.0130)
-0.0008
-0.0017
(0.0143)
-0.0453**
0.0753*
(0.0421)
-0.0235
ep
Private
(0.0505) (0.0462) (0.0529) (0.0302) (0.0677) (0.0349) (0.0613) (0.0378) (0.0205) (0.0992)
-0.2637 -0.0814 -0.1419 0.4058 0.4517 1.7492*** -0.2076 0.2466 0.0956 -1.2451
Cons
(0.6816) (0.4813) (0.6526) (0.4062) (0.7919) (0.5116) (0.6941) (0.3614) (0.4004) (1.1143)
F.stat 23.44*** 17.01*** 3.51*** 24.82*** 36.65*** 13.61*** 27.65*** 6.12*** 1.7900* 12.23***
c
(p. Value) (0.0000) (0.0000) (0.0011) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.098) (0.0000)
R2
Ac
0.1670 0.1379 0.1419 0.1352 0.1881 0.1541 0.1279 0.0255 0.0670 0.1010
Obs. 90 90 90 90 90 90 90 90 90 90
D1,…….D10 are vision and mission statement; board of directors and top management; product/services; zakah, and benevolent loans; employees; debtors;
community; shari’ah supervisory board (SSB); environment and charitable and social activities dimensions respectively.  ROA: average annual change in
ROA over 2006-2010; SSB.size: number of Shari’ah supervisory board members; B.Size: number of board members; NED: percentage of non-executive
directors in the board of directors;; LnTA natural logarithm of bank’s total assets in US$ as a proxy for bank size; lnAge: natural logarithm of bank age
since foundation; Fin./TA: ratio of total bank finances/ total assets; lnGDP: natural logarithm of the gross domestic product of country i as a proxy for
country macroeconomic factors; Private: dummy variable takes the value of 1 if the bank is listed in a stock exchange of the respective country and 0
otherwise.***, **, * indicates significance at the 1%, 5% and 10% levels. Robust standard error between parentheses.
Page 38 of 42
Table 9
Mandatory and Voluntary CSR disclosure and Financial Performance
CSR Index Panel A: Mandatory Panel B: Voluntary
0.0004*** 0.0002**
 ROA (0.0001) (0.0001)
0.0003*** 0.0002**
 ROE (0.0001) (0.0001)
0.0226* 0.0229* 0.0412*** 0.0345***
SSB. size
(0.0129) (0.0131) (0.0086) (0.0092)
t
0.0202** 0.0208** 0.0018 0.0022
B. size
ip
(0.0084) (0.0091) (0.0053) (0.0053)
0.1730** 0.1749* 0.0978* 0.0921*
NED
(0.0838) (0.0922) (0.0601) (0.0561)
cr
0.0241** 0.0239** 0.0182** 0.0189*
lnTA
(0.0108) (0.0112) (0.0091) (0.0098)
0.0004 0.0004 0.0239** 0.0225**
lnAge
us
(0.0248) (0.0248) (0.0141) (0.0117)
0.1198 0.1200 0.0823 0.0824
Fin./TA
(0.0896) (0.0899) (0.0657) (0.0661)
0.0146 0.0141 0.0046 0.0055
lnGDP
Private
(0.0158)
0.0262
(0.0367)
an(0.0165)
0.0258
(0.0371)
(0.0131)
0.0126
(0.0279)
(0.0161)
0.0121
(0.0284)
0.1095 0.1093 0.1302 0.1297
M
Cons
(0.4160) (0.4161) (0.3239) (0.3240)
8.57*** 8.41*** 27.85*** 27.78***
F.stat
(0.0000) (0.0000) (0.0000) (0.0000)
R2 0.3231 0.2931 0.2720 0.2520
ed
Ramsey RESET test (p value) 0.149 0.374 0.125 0.268

Mean VIF 1.99 1.45 1.89 1.24
Obs. 90 90 90 90
CSR Index: corporate social responsibility index;  ROA: average annual change in ROA over
pt
2006-2010;  ROE: average annual change in ROE over 2006-2010 SSB.size: number of
Shari’ah supervisory board members; B.Size: number of board members; NED: percentage of
non-executive directors in the board of directors; lnTA: natural logarithm of bank’s total assets
ce
in US$ as a proxy for bank size; lnAge: natural logarithm of bank age since foundation;
Fin./TA: ratio of total bank finances/ total assets; lnGDP: natural logarithm of the gross
domestic product of country i as a proxy for country macroeconomic factors; Private: dummy
variable takes the value of 1 if the bank is listed in a stock exchange of the respective country
and 0 otherwise.***, **, * indicates significance at the 1%, 5% and 10% levels. Robust standard
Ac
error between parentheses.
Page 39 of 42
Table 10
3SLS estimation results for CSR and FP equations
Panel A: CSR Panel B: Performance

Equation Equation
Dependent Variable CSR index  ROA  ROE
System 1 System 2 System 1 System 2
0.0011***
 ROA (0.0002)
0.0009***
 ROE
t
(0.0001)
ip
2.3269 2.7665
CSR
(1.5282) (1.8095)
0.0299*** 0. 0284*** 1.9682* 1. 9572*
SSB. size
cr
(0.0068) (0. 0068) (1.0105) (1. 0278)
0.0001 0.0002 -0.2868 -0. 3344
B. size
(0.0032) (0.0035) (0.6362) (1.9374)
us
0.0911** 0.0908** 0.4135** 0.4921**
NED
(0.0371) (0.0371) (0.2132) (0.1986)
0.0059* 0.0048** 0.9751 1.1732
lnTA
(0.0032) (0.0021) (2.1596) (2.5572)
lnAge
0.0162*
(0.0096)
-0.1060**
an 0.0174*
(0.0099)
-0.1057**
1.2548
(5.2699)
0.2807
1.4711
(1.2403)
0.4567
Fin./TA
(0.0409) (0.0409) (0.2705) (0.3591)
M
0.0157** 0.0082 0.0084 0.0705
lnGDP
(0.0077) (0.0071) (0.6871) (0.8121)
0.1991 0.1887 1.4557 1.6113
Cons
(0.1742) (0.1689) (2.9112) (2.7498)
ed
R.sq 0.272 0.187 0.074 0.141

Chi. sq 41.35*** 42.11*** 6.06 9.015
Sargan test (p.value) 0.348 0.301 0.348 0.301
Hausman Specification Tests
pt
2SLS vs 3SLS (p.value) 0.246 0.272 0. 246 0. 272

Breusch-Pagan test of independence
(p.value) 0.02
ce
CSR Index: corporate social responsibility index;  ROA: average annual change in ROA over 2006-
2010;  ROE: average annual change in ROE over 2006-2010; SSB.size: number of Shari’ah
supervisory board members; B.Size: number of board members; NED: percentage of non-executive
directors in the board of directors; lnTA natural logarithm of bank’s total assets in US$ as a proxy for
Ac
bank size; lnAge: natural logarithm of bank age since foundation; Fin./TA: ratio of total bank finances/
total assets; lnGDP: natural logarithm of the gross domestic product of country i as a proxy for country
macroeconomic factors; ***, **, * indicates significance at the 1%, 5% and 10% levels. Standard error
between parentheses.
Page 40 of 42
Figure 1: CSR Index across countries in 2011
53.87% 51.56%
51.25% 49.60%
43.45% 44.64%
40.08%39.52%
37.38% 35.71% 34.86%
30.48% 31.46%
t
ip
cr
us
an
Figure 2: CSR Index by Dimension
M
69.75%
62.82% 60.44%
54.44%
ed
43.21% 45.09%
39.17%
23.17%
pt
17.41%
3.33%
ce
D1 D2 D3 D4 D5 D6 D7 D8 D9 D10
Ac
10
Page 41 of 42
Figure 3: Weighted Average CSR Index by Disclosure
Requirements of AAIOFI in 2011
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
t
ip
cr
Mandatory Voluntary
us
Figure 4: Average CSR index classified into “Particular” and
0.7
an
“Universal” disclosures by country
0.6
M
0.5
0.4
0.3
0.2
0.1
ed
0
pt
Universal CSR Particular CSR

ce
Ac
11
Page 42 of 42

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Title: Corporate Social Responsibility and Financial

Author: Hisham Farag Christine Mallin Kean Ow-Yong

To appear in: Journal of Economic Behavior & Organization

Received date: 17-11-2012

42 JEL Classification: G21

39 necessary modifications to these conventional products to ensure Shari‟ah compliance. This

39 discretionary responsibilities as financial intermediaries for individuals and institutions.‟

42 2.2 Corporate social responsibility (CSR) and financial performance (FP)

34 3.1 Dependent variable

42 CSR  f1 ( FP, Z1 ,  1 ) (3a)

34 5. Results and discussion

34 [Insert Table 3 about here]

42 [Insert Table 5 about here]

36 (1983-2010). Journal of Business Ethics (forthcoming).

Bahrain 0.5125 0.4805 0.5430 0.6982 0.4116

Jordan 0.4008 0.2764 0.5194 0.4762 0.3631

Malaysia 0.5156 0.4959 0.5058 0.7589 0.3884

Sudan 0.3146 0.2962 0.3322 0.5051 0.2194

Obs. 90 90 180 90 90 180

Ramsey RESET test (p value) 0.149 0.374 0.125 0.268

error between parentheses.

Panel A: CSR Panel B: Performance

R.sq 0.272 0.187 0.074 0.141

2SLS vs 3SLS (p.value) 0.246 0.272 0. 246 0. 272

Universal CSR Particular CSR

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