Journal of Islamic Monetary Economics and Finance.
Vol.
No.
, pp.
811 - 840
p-ISSN: 2460-6146, e-ISSN: 2460-6618
CORPORATE SOCIAL PERFORMANCE AND FINANCIAL
STABILITY: EVIDENCE FROM ISLAMIC.
SOCIAL AND
CONVENTIONAL BANKING MODELS
Syed Alwi Bin Mohamed Sultan1.
Wan Marhaini Binti Wan Ahmad2.
Obiyathulla Ismath Bacha3 and Roslily Binti Ramlee4 Universiti Malaya.
Malaysia, syedalwisultan@yahoo.
Universiti Malaya.
Malaysia, wmarhaini@um.
INCEIF.
Malaysia, obiya@inceif.
International Islamic University Malaysia.
Malaysia, roslily@iium.
ABSTRACT
This paper addresses two key issues in Corporate Social Performance (CSP) research.
First, it investigates the impact of CSP on Financial Stability (FS), and second, it examines the influence of different banking models on the relationship between CSP and FS.
Using a cross-country sample of 117 financial institutions from 36 countries over an 8-year period .
and the System Generalized Method of Moments (GMM) estimation method, it finds that banking models significantly affect the CSP-FS This is attributed to diminishing marginal benefits of economic growth beyond a certain level of financial intermediation, which increases financial risk.
The results give new insights into the synergies and divergences between different banking models and the overarching goals of social performance and financial stability.
This research contributes novel insights that can inform policymakers, regulators, and industry stakeholders in their quest for a more resilient and sustainable banking sector.
Keywords: Corporate social performance.
CSP index.
Financial stability.
Islamic banking.
Social banking.
Values-based banking.
JEL classification: G10.
G21.
G32.
Article history:
Received : July 17, 2024 Revised : August 21, 2024 Accepted : November 30, 2024 Available online : December 24, 2024 https://doi.
org/10.
21098/jimf.
Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models INTRODUCTION In performing the role of financial intermediation, maturity transformation, and liquidity creation, banking institutions manage highly leveraged balance sheets and thus are exposed to financial risks (Claessens & Kose, 2013.
Paul, 2020.
Mangala & Soni, 2.
Pursuant to the global financial crisis of 2008 (GFC), new regulations have been put into force to govern the banking business to foster a stable and sustainable financial environment (Avrampou et al.
, 2.
The regulatory measures, such as Basel 3, the United Nations Environment Programme Finance Initiative (UNEP, 2.
Principles for Responsible Investment (PRI), and the Equator Principles (Weber & Acheta, 2014.
Weber, 2018.
Chiu, 2.
, aim at bolstering the stability of the financial system and establishing responsible practices within the banking sector.
Nevertheless, the financial sector continues to face two significant challenges.
The first revolves around the delicate equilibrium between advancing sustainable development initiatives and fulfilling financial stability and performance obligations (Pu & Yang, 2.
The second revolves around how the financial sector measures sustainability and integrates it into its core business strategies (PwC, 2.
These gaps are often attributed to the overwhelming focus of the financial sector on profit maximization goals, which can overshadow longterm sustainability considerations (PwC, 2.
Cary .
posits that with the growing importance of sustainable development, there is now an urgent need for the financial services sector to shift towards sustainable banking by allocating financial resources to the most impactful sustainable development needs.
Pu & Yang .
posit that within emerging markets, the symbiotic relationship between banking institutions and major corporations, particularly those with significant environmental footprints, poses a profound dilemma.
Many banking entities rely on maintaining robust credit relationships with these corporations despite the corporationsAo adverse environmental impacts.
Chen et al.
assert that banking institutions require explicit incentives to integrate sustainability principles into their lending practices.
While numerous studies (Albitar et al.
, 2020.
Sandberg et al.
, 2023.
Mohamed Sultan et al.
, 2.
have explored the impact of corporate social responsibility (CSR) activities on corporate financial performance (CFP) within the financial sector, research examining the impact of CSR activities on financial stability (FS) within individual financial institutions remains relatively Studies by Gangi et al.
Nguyen & Nguyen .
, and Ramzan et .
have primarily focused on commercial banks in specific countries or regions, confirming the risk-reducing effects of CSR.
This is supported by Khan .
and Garcya & Josy .
, who suggest that robust CSP initiatives can enhance a bankAos reputation, mitigate risks, and ultimately contribute to longterm financial stability.
However, some studies caution against the potential tradeoffs and challenges associated with prioritizing social objectives over financial Tracey & Sowerbutts .
assert that banking institutions that relax their standards of financial intermediation through higher lending ratios increase their vulnerability to future shocks and crises.
Ozili & Iorember .
argue that the engagement of financial institutions in financing SDG-related activities and projects presents a trade-off because their financial commitment to SDG activities Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024 could pose new risks to financial stability and may lead to losses that threaten the stability of financial institutions.
Given these divergent perspectives, there is a need for a nuanced understanding of how CSP is measured and influences financial stability, particularly within different banking models (Napier et al.
, 2023.
Ben Mimoun, 2.
This is crucial because extant studies have found that the conflicting results in research related to CSP and CSR are due to the use of broad cross-sectional data which obscures industry-specific nuances (Griffin & Mahon.
Margolis et al.
, 2009.
Chatterji et al.
, 2009.
and Fu & Jia, 2.
Hence, without a standardized CSP measure, corporations would easily portray any good deed as socially responsible (Barnett et al.
, 2.
, creating a gap between initiatives and impact indicators, hindering accurate reflection of financial institutionsAo contribution to sustainability and financial stability (Benitez, 2.
Given the critical importance of FS to sustainable banking (Napier et al.
, 2.
, investigating the distinctive characteristics and operational dynamics of various banking models, such as Islamic banks, social banks, and conventional banks, is pertinent for gaining deeper insights into the CSP-FS relationship.
The theoretical framework of Islamic banking models suggests that their commitment to value-based principles and ethical practices makes them inherently more resilient than conventional banking systems.
For example.
Islamic banking is based on ethical principles such as risk-sharing among parties, avoidance of exploitation, promotion of socio-economic justice, prohibition of interest-based practices, adherence to fair and just contractual terms, and avoidance of excessive speculative risks.
These principles serve as built-in risk mitigations in financial transactions (Cihak & Hesse, 2010.
Khan & Bhatti, 2008.
El-Hawary & Grais, 2.
Meanwhile, the theoretical foundation of social banking espouses social development and sustainable practices (Cary, 2018.
Benedikter, 2011.
Weber & Remer, 2011.
De Clerck, 2.
Social banks demonstrate positive social, environmental, or sustainable impacts in all their business dealings.
The social banking business model is based on the two principles of achieving a positive impact on society and a sustainable financial return.
According to Weber & Remer .
, social banking aims to positively impact people, the environment, and culture through its products and services.
The only difference, therefore, between Islamic banking and social banking models is that the sources of the jurisprudence governing Islamic banking are founded on theological scriptures and Divine revelations from the Holy Book of the Quran and the traditions of the Prophet Muhammad .
In contrast, social banking is a human comprehension of ethical financial practices.
Empirical evidence, however, supports that Islamic banks and social banks exhibit greater stability than their conventional counterparts, mainly attributed to their resilience to a reduced reliance on risky and speculative activities (Cihak & Hesse, 2010.
Farooq & Zaheer, 2015.
Benedikter, 2011.
Weber, 2011b.
and Mykhayliv & Zauner.
This contrasts with conventional banks that adhere to traditional banking practices with a primary focus on financial profitability and maximization of shareholder returns (Napier et al.
, 2023.
Schoenmaker & Schramade, 2.
Despite these fundamental differences, past studies have largely treated banking models Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models homogeneously, failing to account for the potential nuances in the relationship between CSP and financial stability across different banking paradigms.
Against this backdrop, this study seeks to bridge this gap in the literature by examining the nexus between CSP and financial stability across Islamic banks, social banks, and conventional banks.
In doing so, the study employs a novel CSP construct that enables a fair and equitable comparison between financial institutions across countries and regions.
This research presents two significant contributions to the existing literature on the nexus between corporate social performance (CSP) and financial stability (FS).
Firstly, it analyses the moderating effects of three distinct banking models:
Islamic banking (IB), social banking (SB), and conventional banking (CB) on the relationship between CSP and FS.
By examining these diverse banking paradigms, we aim to uncover how their underlying principles and practices influence the link between corporate social performance and financial stability.
This comparative analysis stands to contribute novel insights that can inform policymakers, regulators, and industry stakeholders in their quest for a more resilient and sustainable banking sector.
Secondly, it introduces a novel CSP Index as the independent variable in our This index is meticulously constructed using six indicators pertaining to financial inclusion and financial intermediation dimensions, serving as proxies for sustainable banking practices.
By developing this innovative CSP Index, we aim to provide a comprehensive and standardized metric for assessing corporate social performance within the banking sector and tackle the lack of standardization of CSP measurements that has beset past studies.
This novel approach enables us to systematically evaluate the impact of CSP on financial stability across different banking models, thereby advancing our understanding of the dynamics shaping sustainable banking practices.
The remainder of this paper is organized as follows.
Section 2 reviews the relevant literature and develops the hypotheses.
Section 3 discusses the research methodology and design.
Section 4 presents the research data.
Section 5 discusses the findings.
and Section 6 concludes with policy implications.
II.
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
Corporate Social Performance (CSP) & Financial Stability (FS) Corporate Social Performance (CSP) refers to how a company manages its relationships with stakeholders and its impact on society and the environment while achieving the triple bottom line of social, environmental, and financial performance (Aguinis & Glavas, 2012.
Hyun et al.
, 2.
It encompasses various aspects, including ethical practices, social contributions, and stakeholder engagement (Carroll, 1.
Effectively.
CSP is a good behavior barometer and is generally recognized as a measure of how corporations treat their broad stakeholders in the fulfilment of social responsibilities (Carroll, 1999.
Campbell.
Margolis et al.
, 2.
In recent years, the debate on the relationship between social performance activities, measured by the Corporate Social Performance Index (CSP Inde.
, and financial stability within the banking industry has gained significant traction Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024 (Derwall & Verwijmeren, 2007.
Di Giulio et al.
, 2007.
Dhaliwal et al.
, 2011.
El Ghoul et al.
, 2011.
Platonova et al.
, 2018.
Ozili, 2020.
Ozili & Iorember, 2.
Investigations into this area are rooted in the recognition that banks play a pivotal role not only in the allocation of capital but also in driving social and environmental progress (Levine, 2005.
Ang, 2008.
Masood & Javaria, 2.
Prior studies examining the CSP in the financial industry (Galletta et al.
, 2021.
Esteban-Sanchez et al.
, 2017.
Oikonomou et al.
, 2012.
Orlitzky & Benjamin, 2.
have delved into the relationship between CSP and financial stability within the banking sector, illuminating both the potential synergies and complexities inherent in balancing social responsibility with financial performance (Cary, 2018.
Weber.
However, the studies examining this relationship have yielded mixed findings, with some suggesting a positive impact of social performance activities on financial stability, while others indicate the opposite (Khan, 2011.
Gould & Melecky, 2017.
Ozili & Iorember, 2.
On one hand, proponents argue that banks engaging in social initiatives, such as promoting financial inclusion, supporting community development projects, and implementing environmentally sustainable practices, stand to enhance their reputation, mitigate risks, and ultimately bolster their long-term financial stability (Khan, 2011.
Garcya & Josy, 2.
Boutin-Dufresne & Savaria .
show that adopting CSR codes of conduct reduces a firmAos overall business risk and can positively impact long-term risk-adjusted performance.
Orlitzky & Benjamin .
find that higher CSR correlates with reduced financial risk.
Similarly, the studies by McGuire.
Sungren, & Schneeweis .
Aupperle & Pham .
, and Oikonomou et al.
also show a negative relationship between CSP and financial risk, which means that higher CSP activities will potentially lower firm These social development activities can lead to increased customer loyalty, improved employee morale, and a stronger brand image, all of which contribute to a more resilient and sustainable banking operation (Wang & Choi, 2013.
Napier et al.
, 2.
Moreover, banks that integrate environmental, social, and governance (ESG) criteria into their business strategy may be better equipped to identify and manage risks associated with environmental degradation, social unrest, and regulatory changes, thereby enhancing their overall financial stability (Sroufe & Gopalakrishna-Remani, 2019.
Tok & Yesuf, 2.
On the other hand, skeptics argue that the pursuit of social performance activities could potentially detract from a bankAos financial stability by diverting resources away from core banking activities, such as lending and risk management (Ozili & Iorember, 2.
Additionally, there is concern that certain social initiatives may carry inherent financial risks, particularly if they involve lending to underserved or high-risk segments, funding costly community development projects, or implementing environmentally friendly but expensive operational practices (Tracey & Sowerbutts, 2018.
Gould & Melecky, 2.
Furthermore, the impact of social performance activities on a bankAos bottom line may not always be immediately apparent, making it challenging to accurately assess their long-term financial implications (Garcya & Josy, 2016.
Gadanecz & Tissot, 2.
As a result, past studies examining the relationship between social performance and financial stability have yielded mixed results, further highlighting Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models the complexity of this issue.
A key challenge for policymakers regarding financial stability in the financial system is the drive towards restoring the financial system to be sustainable without any adverse effects on stability (Orlitzky & Benjamin.
Given that, this study fills this gap and examines the relationship between CSP and financial stability with the following hypothesis:
Hypothesis 1: A significant relationship exists between corporate social performance and financial stability within the banking industry.
Impact of Banking Models on Financial Stability: Islamic and Social Banking Models The Islamic banking industry has emerged as a formidable sub-segment within the global financial system since its conceptual developments in the late 1940s and revival into the modern financial system in the mid-1970s (Vogel & Hayes, 1998.
Khan & Bhatti, 2008.
Abasimel, 2023.
Belkhaoui, 2.
According to the Islamic Financial Services Industry Stability Report 2022 (IFSB, 2.
, the global Islamic financial services industry grew by 11.
3% year-on-year in 2021 and is estimated at US$3.
06trillion, including banking, capital market, takaful, and asset management industry sub-segments.
The Islamic banking segment alone is estimated at US$ 2.
trillion in 2021.
Archer & Karim .
contend that the Islamic banking and financial services industry provides financial services on a basis that is compliant with the principles and rules of Islamic commercial laws .
iqh al-muymala.
, a branch of Shariy laws.
The theoretical model of the Islamic financial system, which is based on risksharing principles, supports the notion that the Islamic banking model has greater stability and resilience (El-Hawary & Grais, 2.
At the heart of this financial system that propagates socio-economic justice is prohibiting usurious practices or interest-based transactions and the uncertainties in contractual terms and obligations, commonly referred to as RibaAo and Gharar in Islamic discourse (Cihak & Hesse, 2.
The Islamic banking system is also against trading in financial risk and excessive speculation, which are seen as a form of gambling, and investing in businesses that are considered sinful (Cihak & Hesse, 2.
According to the 12th-century Maliki jurist Ibn Rushd.
Gharar in a sale contract causes harm to one of the contracting parties and is itself caused by information asymmetry regarding the essential elements of the contract (Zuhayli et al.
, 2.
The strong prohibition of RibaAo and Gharar vindicates that the Islamic banking system is grounded on the principles of morality, fairness and justice.
However, the practical aspects of Islamic finance have resulted in the predominant employment of fixed-obligation debt-based contracts for credit facilities using Shariah contracts (Ali & Izhar, 2.
These fixed obligation contracts dilute the effectiveness of the risk-sharing mechanism.
According to Ali and Izhar .
, the more concerning issue for the stability of the Islamic financial sector is the overwhelming reliance of the Islamic financial institutions in certain jurisdictions on the fixed obligation type of contracts of Tawarruq, two-sided Murabaha, and commodity Murabaha.
These arrangements eliminate any trace of risk sharing and bring the Islamic financial sector synthetically similar to a debt-based loan and credit obligation offered by the conventional banking system (Asutay.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024 Ali & Izhar, 2.
In that regard, the Islamic banking system is even more prone to instability due to the lack of support infrastructure and legal precedence on defaults that are available to the conventional banking system.
The social banking system is another ethical and value-based financial system that espouses social development and sustainable practices (Cary, 2018.
Benedikter, 2011.
Weber & Remer, 2011.
De Clerck, 2.
Social banks have gained greater prominence, especially post-GFC, because of their positive impact on sustainable banking through financial products and services (Weber, 2.
Weber & Duan .
state that social banks deliver financial intermediation solutions to individuals and businesses, demonstrating positive social, environmental, or sustainable impacts.
The social banking business model is based on the two principles of achieving a positive impact on society and a sustainable financial According to Weber & Remer .
, social banking aims to positively impact people, the environment, and culture through its products and services.
One recent initiative to formalize the role of social banks was the establishment of the Global Alliance for Banking on Values (GABV, 2.
The GABV is an umbrella organization for value-based financial institutions, founded at the beginning of the global financial crisis in 2009 by 39 financial institutions with a joint mission of using finance to deliver sustainable economic, environmental, and social development (Tok & Yesuf, 2.
Value-based banks have emerged with revolutionary banking models that uniquely positioned them to foster economic sustainability by offering value-based financial services and products necessary to serve a broader spectrum of stakeholders (GABV, 2.
Weber .
examines 13 member banks of the GABV, analyzing their business and financial indicators.
The results suggest that these social banks follow the mission of social finance and prefer social impacts over financial returns without neglecting financial sustainability.
However, as social banks focus more on supporting and funding small, innovative firms, the financial risk associated with these smaller firms is often higher than larger, more diversified firms.
Hence, this exposes social banks to a portfolio of riskier assets, which may negatively affect the financial stability of the bank and the industry.
Mykhayliv & Zauner .
also find evidence that social banks are significantly more prone to bank runs due to lower liquidity buffers than larger banking institutions.
This also shows that increasing the social banking systemAos inclusiveness and diversity of investor base is important for its stability.
This would help make the system more resilient and less prone to quick fund shifting due to the behavior of a single type of investor who is indifferent to investing in value-based banking (Weber, 2.
Hence, building on the review above, this study aims to investigate the impact of value-based banking models, specifically Islamic banking and social banking, on the dynamic between CSP and FS.
In order to provide a comprehensive analysis, the study will also include an examination of the conventional banking model for comparative purposes.
Herein is the hypothesis:
Hypothesis 2: The banking models significantly impact the relationship between corporate social performance and financial stability.
Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models Lack of Standardization in CSP Index The measurement of CSP is a challenging issue and has been a subject of critical It is one of the key factors cited for the inconsistencies found in empirical results relating the impacts of CSP (Erol et al.
, 2021.
Fu & Jia, 2012.
Orlitzky & Benjamin, 2001.
Griffin & Mahon, 1.
According to Griffin & Mahon .
, most studies on the relationship between CSP to other variables, such as financial performance, analyze broad, cross-sectional data across multiple industries, masking the individual differences and specific contexts of an industry.
The CSP measurements of some index providers include a wide variety of CSP activities such as support for local communities or charities, reputation of the organization, social engagement, environmental responsibility, brand perception, proxies representing ethical practices, development of recycling programs, minority, and female representation on the board of directors, product quality, illegal politicking, fair dealings with customers, and sustainability practices (Margolis et al.
, 2.
Some of these CSP measurements are challenging to quantify and compare fairly, particularly within specific industries like the financial sector.
For example, the CSP measurements, such as environmental policies relating to green building certifications, adopting biodiversity, and reducing building emissions, are not core to banking operations (Fu & Jia, 2.
Additionally.
CSP measurements also relate to concepts of an inclusive and diverse workforce as a social performance indicator, which is a challenge for financial institutions operating in countries where most of the population is of a singular race or religion (Waddock & Graves.
Moreover, countries where cultural and religious restrictions remain strong regarding gender-related matters also pose a challenge to having a consistent set of CSP measurements (Wang et al.
, 2.
Inconsistencies in the CSP measurements have also been due to the sample size and geographic setting of samples, where some samples use a country setting, and others use cross-country settings (Griffin & Mahon, 1.
Some of these dimensions of social performance may limit the ability of certain banking institutions to score well.
For instance, cultural differences regarding religion and social settings may affect the ability of Islamic banks to score well in the CSP Index, even though Islamic banks are centered on principles of ethics, fairness, and justice.
The lack of data on some of the dimensions of social performance measurement indices may also result in the scores not genuinely reflecting the true nature of the banking activities towards sustainability causes.
Given the arguments regarding the issues of past CSP Indices, especially on the lack of transparency or biases of data points, this research constructs a novel CSP Index customized to be associated with key dimensions of financial inclusion and financial intermediation that relate directly to successful stakeholder management for the financial sector.
To achieve this goal, the CSP Index in this study employs six indicators as proxies, as shown in Table 1.
These indicators are selected for their consistency and comparability to financial datasets of global financial institutions, focusing on omnipresent measures of financial inclusion and financial intermediation.
This study attempts to design a novel CSP Index that tackles the weaknesses of previous CSP proxies of past studies.
Firstly, it is designed using data points taken from the financial statements of the sample banking institutions, hence Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024 establishing credibility, verifiability, and comparability to the dataset.
Secondly, the CSP Index in this study is a multidimensional construct using variables relating to the SDGs relating to financial inclusion and financial intermediation, critical elements of socio-economic development.
Finally, the study avoids biases of subjective social performance criteria or elements that may result in an uneven playing field for the sample financial institutions, including religious-based and ideology-based business models.
Herein lies the unique contribution of this study to this body of knowledge.
RESEARCH METHODOLOGY AND DESIGN
Construction of the CSP Index This study tackles the issue regarding the non-standardization of CSP measurements by constructing a novel CSP index using six proposed proxies to provide a more nuanced and comprehensive assessment of the social responsibility practices within the financial sector.
These proxies, meticulously selected to align with crucial dimensions of financial inclusion and financial intermediation, offer a robust framework for evaluating the societal impact of financial institutions.
In that regard, financial inclusion refers to the efforts to ensure all individuals and businesses, regardless of their socioeconomic status, have access to useful and affordable financial products and services, including bank accounts, credit facilities, insurance, and payment systems (Vo et al.
, 2.
Financial intermediation, meanwhile, refers to the process by which financial institutions, such as banks and credit unions, act as intermediaries between savers and borrowers to undertake key financial intermediation activities.
These include lending, offering liquidity facilities, offering risk management and mitigation through diversification of investments and pooling of financial resources, and transforming assets from short-term obligations to long-term assets .
Netin et al.
, 2.
Each proxy used in the construction of the CSP Index captures distinct facets of the relationship between financial institutions and the communities they serve, thereby contributing to a more holistic understanding of corporate social responsibility within the sector.
Practically, the CSP Index of this research, constructed to measure the social performance of the sample banking institutions, is designed to be a comparable and verifiable index using data available in the financial reports of all banking institutions.
Herein lies a significant difference between the CSP Index of this study when compared against other widely used social performance indices, which use subjective, biased, and non-verifiable data The components of the CSP Index are shown in Table 1.
Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models Table 1.
CSP Index Indicators Dimensions/Indicators Financial Inclusion Dimensions Deposit Sustainability (DS) Loan to GDP Ratio (LGD) Deposit to GDP Ratio (DR) Financial Intermediation Dimensions Net Loan Ratio (LR) Loan Growth (LG) Deposit Growth (DG) Description Year-on-Year growth of Savings Accounts and Demand Deposit Accounts.
Total Gross Loans to Customers divided by GDP.
Total Deposits divided by GDP.
Net Loans and Advances to Customers divided by Total Assets.
Year-on-Year growth of Total Loans.
Year-on-Year growth of Total Deposits.
Firstly, the loan-to-GDP ratio (LGD) is a critical indicator of a financial institutionAos contribution to economic development and growth.
A high LGD signifies substantial lending activity and financial deepening, which can stimulate investment, entrepreneurship, and job creation, thereby fostering inclusive economic growth (Khera et al.
, 2022.
Vo.
Nguyen & Van, 2.
By incorporating this proxy into the CSP index, we can gauge the extent to which financial institutions facilitate access to credit and support economic empowerment within their communities.
Secondly, loan growth (LG) and deposit growth (DG) metrics provide insights into the expansion and diversification of financial services offered by institutions.
A robust LG rate indicates increased access to credit for individuals and businesses, promoting financial inclusion and entrepreneurship (Khera et al.
, 2.
The productive allocation of financial resources is a vital cog of financial intermediation that helps further economic growth and social development (Demirgyy-Kunt & Huizinga, 2.
Meanwhile.
DG reflects consumer confidence and trust in the banking system, which is essential for fostering stability and resilience within the financial sector (Galletta et al.
, 2.
Khera et al.
assert that the growth of deposits is an essential indicator of financial intermediation towards achieving social performance.
It offers households access to savings instruments for managing consumption and setting aside funds in case of unforeseen shocks.
By including these proxies in the CSP index, we can assess financial institutionsAo effectiveness in meeting their customersAo evolving needs while ensuring the sustainability of their Thirdly, the net loan ratio (LR) is calculated as net loans and customer advances divided by total assets.
It offers valuable insights into financial institutionsAo quality and risk management practices in undertaking their financial intermediation function.
A prudent LR ratio indicates a balanced portfolio with adequate provisions for credit risk, safeguarding the stability and integrity of the banking system (Demirgyy-Kunt & Huizinga, 2.
By monitoring this proxy, we can evaluate the extent to which financial institutions are performing their roles as credit intermediaries while managing risks responsibly and fulfilling their fiduciary duties to depositors and investors.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024 Fourthly, deposit sustainability ratio (DS) is measured by the year-on-year growth of savings accounts and demand deposits.
Imam & Kpodar .
state that a developed financial sector helps mobilize savings and facilitates capital allocation where productive growth is needed most.
Lack of access to savings and deposit products will deprive parts of the population of being involved in the formal sector of the economy and will lead to inefficient and sub-optimal financial intermediation (Imam & Kpodar, 2.
Therefore, savings and current account growth metrics reflect the accessibility and affordability of banking services for individuals and households.
A rise in savings and current account growth signifies increased financial inclusion and literacy, empowering individuals to save, invest, and plan for the future.
By incorporating these proxies into the CSP index, we can assess the efforts of financial institutions in promoting savings mobilization and empowering underserved communities to participate in the formal financial Finally, the deposit to GDP ratio (DR) provides insights into the depth and penetration of the banking sector within the economy (Khera et al.
, 2022.
Galletta et al.
, 2.
A higher DR suggests greater financial intermediation and resource mobilization, facilitating capital formation and investment.
By including this proxy in the CSP index, we can evaluate the role of financial institutions in mobilizing savings, channeling funds to productive sectors, and fostering economic resilience and development.
Therefore, in this paper, the CSP Index will rank financial institutions higher based on their financial intermediation and inclusion scores, emphasizing social responsibility over profit maximization.
Davis & Kim .
assert that the focus on profit maximization led to a broad shift by financial institutions during the GFC, where capital was intermediated through opaque financial instruments and neglected the primary lending production process (Lopez Rafaschieri.
, &
Lopez Rafaschieri.
A, 2.
The construction of a novel CSP index using the six proposed proxies, as explained in the preceding paragraphs, offers a robust framework for assessing the social responsibility practices of financial institutions.
By incorporating key dimensions of financial inclusion and intermediation, this index provides a more comprehensive and nuanced understanding of the societal impact of the financial sector, thereby facilitating informed decision-making by stakeholders and policymakers towards promoting inclusive and sustainable development.
Data and Estimation Models In testing the hypotheses, the study uses secondary data from 117 financial institutions comprising 40 Islamic banks, 40 conventional banks, and 37 social The sample financial institutions originate from 36 countries globally, including Asia Pacific.
Europe, the Middle East.
North America, and South America.
The panel data consists of data for eight years between 2013 and 2020.
This studyAos bank-level data are from the BankFocus database.
The remaining country-level data are from the World Bank Open Database, accessible at https:// Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models The selection of sample financial institutions is grounded in the proportional representation of banking models relative to their larger population.
Social banks in this study are chosen to represent over 62.
5% of the total assets under management of members of the Global Alliance for Banking on Values (GABV).
Similarly.
Islamic banks constitute approximately 70% of the total assets within the Islamic banking industry.
To ensure comparability, conventional banks are selected based on asset sizes similar to Islamic banks and are drawn from comparable geographic locations to match the distribution of Islamic banks and social banks.
This approach aligns with previous research, notably the methodology employed by Fu & Jia .
Independent Variable The CSP Index is the key independent variable comprising financial intermediation and inclusion dimensions.
The six proxies used for the CSP Index are: .
Net Loan Ratio (LR).
Deposit Sustainability (DS).
Loan Growth (LG).
Deposit Growth (DG).
Deposit to GDP Ratio (DR).
Loan to GDP Ratio (LGD).
The following equation will express the CSP Index (CSPji.
where j,i and t stand for bank, country and time, respectively.
Dependent Variable The Dependent Variable is financial stability represented by the z-score.
It is a commonly used indicator of financial stability following the research by Beck et .
, and Cihak & Hesse .
The z-score measures the distance to default, which measures the value of a banking institutionAos equity and reserves against business risks, liabilities, and volatility (Strobel, 2.
Following Cihak & Hesse .
, the z-score is computed as zO.
AA)/E, where k is the ratio of equity capital and reserves over total assets.
AA is the measure of profitability using the average return of assets (ROAA), and E is the standard deviation of average return on assets (ROAA) as a proxy for return volatility.
Control Variables Incorporating control variables in this research study enhances the robustness and validity of the research findings by accounting for potential confounding factors and contextual variations.
In the context of this study, the utilization of both bank-level and country-level control variables is essential for providing a comprehensive understanding of the relationship between CSP and FS.
Following previous studies on the CSP, this research will control for bank-level differences in size, capital adequacy ratio (CAR), and cost-to-income ratio (Cavaco & Crifo, 2014.
Buchanan et al.
, 2.
Size is expressed by the natural logarithm of total assets in U.
dollars billion (TA), and CAR is derived by dividing total equity by total Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024 assets (TE/TA) (Finger et al.
, 2.
The cost-to-income ratio (COI) is an efficiency ratio used to measure a banking institutionAos ability to control operating costs to its operating income (Dao & Nguyen, 2.
A higher COI value would denote greater inefficiency (Rajhi & Hassairi, 2.
Meanwhile, to verify the dependence of bank performance on the economic conditions of the country, we use the natural logarithm of GDP (GDP) and inflation rate (IF) following the study by Hossain & Oon .
The study also controls for sustainability practices of the countries by using the CO2 emissions measured by metric tons per capita (CO.
CO2 is a principal greenhouse gas that affects the EarthAos radiative balance and is the reference gas against which other greenhouse gases are measured for sustainability and climate-related studies (The World Bank, 2.
By including these country-level variables, the paper can account for variations in economic conditions, regulatory environments, and environmental contexts across countries, providing a more nuanced analysis of the CSP-FS relationship.
In summary, the inclusion of both bank-level and country-level control variables in the study enhances the comprehensiveness and robustness of the analysis by accounting for internal operational factors and external contextual factors that may influence the CSP-FS relationship.
controlling for these variables, the study can provide more accurate and reliable insights into the complex dynamics between corporate social responsibility and financial performance in the banking sector.
Moderating Variables Moderators or moderating variables are a set of variables introduced in the models, which affects the relationship between the independent and dependent variables (Saunders et al.
, 2.
As the core theme of this research is the role of business models in the nexus between CSP and FS, the moderating variables consisting of the sample of IBs.
SBs, and CBs will be used.
To examine the relationship between the variables, the study uses the GMM as the regression estimator, following the study by Ibrahim & Rizvi .
Imam & Kpodar .
, and others.
Table 2 shows the complete set of variables used for this study.
Table 2.
Variables Variables Dependent Variables z-score
ROAA
ROAE
Independent Variables CSP ESG Score Description (ROA Equity Rati.
/ Standard Deviation of ROA Return an Average Asset Return on Average Equity Corporate Social Performance Index measured from 6 ratios adopted form the financial statements of the sample 117 banks.
The ESG Score of Refinitiv Eikon which is calculated from over 630 companylevel ESG measures from 10 categories that formulate the three pillars of environmental, social and corporate governance.
Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models Table 2.
Variables (Continue.
Variables Bank-level Controls CAR
COI
Country-level Controls GDP
CO2
Moderating Variables Interaction Variables IBCSP
SBCSP
CBCSP
Description Total Equity to Total Assets The natural log on Total Assets Cost to Income Ratio The natural log of GDP Inflation as measured by the consumer price index CO2 emissions measured by metric tons per capita (CO.
A sample of 40 Islamic Banking financial institutions A sample of 37 Social Banking financial institutions A sample of 40 Conventional Banking financial institutions CSP scores for individual Islamic banks CSP scores for individual Social banks CSP scores for individual Conventional banks Panel Data Model and Regression Models This research utilizes panel data structures, known for their efficiency in econometric estimations and testing complex behavioral hypotheses (Das, 2019.
Jha & Rangarajan, 2.
Panel data can employ static or dynamic regression However, static panel data may suffer from biases and inconsistencies due to endogeneity issues such as reverse causality (Hauk Jr.
, 2017.
Ullah et al.
To address endogeneity, the generalized method of moments (GMM), particularly the system GMM estimator, are recommended (Ullah et al.
, 2018.
Das.
The efficiency of GMM models when using panel data is achieved by using dynamic panel data estimation models that use lags of the dependent variables as regressors or explanatory variables (Ullah et al.
, 2.
Arellano & Bond .
and Blundell & Bond .
develop the generalized method of moments estimation methods, which can be used for dynamic panel data.
In dynamic panel data, the cause-and-effect relationship for underlying phenomena is generally dynamic over time.
The GMM model provides consistent results in the presence of different sources of endogeneity: Auunobserved heterogeneity, simultaneity, and dynamic endogeneityAy (Wintoki et al.
, 2012, p.
Traditionally, researchers (Schultz et al.
, 2010.
Wintoki et al.
, 2.
have used two lags of the dependent variables, arguing that two lags are sufficient to capture the persistence of the dependent variable.
The GMM model removes endogeneity by an internal transformation of data.
Transformation refers to a statistical process where a variableAos past value is subtracted from its present value (Roodman, 2.
In this way, the number of observations is reduced, and as such, this internal transformation process enhances the efficiency of the GMM model (Wooldridge.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024 Additionally, two transformation methods can be used as GMM estimators:
the first-difference transformation, also known as one-step GMM, and the secondorder transformation, also known as two-step GMM.
However, the one-step GMM has some limitations.
For example, suppose a particular variableAos value is missing for the current period.
In that case.
Roodman .
argues that, the first difference transformation will result in missing values when the past value of the variable is deducted from the current value.
This will result in the loss of too many To avoid potential data loss from the internal transformation problem of the one-step GMM.
Arellano & Bover .
recommend using a second-order transformation, the two-step GMM estimator.
The two-step GMM estimator applies forward orthogonal deviations, which means that instead of subtracting the previous observations of a variable from its current value, the two-step GMM model subtracts the average of all future available observations of a particular variable (Roodman, 2.
Using a two-step GMM model, researchers can prevent unnecessary data loss.
Therefore, in the case of this study that uses a balanced panel dataset, employing the one-step and two-step GMM model provides more efficient and consistent estimates for the involved coefficients (Arellano & Bover.
To test Hypothesis 1, the following equation will be employed:
z-scorejit = 0 z-score jit-1 1CSPjit 2TAjit 3CARjit 4COIjit 5GDPit 6CO2it 7IFit jit For Hypothesis 2, the study explores the moderating impact of three banking models on the relationship between CSP and FS through the incorporation of interaction terms.
This methodological approach is substantiated by the findings of Brambor et al.
, who advocate for the inclusion of interaction terms in the presence of conditional hypotheses.
A conditional hypothesis arises when the association between two or more variables is contingent upon the values of one or more additional variables (Brambor et al.
, 2.
Therefore, in testing Hypothesis 2, where the sample comprises IB.
SB, and CB as moderating variables along with the interaction variables of IBCSP.
SBCSP and CBCSP, the respective model equations are as follows:
z-scorejit = 0 z-score jit-1 1CSPjit 2TAjit 3CARjit 4COIjit 5GDPit 6CO2it 7IFit 8IBjit 9IBCSPjit jit z-scorejit = 0 z-score jit-1 1CSPjit 2TAjit 3CARjit 4COIjit 5GDPit 6CO2it 7IFit 8SBjit 9SBCSPjit jit z-scorejit = 0 z-score jit-1 1CSPjit 2TAjit 3CARjit 4COIjit 5GDPit 6CO2it 7IFit 8CBjit 9CBCSPjit jit Where j,i,t stand for bank, country and time respectively.
Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models IV.
DATA
Descriptive Statistics Table 3.
Descriptive Statistics Variable Mean Std.
Dev.
ISLAMIC
BANKING
Std.
N Mean Dev.
LADR
CSP
CAR
COI
CO2
GDP
OVERALL
SOCIAL
CONVENTIONAL
BANKING
BANKING
Std.
Std.
N Mean N Mean Dev.
Dev.
Table 3.
presents the descriptive statistics of the variables used in the main estimation for the sample of all banks and a breakdown of the respective Islamic (IB.
, social (SB.
and conventional banks (CB.
for the period 2013 to 2020.
All bank-level variables are winsorized at the 1st and 99th percentiles to remove the impact of outliers.
The findings show that the mean of the z-score is 53.
25%, with CBs recording a higher mean z-score at 60.
22% compared to SB and IB.
The z-score measures the number of standard deviations a companyAos income has to fall to deplete equity and is, therefore, inversely related to the probability of insolvency (Strobel, 2.
As such, a higher z-score indicates that CBs operate their business activities at lower levels of risk.
The CSP Index has an overall mean of 116.
7%, with IBs scoring a higher mean 1% against 114.
2% for CBs and 111.
4% for SBs.
The CSP Index comprises the six positive indicators related to financial inclusion and intermediation.
Therefore, a higher score on the CSP Index indicates that IBs demonstrate better social performance compared to SBs and CBs.
The TA of the overall sample set is US$ 22.
49 billion, with CBs showing a higher mean TA at US$ 23.
47 billion.
The mean CAR of the sample banks is 10.
62%, with IBs recording the highest CAR with a mean of 11.
05%, implying that IBs have better capital buffers against risk weighted assets.
The cost-to-income ratio (COI), an efficiency ratio used to measure a banking institutionAos ability to control operating costs to its operating income (Dao & Nguyen, 2.
, has a mean of 59.
CBs record the lowest COI at 52.
indicating that CBs are more efficiently managed compared to IBs and SBs.
The correlation coefficients between the independent variables are provided in Table 4.
They also show all the independent variables with a correlation coefficient value of less than 0.
7, hence avoiding any problem of multicollinearity (Dwumfour, 2017.
Kennedy, 2.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024 Table 4.
Pearson Correlation Matrix Variables .
CSP
CAR
COI
CO2
GDP
RESULTS AND ANALYSIS
Regression Analysis: CSP-FS Relationship Table 5.
displays the baseline results using the System GMM regression estimation, assessing the relationship between CSP and FS.
Column 1 shows the results of the one-step System GMM estimation and column 2 shows the results of the twostep System GMM estimation.
According to Arellano & Bover .
the two-step GMM estimator prevents unnecessary data loss (Roodman, 2.
, hence provides more efficient and consistent estimates.
The analysis reveals a robust and significant negative association between CSP and FS across both regression models, indicating that increased social activities among banks overall adversely affect financial stability.
This impact is not just statistically significant but also economically meaningful.
a one standard deviation rise in CSP .
elevates financial risk by 1.
30% .
255% * 0.
, taking the results of 1-Step System GMM as a case in point.
In essence, heightened engagement in social activities by financial institutions amplifies the likelihood of defaulting on their obligations.
Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models Table 5.
CSP-FS Relationship Using System GMM
VARIABLES
z-score .
CSP
CAR
COI
CO2
GDP
Constant Observations Number of Banks Arellano-Bond test AR.
-valu.
Arellano-Bond test AR.
-valu.
Sargan Test (Chi2, p-valu.
Hansen Test (Chi2, p-valu.
1-Step
System GMM
2-Step
System GMM
001***
255***
506***
0967***
996***
707***
592***
0721***
92***
These findings underscore that greater involvement in social performance initiatives within the banking sector correlates with diminished financial stability.
This phenomenon suggests that as institutions allocate more resources towards social initiatives, such as community outreach programs or sustainability efforts, they may inadvertently expose themselves to greater financial instability.
The diversion of funds and attention away from core financial activities could weaken their financial health and resilience, potentially leading to challenges in meeting their financial obligations.
Given that, the study confirms Hypothesis 1 and concludes that there is a significant and negative relationship between CSP and financial stability within the banking industry.
These conclusions echo earlier studies by Saha & Dutta .
and Ozili & Iorember .
, suggesting that while financial inclusion and intermediation foster economic growth, they also bring about adverse effects such as deteriorating credit quality and heightened financial risk, especially beyond a certain threshold of financial expansion.
Given that as a baseline, the study further explores the impact of banking models in the relationship between CSP and FS.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024 Impact of Banking Models on the CSP-FS Relationship To undertake the regression of the banking models, we specify a dummy variable for each banking model that takes either 1 or 0 to represent the attribute of the variable (Das, 2.
Each is then interacted with CSP, denoted as IBCSP.
SBCSP, and CBCSP.
The results of the GMM methods on the CSP-FS relationship by banking models are shown in Table 6.
The results show that all three banking models under the GMM estimation models do not significantly impact the CSP-FS relationship.
Despite the insignificant findings, the IBCSP and SBCSP interaction variables as shown in column 1-4, indicate positive signs.
Meanwhile, the CBCSP interaction variable as shown in column 5-6, indicate negative signs.
Table 6.
CSP-FS Relationship: Moderating Effects of Banking Models Using z-score
VARIABLES
z-score .
ISLAMIC
BANKING
1-STEP
2-STEP
GMM
GMM
1-STEP
GMM
2-STEP
GMM
CONVENTIONAL
BANKING
1-STEP
2-STEP
GMM
GMM
SOCIAL BANKING
990***
228***
400***
0841***
989***
400***
0838***
005***
497***
428***
003***
414***
490***
996***
751***
247***
0943***
996***
351***
0866***
Linear Combination (CSP IBCSP/SBCSP/ CBCSP) 9807*** 8737*** 1067*** 1735*** 8637*** 991*** Constant .
CSP
IBCSP/SBCSP/CBCSP
IB/SB/CB
Size
CAR
COI
CO2
GDP
Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models Table 6.
CSP-FS Relationship: Moderating Effects of Banking Models Using z-score (Continue.
VARIABLES
Observations Number of Banks Arellano-Bond test AR.
-valu.
Arellano-Bond test AR.
-valu.
Sargan Test (Chi2, p-valu.
Hansen Test (Chi2, p-valu.
ISLAMIC
BANKING
1-STEP
2-STEP
GMM
GMM
SOCIAL BANKING
1-STEP
GMM
2-STEP
GMM
CONVENTIONAL
BANKING
1-STEP
2-STEP
GMM
GMM
As per Kingsley et al.
, it is possible to encounter cases where the estimated coefficient on an interaction term is statistically insignificant, while the effect of a change in the primary explanatory variable differs significantly from zero across some range of the moderating variable.
Failing to address this dichotomy may lead to misinterpretation of empirical support for the conditional Therefore, the study tests the linear combinations of CSP and the interaction term coefficients for statistical significance for all banking models.
The results of this analysis across all three banking models as presented in Table 6 under the item AuLinear CombinationAy show that they are negative and significant.
This is consistent with the findings of Hypothesis 1 and confirms Hypothesis 2 that the banking models significantly impact the relationship between CSP and financial stability.
The findings here are consistent with McLean & NoceraAos .
and Ozili & Iorember .
, indicating that extensive expansion of financial inclusion and intermediation for socio-economic growth can increase financial risk.
Additionally.
Saha & Dutta .
argue that smaller banks face higher financial risk due to vulnerabilities in loan extension without robust credit assessment and customer More importantly, the findings highlight another important reality regarding Islamic banking and social banking models: these so-called valuesbased banking models operate very similarly to the conventional banking model.
VI.
CONCLUSION AND RECOMMENDATION
Our study explores the connection between CSP and financial stability (FS), evaluating how value-based banking models influence this relationship.
This focus comes in response to the growing demand for sustainable alternatives in the banking sector.
By adopting a comparative approach, the study aims to shed light on how each banking modelAos distinct values, principles, and practices influence the relationship between CSP and financial stability.
Drawing on empirical evidence from a diverse sample of banks operating within each model, we seek to Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024 offer insights into banksAo unique challenges and opportunities as they navigate the intersection of social responsibility and financial stability.
Through this analysis, the study contributes to a deeper understanding of the sustainability performance of Islamic, social, and conventional banks, ultimately informing strategies for promoting financial stability while advancing social and environmental objectives within the banking industry.
The study uncovers an adverse effect of the CSP on FS for all three banking models, namely.
Islamic banking, social banking, and conventional banking This implies that heightened social performance activities in the respective banks might exacerbate financial instability.
This underscores the critical need to strike a careful balance between social development initiatives and the imperative of upholding financial soundness within the banking sector.
The findings also highlight the critical need for strict governance and supervision of maturity transformation and liquidity creation activities to mitigate the adverse impacts of financial deepening.
The results of the Islamic banking and social banking models require a rethink of the real contribution of these so-called ethical and value-based banking models to financial stability.
The results suggest that the Islamic banking and social banking models do not differ from the operational practices of conventional banks.
Such concerns have been raised regarding the Islamic banking model in extant studies.
Asutay .
contends that the Islamic banking industry has relegated its social roles to the periphery and given greater focus on profitability motives.
In a similar vein.
Sairally .
notes that Islamic banking practices gyrate closer to mirror conventional banking products, such as the adoption of interest-like fixed return instruments and heavy reliance on credit intermediation as opposed to investment These insights emphasize the complexity of adopting the true value-based banking models in relation to its contribution to social performance and financial stability.
Additionally, this research marks a significant milestone in the field of sustainability measurement, presenting a pivotal contribution to the field.
Introducing an enhanced measurement tool not only refines existing methodologies but also delves into the intricate dynamics of corporate social responsibility (CSR), specifically within financial institutions.
At its core, the CSP Index represents a methodological leap forward, addressing longstanding financial sustainability By integrating multiple dimensions of CSRAisuch as inclusivity and responsible intermediationAithe index offers a comprehensive framework to determine the adoption of sustainability practices into the business strategies of banking institutions.
This holistic approach not only enhances transparency but also empowers stakeholders to make informed decisions about corporate governance and ethical investments.
This study offers a few policy recommendations that outline strategic approaches for central banks to manage financial institutions in balancing social development initiatives with financial stability measures.
Firstly, central banks should implement robust regulatory frameworks that mandate financial institutions to adequately assess and manage the risks associated with their social performance activities.
This involves integrating social risk assessments into existing risk management frameworks, ensuring that banks evaluate the Corporate Social Performance and Financial Stability:
Evidence from Islamic.
Social and Conventional Banking Models potential impact of their social initiatives on their financial stability.
By requiring comprehensive risk assessments, central banks can mitigate the possibility of adverse financial impacts stemming from socially oriented activities.
Moreover, policymakers can incentivize banks to prioritize sustainable banking practices that align with both social development goals and financial stability objectives (Yip & Bocken, 2.
This can be achieved through a combination of regulatory measures and market incentives.
For instance, central banks may consider offering preferential capital treatment or reduced regulatory burdens for banks that demonstrate strong commitment to sustainable finance.
By aligning regulatory incentives with societal objectives, central banks can encourage financial institutions to integrate social responsibility into their core business strategies.
Furthermore, central bankers should explore innovative financial instruments and incentives tailored to promote social development without compromising financial stability.
This may include developing a differentiated capital charge framework where banks receive lower capital requirements for investments in socially beneficial projects or activities, which may be measured using a standardized CSP Index.
Such measures not only encourage banks to allocate resources towards socially impactful endeavors but also enhance the resilience of the financial system by diversifying risk exposures.
Additionally, central banks should foster collaboration among financial institutions, regulators, and stakeholders to exchange best practices and promote knowledge-sharing on sustainable finance initiatives.
This collaborative approach can facilitate the development of industry standards and guidelines that enhance transparency and accountability in social performance reporting.
Furthermore, future research in this area could delve deeper into understanding the specific mechanisms through which social performance activities impact financial stability across different banking models.
Longitudinal studies could provide insights into the dynamic nature of this relationship over time, while qualitative research approaches may offer a deeper understanding of the underlying drivers and motivations behind banksAo social performance initiatives.
Additionally, comparative studies across countries and regions could elucidate the influence of regulatory environments and cultural factors on the relationship between CSP and financial stability.
Despite its contributions, this study has certain limitations.
Firstly, the lack of a commonly adopted sustainability reporting standard across global financial institutions affects the scale and scope of datapoints in constructing a more comprehensive and robust CSP Index for this study.
Moreover, the studyAos selection of social banks from the members of GABV may have limited the generalizability of the results to broader group of social banks.
Furthermore, the studyAos quantitative approach may have overlooked qualitative nuances and contextual factors that could influence the relationship between CSP, banking models, and financial Future research could address these limitations by employing a mixedmethods approach, incorporating qualitative data and longitudinal analyses to provide a more comprehensive understanding of these dynamics.
In essence, by addressing these research gaps and adopting evidence-based policy interventions, stakeholders can foster a banking sector that contributes to social development and maintains the resilience and stability necessary for sustainable economic growth.
Journal of Islamic Monetary Economics and Finance.
Vol.
Number 4, 2024
REFERENCES