gif Islamic Banking
Within the financial sector, the interface of financial institutions with society inevitably raises the question pertaining to their social responsibilities. Like other businesses, it can be argued that they cannot be dissociat- ed from their economic and social contexts. Particularly in today’s world where inequali- ties in wealth and life chances prevail, finan- cial institutions are called upon to play a key role towards the alleviation of poverty and reducing social and economic exclusion. Hence, commercially-oriented high street banks have been seen to be actively partici- pating and publicising their CSR initiatives. Also, new groups of ‘socially responsible’ financial institutions have emerged which embrace CSR as an integrated way of doing business.
The practice of CSR is certainly also relevant to the Islamic finance discourse, as the dis- cipline is grounded on core ethical values, rooted on religious tenets and as IFIs are called upon to institutionalise the Islamic ethical values by promoting socio-economic welfare. The fact that IFIs are expected to comply with both the form and substance of the Islamic law (Shariah) should affect the financial institutions’vision and mission, objectives, organisational structure and management, procedures, modus operandi, products and services, training require- ments, regulation and corporate govern- ance.
Firstly, adherence to the Shariah entails le- gal implications which subject the practice of Islamic finance to a strict application of the textual directive of the religious law and jurisprudence–necessitating the elimination of all dealings prohibited by Shariah and the promotion of Islamic exhortations. Secondly, adherence to the Shariah also includes abid- ance by the spirit of the maqasid al-Shari’ah (objectives of Islamic law) which attributes a more long term holistic objective to IFIs–that of working towards the optimisation of hu- man well-being. In this respect, a social role is often assigned to IFIs in addition to the ob- jectives of being economically and financially viable and of being Shariah-compliant.
This paper seeks to examine the implications of CSR on financial institutions, including IFIs. It thus discusses the relevance of CSR to financial institutions from both a main- stream Western perspective and from the viewpoint of the Islamic finance paradigm. Section II therefore starts by elucidating the various definitions, dimensions and variants of CSR promulgated in the literature. Section III then discusses the concept from a firm’s perspective, providing the arguments for and against the adoption of CSR as a manage- ment practice and highlighting the increas- ing attention attributed to it at the corporate level. This section also discusses the two
44 Global Islamic Finance April 2012
ethical, moral issues; accounting, reporting and corporate governance; the environment and sustainability; responsible business be- haviour, and social responsibility in financing and investing. Nonetheless, the underlying principle in these terms is that corporations are concerned not only with the quest for profits and economic performance. Rather, other social and non-economic criteria of evaluating firm performance are deemed important.
Author: Beebee Salma Sairally,
Researcher, International Shariah Reseach Academy for Islamic Finance (ISRA), Malaysia
CSR Definitions A variety of definitions of CSR can be found in the business and management literature. Different organisations and authors have submitted their respective definitions, with some focusing on the notion of sustainable development, increased economic welfare, search for a balance between positive and negative impacts of the firm, and meeting the legal, ethical, social, and commercial re- sponsibilities of businesses.
broad models on CSR: the European model where CSR forms part of an explicit and in- tegral strategy of the core business, and the American model where CSR represents an implicit and peripheral policy of the business and carried out as a voluntary philanthropic exercise. Based on Carroll’s four-part defini- tion of CSR, Section IV then discusses the CSR of financial institutions from a Western perspective and Section V delineates the practice of CSR by mainstream financial institutions as well as socially responsible financial institutions (SRFIs).
Section VI finally discusses the implications of CSR on IFIs and in this respect compares the Islamic view of CSR – as defined by the AAOIFI (2010) standard on CSR–with its mainstream perspectives. Section VII con- cludes by highlighting the current debate in the Islamic financial industry which calls for the endorsement of a more socially respon- sible approach in the practice of IFIs in line with the maslahah (protection of public in- terest) principle under the broader objective of achieving the maqasid al-Shariah (objec- tives of Islamic law).
CSR: DEFINITIONS, DIMENSIONS AND VARIANTS A plethora of terms are used in the literature to connote the social responsibility of busi- nesses. Examples include CSR, corporate citizenship, corporate accountability, corpo- rate governance, business ethics, ethical corporation, corporate responsibility and sustainability, stakeholders’ interests, sus- tainable corporations, and the triple bottom line approach. The wide array of terms inevi- tably reflect the broad arena of concepts in- volved under the umbrella term CSR: social,
Overall, the idea of social responsibility is associated with the concern of corpora- tions about the impact of their actions on the welfare of society. With a view to have a “positive and productive” societal impact, CSR thus represents the set of standards of behaviour that corporations subscribe to.
One of the most widely accepted definitions is the one provided by Carroll. He utilises a sophisticated approach in defining CSR in terms of four responsibilities that society expects corporations to shoulder: economic, legal, ethical, and discretionary.
• The economic responsibility required of a business is for it to be foremost prof- itable, efficient, and viable. It would, for instance, include producing goods and services that society demands, supplying quality products at fair pric- es, earning a reasonable return for its shareholders, providing safe and fairly paid employment to the workforce, and above all to operate in such a way as to stay in business. • The legal responsibility required of a business is for it to obey the laws and regulations of the jurisdiction in which it operates. • The ethical responsibility expected of a business refers to those over and above the legal requirements – responsibili- ties that embody ethical norms, but not necessarily codified into law. Accord- ing to Carroll, the ethical responsibility “embraces a response to the “spirit” of laws and regulations and helps guide business actions in those decision arenas in which regulations are ill-de- fined or non-existent”. Some examples would include: ensuring compliance to societal values, norms and standards;
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