Islamic business scorecard and the screening of Islamic businesses in a cross‐country setting

• Author: Mamunur Rashid,Andrew S.T. Wei,Balqis O. Adedokun,M. Kabir Hassan,Jayalakshmy Ramachandran
• Date: 01 September 2019
• DOI: http://doi.org/10.1002/tie.22038
• Published date: 01 September 2019

RESEARCH ARTICLE

Islamic business scorecard and the screening of Islamic

businesses in a cross-country setting

M. Kabir Hassan

1

| Mamunur Rashid

2

| Andrew S.T. Wei

3

| Balqis O. Adedokun

4

|

Jayalakshmy Ramachandran

5

1

Department of Economics and Finance,

University of New Orleans, New Orleans,

Louisiana

2

Department of Accounting and Finance,

School of Business and Economics, Universiti

Brunei Darussalam, Gadong, Brunei

3

Labuan Faculty of International Finance,

Universiti Malaysia Sabah, Kuala Lumpur,

Malaysia

4

Independent Researcher, Lagos, Nigeria

5

Nottingham University Business School,

University of Nottingham Malaysia Campus,

Semenyih, Selangor, Malaysia

Correspondence

Mamunur Rashid, School of Business and

Economics, Universiti Brunei Darussalam, Jalan

Tungku Link, Gadong, BE 1410, Brunei.

Email: mamunur.rashid@ubd.edu.bn

Screening of shari'ah compliant firms is incomplete without the inclusion of ethical and social

responsibilities. The existing “activity screen”does not directly capture the ethical and social

footprints of firms. The purpose of this study is to create and test an Islamic business scorecard

that combines activity, ethical, and social responsibilities that Islamic businesses must comply

with. This new Islamic business scorecard replaces the existing activity screens and is added to

the financial screens to create an integrated business screening mechanism to identify shari'ah

compliant firms. This study utilizes data from a sample of 410 shari'ah compliant companies

listed with stock exchanges in Malaysia, Pakistan, and Bangladesh. Out of the five newly devel-

oped constructs of the Islamic business scorecard, the results indicate Islamic firms are less com-

mitted to social responsibilities and tend to push forward economic responsibilities that focus

on profitability and growth. Of the three countries, this study reports Malaysian firms have the

highest compliance scores, while Bangladesh displays characteristics of the “next-big shari'ah

destination”. Financial screens are more important than the Islamic business scorecard for firms

in the construction, industrial, technology, and trading/services sectors. Because of its connec-

tion with the economic, ethical, and social dimensions, the scorecard helps to identify the true

nature of shari'ah compliance as a useful decision tool for investors and policymakers.

KEYWORDS

CSR, ethical identity index, Islamic business scorecard, shari'ah screening

1|BACKGROUND

The Islamic financial universe revolves around investment and financ-

ing activities based on shari'ah principles (Derigs & Marzban, 2008).

To make the process easy, Islamic equity index providers classify com-

panies as shari'ah compliant or noncompliant by adopting diverse

screening criteria. Shari'ah screening is the major yardstick to differen-

tiate between permissible and nonpermissible investment or financial

activities for Muslims. Put simply, Islamic businesses are defined based

on their shari'ah screening status. The most dominant method of sha-

ri'ah screening involves “activity screening”, which essentially helps to

broadly identify the shari'ah permissibility of Islamic business activi-

ties. However, for several reasons the activity screen presents an

inadequate definition of Islamic firms. For instance, first, Islamic firms

are characterized as the “caretakers”of social and financial resources

who must promote activities in an ethical and socially responsible way

(Dusuki, 2008; Nienhaus, 2011). Interestingly, the “activity screen”

does not consider advances in Islamic ethical and social identities.

Consequently, Islamic firms have not demonstrated high ethical and

social values (Hassan & Rashid, 2010; Haniffa & Hudaib, 2007; Rah-

man & Saimi, 2015; Rashid, Hassan, Amin, & Samina, 2017).

Second, there is a major misalignment of social as well as institu-

tional parameters. If business organizations, as part of a society, are

liable to fulfill economic, legal, ethical, and philanthropic commitments

to stakeholders (Carroll, 1999), the “activity screen”has failed to jus-

tify the importance and strata of “(social) responsibility”for Islamic

businesses. The existing screening exercises have also grossly failed to

satisfy the increasing institutional demand for Islamic businesses to be

open, pragmatic, and engaging, such as appealing to people of all races

and religions as well as connecting with companies from multidimen-

sional industries (Amaeshi et al., 2016). This misalignment is evident in

the heterogeneity in screening exercises as shown in Table 1. Screen

providers (i.e., DJIM, FTSE, etc.) have differences in opinion because

of diverse expectations and levels of tolerance (Pok, 2012).

DOI: 10.1002/tie.22038

Thunderbird Int. Bus. Rev. 2019;61:807–819. wileyonlinelibrary.com/journal/tie © 2019 Wiley Periodicals, Inc. 807