Evaluating the corporate social performance of Islamic financial institutions: an empirical study

Purpose – In order to fulfill the Shari'ah objective of promoting the welfare of society, institutions offering Islamic financial services (IIFS) are expected to consciously align their decisions and actions so that they are “socially responsible”. An integral policy approach towards corporate social responsibility (CSR) would constitute assigning explicit social objectives to IIFS over and above their economic, legal, Shari'ah, and ethical responsibilities. Alternatively, the task of undertaking socially-oriented projects could be argued to be a discretionary responsibility of IIFS, with the objective of CSR being sought merely as a peripheral practice. Recent debates on the evolution of the practice of Islamic finance highlighted the profit and economic efficiency motives of IIFS rather than their concern for socio-economic equity and welfare. A divergence between the economics literature on Islamic finance and the course taken by the practical field of Islamic banking and finance has been argued to be arising over the years. An assessment of this contention motivates this study. The paper aims to discuss these issues. Design/methodology/approach – The study seeks to assess the corporate social performance (CSP) of a sample of 46 IIFS, located worldwide, which have responded to a questionnaire survey and whose CSR practices have been further verified by content analysis. Findings – The findings revealed that the majority of the Islamic financial practitioners believed in attributing an integrated social role to IIFS. However, the practices of the IIFS reflected a more limited approach to CSR. Most of the IIFS were observed to be focused on meeting their legal, economic and Shari'ah responsibilities, that is, were concerned with the goals of profit maximisation and for their transactions to meet Shari'ah compliance. CSR was practised as a peripheral activity by the IIFS as opposed to being an integral, well thought-out and deliberate policy decision of management. Practical implications – If the welfare of Muslim communities and general human well-being are to be promoted by IIFS – in line with the maqasid al-Shari'ah – this study questions whether the organisational structure of IIFS should be revisited and be re-orientated to facilitate their efficient performance in terms of contribution towards social development and human well-being. The question about the most appropriate business model of the Islamic finance practice that will bring about such a socially responsible outcome is yet to be resolved. This could be an important area for future research. Originality/value – This study rises to the call of some Islamic researchers who voiced out the need to assess the performance of IIFS vis-à -vis their social objectives. The study is among the pioneers to quantify CSR practices of IIFS by conducting an empirical analysis on the CSP of the IIFS. © 2013, © Emerald Group Publishing Limited.