Ethical performance of Islamic banks in the GCC countries

The emphasis on ethical activities within financial industry and in banking sector in particular has increased in recent years. Such awareness of business ethics came as a consequence of the poor corporate governance that had a negative impact on the economic growth as well as on the societies and environment. As a result, the emphasis has moved from the ‘shareholders only’ approach of corporate governance to a larger corporate governance model that emphasises on stakeholders’ values. Due to such understanding, it is suggested that ethics should be embedded into everyday business activities of banks. Given that Islamic banks are operating according to Islamic law that prioritises ethical values, where social goods, environmental concerns and ethical individual and organisational behaviours come at its heart, they are expected to be highly ethical in offering products and services. In addition, due to the high level of competition in the financial markets, businesses are under pressure of optimising their communication management to be able to boost their reputation through emphasising ethics, from all social perspectives, as a way of generating brand image, which may in turn lead to competitive advantage that will positively attract and expand their customer based market. Consequently, taking into consideration that Islamic bank operate based on such principles and moral axioms, they are by definition required to be actively ethical in their businesses. Based on such arguments, this study aims to examine the ethical practices of Islamic banks and assess the influence of such ethical business behaviour on the customer based market through attracting more deposits and increasing the financing activities of Islamic banks in the case of GCC countries. In order to achieve the outlined aims, this research applies content analysis to assess the ethical performance of Islamic banks through measuring ethical activities communicated in their annual reports. In addition, this study applied regression analysis to measure the impact of ethical behaviour of Islamic banks on their customer based market by attracting more deposits and increasing their lending activities. The empirical results suggest that Islamic banks are not minimising the gap between the ideal ethical performance and current practices, as their communicated ethical activities are just above the average. This indicates that Islamic banks are not fully embedding the ethical values that are derived from Islamic law into their business operations. Moreover, the regression results provide empirical evidences of the positive impact of ethical performance on the customers’ depositing and borrowing behaviour. The results tend to suggest that when Islamic banks embed ethics into their financial services, they will attract more customers to deposit funds and also more customers to borrow funds from them. Having obtained such results, it can be argued that by being ethical Islamic banks will benefit the society in which they operate and, in return, will maintain their financial stability, which will promote the sustainable development of the whole society. Having achieved the research aims and objectives, it can be stated that this research has contributed to the existing literature by providing the empirical evidences of the current ethical practices of Islamic banks in the GCC countries. Furthermore, this study provided the empirical evidences of the impact of ethical performance on customers lending and borrowing behaviour, which filled an existing gap in the current literature