Corporate Sustainability and Financial Performance of Middle Eastern Islamic Banks

Abstract

Purpose: This research analyzes the connection between the sustainability performance and the financial indicators of Middle Eastern Islamic banks to determine whether the implementation of sustainability regulations had any impact on their financial performance. Design/Methodology/Approach: The research examines the financial and sustainability-related performance indicators taken from published annual reports and websites of Middle Eastern Islamic banks. To analyze cause and effect variables, the indicators will be examined by conducting Linear, Panel Regression and Granger causality. Results: The environmental and social performance of Middle Eastern Islamic banks increased significantly between 2014 and 2018. Furthermore, a bi-directional causality between financial performance and sustainability performance of Middle Eastern Islamic banks has been found. This interaction may be explained by the good management theory and slack resources theory and influenced by the stakeholder's pressure to adhere to Islamic values and the institutional pressure of the AAOIFI standards. Research limitations: The environmental and social performance of Middle Eastern Islamic banks progressed significantly in the last couple of years but since this is still a new concept with regulations being recently introduced, the field is currently going through the early development phase and more data is needed to analyze the long-term effects of the regulations. Practical implications: Studies showed that improving a firm’s corporate social and environmental performance will have a positive impact on their financial performance. By following this approach, Middle Eastern Islamic banks can invest in corporate sustainability to increase their financial success on the one hand and preserve the environment on the other by investing more in sustainability activities. Social implications: Middle Eastern Islamic banks will be able to lead and drive businesses to become greener, which will reflect on society and on the total economy. As a result, the countries will be able to lower their pollution rate and have better control of other natural calamities affecting the everyday life of the society without affecting financial returns. Originality/Value: This study will be the first to investigate the sustainability performance of Middle Eastern Islamic banks, including their product and services. Also, the study adds to the knowledge regarding the influence of financial sector regulations and policies on the environmental and financial performance of banks.