Underpinning the benefits of green banking: A comparative study between Islamic and conventional banks in Bangladesh

• Date: 01 September 2019
• Author: Kashfia Sharmeen,Mohammad Dulal Miah,Rashedul Hasan
• DOI: http://doi.org/10.1002/tie.22031
• Published date: 01 September 2019

RESEARCH ARTICLE

Underpinning the benefits of green banking: A comparative

study between Islamic and conventional banks in Bangladesh

Kashfia Sharmeen

1

| Rashedul Hasan

2

| Mohammad Dulal Miah

3

1

Department of Finance, Bangladesh Institute

of Capital Market (BICM), Dhaka, Bangladesh

2

School of Accounting and Finance, Faculty of

Business, Hospitality and Humanities, Nilai

University, Nilai, Malaysia

3

Department of Economics and Finance,

University of Nizwa, Nizwa, Oman

Correspondence

Rashedul Hasan, School of Accounting and

Finance, Faculty of Business, Nilai University,

No 1, Persiaran Universiti, Putra Nilai, 71800

Nilai, Negeri Sembilan, Malaysia.

Email: rashedul@nilai.edu.my

This study aims to compare environmental motives and performance of conventional and Islamic

banks in Bangladesh. Green compliance index was developed based on the Bangladesh Bank

(the central bank of Bangladesh) guidelines whereas information regarding governance variables

is collected from the annual reports of 9 Islamic and 31 conventional banks. Results show

Islamic banks are more environmentally friendly compared to their conventional counterparts.

Board size is negatively related to green compliance whereas board independence and auditor's

type do not have any significant influence on green compliance for both clusters of banks. Com-

pliance with green banking policies enhances the reputation for Islamic banks and accountability

and profitability for conventional banks. Results of this study provide useful information for reg-

ulatory authorities to formulate policies that are conducive to enhance bank's environmental

performance.

KEYWORDS

carbon emission, corporate social responsibility, environmental performance, governance,

green banking

1|INTRODUCTION

The world at large is experiencing devastating effects of the global cli-

mate crisis including droughts, floods, tsunami, water scarcity, rising

sea level, and the resulting demographic shifts. These consequences

of climate change threaten the sustainable living on this planet, which

calls for an urgent and collective response from both developed and

developing countries. Sir Nicholas Stern has already warned green-

house gas (GHG) emissions can be reduced to a stable level by spend-

ing merely 1 % of the global gross domestic product (GDP) if actions

are taken immediately; however, maintaining the same level would

require around 5–20% of the global GDP if mitigating strategies are

not articulated and adopted soon (Stern, 2007). This entails an effec-

tive response toward climate crisis is an urgent issue that requires

concerted efforts from all segments of the economy.

Financial institutions, particularly banks, can accelerate the move-

ment of a clean world to a large extent. For instance, these institutions

can implement a “go-green”policy for themselves and encourage cli-

ent firms to adopt clean technology. In the long term, this strategy is

expected to be favorable for firms, to reduce the cost and induce the

access to the new market. As per their interest, banks should follow

the carbon footprint of their clients or projects to ensure overall sus-

tainability. Nieto (2017) estimates loan exposure to higher environ-

mental risk sectors in the United States, European Union, China,

Japan, and Switzerland amounts to US$1.6 trillion. Any unfavorable

changes in these sectors may result in financial shocks. This urges

banks to carefully consider clients' or projects' risk stemming from cli-

mate change and regularly disclose carbon footprint resulting from

their own operations.

Banks' environmental performance varies as they do not have

proper knowledge about the benefits they might receive through

implementing green finance. Thus, it is essential to unfold the underly-

ing benefits of green banking for the greater interest of the planet. A

good volume of studies has explained the environmental performance

of banks and its determinants. However, most of these studies include

environmental disclosure to corporate social responsibility (CSR).

Moreover, these studies mainly focus on developed economies (see

e.g., Branco & Rodrigues, 2008; Douglas, Doris, & Johnson, 2004;

El-Bannany, 2007; Jizi, Salama, Dixon, & Stratling, 2014; Menassa &

Brodhäcker, 2017; Nobanee & Ellili, 2016; Thompson & Cowton,

2004; Weber, 2012) whereas the academia and policymakers should

render more attention toward environmental issues of developing

DOI: 10.1002/tie.22031

Thunderbird Int. Bus. Rev. 2019;61:735–744. wileyonlinelibrary.com/journal/tie © 2018 Wiley Periodicals, Inc. 735