Background of Study

Corporate social responsibility (CSR) has been present in the Management and Accounting
literature for about 45 years Wood, (2010). Both organizations and societies have significantly
increased their focus on CSR in recent years Adams and Frost (2006); Gulyás (2009); Young and
Thyil (2009). Traditionally, companies have to focus on strategies for their business operations
and profit such as differentiation, diversification, turnaround, concentration and globalization.
However, recent developments in strategic thinking support the need to add activities that expand
out from the company into society. Scholars have identified these activities as corporate social
responsibility (CSR) activities Carroll (1979); Margolis and Walsh (2001). Further, CSR
scholars, managers and authors have recognized the actions of cause marketing, donation,
society improvement, disaster relief, protection, peace initiatives and pollution reduction as
company's social responsibility activities. In the context of developing countries have societal
and environmental problems such as human rights, environmental pollution and labor issues.
However, people in developing countries believe that multinational companies (MNCs) can
solve these problems engaging with CSR initiatives under sustainable development and co-
operation with civil society Ite, (2004).

Business organizations are always thinking to increase their financial performance. If they
engage with socially responsible activities, they can solve the societal and environmental
problems Henderson,( 2001). Because the above problems are common to developing countries,
researchers also suggested overcoming those issues implementing CSR practices. The issues
outlined above are directly relevant to Nepal, a developing country in the third world. Therefore,
the current study will firstly identify existing CSR practices and confirm their benefits through
investigating CSR and company performance.

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Statement of the Research Problem

The financial sector is one of the most important within the economy; higher performance could
be achieved by engaging in social activities Grant, (1991).There is no reason to believe that
shareholders are willing to tolerate an amount of corporate non-profit activity which appreciably
reduces either dividends or the market performance of the stock Hetherington, (1973). Therefore,
when a company increases its costs by improving CSR in order to increase competitive
advantage, such CSR activities can enhance company reputation, thus, in the long run CFP can
be improved by sacrificing the short term CFP Balabanis, Philips and Lyall, (1998). Today,
businesses that embrace CSR continue to see positive results such as; enhanced reputation,
increased sales and customer loyalty, Competitive edge, Strengthened relationships and
expanded market share. This drives the bottom line as people care about how an organization
conducts business. All organizations have an impact on society and the environment through
their operations, products and services and through their interaction with key stakeholders Fox,
Mumo and Kavwanga, (2005). Institutions can enhance CSR as part of marketing strategy. As
such CSR is important in all firms Moore and Spence, (2006). Research points to a positive
relationship between CSR and financial performance. Investment in CSR can attract customers;
enable a firm to penetrate a hostile market and attract highly competitive staff who will help the
firm attain its mission. A business should operate in a way that the society does not feel
unappreciated as it strives to maximize its profits Hetherington, (1973).

In contest of Nepal one of the study, which is related with corporate governance (Sharma Poudel
& Hovey) the findings of this study have important implication for bank in Nepal since it is
found that strong board size and audit committee size and higher proportion of independent
director in audit committee, lower frequency of board meeting and lower ratio of institutional
ownership has better influence in Nepalese banks. Managers should therefore put in place
measures to address issues that affect communities who live in their areas of operation.

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Research of the Objective

This study will analyze the corporate social responsibility and financial performance in banking
sector of Nepal. The specific objectives of the study are:

 To examining the CSR Practices in Nepalese commercial banks.

 To determine the relationship between corporate social responsibility and percival
financial performance on Nepalese banking industry.

Research Questions

This study is able to deal with the following issues:

 What are the CSR Practices in Nepalese commercial banks?

 What are the relationship between corporate social responsibility and financial
performance?

Rationale for the Research Project

The study will enable company executives understand that engaging in social activities can help
in managing emerging social risks as an offshoot of their operating activities. The study will
highlight a better way of marketing for a firm and its management. The study will help a firm
attract, motivate and retain competent employees who will enable it realize its objectives. Social
activities help companies to be known as responsible corporate citizens with sensitivity towards
social and environmental issues by understanding the effect of corporate social responsibility
activities on financial performance, investors will determine how to allocate their portfolio so as
to maximize returns and thereafter change their assessment of companies' performance and will
be making decisions based on criteria that will include ethical concerns (Carroll, 1991).
Furthermore, this study will add knowledge to previous studies on corporate social responsibility
by adding the component of its effect on long term financial performance. Analysts will find this
study helpful when trying to understand the effect that engaging in social activities has on a
firm’s long term financial performance.
3
Related Literature

Hirigoyenand Rehm, (2015) The same interpretation may be applied to the societal commitment
dimension, which promotes the management of the societal impacts of products and services and
is increasingly controlled, and the stock market behavior dimension, which assesses the account
taken of the rights and interests of customers, the integration of social and environmental
standards into the selection of suppliers, and respect for competition rules. In these two latter
dimensions, the behavior of companies is quite tightly constrained and management has little
discretion. In contrast, there is no doubt that the human resources and environment dimensions
rely more on a voluntary commitment from companies, in contrast to restrictive measures
dictated by opportunistic considerations.

Johansson, Karlsson and Hagberg, (2015)The relationship between CSR and financial
performance in large Swedish publicly traded companies it can be concluded that no significant
relationship can be observed for the sample during the time period 2006-2009. Accordingly,
this research joins the large body of research within this research area which also failed to
observe a significant relationship between the variables CSR and financial performance. It can
therefore be inferred that there are other factors which influences financial performance to a
larger extent than CSR.

Bolton, (2013) The results consistently show several key contributions. First, there is a positive
relationship between CSR and financial performance, measured with both operating performance
and firm value. Second, it seems that the types of CSR activities the firm invests in do make a
difference. A decomposition of the results shows that the superior performance and firm value is
being driven by the bank’s CSR activities that are related to the core operating activities, and not
to tangential activities that could be akin to green-washing. These two performance-related
results were most significant for the largest firms and all results are robust to controls for
endogeneity and bank size. Third, there is no general relationship between CSR and bank risk-
taking, but this is because different types of CSR initiatives seem to create offsetting effects on
firm risk. There is a negative relationship between bank risk and CSR activities related to core
operations (measured by KLD-Business), while there is a positive relationship between bank
risk-taking and CSR activities that are not related to core operations (measured by KLD-
Discretionary). The implication is that the types of CSR investments that banks made mattered
4
more than the amount of CSR investments. Finally, we see a similar relationship with the
likelihood of banks needing financial assistance through TARP: banks with low KLD-Business
scores and banks with high KLD-Discretionary scores were more likely to need financial
assistance through TARP. That is, banks with the weakest CSR structures were the most exposed
to needing to be bailed out by the U.S. government.

Sobhy and Megeid,( 2013) The study reveals that service quality is most significant predictor of
banking service customer satisfaction. This suggests that management should ensure that the
banking environment should concentrate on fair and prompt service to their customers. Service
quality is positively related to customer satisfaction which in turn enhances better financial
performance. Also the results reveal that customer satisfaction is most significant predictor of
banking service quality. This suggests that management should ensure that the banking
environment should concentrate on fair and prompt service to their customers. CSR positively
influences customer satisfaction toward banking service quality. Based on the results of
hypotheses testing and the analysis which has been carried out it is concluded that there is a
positive relationship between CSR and financial performance and the descriptive and inferential
measures shows that corporate social expenditure depends upon the financial performance of
the bank. This positive and direct link found between customer service quality and
profitability and liquidity reveal that financial performance is a key motivator for banks to

CSR.

Taşkın, (2015) The results of the regressions show that the banks with higher CSR scores tend to
have lower ROA and ROE, but the result is not statistically significant. Another striking fact is
as the banks’ scores increase, the amount of net interest margin they charge from their
customers increase significantly, too. Conversely, the banks that have higher NIMs, have higher
CSR scores, which shows a bidirectional relationship between NIM and CSR. On the other hand,
the profitability measures, namely ROA and ROE, fail to explain the CSR scores. We cannot
infer a statistically significant relation between those measures and CSR. Moreover banks with
larger asset bases tend to be more profitable and are better in terms of CSR scores.

Cornett, Erhemjamts, and Tehranian, (2014) The largest banks consistently have higher All
Strengths and All Concerns scores during the sample period. However, this group sees a steep

5
increase in all strengths and a steep drop in all concerns after 2009, as the worst of the financial
crisis passed. We also find that more profitable banks, banks with higher capital ratios, and banks
that have charge lower fees to deposits have significantly higher All Strengths scores. Further,
All Strengths scores decrease significantly for the full sample of banks in 2010-2011. We find
that banks with more female and minority directors have significantly higher All Strengths
scores. For banks that have low involvement in low income communities, it is the smallest banks
that show many significant relations between corporate social responsibility and bank
characteristics. Yet for banks that have high involvement in low income communities, it is the
largest banks that show many significant relations. Finally, we find that the largest banks appear
to be rewarded for being social responsibility, as both size adjusted ROA and ROE are positively
and significantly related to CSR scores.

(Lenka & Jiří, 2014)Knowledge of business practices indicate to a fact that the acceptance of moral
principles in business is not integrated into a management decisions of companies and it cannot
be expected that self-regulatory ethical instruments of companies (such as CSR) will be
effective. The experience with CSR application and ethical principles in the banking sector tend
to accept the opinion that the social responsibility of banks and baking ethics are seen by a bank
management as a suitable marketing tools for communication with a general public and are not
integrated into policies of commercial banks. Even experience with crisis demonstrated the fact
that there is an absence of moral principles in decision making of bank managers.

(Mosaid & Boutti, 2012 )This research has attempted to empirically assess the relationship between
CSRD and Islamic banks performance as measured by ROA and ROE. The results revealed an
important lack in information disclosed regarding corporate social responsibility. In addition,
some banks disclose more than other banks of the sample (Al Baraka Bank, Al Salam Bank).
QIIB has the lowest value of CSRDI. In the other hand, the results of regression models refute a
statistically significant relation between ROA and ROA with CRSDI.

6
Author Country Sample Period Mythology Major Finding
Hirigo Europea 329 2009 Granger- There is a positive relationship and mutual
yen n,Asian and cause reinforcement between financial
and and 2010 performance and social responsibility
Rehm, North
(2015) America
n
compani
es
Bolton 3,100 Mean ,
U.S. 1998- Overall, results suggest that improving the
( 2013) median,
banks 2010 quality of CSR at banks might go a long
Stand
way towards improving individual bank
deviation
performance and reducing the risk
associated with U.S. financial institutions.
Sobhy 8 Regression
Egyptia 2003- The study found that there is a positive
and model
2009
relationship between the profitability and
Megei
operation levels and liquidity performance
d,
(2013)
Taşkı,( 11 2013 Regression
Turkish There is a bidirectional relationship
2015) Model
between CSR and profitability
Dahiya Jordan 2011 Regression
listed It is concluded that there is a significant
t, Dr. model
compan
positive relationship between (CSR), Bank
Ahma y
performance
d A.;
Awwa
d,
Moha
mmed
R.

7
Abu;
Hajjat,
Emad
S.;
Wesha
h ,
Sulaim
an R.;,
(2012)
Cornet U.S 109 2010- Regression This Study find that the largest banks
2011
t, s appear to be rewarded for being social
Erhem responsibility, as both size adjusted ROA
jamts, and ROE are positively and significantly
& related to CSR scores.
Tehran
ian,
(2014)
Lenka Czech 4 2011- Cluster Negative relation with CSR and
Republi 2012
and analysis recommend the improvement of CSR
c
Jiří,
(2014)
Mosai Marcos 8 2009- Regression Significant relation between CSR and
2010
d and models financial performance
Boutti,
(2012 )

8
Conceptual Framework

CSR Dimensions

One of the major contributions of this research is that it takes into account the various
dimensions of social responsibility, in contrast to other studies that prefer a holistic approach or
focus on one dimension in particular.

Human Resource

This area assesses ongoing improvements in employee allowance, tanning and working
conditions.

Corporate Governance

This dimension focuses on the efficiency and integrity of governance, which refers to the
independence and effectiveness of the Board as well as the effectiveness and efficiency of audit
and control mechanisms. In particular it evaluates the risks of social responsibility, the rights of
(particularly) minority shareholders, and transparency and rationality in executive compensation.

Community Commitment

This dimension assesses the effectiveness and integration of managerial commitment, the
company’s contribution to the social and economic development of the local area and its human
communities, specific commitments to manage the societal impact of products and services and
finally, the transparent and collaborative contribution to causes of general interest.

Financial Performance

The dependent variable is financial performance of the firms. Two financial variables were
selected and integrated with this models which is return on assets and return on equity.

9
Return on assets

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
ROA gives a manager, investor, or analyst an idea as to how efficient a company's management
is at using its assets to generate earnings. Return on assets was measured by the annual net
profit/average total assets

Return on equity

Return on equity (ROE) is a measure of financial performance calculated by dividing net income
by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its
debt, ROE could be thought of as the return on net assets.

TA: Total Assets at end of fiscal year

Figure 1. Conceptual Model

Independent variables Dependent variable

Corporate Social
Responsibility Measurement Financial

Variables Performance

1. Human Resource 1. Return on

equity
2. Corporate Governance
2. Return on
3. Community
Assets
commitment

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 Research Methodology

Research Methodology

The proposed topic relates to Nepalese Bank and financial initiation. For this purpose, primary
and secondary data will be used to assess the performance of the bank and financial institution.
The vital information will be gathering from the financial statements of Nepalese banks and
financial institution over the period of 2010-2017.

Population
Commercial banking sector of Nepal will be taken as population for this research. Altogether,
there are twenty-eight commercial banks in Nepal.

Sampling Method and Sample Size

In this research, convenience sampling method will be used. The sample frame will consist the
commercial banks in Nepal. The sample size of the research will be twenty-eight commercial
banks operating in Nepal.

Sampling Technique

For this research, criteria based sampling technique will be used. For this research, the Nepalese
commercial banks must come into operation in 2010 A.D. as a commercial bank because the
researcher is going to study by taking the data since 2010 A.D and banks must not be merged
with any other financial institution in 2017AD.
Data Collection Method
The proposed topic relates to Banking Sector of Nepal. For this purpose, primary and secondary
data will be used to assess the performance of the banks. The primary data gather from Nepalese
commercial banks which is help different CSR related questioners to ask the bankers. In
collecting information on the independent variable CSR, the primary data source employee will
be questionnaire consisting of closed-ended questions. Research questions will design as
concisely as possible in order to obtain maximum information on management views and
motives for CSR practices. The items in the questionnaire were thus used to measure their views
on CSR practices, as well as their motivation for CSR practices. Questions covering views

11
influencing the practice of CSR sought to understand the views behind this practice. The rest of
the questions sought to examine the banks’ motivation for practicing CSR. For these questions
on banks’ views on CSR and their motivation for CSR activities, we adopted a 5-point Likert
scale adapted from Ofori, Nyuur, & S-Darko, (2014). The scale ranged from ‘1 = strongly agree’
to ‘5 = strongly disagree’.

These scales were subjected to reliability analysis. The most widely-used reliability measure in
research is the Cronbach’s alpha which assesses the consistency of the entire scale and indicates
how well the items correlate positively to one another. Cronbach’s alpha ranges from 0 to 1, with
0 standing for a completely unreliable test, higher values close to 1 indicating higher internal
reliability and 1 standing for a completely reliable test. Different positions on what constitutes an
acceptable value of Cronbach’s alpha have been observed (Cortina, 1993). The common practice
in the research, arbitrary value of 0.70 as a sufficient measure of reliability or internal
consistency of an instrument, Gliem and Gliem, (2003).

Secondary information is gathered from the financial statements of Nepalese commercial banks
over the period of 2010-2017. This data will be used to calculate the regression analysis of the
selected Nepalese banks for the above-mentioned period. Moreover, data will also gather from
articles, papers, the World Wide Web, Nepal Rastra Bank reports, Specialized International
Journals, and relevant previous studies.

Research Hypotheses

Hypothesis 1: There is a positive relationship between a company’s CSR performance and its
financial performance (ROA and ROE)

Hypothesis 2: There is a negative relationship between a company’s CSR performance and its
financial performance (ROA and ROE)

Data Analysis Tools and Model

The study used Statistical tools to determine the relationship between firm’s CSR investment and
profitability. The strength of the relationship between CSR and performance will be test using

12
covariance correlation coefficient. Regression analysis will use to determine the relationship
between CSR and firm’s financial performance. The panel data model is of the following form:

Yit = αi + β1X1 it-1 + β2X2 it-1 + β3X3 it-1 + Ɛit-1

Where:
Yit is the performance of firm i at time t, αi is a constant term, β0, β1 and β2, β3 are the
beta coefficients, X1, X2 and X3 are the explanatory variables, and Ɛit-1 is the error term.

Based on the hypotheses formulated, the specific models to be tested are as follows:

ROAit = αi + β1CSR it-1 + Ɛit-1(Model 1)

ROEit = αi + β1CSR it-1 Ɛit-1(Model 2)

Where:
CSR = Corporate Social Responsibility
ROE = earnings after interest and taxes/total equity for firm
ROA = earnings before interest and taxes/total assets for firm
SIZE = size of the firm (log of total assets) for firm
ε (error) = the error term

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 Expected Outcome

This study will be concludes that CSR for the success of a commercial bank since it helps to
improve financial performance. It is, therefore, a noble practice for commercial banks to engage
in CSR as part of their operating activities and set aside funds annually towards a social course.
CSR should therefore be considered as part of daily operating activities and that for a firm to
grow and realize its dreams, it has to engage itself morally and commit itself at improving the
society’s social and living standards. However, it will be given the numerous benefits of
corporate social responsibility; it is recommended that firms continue to give priority to this
practice.

The study will reveal that highly profitable institutions have heavily invested in CSR activities.
Therefore, commercial institutions should operate outside their normal business activities to
support the community. Improving the livelihood of a community attracts volunteers, investors
and sponsors who will help a commercial institution achieve its objectives towards community
needs

References

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Bolton, B. (2013, JUNE). Corporate Social Responsibility and Bank Performance.

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