Does Corporate Social Responsibility Expenditure Affect Financial Performance of Islamic Banks in Bangladesh?




Mehedi Hasan Tuhin


Correspondence:
Mehedi Hasan Tuhin
Assistant Professor
Dept. of Business Administration
Sylhet International University
Shamibabad, Bagbari, Sylhet, Bangladesh.
Email: mehedi_siu@yahoo.com

Abstract

The aim of this study is to measure the impact of corporate social responsibility (CSR) expenditure on Islamic banks' financial performance in Bangladesh. The Return on Asset (ROA) and Return on Equity (ROE) are used as proxy for financial performance of bank for this study. The data of CSR expenditure and the performance variable are collected from all seven full-fledged Islamic banks in Bangladesh for the period 2007-2011. The simple regression analysis is applied to test the association between CSR expenditure and the bank's financial performance. The results show that there is no significant impact of CSR expenditure on Islamic banks' financial performance.

Keywords: Corporate Social Responsibility; Financial Performance; Islamic Banks; Bangladesh.




1. Introduction
Corporate Social Responsibility (CSR) has become an issue of global concern. CSR is the process by which an organization evolves its relationships with stakeholders for the common good. Social responsibility means not only fulfilling legal expectations, but also going beyond compliance to fulfill social needs. Through CSR corporate entities visibly contribute to the social good. Thus CSR is no charity or mere donations. Socially responsible companies use CSR to incorporate economic, environmental and social objectives with the company's operations and development.

CSR activities practiced by banks can create awareness about banking activities and increase loyalty among customers, depositors, and employees of the bank. The banking sector contributes to the society as part of CSR in the form of education, health, and environment etc which can stimulate sustainable economy developments. Through CSR activities, a bank overcomes the barrier between bank and society. As a result, both deposit and investment improves with the increase of CSR expenditure. On the other hand, implementing CSR activities is costly for banks and it enhances the total cost which might reduce the impact of CSR activities on the banks' profit in the short-run. Though the cost of the banks enhances with the CSR activities in the long run it has a good impact on a bank's performance. CSR builds up stakeholders' confidence and creates a good corporate image of the bank.

CSR activities are relevant with Islamic laws. As per Islamic Shariah all Islamic financial institutions should be involved and perform social responsibility to the society. According to Sadeq (2007) the prime objectives and functions of Islamic banks are the betterment of general human being; bringing about social and economic benefits to the Islamic world; making brotherhood, social equality and equitable distribution in Muslim societies; establishment of distributive justice; development and support of small scale enterprises; discharging of corporate social responsibility, including its disclosure. Farook (2007) identified the three major foundational principles for Islamic Corporate Social Responsibility i) The principle of vicegerency ii) The principle of divine accountability iii) The principle of enjoining good and forbidding evil. In the view of Sairally (2005), Islamic banks should be accountable not only to the success of the industry but also towards the community, on top of being responsible to Allah. In other words, to be consistent with the objective of Islamic moral economy, Islamic banks need to realize social responsibility in order to promote socio-economic development.

In the context of Bangladesh, the practice of CSR prevails in the banking sector of Bangladesh. Islamic banks can play a significant role towards stakeholder and towards the society through CSR activities. But do CSR activities have any positive or negative impact on their financial performance? In this paper I have tried to find out the answer of this question. Many studies have been conducted and various arguments have been made regarding the relationship between financial performance and CSR. However, the existing evidence is inconclusive and hence there is need for more studies to provide research evidence in this context.

CSR activities are in a naive stage and proper application of CSR is not present at this moment in Bangladesh. Therefore, the findings of this study would be helpful to the society, depositors, investors, employees, and decision makers regarding the impact of CSR on Islamic Bank's performance. It is expected that the study would enrich the existing literature by providing empirical evidence from Bangladesh in this regard.

The remainder of this paper is organized as follows. Section two outlines the research objectives of the study. Literature review and hypotheses development are discussed in section three and four. Section five describes research method. Section six discusses findings of the study and section seven makes concluding remarks of the study.

3. Literature Review
A number of studies have been carried out in both developed and developing countries to measure the impact of CSR on banks' financial performance. Margolis, Elfenbein and Walsh (2009) stated that there are more than 200 published studies on this subject and yet there is no clear consensus on the relationship between CSR and corporate financial performance.
Wright and Ferris (1997) found a negative relationship between CSR and financial performance of a firm but Posnikoff (1997) reported a positive relationship and McWilliams and Siegel (2000) found inconsistent results regarding the relationship between CSR and short run financial returns. Teoh, Welch and Wazzan (1999) found no relationship between CSR and financial performance. Konar and Cohen (2001) argued that a firm with a better environmental performance has a significant positive impact on its market value. According to Dam (2006), there are in fact strong linkages between corporate social responsibility and financial performance. Fauzi (2009) found that CSR has no effect on financial performance. Arshad, Othman and Othman (2012) stressed the impact of CSR on Malaysian Islamic banks' performance and found that CSR was significantly positively related to firm performance as measured by ROA and ROE. Samina (2012) found a strong positive correlation between CSR Expenditure and Bangladeshi Islamic banks' performance (Investment, Deposit, Profit). Weshah, Dahiyat, Awaad, & Hajjat (2012) found a significant positive relationship between (CSR), bank size, the level of risk in the bank on one hand and financial performance on the other hand in the Jordanian banking companies. Islam, Ahmed and Hasan (2012) revealed that the average return on asset ratios of the banks having high Corporate Social Performance (CSP) is higher compared to that of the banks having low CSP, though this could not be proved statistically. Hossain and Alam (2012) indicate that the relationship between investment in CSR and market price per share is statistically significant; on the contrary the relationship between investment in CSR and net asset value per share is not statistically significant at 5% level of significance. Malik and Nadeem (2012) verified the relationship between EPS, ROA, ROE, Net Profit and CSR using regression models and found that there is positive relationship between profitability (EPS, ROA, ROE, and Net Profit) and CSR. Flammer (2013) argues that adopting a CSR-related proposal leads to superior financial performance.

4. Hypotheses
Based on objectives of the study two specific hypotheses have been formulated.

Hypothesis 1: There is positive correlation between CSR expenditure and ROA of the Islamic banks.
Hypothesis 2: There is positive correlation between CSR expenditure and ROE of the Islamic banks.

5. Methodology
Out of banking institutions, the study concentrates only on the listed Islamic Shariah-based banks in Bangladesh. On December 31, 2012 there were 7 full-fledged Islamic banking companies listed on Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). All seven banking companies listed on the DSE and CSE are selected. The study is based on secondary data. Necessary data have been collected from annual reports, web-sites and publications of Bangladesh Bank. The period of the current study covers five years from 2007 to 2011.

Model Development
To investigate the impact of CSR expenditure on ROA, it is assumed that-

Y1= a+b1x1

Where, Y1 = ROA in terms of percentage,

a= constant term,
b1 = Regression coefficients for the independent variable,
x1 = CSR expenditure in BD Taka

Here, Y1 (i.e. ROA) is the dependent variable, while the x1 is the independent variable.

To investigate the impact of CSR expenditure on ROE, it is assumed that-

Y2= a+b2x2

Where, Y2 = ROE in terms of percentage,

a= constant term,
b2 = Regression coefficients for the independent variable,
x2 = CSR expenditure in BD Taka

Here, Y2 (i.e. ROE) is the dependent variable, while the x2 is the independent variable.

6. Findings

6.1 Descriptive Statistics
Table 1 reports the descriptive statistics of the ROA, ROE and CSR expenditure of sample banks. The table indicates that the mean of CSR expenditure is about 44176782 BD Taka. It also shows that the extent of CSR expenditure has a considerable range. While the minimum is 0.00 BD Taka, the maximum is 410700000 BD Taka. As indicated in the table, ROA and ROE of listed banks have also wide ranges. ROA ranges from -10.92 % to 3.54% while ROE ranges from -46.45% to 30.71%.

Table 1: Descriptive Statistics for Independent and Dependent Variables

6.2 Regression Analysis

6.2.1 CSR Expenditure and ROA
The results of the regression analysis of the association between ROA and CSR expenditure of listed Islamic banks are documented in the following section.

Table 2: Regression Results

Panel A: Model Summary

a. Predictors: (Constant), CSR expenditure

Panel B: ANOVAa

a. Dependent Variable: ROA
b. Predictors: (Constant), CSR expenditure

Panel C: Coefficientsa

a. Dependent Variable: ROA

The above table reveals that F value is not significant at .328 level. This indicates that the variation caused by CSR expenditure in the ROA is not significant.
The value of Correlation Coefficient (R) and Coefficient of Determination (R square and Adjusted R square) of the model are also shown. The value of correlation coefficient is .170 and R square is .029. These show that the independent variable under reference has very low degree of correlation with ROA. According to the results, we can conclude that CSR expenditure of Islamic banks have no significant influence on their financial performance measured by ROA. Thus, Hypothesis 1 is not supported.

6.2.2 CSR Expenditure and ROE
The results of the regression analysis of the association between ROE and CSR expenditure of listed Islamic banks are documented in the following section.

Table 3: Regression results

Panel A: Model Summary

a. Predictors: (Constant), CSR expenditure

Panel B: ANOVAb

a. Predictors: (Constant), CSR expenditure
b. Dependent Variable: ROE

Panel C: Coefficientsa

a. Dependent Variable: ROE

The above table reveals that F value is not significant at .203 level. This indicates that the variation caused by CSR expenditure in the ROE is not significant.
The value of Correlation Coefficient (R) and Coefficient of Determination (R square and Adjusted R square) of the model are also shown. The value of correlation coefficient is .221 and R square is .049. These show that the independent variable under reference has a very week degree of correlation with ROE. According to the results, we can conclude that CSR expenditure of Islamic banks have no significant influence on their financial performance measured by ROE. Thus, Hypothesis 2 is also not supported.

Ullmann (1985) stated that as there are many variables in between CSR and a firm's financial performance, it is very difficult to find any significant relationship between these two measures. McWilliams and Siegel (2000) stated that if any kind of relationship prevails between CSR and financial performance, it would disappear with incorporation of more accurate variables such as R&D into the economic models. Another cause might be that CSR often provides indirect competitive advantages which in turn make it difficult to measure its connection to financial performance. These arguments are supported from the findings of this study.

7. Conclusion
The practice of CSR in financial institutions has brought a new dimension to the social economic scenario of Bangladesh. Though CSR activities are being practiced by Islamic banks to a certain extent, doubt remains as to whether such initiatives could potentially lead to better performance and sustained competitive advantage. Previous studies have provided conflicting results regarding the relationship between CSR and financial performance. Our findings from this study suggest that CSR activities of Islamic banks do not have significant influence on their financial performance.

Although no significant relationship has been found between CSR and financial performance, the management of Islamic banks should be committed to CSR activities in the future as it will be a prerequisite to attract and retain customers and employees and thus survive in the market. It is to be noted that performing some CSR activities is not enough to contribute financial performance. Islamic banks should properly select the right kind of CSR activities and perform them with great care. It should be consistent with a long-term plan rather than a short-term business solution.

Appendices

Appendix 1: Sample Banks' CSR Expenditure 2007-2011 (Figures in Taka)

Source: Bangladesh Bank (2012)

Appendix 2: Sample Banks' ROA 2007-2011 (Figures in Percentage)

Source: Annual Reports 2007-2011

Appendix 3: Sample Banks' ROE 2007-2011 (Figures in Percentage)
Source: Annual Reports 2007-2011

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