Does Corporate Social Responsibility affect the Risk and Return of Banks? A Comparison between Islamic and Conventional banks

The concept of Corporate Social Responsibility (CSR) has become very prevalent in both the private as well as public sectors in recent years. Considering the importance of corporate social responsibility, many organizations have renamed their core business values to include CSR. As part of the CSR concept, companies are encouraged to act as involved members of society, taking into consideration the environment, creating jobs and promoting labor practices, and promoting education. The economic literature indicates the critical role banks play in stimulating growth from their quest to perform the tasks of financial intermediation and mobilizing savings and directing them to the business sector according to its current and investment needs to achieve efficient resource allocation and reduce risks. In this context, Islamic banks emerged as financial institutions that take Islamic Sharia as a basis for their transactions. This expansion in the Islamic financial industry is not a complete success as long as the Islamic banks do not pay enough attention to social responsibility, including practicing some activities and providing some services that indicate their responsiveness to the hopes and aspirations of society. The aim of this study is to investigate the effect of CSR on bank return and risk in emerging market countries. It also examines if the CSR effect is different between Islamic and conventional banks. Data is collected from 67 emerging markets countries with 13 Islamic banks and 44 conventional banks. Using the Prais-Winston regression method, the results show that CSR practices have a significant positive effect on the return level measured by the Net Interest Margin (NIM). Moreover, the evidence shows that the effect of CSR on bank risk, measured by Z-score, is insignificant. Finally, we aim to provide recommendations for Islamic banks to shift from CSR into the wider SDG framework to achieve sustainability.