Exploring CSR and Sustainable Development Practices of Islamic Banks in Malaysia: An Empirical Analysis

Abstract

The concepts of Corporate Social Responsibility and Sustainable Development have been evolved over the last fifty years in the West. Since the financial crisis in 2008, these concepts have been brought to surface to tackle the ethical and moral issues that have been neglected by the financial and business practices due to the attachment to the neo-classical economy understanding. The role of CSR is significant in shaping sustainable banking model, which is expected to have impact on management, products and services, community and environment. Therefore, banks as well as other corporations are expected to engage actively in CSR practices in contributing to sustainable development.

With the emergence of Islamic banking and finance, a paradigm shift was expected in financial world towards ethical practices, as Islamic moral economy aims to uphold the socioeconomic justice and to serve the interest of larger stakeholder. However, the experience in the last thirty years testifies that Islamic banks have failed to fulfil the social expectations through CSR and sustainable development practices; and hence social failure of Islamic banks is debated widely. In fact, a sustainable banking in the form of Islamic social bank is proposed at the end of this study that fits into the aspiration of an Islamic moral economy.

The main aim of this research, thus, is to explore the perceptions of Malaysians towards the social dimensions of Islamic banking. Hence, this study analysed the Malaysians knowledge and practises with regard to CSR and sustainable development with the objective of locating their personal experience with their respective Islamic banks. This research further aims to propose the establishment of Islamic social banking based on Shari’ah principles that fulfils social and developmentalist needs of Malaysians, for which the participants’ perceptions are referred to in developing the nature and shape of such a new institutionalisation.

In fulfilling the research aim, primary data were gathered through employing questionnaire surveys from customers of Malaysian Islamic banks representing the demand side of the industry; and semi-structured interviews were conducted with the Shari’ah advsiors, bank managers, executives and also Shari’ah executives of Islamic banks which bring the insights from the supply side. The data were analysed using descriptive statistics and inferential statistical tools. The interview data were analysed using thematic analysis through coding method to identify similar patterns of answers.

The findings of this study suggest that the conventional concepts of CSR and sustainable development are relevant to the nature of Islamic banking and therefore should be implemented in their practice. In fact, respondents expressed their expectation for Islamic banks to be more ethical and socially responsible in their operations. In responding to the observed social failure of Islamic banking, the respondents asserts that technical objectives such as prohibition of riba’ and providing Shari’ah compliance product is sufficient but not enough to achieve the social objectives. As identified by the participants, there are several issues preventing Islamic banks to perform CSR that mostly are internal problems involving lack of self-awareness on CSR. Further, the study signifies that CSR should be the success factor for Islamic banks in achieving sustainable development to survive in the highly competitive market. Additionally, the study also show strong demand from the respondents to institutionalise an Islamic social banking to serve the socially and financially excluded groups in achieving developmentalist and social objectives by particularly empowering the Malaysian people in the rural areas, as the very nature of Islamic moral economy proposes.