Perspective of the Islamic Banking Industry in Pakistan

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.
1.3Factors 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].