Does stakeholder pressure matter in Islamic banks’ corporate social responsibility and financial performance?

• DOI: https://doi.org/10.1108/IJOES-10-2021-0183
• Published date: 20 May 2022
• Date: 20 May 2022
• Pages: 236-263
• Subject Matter: Economics,Social economics
• Author: Muhammad Ali,Sadia Mehfooz Khan,Chin-Hong Puah,Muhammad Shujaat Mubarik,Muhammad Ashfaq

Does stakeholder pressure matter

in Islamic banks’corporate social

responsibility and financial

performance?

Muhammad Ali

Graduate Business School, UCSI University, Kuala Lumpur, Malaysia

Mehfooz Sadia Khan

Department of Business Administration, IQRA University, Karachi, Pakistan

Chin-Hong Puah

Department of Economics, Faculty of Economics and Business,

Universiti Malaysia Sarawak, Kota Samarahan, Malaysia

Muhammad Shujaat Mubarik

College of Business Management, Institute of Business Management,

Karachi, Pakistan, and

Muhammad Ashfaq

IUBH University of Applied Sciences, Munich, Germany

Abstract

Purpose –This study aims to examine the impact of stakeholder pressure on Islamic banks’corporate

social responsibility(CSR) practices and financial performance.

Design/methodology/approach –A close-ended questionnaire wascollected from 282 Islamic bank’s

branch managers.Partial least square structural equation modelingwas used to test the hypothesized model.

Both measurementand structural models were found to be fit for this research.

Findings –Results indicate that all components of stakeholder pressure (management, client,

competitor, Sharia advisory board and com munity) have a significant positive impact on Islamic CSR. The

findings of this study further revealed that Islamic CSR is a significant predictor of bank ’sfinancial

performance. Based on the present empirical results, this study suggests that Islamic bank managers

should develop the best CSR practices to gain a competitive advantage and sustainable financial

performance.

Originality/value –Overall, this study contributes significantly to the Islamic bank CSR literature.

However, to the best of the authors’knowledge,few studies have been conducted to establish a link between

firm performanceand CSR in Islamic banks using a comprehensivemodel of stakeholder pressure.

Keywords Corporate social responsibility, Stakeholder, Islamic banks, Firm performance

Paper type Research paper

Conflict of interest: The corresponding author states that there is no conflict of interest on behalf of all

authors.

The authors are grateful to the journal’s anonymous referees for their extremely useful

suggestions to improve the quality of the paper.

IJOES

39,2

236

Received1 October 2021

Revised1 February 2022

10March 2022

9 April2022

Accepted14 April 2022

InternationalJournal of Ethics and

Systems

Vol.39 No. 2, 2023

pp. 236-263

© Emerald Publishing Limited

2514-9369

DOI 10.1108/IJOES-10-2021-0183

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/2514-9369.htm

1. Introduction

Financial scandals in modern businesses, such as WorldCom and Enron, have caused

organizations to re-examinetheir roles and responsibilities. Organizations face stakeholders’

pressure to work under ethical practicesand develop standards, policies and behaviors that

sensitively address their stakeholders’issues (Khurshid et al.,2014). The effectiveness of

organizations’corporate social responsibility (CSR) activities plays an important role in

deciding their investors’investment decisions and customers’patronage (Jaiyeoba and

Haron, 2016) . Additionally,it becomes evident that financial institutions play an active role

in protecting the environment, have ethical trading practices, care about their employees

and build an effective image for society’s welfare. Therefore, International Financial

Institutions (IFIs), such as Islamic banks, must actively contribute to society’s overall

progress (Jaiyeobaet al., 2018).

Garriga and Melé (2004) stated that the conceptof CSR offers a landscape of theories and

also proliferates the problematic, unclear and controversial approaches. Friedman (1970,

2007) noted that a firm does not have any greater responsibility to the public than focusing

on legal profit-making and where managers are responsible for maximizing shareholder

wealth. The meaning of corporate executive social responsibility is further elaborated by

Friedman (2007). In his view, it means that some actions are against the interest of an

employer (e.g. to reducepollution when an organization spends too muchthat has nothing to

do with its interest or is required by the lawto contribute toward social objectives that can

improve the environment but at the expense of an organization’s profits; instead of better

qualified workers, hire “hardcore”unemployed to contribute toward the social objective of

poverty reduction or refrain from increasing the product’s price to contribute to social

objectives such as preventing inflation) (Jaiyeoba et al.,2018). In sum, in Friedman’s view,

social responsibility should be directed toward the shareholders as they are the economic

engine of an organization and a hiring authority for managers and other executives.

Therefore, the only activities they should engage in must be according to their owners’

desire and conform to a society’s basic rules while trying to make as much money as

possible (Jaiyeoba et al., 2018). This is why Friedman’s doctrine is always considered to be

controversial.

To the supporters and proponents of CSR (Aribi and Arun,2015;Jaiyeoba and Adewale,

2015;Khurshid et al., 2014;Carroll, 2006;Ararat, 2008;Arthur et al.,2007;Zubairu et al.,

2011;Dusuki, 2008;Hamiduet al., 2015;Hassan and Salma Binti Abdul Latiff, 2009;Farook,

2007;Reinhardt et al., 2008;Freeman,1984;Windsor, 2001;Isa, 2012), Friedman’s ideas are

considered as exploitation that deprives most citizens, whereas the corporate elites are to

gain enormous wealth. On the contrary, Freeman (1994) argued that a manager’s

responsibility is not only limited to wealth maximization of its shareholders, but also to

satisfying all stakeholders. He notes thatan organization’s success depends on its abilityto

retain its stakeholders by maintaining good relationships with its major financiers and

shareholders and their customers, employees, communities or societies on a whole level. In

comparison to the views of Friedman, these researches support the notion that the

responsibilities of an institution should encompass all of its stakeholders (Jaiyeoba et al.,

2018).

Moreover, large corporations mainly focus on CSR activities because of their multiple

benefits to society and the economic system. Therefore,CSR activities are adopted by most

companies regardlessof the industry. In this sense, commercial banks can be considered the

most significant contributor to economic performance. The CSR activities initiated by the

banking system indicate that the banks are actively involved in societal development and

improving economic performance.In Islamic banks, the CSR concept is already explained in

Stakeholder

pressure

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