gif Islamic Banking
Economic Responsibilities of Financial In- stitutions The primary purpose of a financial institution is to provide a range of financial services to customers, public authorities, private indi- viduals and businesses to further their own objective of economic and financial gains. The following economic functions have spe- cifically been attributed to financial institu- tions in the literature. • Provide indirect financing. Acting as fi- nancial intermediaries, transferring re- sources from savers to borrowers and investors; • Accumulate capital. Funding long term projects by pooling funds from various savers; • Provide liquidity. Reconciling the liquid- ity preferences of borrowers and sav- ers;
• Select projects. Screening and funding viable projects; • Monitor funds. Ensuring that funds are used as agreed; • Enforce contracts. Ensuring that repay- ments are made by borrowers; • Manage, transfer, share and pool risks. Raising funds, determining repayment rules as well as establishing who bears the risks; • Diversify risks. By pooling a large number of investment projects togeth- er; • Record transactions. Keeping records of the payment systems and all exchange transactions.
Figure 2 (Table 1): The RDAP Scale of Corporate Social Responsiveness CSR Responses
Wilson (1975)
McAdam (1973)
Davis and Blomstrom (1975)
Clarkson (1995)
Reactive
Resistance to change behaviour
Withdrawal
Deny respon- sibility (Doing less than what is required)
Defensive
Do only what is required
Embrace a public relations approach
Admit responsi- bility but fight it (Doing the least that is required)
Sources: Adapted from Carroll and Clarkson 48 Global Islamic Finance April 2012 Accommodative Be progressive and
adapt to society’s expec- tations
Adopt a legal ap- proach
Bargain for a compro- mise
Accept responsibility (Do- ing all that is required)
Solve the problem
Anticipate respon- sibility (Doing more than what is required)
Do Nothing <------------------------------------------------------> Do Much Proactive Lead the industry
As financial institutions provide the above services, they add social and economic val- ue by offering products and services needed by society and generating employment in so- ciety. These are considered important con- tributions of financial institutions towards socio-economic development. Nonetheless, as in the case of businesses and firms, it is commonly argued that financial institutions should promote other social responsibilities over and above their economic and legal re- sponsibilities.
Ethical and Discretionary Responsibilities of Financial Institutions Zeegers noted some of the ethical and dis- cretionary responsibilities of relevance to financial institutions:
• Providing security guarantees to their depositors for funds entrusted to them so that confidence in the financial sys- tem is maintained; • Exercising care in the use of funds de- posited with them; • Showing concern for local social needs by ascribing funds to meet these needs; • Showing concern for the environment
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