Sustainability Accounting in the Islamic Development Bank:
A Case Study to Explore Sustainability and Financial
Accounting Institutional Drivers and Investigate
Sustainability Accounting Changes

Abstract

Financial institutions are unique: they act as financial intermediaries within their respective societies; as such, it is expected that financial institutions should manage sustainability concerns arising from their operations to the very highest standards. Islamic banks specifically claim to be regulated by religious principles that stress the ethical, social, and environmental dimensions of business and other aspects of conduct. However, many researchers find fault with the sustainability-reporting practices of Islamic banks. Further, Islamic banks’ practices in terms of their so-called ‘alternative’ ethical financial products and financial accounting practices tend to mimic those found in the conventional banking sphere. As part of an urgent response to the current global sustainability crisis, scholars have called for more in-depth and contextualised research on the sustainability practices of organisations, including Islamic banks.

To investigate this gap in the literature and address this emerging topic, the researcher developed an initial conceptualisation based on prior research and neo-institutional theory to explain the homogeneity-related reporting practices of a leading Islamic bank and conventional banks. This approach was based on Miles et al.’s (2014) suggestions and was consistent with Adams’ (2017a) approach. To address the present study’s research questions (RQs), this initial conceptualisation aimed to link the relevant concepts and address the expected institutional relationships (DiMaggio and Powell, 1991).

The researcher adopted a qualitative case-study approach to investigate the accounting practices, drivers, and changes acting upon the Islamic Development Bank (IDB); this comprised of (i) documentary analysis, and (ii) semi-structured interviews. The study’s conceptualisation allowed the exploration of a range of institutional forces influencing the financial and sustainability reporting of the IDB. Furthermore, the researcher integrated Laughlin’s (1991) pathways of change model and Adams’ (2017b) framework to investigate the nature and extent of the changes in the sustainability accounting practices of the IDB. First, a comparative content analysis was undertaken (a disclosure index and thematic analysis) of the annual reports of the IDB and the World Bank (WB) over a 15-year period (2003–2017). Second, semi-structured interviews were conducted with IDB board executives, senior managers, and Shari’ah Supervisory Board (SSB) members, WB board executives, and other stakeholders. The rationale for comparing the reporting practices of the IDB with those of the WB and interviewing WB executives was driven by the study’s underpinning theory: that organisations such as the IDB tend to be influenced by and mimic the practices of other similar successful organisations in their sector (i.e. the WB).

This research study contributed to the existing literature by exploring the following RQs: (i) What are the main institutional isomorphic drivers that influence the IDB’s reporting practices?;(ii) What are the influences of the SSB (religious board) and its claimed institutional core values’ on the IDB’s reporting?; and (iii) To what extent has the sustainability accounting of the IDB changed due to the institutional isomorphic forces?

First, the comparative content-analysis findings on the reporting practices of the WB and the IDB indicated the explanatory value of isomorphism and isopraxism in explaining the differences and similarities in sustainability reporting practices among multilateral development banks (MDBs). Second, the interview findings documented that unlike financial accounting, the IDB’s religious board has no influence on the bank’s interventions concerning its sustainability practices or reporting.

Similarly, the findings indicated that debt markets and rating agencies have a limited influence on the IDB’s sustainability accounting. In contrast, informal coercive, normative, and mimetic isomorphic institutional elements (e.g., the United Nations (UN), professional groups, and consulting firms) are powerful drivers of the IDB’s sustainability reporting. While the findings also indicated that sustainability changes have occurred in the IDB’s design archetypes, these changes were morphostatic changes, dictated by the IDB’s conventional and original interpretive schemes. It is hoped that this research project will make a useful contribution to institutional theory and the organisational-change literature. Further, the researcher hopes that the findings will provide a blueprint to guide policymakers on the best practices to support sustainable development and sustainability accounting in the IDB.