The Determinants of Corporate Social Responsibility and Risk Taking in Islamic Banks: International Evidence

This study examines the effect of the Islamic Banks’ (IBs) financial performance on Corporate Social Responsibility (CSR) by analyzing the CSR activities in a comprehensive sample of 133 IBs across 35 countries. The CSR disclosure index shows that IBs engage across a range of social activities, both as individual banks and as countries. However, IBs seem to show more commitment to the Sharia, Human Rights, and Social components, whilst the least attention is paid to the Environment component. IBs also show a considerable awareness of the Voluntary and Mandatory activities recommendations by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI); however, the IBs pay higher attention to voluntary CSR activities. The study results find an evident emphasis on the IBs’ strategy towards more practice, suggesting that the good management and slack resources and stakeholder theories apply to these banks, along with the agency theory, which is reinforced by more activities and through disclosure to the wider stakeholder community. The empirical analysis highlights a positive association between CSR activities and financial performance. The second theme considered by this study is the link between CSR and State Ownership (SOE). The empirical evidence shows that state-owned banks are positively associated with CSR based on the soft budget constraint, stakeholder, agency, and legitimacy theories. Also, the higher independence levels of state ownership find significant positive relationships with CSR. The result also attributes the impact of publicly traded and privately owned IBs on outcomes. The study finds that publicly traded and privately owned IBs have a significant positive relationship with CSR. The results of tests on the independence levels of state ownership buttress the assertion that these effects reflect differently for the publicly traded and privately owned IBs. The higher degree of state ownership independence in privately owned banks reflects higher CSR than the publicly traded IBs. In addition, country-level institutions affect the state ownership-CSR intensity relation. This study also examines risk-taking by publicly traded and privately owned banks in an Islamic banking sector employing a diversified international sample of countries. This part of the thesis investigates the risk and stability features using the credit risk and Z-score as the insolvency proxy. The study finds that publicly traded banks engage in more risky activities than their privately owned peers. The study further investigates whether the bank’s size impacts bank risk-taking; small IBs appear less risk-taking across different countries. Also, the study analyses the link between ownership structure and risk in privately owned and publicly traded banks, finding that ownership structure is significant in explaining risk differences but mainly for publicly traded banks. State ownership shows that it is not a determinant in taking risk differences. On the other hand, institutional investors are more likely to engage in risky activities when they hold higher stakes. The study also finds that publicly traded banks are likely to exhibit more risk-taking than their privately owned counterparts in diverse institutional and legal traditions