Do Corporate Social Responsibility

Disclosures Improve Financial

Performance? A Perspective of the
Islamic Banking Industry in Pakistan
 Table of Contents

1. Introduction................................................................................................... 2
1.1 The Foundation of Islamic CSR .................................................................. 3
1.2 Corporate Social Responsibility (CSR)....................................................... 3
1.3 Factors of Corporate Social Responsibility ............................................ 3
1.3.1 Health....................................................................................................... 3
1.3.2 Education................................................................................................. 4
1.3.3 Donation .................................................................................................. 4
1.4 Financial Performance ................................................................................. 4
1.5 Factors of Financial Performance ............................................................... 4
1.5.1 Earnings per Share ................................................................................. 4
1.5.2 Return on Assets ..................................................................................... 4
1.5.3 Return on Equity .................................................................................... 4
1.6 CSR Disclosure by Islamic Banks ............................................................... 5
1.7 Beneficial Improvement in Financial Performance by the Disclosure
of 6
CSR ....................................................................................................................... 6
1.7.1 Consumer Trust With Banks ................................................................ 6
1.7.2 Corporate Social Responsibility Provides a Positive Approach to
Customers ............................................................................................................ 6
1.7.3 Community Involvement ....................................................................... 6
1.8 CSR Programs Add Real Value ............................................................... 6
Conclusion............................................................................................................ 7
References ............................................................................................................ 8
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1. Introduction
In the financial theory, a financial manager's primary purpose is to maximize shareholder
wealth and share prices. However, the concept which covers ethical, environmental and social
tasks of enterprises is known as corporate social responsibility: Like banks, financial
institutions play an important role in the social responsibility of enterprises (CSR). In recent
years, the concept of corporate social responsibility has increased dramatically. The new topic
for companies all over the world is not corporate social responsibility. CSR, however, is
important because it affects every aspect of a bank's activities. Social corporate responsibility
with a variety of descriptions and solutions is an important subject. Corporate social
responsibility is therefore linked to a business approach that contributes to long-term
development by providing all stakeholders economic, social and environmental benefits [1].
The objective of corporate social responsibility is to ensure ethical conduct for businesses.
Corporate social responsibility (CSR) has as its fundamental objective the sustainability of
business activities in order to create shared value for business as well as society. This is one of
today's standard business practices for corporate social accountability. Corporate social
responsibility is also a business strategy that promotes long-term development by providing
economic, social, and environmental benefits to all stakeholders. For a period, financial
performance can be defined as a bank's financial position, as well as the effectiveness of a
bank's resources and incomes growth. Some variables such as: asset return (ROA), equity
return (ROE), equity earnings (EPS) are used to evaluate all banks' wealth. The financial
statements and the annual reports are the main instruments for measuring banks' management
performance and financial performance. The important component in the financial statement
used to inform management performance is net income because net sales shows all banks'
financial performance.
From a theoretical standpoint, Islamic banking is based on the profit sharing principle in place
of the loans/deposits found in conventional banks. In contemporary Islamic banking, two
conflicting legal views have emerged. Islamic scholars argue that in the globally competitive
banking industry, there is no need to redefine products offered by conventional banks. Instead,
the minimum necessary changes to those conventional products should be adopted by Islamic
banks to ensure compliance with the Shariah. The tendency to demonstrate 'form over
substance' is symptomatic of 'large companies' driven by the profit maximum (Warde, 2013
cited in Belal et al, 2014).
For the believers, the Holy Quran emphasized and stated the CSR activity: 'You cannot achieve
righteousness without giving to charity from your loving belongings. What you donate to
charity, ALLAH is aware of’’ Quran, surah 3 Ayahs 92 [3:92]. The Holy Quran and
Sunnah underline the CSR's financial contribution in the form of Sadqah and Zakat. Zakat
means purifying. The maximum possible contribution is mandatory for the wealthy and for
those who are not able to work or earn for themselves, particularly for widows, orphans and
elderly. Islam, in the way of religion, offers a complete life code including instruction in all
aspects of life such as politics, industry, society, economy and religion on faith, moral, moral
and prayer, and faith in Allah [3]. The primary goal of Islam is comprehensive economic
stability. Ethical and moral teaching of Islam produces complete and eternal principles that
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guide people, society, business and the economy in their interactions. Islamic banks should
provide economic and social benefits for their stakeholders and their social corporate
responsibilities, including publications, should be met. Farook (2008) argues that disclosure
provides evidence of the involvement of Islamic banks in social activity and that it thus gains
legitimacy [4].
This report mainly aims to identify the impact of corporate social responsibility on banks
financial performance. Evaluate the current performance of Islamic and conventional banks
Analyze the impact of corporate social responsibility on the Islamic and Conventional Banking
Sector and Measure the effect of corporate social responsibility on financial performance.

1.1 The Foundation of Islamic CSR

The oneness of Allah (SWT), who sent messengers to convey His message and direct the people
to the right path, is the foundation of Islamic thoughts and concepts. Islam respects all
messengers' teachings and righteous paths, from Adam to Moses to Jesus.
However Muhammad (PBUH) is the final messenger of Allah and a final book (Quran) is
revealed to him to guide people and solve the current and emerging world issues. The Quran
provides the theoretical framework while a practical example is the life of the Prophet (PBUH).
The Quran and Sunnah which form the basis for the CSR from a Muslim perspective are the
principles and source of Islam's teachings [5]. In the Islamic perspective, a religious bond is
more precious than a common bond, given the importance of Shariah. Religious bond requires
full obedience to Shariah and a way of living of life according to the teachings of Qur'an and
Sunnah, the primary considerations being ethics, virtue, moral conscience and welfare.

1.2 Corporate Social Responsibility (CSR)

Nowadays, everywhere we look, the business world is cornered by the concept of corporate
social responsibility (CSR). Large businesses are encouraged to be socially accountable.
However, there is disagreement about how CSR should be defined in both the corporate and
academic worlds. The first studies on CSR were conducted by Bowen, who published "Social
Responsibility of Businessman" in 1953. Throughout the 1960s, many other researchers
attempted to authenticate and describe a more accurate meaning of CSR (Iqbal et al, 2013).
Hopkins (1999) describes the ethical or socially responsible treatment of the company's
stakeholders within the concept of CSR. There are stakeholders inside and outside a company.
This improves stock ownership growth both within and outside the company through social
responsibility.

1.3 Factors of Corporate Social Responsibility

Following are the important factors of corporate social responsibility:

1.3.1 Health
It shows that the health of its employees and members of the communities is paid by Islamic
and classic banks. Specific money is being given to hospitals for health and health care of the
needy. Medical facilities are available for employees of financial institutions. A healthy
community can be created by the network. Financial institutions therefore need to establish a
link between people and health care [8].
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1.3.2 Education
This factor shows that Islamic and conventional banks pay for their staffs and others who are
unable to provide education within the community. CSR is a factor in education. Because such
types of costs to society create good will, the banks that take it into account earn long-term
profit. A day of education support is a key to financial institutions' success (Iqbal et al, 2013).

1.3.3 Donation
The factor of donations show the financial institution's interest to pay the recovery of society
by a specific amount of money. Commercial banks donate to people with natural disasters
such as floods, earthquakes, and so on. It is called donation, the transfer of someone's usufructs
to another person or institution. Donation is a service offered for the sake of charity and society
by an individual or legal person. Cash facility, new or used items such as clothing,
playgrounds, food and cars could take the form. It also includes emergency relief and
development support, or medical needs such as organ transplantation and donation of blood
[8]. Donations in kind are also known as things and services offered as a charity. Institutions
which give donations called the donor or any other organization that accepts the donation
called 'done'.

1.4 Financial Performance

In order to understand how the company manages its revenue raising resources, it is possible
to define the financial position of an enterprise during a certain period of time. In order to
measure the financial health of the company, the profitability, return on capital, net profit,
income per share, etc.

1.5 Factors of Financial Performance

Following are the important factors of financial performance:

1.5.1 Earnings per Share

Share income shows how much profit the banks make for every remaining share of the
common stock during the time frame of one year.

1.5.2 Return on Assets

Asset return often referred to as return on investment (ROI). Asset returns show the profits
produced by banks' assets each year. Asset returns are an indicator of how much a
company earns over its total resources.

1.5.3 Return on Equity

Equity reappearance measures the return on investment earned in a commercial bank on
both preferred and common shareholders. It shows that each unit of shareholders has the
ability to make profit.
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1.5.4 Net Profit

Revenue is net profit, excluding all costs. The company shows its net profit after deducting
interest and profit taxes. During the first phase of the category of CSR, known as the legal
stage, companies have an obligation to comply with laws and regulations and are involved in
CSR. Companies use CSR as a competitive advantage and improve their economic
performance. The aim of the charitable and ethical work is to balance benefit, the world's
people and the world. At this stage, the company concentrates not only on profit but also social
welfare. Many authors argue that companies are socially responsible and can certainly benefit
[9]. There are many different opinions as to why businesses are involved in CSR and why
CSR matters for the company. Companies are committed to CSR in order to look better, feel
better, and live longer. The reasons are, in the opinion of potential customers, business
associates, investors and media etc., that the company is good at participating in CSR.
Furthermore, the employees, customers, shareholders and board members will be happy.
Secondly, the specific costs of CSR investment are limited and companies that invest in CSR
actually benefit from that in terms of their employee's moral standards and productivity.
Thirdly, cost for CSR investment is significant, but the cost of other companies are offset by
a decrease. Not only companies' shareholders should meet all stakeholders. It is also
recommended. Most scholars studying social responsibility and financial performance
proposed a significant positive relationship. [10].

1.6 CSR Disclosure by Islamic Banks

Substantial academic research has been conducted on CSR disclosure, but there has been
relatively little focus in bank CSR disclosure (e.g., Branco, Rodrigues, 2008 etc.) Banking is
measured as one of the best key contributors to economic stability and growth and is highly
visible to public assessment. It has a wide set of investors including owners, buyers, depositors,
regulators and managers (Yamak and Suer, 2005).
CSR is consistent with Islamic values and evidence shows that Islamic banks are in compliance
with principles and the ethics of Islam (Aribi and Gao 2011, p. 217), and an increase in the
discovery of Islamic banks concerning CSR is also occurring (Rahman and Bukair 2013).
While Islamic banks have made the disclosure of information related to shareholder interests
less than estimated, and Islamic banks have put more focus on information related to the
interests of a broad range of stakeholders (Platonova et al. 2016, p. 16).
It further argued that there is an extensively different ethical disclosure of Muslim Banking
operating in a Gulf district between communicated and ideal (Haniffa and Hudaib 2007, p.
111). The nationwide CSR disclosure studies have also shown that there are variations, with
full disclosure of all aspects of the CSR in Indonesian Islamic banks (Darus etc. 2014b), with
Muslim banks committed to community-oriented CSR (Daruset al. 2014a) in Malaysia, and
with good moral results in Bangladesh (Hassan et al. 2010, p. 61). Although the social-ethical
information is insufficient in Bahrain (Aribi and Arun 2015, p. 793), overall low environmental
awareness exists in the UAE, and conventional banks have higher disclosures compared to
Islamic banks (Nobanee and Ellii 2016), as well as minimum disclosure in the UK Islamic
Banks (Ahmed and El-Belihy 2017, p. 24). The results of some comparative study have shown
a significant difference in the Gulf region between the disclosures of Islamic banks and
conventional banks by the CSR (Aribi and Gao 2010, p. 72). During the five-year period of
study, Islamic banks from Malaysia and Indonesia have shown an increase in the number of
disclosures of CSR, while disclosure in both countries, Malaysia or Bahrain is small compared
to the expected level (Rahman et al. 2016).
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1.7 Beneficial Improvement in Financial Performance by the Disclosure of

CSR

1.7.1 Consumer Trust With Banks

CSR is one way of contributing to building this trust, not through large and extensive
charitable investment, but via local approaches. It can include funding local schools for
education, support for the older people in the elderly, and public education so that people get
free financial advice. It also requires active public participation, local CSR funding, clean-up
efforts and environmental efforts. To go locally means that your community will continue to
demonstrate its efforts, which are even more likely to do business with the bank. If you are
able to build trust through CSR efforts, you have already taken one great step towards ensuring
a long-term customer and increasing the benefit of corporate social responsibility in your
banking [21].

1.7.2 Corporate Social Responsibility Provides a Positive Approach to

Customers
Positive social involvement actively helps to enhance and attitude of consumers. For example,
local food banks donating companies are more caring than nothing. In turn, the sense of
management and ownership of the entire organization is improved for consumers. This kind
of positive client perception can be supported by education, voluntary work and donations. At
the same time, CSR actively focuses on media, contributing to positive news stories, social-
media shares and website mentions that benefit from the efforts of organizations and
stakeholders in the area.

1.7.3 Community Involvement

Community participation is the foundation for all the CSR policy advantages carried out and
extends far beyond standard charitable activities [21]. Banks should develop innovative
schemes such as:
 permanent learning programs for underprivileged sectors of society
 sponsoring of youth entrepreneurs
 provision of academic bursaries and proposals to underwrite research
 health support programs

1.8 CSR Programs Add Real Value

While there are countless other advantages to investing in your community while the most
obvious benefits are the company Social responsibility in improving consumer perceptions and
the reputation, increased media coverage and brand awareness. For example, investing in
financial literacy means your community is better prepared to make good investment decisions.
You can manage your debt, save money and purchase a home with intelligent credits and
mortgages. They therefore have the tools to better utilize their revenue to improve their
finances, their profits and therefore both for their banking organizations.
 7

Conclusion

The fundamental approach is to ensure that banks benefit meaningfully and conceptually from
CSR and create an image of effective governance and external social responsibility. The aim
of this report is to examine the information and perceptions of managers on the CSR practice
of Islamic banks in Pakistan. It shows that Islamic banks are committed to the creation of value
for society and the whole community, which is one of Shariah-based organizations’ primary
objectives. Customers and the environment are not so important areas. It should be noted that
neither bank is concerned with their customers' wellbeing and value creation. Islamic banks are
also required to publish their annual reports in Urdu and other local languages in terms of
solving the communication gap in countries such as Pakistan, where literacy rates are low and
the general public has a limited understanding of the English language. The study also
concluded that organizational engagement has a significant direct and caching impact on future
financial performance opportunities. The study successfully communicated through sensible
actual studies that being socially responsible can help businesses gain financial well-being and
learn how organizational engagement can enrich through various interactions. In this report
advantages is being discussed that are encourage sustainable behavior of employees, provides
real benefits for society as a whole, Make banks more aware of their potential role in society.
The link between social and financial performance in the banking industry is demonstrated in
our report.
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