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Corporate Social Responsibility in Islamic Financial Institutions (IFI): A

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J Bus Ethics (2015) 129:785–794
DOI 10.1007/s10551-014-2132-9

Corporate Social Responsibility and Islamic Financial Institutions

(IFIs): Management Perceptions from IFIs in Bahrain
Zakaria Ali Aribi • Thankom Arun

Received: 1 August 2012 / Accepted: 1 June 2013 / Published online: 29 March 2014
 Springer Science+Business Media Dordrecht 2014

Abstract Islamic finance is gaining greater attention in instruments in the financial sector. The savings and
the finance industry, and this paper analyses how Islamic investments of IFIs are settled by real sector economic
financial institutions (IFIs) are responding to the welfare activities, which focus on long-term goals rather than the
needs of society. Using interview data with managers and short-term risk-taking decisions which are popular in the
content analysis of the disclosures, this study attempts to financial sector. The fundamental question is how an
understand management perceptions of corporate social institution built on Islamic values continues in a ‘value-free
responsibility (CSR) in IFIs. A thorough understanding of society where economists focused exclusively on the
CSR by managers, as evident in the interviews, has not mechanics of economics’ (Rice 1999, p. 345). However,
been translated fully into practice. The partial use of IFIs’ over the years, changes in the arguments of leading econ-
potential role in social welfare would add further chal- omists have appeared, over the incessant distributional
lenges in the era of financialisation. concerns of international development, encouraged by
market turbulence. For instance, in a recent essay on
Keywords Islamic finance  Management perceptions  ‘markets and morality’, Bhagwati (2011) has argued that
Corporate social responsibility  Bahrain values will determine the player’s behaviour in the market
place, but further asserts that good policies have ‘to walk
on both legs, positive and normative, and both have to be
Introduction sound and strong’ (p. 163). IFIs follow both positive and
normative traditions; although they are structured around
The Islamic financial institutions (IFIs) are a fast-growing Islamic principles, they follow modern business practices
sector of the global finance industry, and posing challenges outright. In this paper, we analyse how corporate social
to the ways that existing financial institutions are perceived responsibility (CSR), a concept defined in a Western con-
and experienced around the world. IFIs follow a zero- text, is consistent with the practices of IFIs.
interest approach based on equity and risk sharing and have The social responsibility of corporate institutions and
become a trillion US dollar industry (Sheng and Singh how they respond to the welfare expectations of society are
2012). These institutions have a unique ethical identity important concerns in modern business. The EU (2011, p. 6)
which gives equal importance to social goals and profit, defines CSR as the ‘responsibility of enterprises for their
and challenges the conventional bias towards debt impacts on society’ which tacitly infers welfare subtexts in
the handling of corporate institutions. The definition further
explains that enterprises ‘should have in place a process to
Z. Ali Aribi (&)  T. Arun integrate social, environmental, ethical human rights and
Institute of Global Finance and Development, Lancashire
consumer concerns into their business operations and core
Business School, The University of Central Lancashire,
Preston, UK strategy in close collaboration with their stakeholders’ (p.
e-mail: ZAli-aribi@uclan.ac.uk 6). Under CSR, businesses are addressing the needs of a
T. Arun larger group of stakeholders (Clarkson 1995), a major
e-mail: TGArun@uclan.ac.uk change from Friedman’s view on firms and profits.

123
786 Z. Ali Aribi, T. Arun

Kitzmueller and Shimshack (2012) synthesise diverse The paper is organised as follows. First is a discussion
strands of the literature on CSR and contend that although on the fundamentals of CSR in IFIs. Next is a description
CSR can achieve a second-best level of public goods pro- of the research method used in the paper. The third section
vision, a concisely defined CSR can produce greater welfare presents our results and analysis, followed by conclusions
than public or private provisions. Furthermore, the paper and implications.
states that ‘the match of preferences between shareholders
and stakeholders motivates different models with different
implications’ (ibid, p. 78). This is true in the case of IFIs, CSR Fabric in IFIs
where stakeholders are motivated by profit maximisation
based on Islamic law, a model based on normative aspects IFIs expect to follow ethical practices in compliance with
of CSR, different from the usual ones based on ‘instru- Shari’ah principles which insist on lawful transactions and
mental considerations’ as suggested by Margolis and Walsh prohibit interest and speculation in business transactions.
(2003). The ethical identity marks IFIs as culturally distinct Shari’ah-compliant financial products are the foremost
organisations aiming for profit maximisation based on feature of IFIs. These institutions conform to Islamic prin-
Islamic principles rather than on market principles. ciples which are universal, and broadly agree with most of
In a conventional company, agency theory highlights the the CSR agenda as codified in the UN Global Compact and
complexity of contractual relations among different interest even exceed the UN requirements in the developing human
groups, particularly between owners and managers. The capital and transparency in business transactions (Williams
majority of IFI stakeholders are deeply concerned that their and Zinkin 2010). In many ways, the CSR aspect of Shari’ah
funds are invested in a Shari’ah-compliant manner (Chapra principles is grounded in the shared religious obligation of
and Ahmed 2002). If IFI managers behave very differently IFI stakeholders which may not be achieved at an individual
from the ethos of shareholders, and make investments level (Farook 2007). According to Al-Gazzali, a scholar in
which are not Shari’ah compliant, potential agency prob- the 11th Century, the purpose of Shari’ah is ‘to promote the
lems arise. In addition, the agency problems could escalate, welfare of the people, which lies in safeguarding their faith,
with the separation of cash flow and control rights for their lives, their intellect, their prosperity and their wealth’
depositors and investors (Safieddine 2009). The view is (cited in Kamla 2005, p. 112). The principles of social jus-
that the traditional governance mechanisms to protect the tice and the well-being of society are central to the Shari’ah
shareholder’s interest might not be sufficient in the case of principles, and are obviously reflected in defining the social
IFIs. To mitigate agency problem, IFIs are expected to responsibility of IFIs, which differentiate these institutions
provide reliable information through regular and transpar- from their conventional peers.
ent financial reporting systems (ibid). Islam defines private ownership of resources in a dis-
Our focus in this paper is two-fold: (1) to understand tinctive manner. Although individuals are accepted as
management perceptions of CSR in IFIs; and (2) to under- trustees of their own resources, the resources must be utilised
stand the extent to which IFIs follow in practice the ethical for the benefit of all human beings in an equitable way. The
and social objectives implied by Shari’ah. This study is view is that, more than a religion, Islam is an organisation for
based on IFIs in Bahrain, which has two-thirds of the Islamic society and its institutions, as well as a guide for the conduct
banks of the Gulf Cooperative Council states (GCC). of individuals within that institutional and social context
Globally, the GCC states account for a high percentage of (Tinker 2004). The trusteeship demands the spreading of
Shari’ah-compliant global financial assets (Wilson 2009). justice, truth, good deeds and virtue by humankind (Al-
Other than Islamic banks, Bahrain has eleven Islamic Qaradawi 2000), based on individual responsibility to the
insurance companies (takaful) and has a significant presence community, advanced on the foundations of khilafah (fun-
in the market for Islamic Securities (sukuk) (IIBF). Bahrain damental unity and brotherhood of mankind) and justice
is also host to a number of key organisations in Islamic (Chapra 1992). However, Islam recognises the contribution
Finance such as the Accounting and Auditing Organisation of individual initiatives and self-interest through profit and
for Islamic Financial Institutions (AAOIFI), which sets private property, which are instrumental for efficiency and
standards for Islamic accounting and financial reporting growth (ibid). The market or state will not succeed without
among IFIs. The other major institutions in the region are the abundant individual efforts within the limits of social wel-
General Council for Islamic Banks and Financial Institu- fare. These principles have an enormous impact on indi-
tions (GCIBFI), the International Islamic Financial Market vidual and macro-business activities.
(IIFM) and the Islamic International Rating Agency (IIRA). In Islam, Riba (interest) is regarded as a prominent
The presence of these guiding organisations and the pro- source of unjustified advantage (Sarker 2000), and is cited
active approach of the Central Bank of Bahrain make the in the Holy Qur’an as: ‘But Allah has permitted trade and
country the natural hub for IFIs in the region. has forbidden interest’ (The Holy Qur’an: 2: 275). Riba

123
Management Perceptions from IFIs in Bahrain 787

causes unfair distribution of income in favour of the lender these schemes within an institution (institutional resources
who has a guaranteed return on his capital without taking or depositors’ funds) and the policies concerning those who
any risk. It is perceived as a form of oppression, unfairness, are unable to pay back, are important information for IFI
exploitation, and can cause damage to the economy (Ward stakeholders; annual reports are expected to reveal these
2000). There is an approach to productive wealth in Islam practices explicitly. Debtors are an area of concern for any
which obliges its circulation without usurious transactions financial institution. However, Shari’ah requires the lender
(Chapra 1992). Thus, the prohibition of interest at extor- to defer or even forego the collection of debt. The stake-
tionate rates aims at a shared risk between the lenders and holders would expect to know the details of treatment of
the entrepreneurs which does not impede a rate of return on insolvent clients by IFIs, and whether it is in accordance
investment. This rate is not fixed and is built on contracts with Shari’ah rules.
drawn on equity participation, profit-sharing (Mudaraba) In Islam, the issue of the natural environment has an
and profit and loss sharing (Musharaka). Although the inherently ethical basis (Williams and Zinkin 2010).
profits are shared in a mutually agreed manner, the finan- According to the Holy Qur’an, Nature belongs to Allah and
cial loss is fully born by the investor, except in extreme as vicegerents of Allah; individuals have a duty to protect
situations of negligence or misconduct by the lenders land and natural resources. In Islam, the agency known as
(Aggarwal and Yousef 2000). However, in practice, there Hisba which acted as an environmental regulator has
is a view that investment account holders in IFIs have declined in prominence with the emergence of market-
limited rights, and are exposed to higher agency costs than based development strategies based heavily on the exploi-
their counterparts in conventional institutions. tation of natural resources (ibid). IFIs need to be cautious in
Zakah, charities, donations and Quard al-hassan are the identifying projects which might have an adverse impact on
major financial transfers appropriate to the social respon- nature and society. However, despite rising incomes,
sibility of IFIs. Shari’ah laws insist on the religious tax modern-day businesses have a better awareness of the
Zakah, which is one of the five pillars of Islam. This capital consequences of degrading environmental quality, and
levy is payable once a year on any productive asset that has possible impact on human welfare, which has put Islamic
been possessed for the Zakah period (i.e. one lunar year). values on the environment much closer to business prac-
Zakah payment is obligatory on Muslim individuals and tices. The other area which is central to the CSR fabric of
businesses subject to fulfilling certain conditions and after IFIs is their relation with employees. Studies are consistent
deducting the debts and needs of those individuals and about the nature of major disclosure requirements under this
businesses, but insists on a share for the community of the category: payments (wages and bonuses) education and
generated wealth. The responsibility for collecting and training for employees, equal opportunities and working
distributing Zakah, generally falls on Islamic states, but environment (Maali et al. 2006).
where this is not the case, individuals and businesses are The principles of financial assistance and the prohibition
still obliged to pay it for the welfare of the community of Riba provide a firm foundation for the CSR framework
(Maali et al. 2006). In practice, there are insufficient of IFIs. In general, this discussion informs the immense
macro-level mechanisms for collecting Zakah, which go value base of IFIs which has the potential to enhance and
against the mandate on sharing wealth given by the Holy implement CSR principles in practice. However, the gap
Qur’an.1 However, IFIs are in a unique position to fill the between the teaching of Islamic principles and their prac-
gap on shared religious obligation2 in mobilising Zakah. tice is significant in many Islamic countries, particularly on
Charity and donations are voluntary payments encour- equality and basic human rights (Beekun and Badawi 2005;
aged by Islam for social activities and are not an obligatory Williams and Zinkin 2010), and this may also have con-
payment like Zakah. The IFIs have a separate entry for sequence for IFIs. We attempt to understand this gap
Zakah and Charity in their annual reports; this is to between principle and practice from two perspectives:
explicitly reveal the broader attitude of the institutions to senior managerial perceptions of CSR in IFIs; and the
social welfare. The other related payment for social benefit actual reporting of CSR in the annual reports of IFIs.
is Quard al-hassan, a loan to individuals who are in dif-
ficulty. Disclosure of the amount advanced under each
category of financial help, for social welfare, financing of Research Methods

1
Interviews
The Holy Quran says that ‘in their wealth there is a certain portion
for those who ask for and for those who are in dire need’ (Qur’an:
70:24, 25). The interview strategy was aimed at understanding the
2
A study of 32 Islamic Banks reveals that the majority carry out perceptions of managers in IFIs, in order to inform our
Zakah (IIIT, 1996; cited in Maali et al. 2006). analysis of the nature and practice of CSR in these

123
788 Z. Ali Aribi, T. Arun

institutions. We conducted 18 in-depth semi-structured Table 1 List of interviewees

interviews with senior executives in nine IFIs operating in Interviewee Position Nature of Education Gender
Bahrain. The senior executives were selected for their no. organisation
overall knowledge of Islamic banks, including strategic
I1 Executive IFI BA Male
objectives which might have implications for CSR (Belal
manager
and Owen 2007). The primary objectives of these inter-
I2 Executive IFI MBA Male
views were to acquire detailed insights into the perceptions manager
of IFI management toward CSR, particularly whether the I3 Senior IFI MSc Male
Islamic principles have been translated into practice. manager
The interviews were guided by a small set of open-ended I4 Senior IFI BA MSc Male
questions, which allowed further discourse between intervie- manager
wees and the researcher. This method helped us to understand I5 Financial IFI BA Male
managers’ ‘construction of reality’ at a ‘depth which addres- controller
ses the rich context that is the substance of their meanings’ I6 Senior IFI BA Male
manager
(Jones 1985, p. 46). Interviewees’ names and contact details
I7 Executive IFI BA, Male
were obtained from the annual reports and the companies’
director MBA
websites. Initial contact with these institutions was made
I8 Executive IFI BA CPA Male
through formal letters addressed to company secretaries. The manager
initial population for this study comprised all banks that claim I9 Corporate IFI PhD Male
to operate on an Islamic basis, identified from GCIBF. Seven secretary
responses were received from IFIs and two from regulatory I10 Manager IFI BA, CFA Male
bodies. These institutions are Albaraka Islamic Investment I11 Senior IFI BA CPA Male
Bank, Takaful International, Arcapita Co, Bahrain Islamic manager
Bank, Gulf Finance House, Kuwait Finance House, Bahrain, I12 Senior IFI BA Male
Capivest, AAOIFI and GCIBF. As explained in the intro- manager
duction, the last two are key apex organisations in Islamic I13 Executive IFI BA Male
director
finance based at Bahrain. A brief profile of the interviewees
I14 Senior IFI MSc CPA Female
showing their demographic background, status and nature of manager
their organisation is given in Table 1.
I15 Executive IFI PhD Male
After securing an appointment, background notes on the director
research and interview were sent to the interviewees in I16 Executive IFI BA Male
advance. Furthermore, participants were assured that their director
names and their organisation’s details would not be dis- I17 Executive CIBAFI PhD Male
closed when quoting them. Each interview ranged from an director
hour to an hour and a half. With the permission of inter- I18 Manager AAOIFI PhD Male
viewees, an audio recorder was used to record each inter-
view. We opened the discussion by asking interviewees with each transcript being identified by a code. Considering
whether they knew CSR, then rolled out the questions on the broad questions in the interview guide, the researcher
various issues for more specific comments. An interview read all the transcripts repeatedly and highlighted sub-
guide containing a list of questions was prepared prior to stantive statements deemed relevant to the research focus.
the interview process, with two major sections: the moti- After going through all the transcripts, the researcher went
vation for CSR, and the activities of CSR. read them through again while listening to the tape, in
Writing up the transcript was done in the same language order to find any statements and intonations that he might
as the interviews. Where this was in Arabic, the researcher have failed to highlight.
translated the documents into English and cross-checked The previous stage resulted in a comprehensive repre-
their accuracy with another translator to make sure that the sentation of statements from the interviews, which required
translation was a true reflection of the interviewee’s further decomposition. The following stage was therefore
meaning. Although no variations were found, the procedure to derive a set of categories for the responses to each
generated over 70 pages of data. question from the highlighted statements and give them
We employed Miles and Huberman’s (1994) approach headings (Gillham 2000). These categories and headings
in the analysis of transcripts through classification of the were checked against the highlighted statements and
interview content by identifying substantive points and amendments were made. This procedure was repeated
putting them into categories. The analysis process started twice at different points of time to ensure that no categories

123
Management Perceptions from IFIs in Bahrain 789

and headings had been missed. Subsequently, a large where

matrix was constructed for each broad research question. CSRIj = corporate social reporting index score for
Categories and headings classified under these questions company j.
were entered into the matrix. The researcher then went N = number of items in the index
through the transcripts assigning each highlighted state- Xi = 1 if the item is disclosed
ment to a category. In addition, a second separate file was 0 if the item is not disclosed
maintained to record overall observations on the meaning 0  Ij  1
of the data for all interviews.

Content Analysis Findings and Discussion

Content analysis was employed to explore CSR practices in Management Perceptions of Motivations for CSR
the case of the above seven IFIs for the years 2006–2010,
whose annual reports for 2006, 2008 and 2010 were avail- There is significant support among managers for CSR, and
able in an English version on the Internet. Content analysis recognition of the need for social and economic responsibil-
is a method of codifying the text into various themes ities of businesses to go together. As one manager (I7) con-
depending on selected criteria, and deciding which docu- tended, the core value of Islamic banks, besides making profit,
ments were to be analysed (Krippendorff 1980). Content is to share the aspirations of economic development and
analysis has been widely employed in CSR research (Gray social justice. I7 went on to describe a project on affordable
et al. 1995) and is the most common method of analysing housing; although the profit margins were very low or almost
social and environmental reporting, particularly in firms nil, the IFI preferred to continue with this project to solve the
(Milne and Adler 1999). Although CSR reporting can be housing problems of the low income population in the com-
made through a variety of channels such as advertising, munity. However, there is an opinion (I1) on maximising
promotional leaflets, company websites, interim reports and returns to shareholders among the respondents. Although this
press releases, a substantial proportion of research has is a minority view, this subject clearly stated that IFIs are
employed the annual report as the main data source of a expected to generate profit, and are not charity organisations.
company’s attitudes toward social reporting. Moreover, in Apart from this one case, all the other participating managers
developing countries other disclosure channels have little emphasised that profit does not constrain their CSR. Fur-
use (Abu-Baker and Naser 2000), and the annual reports are thermore, there is an overwhelming agreement among the
the best source of information. The CSR content analysis managers on the societal view of IFIs as players with
literature does not provide a clear reference to themes of responsibility to ensure socio-economic justice.
CSR reporting (Unerman 2000), as most studies built their Religion seemed to be the primary motivation fuelling
categories for analysis on the framework of previous studies the recognition for CSR, as evident in the interviews. Most
(see, for example, Ernst and Ernst 1978; Gray et al. 1995; managers pointed out that since IFIs are set up with a
Guthrie and Mathews 1985; Guthrie and Parker 1990; religious motivation, the institutions are inclined to be
Hackston and Milne 1996). This study drew on the literature ethical and socially responsible.
on social and environmental disclosure from an Islamic Islam encourages us to serve our society; therefore, it
perspective (e.g. Rice 1999; Kamla et al. 2006; Maali et al. is part of our commitment as Muslims to be socially
2006; Haniffa and Hudaib 2007; Williams and Zinkin 2010; responsible. (I9)
Aribi and Gao 2010, 2012) to design the key themes of CSR Our activities derived from Islam. Islam encourages
in IFIs (see Appendix 1). us individuals and companies to help the other, give
In order to explore CSR reporting practices of IFIs in the donation be socially responsible. (I2)
form of an index, a Corporate Social Responsibility Index
(CSRI) score is calculated. The approach to scoring items These views supported the argument that embarking on
is essentially dichotomous in that an item in the research social responsibility from an Islamic perspective is not for
instrument scores one if communicated and zero if it is not financial or any other reward, but rather to gain God’s
(see Haniffa and Cooke 2002; Haniffa and Hudaib 2007), blessing (Rice 1999; Haniffa and Hudaib 2007; Moham-
and is additive and equally weighted to avoid potential med 2007; Williams and Zinkin 2010). In a way, the range
scoring bias and scaling problems (Cooke 1989). of religious convictions has resulted as motivators of CSR
(Hemingway and MaclaGan 2004). The view is that an
X
N
xi
CSRI ¼ ð1Þ individual’s accountability towards God encompasses his
i¼1
N accountability to Umma (society) (Lewis 2001). This

123
790 Z. Ali Aribi, T. Arun

notion was very common among managers, because it is in the case of the Islamic banks, it is important to know
increasingly clear that business needs to take into account the reason for the loan, and where the loan is going to
the community in which it is operating (Jamali and be spent, and ensure that the finance is being invested
Mirshak 2007). The understanding of CSR among the in a productive and ethical project. (I14)
managers in IFIs thus seems anchored in relation to the
In accordance with Islamic principles of social responsibil-
Islamic philosophy of conducting business within eco-
ity and justice, Islamic banks are expected to care for the
nomic, legal and ethical dimensions.
less fortunate in society (Maali et al. 2006). Without
exception, all managers consistently referred to the philan-
Management Perceptions of CSR in Practice thropic activities of Zakah, donations and charity. There is
a shared view (I14) that in addition to their making a profit,
Following the views on CSR, further questions were asked God has asked individuals to purify their money by paying
about CSR activities performed by their companies. Since the Zakat and other voluntary payments. Unlike the payments
main objective of IFIs is to provide products and services that of Zakah which are obligatory on Muslims, charity and
are Shari’ah compliant, IFIs serve the community as part of donations are given by individuals and businesses on a
their commitment to social responsibility. There is a com- voluntary, although strongly encouraged basis. Most man-
pelling view among most managers that Islamic banks are agers mentioned that part of their CSR is helping the less
naturally inclined to be socially responsible due to their fortune people in society and supporting charitable organ-
adherence to Shari’ah. The elimination of interest itself is isations through their dedicated charity accounts.
considered an important part of adding value to society (I18).
We have established an account dedicated mainly for
It was observed in the interviews that IFIs are under pressure
donation and charity, and usually we transfer the
to operate within the boundaries of Shari’ah, which strictly
non-Islamic income (defined by the Shari’ah com-
requires all transactions to be lawful (Halal) from an Islamic
mittee) to this account to be spent in social activities
perspective, and avoids any unethical ones. Shari’ah com-
and strictly not to be included in the bank’s profit. We
mittees are an exclusive feature of IFIs, supporting the CSR
also make payments to some poor families on a
framework and making sure that IFIs are not moving away
monthly basis, and fund some charitable organisa-
from Shari’ah principles.
tions on an annual basis. (I16)
Our business has to be in accordance with Shari’ah
Purely social loans such as Qard al-hasan are provided to
principle. For example, we had an opportunity of
help needy people who cannot borrow the money. The
making a business deal last month, but we discovered
following quotations provide examples of the nature of the
that 1 % of the total revenue from that deal would
involvement by IFIs in these types of activity:
come from activities which contradicted Shari’ah
morals, therefore the Shari’ah committee refused to … the Qard al-hasan account receives donations from
approve the entire investment decision. (I9) the bank and external donors, and its main purpose is
to help the needy people by lending them money
There is a perception among the managers that Islamic banks
without any charge for a fixed period of time, and it
fill two very significant positions in the community: religious
covers expenses for education, medical treatment and
and financial. On the religious side, Islamic banks take
marriage. (I15)
responsibility to comply with Shari’ah by offering Halal
financial products and services, thus setting an example for IFIs may face financial arrangements such as Mudaraba
people in the community who observe their activities. On the and Ijarah, where clients are unable to pay their instal-
financial side, the banks’ control of large funds and revenue ments. According to Shari’ah law, the lender is required to
helps them to undertake a social role. Thus, IFIs are supposed be lenient with the debtor, and an insolvent debtor should
to serve the ethical needs of an Islamic society and undertake be granted a period of grace. However, we found a lack of
an important social function (Maali et al. 2006). One disclosure related to banking policy toward its insolvent
manager tried to elaborate the difference between IFIs and clients. In this regard, one manager stated that such a policy
the interest-based banks in their method of conducting exists, but they do not disclose it:
business and asserted that Islamic banks’ commitments to
The policy of Islamic banks is not to take any charge
CSR principles are reflected in their products and services.
from insolvent clients if it was proved that the client
The conventional banks receive deposits from the was in financial difficulty situation… However, to
depositors and give them to the borrowers as loans or protect the bank side from dishonest clients, we may
capital; they do not look at the reason behind the transfer the case to the court and charge the client if
finance, which might be an unethical reason. However, we find the client wants to deceive the bank. If we

123
Management Perceptions from IFIs in Bahrain 791

Table 2 CSRI mean over the Theme BIB GFH Takaful Capivest Arcapita AIB KFHB Theme rank
three years and ranking
Shari’ah 0.13 0.80 0.2 0.60 1.00 0.6 0.20 2
Zakah 0.80 0.80 0 0.60 0 0 0.60 3
Charity and donations 1 0.66 0 1 1 1 1 1
Qard al-hassan 1 0 0.5 0 0 0 0 4
Debtors 0 0 0 0 0 0 0 6
Environment 0 0 0 0 0 0 0 6
Employee 0.33 0 0 0.22 0.11 0.33 0 5
Overall rank by each bank 1 3 7 2 4 5 6

receive such charge, it has to be transferred to honour the ethical and social objectives implied by Sha-
charity account …. We look to the insolvency client ri’ah. To tackle this, content analysis was employed to seek
from a social point of view, especially if the client evidence of CSR as disclosed in annual reports. Table 2
died and he or she owes the bank. (I14) presents the 3-year mean CSRI, the overall CSRI ranking
by each bank and theme ranking based on seven observa-
One of the interviewees (I7) gave a little more detail on
tions for each theme. Table 3 presents the results of the
how they dealt with similar situations. For instance, in one
CSRI for each theme for the three years examined in this
case, the client had a short-term Murabah contract with the
study and the overall CSRI for each year by each bank.
bank, and faced difficulty in paying back the instalments.
This shows clearly that the extent of CSRI by Islamic
Following the request for a deferred payment, the bank
banks falls far short of our index. Those banks coming
decided to extend the period of payment based on an
closest to meeting our benchmark were GFH, followed by
enquiry which proved that the delay was not because of the
Capivest and Arcapita which achieved second and third
client’s negligence. However, such a policy is not disclosed
positions respectively. However, the level of information
publicly in the annual report of IFIs, and one manager (I12)
disclosed varies across the sub-themes.
argued that disclosing such information would encourage
The theme on Shari’ah-compliant products and services
moral hazard-type situations.
by IFIs scored second in the theme disclosed ranking
Overall, the interview results reveal that although the
(Table 2). Table 2 also shows that all IFIs in the sample
managers have a sound understanding of the motivations for
disclosed information about their Shari’ah compliance
CSR constructed on Islamic principles, this has not been
over the three years. The results showed that Arcapita and
translated adequately into practice. The narrow framework of
GFH have the highest CSRI, with the former getting full
Zakat distribution and other non-systemic philanthropic
score with regard to this theme. The high number of IFIs
activities is dominant among IFIs, rather than any significant
disclosed under this theme was not startling since IFIs need
capacity-building efforts in communities (Asutay 2008).
to assure their stakeholders that all their activities and
However, we do not subscribe to these views, particularly on
products comply with Shari’ah. The three-year mean CSRI
the proven impacts of direct cash transfers in the development
ranges from 0.13 to 1.00, suggesting variations and
literature, built on the ‘realisation that you cannot pull
inconsistencies between the items among these banks. This
yourself up by your bootstraps if you have no boots’ (Hanlon
finding is in agreement with those of Haniffa and Hudaib
et al. 2010, P. 4). Other than providing cash transfers, the IFIs
(2007) which show that the level of disclosure is incon-
also respond to the needs of their clients by rearranging the
sistent over the period of three years. Only four IFIs dis-
terms and conditions of loans. Some studies have noted a lack
closed information on the nature and disposal of earnings
of CSR initiatives in IFIs (Dusuki 2007; Haniffa and Hudaib
prohibited by Shari’ah. For instance, GFH reports that
2007). According to the duty-based common-sense morality
interest from deposits in the Central Bank of Bahrain uti-
framework, institutions have special obligations towards
lised for charitable purposes (GFH 2006).
closely related groups (Frederiksen 2009), which is more
Table 2 shows that Zakah ranks number three in the
likely in the case of institutions such as IFIs, instituted on the
themes disclosed. We found that only four IFIs paid Zakah
basis of religious principles. The ‘special obligations’ of IFIs
on undistributed profits. The three-year means CSRI range
may warrant more collective social welfare initiatives.
from 0.60 to 0.80. Although three IFIs disclosed the bal-
ance on Zakah funds, neither provided reasons for the
Results of Content Analysis balance, a finding similar to the results of Haniffa and
Hudaib (2007). For the other banks, which are not required
The second objective of this paper was to examine to what to pay Zakah on behalf of their shareholders, it is the
extent IFIs in practice, rather than in principle, actually responsibility of management to calculate the Zakah

123
792 Z. Ali Aribi, T. Arun

according to the guidelines provided by AAOIFI and dis-

2006
Kuwait finance house

0.2
0.6
close the amount due in respect of shareholders and

1
0
0
0
0
depositors (AIB 2010).

2008
All IFIs in the sample, with the exception of Takaful,

0.2
0.6
1
0
0
0
0
disclose information on charity and social activities, and
2010
five of them have full CSRI scores. The high level of

0.2
0.6
1
0
0
0
0
disclosure under this theme may be attributed to the notion
that Islamic Banks are viewed as financial institutions with
2006

0.33
0.8
0 a social face (Mashhour 1996, cited in Maali et al. 2006).
1
0
0
0
IFIs control large funds and revenue, which helps them to
2008

0.33
0.2

undertake a social role in society (Maali et al. 2006);

0
1
0
0
0
Albaraka

however, the contribution by the banks to their charity

2010

0.33
0.8

funds is low. We found a large proportion of the charity

0
1
0
0
0
funds are from non-Islamic incomes which the banks dis-
2006

0.33
pose as charity (GFH annual reports 2009, 2010).
1
0
1
1
0
0

The differences across themes and institutions raise

2008

serious challenges for IFIs in Bahrain. Chapra and Ahmed

1
0
1
1
0
0
0
Arcapita

(2002) provided evidence that nearly 86 % of depositors in

2010

Bahraini Islamic banks are prepared to withdraw their

1
0
1
1
0
0
0

funds if those banks fail to operate in accordance with

2006

Shar’ia, and 30 % would withdraw their funds if there

0.33
0.2
0.6

were rumours of poor managerial performance. The CSRI

1
0
0
0

scores of four themes—Qard al-hassan, debtors, employ-

2008

0.8
0.6

ees and environment—raise a set of challenges for IFIs. In

1
0
0
0
0
Capivest

the case of Qard al-hassan, which provides loans to indi-

2010

0.33
0.8
0.6

viduals in difficulty, we found that only two Islamic banks

1
0
0
0

provided this loan, with mean reporting ranges of 0.50–1

2006

0.20

0.75

by Takaful and BIB respectively. The theme on debtors

0
0

0
0
0

includes information on banks’ debt policy and activities.

2008

0.20

Surprisingly, we did not find any information disclosed on

0
0
0
0
0
0

debt policy in the sample IFIs. However, such a policy is

Takaful
2010

0.20

0.75

clearly stated in the Holy Qur’an as a way of dealing with

0
0

0
0
0

debtors in difficult situations: ‘If the debtor is in difficulty,

2006

grant him time till it is easy for him to repay’ (The Holy
0.80
Gulf finance house

0.8
1
0
0
0
0

Qur’an, 2: 280).
Furthermore, none of the IFIs studied shows any
2008

0.80
0.8

information regarding the environment. This is in contrast

0
0
0
0
0

with the literature, where researchers such as Maali et al.

2010

0.80
0.8

(2006) and Haniffa and Hudaib (2007) suggested other-

1
0
0
0
0

wise. This divergence may be due to the fact that the

2006
Bahrain Islamic bank

0.33

sample consists of financial institutions only, and that

0.8
0

1
1
0
0

environmental issues may not be seen as a concern by this

2008

type of institution. The theme of employee score is another

0.20

0.33
0.8
1
1
0
0

baffling result. Since human resources are an important

asset of any business entity, why have IFIs given less
2010

0.20

0.33
Table 3 Annual CSR index

0.8

importance to this? This category covers the policies on

1
1
0
0

equal opportunity, wages, workplace environment, and

Charity and donations
Shari’ah compliance

training and development. Only three IFIs disclosed

information under this category, with means for the 3 years
Qard al-hassan

Environment

ranging from 0.11 (Arcapita) to 0.33 (BIB).

Employee

The differences in the levels of disclosure across the

Themes

Debtors
Zakah

themes need some discussion. Stakeholder theory by

Freeman (1994) assumes that values are necessarily for

123
Management Perceptions from IFIs in Bahrain 793

business, and expects managers to articulate the shared industry, how to reconceptualise their role in social welfare
sense that the created value brings its core stakeholders and Shari’ah compliance is a challenge for IFIs.
together. IFIs are value-based institutions and give due
rights to each stakeholder, in accordance with their relative
stake, which implies that ‘all stakeholders get what is just Appendix 1
for them’ (Ullah and Jamali 2010, p. 624). Attempts were
made earlier to identify the relative importance of various Themes and sub-themes of CSR
stakeholders in IFIs. However, some of our results con-
tradict this ranking. For instance, employees are considered
Category/ Sub-themes
as the most important category of stakeholder along with
themes
owners, by Beekun and Badawi (2005). Our results indicate
a low score of 5 for employees—does this mean that Shari’ah Compliance with Shari’ah in all products and
employees are not a priority stakeholder among IFIs? The compliance services
same concern is relevant to the lack of disclosure under the Nature of unlawful transactions (if any)
categories of environment and debtors, because of their Reasons for undertaking such transactions
eminence in Islamic principles. Irrespective of these puz- Shari’ah Board’s view on the amount of revenue or
expenses from these transactions
zling trends, the high rank obtained by charities and
How the bank disposes of such revenue
donations for social activities is distinctive. Since these
payments are voluntary in nature, the trend reveals a Zakah Source of Zakah
broader understanding of social welfare in IFIs. Further- Amount of Zakah
more, these sort of ‘cash transfers’ have been spreading Beneficiary
across the world as a measure to reduce transaction costs in Balance of Zakah
development projects, and the results imply that IFIs are Reasons for non-distribution
following the new drift in international development. Charity and The nature of charitable social activities
donation The amount spent on these activities
The sources of funds
Conclusion Qard al-hasan Source of funds allocated to Qard al-hasan by
bank
This study attempts to understand management perceptions Source of funds allocated to Qarad al-hasan by
donation
of CSR and its disclosure in IFIs in Bahrain through
The amounts given to beneficiaries
interviews and content analysis. The distinct feature of IFIs
The social purpose for which the funds were given
is its social responsibility role in its operations, which
Debtors The policy in dealing with insolvent clients/debtors
differentiates these institutions from their conventional
The amount charged as late penalty
peers. The findings of the study revealed that IFIs in
The Shari’ah Board’s opinion
Bahrain fall short in the ethical and social objectives
Environment Environmental policy
implied by Shari’ah principles. Nevertheless, the managers
Lending policy
have a thorough understanding of CSR, although this is not
reflected sufficiently in practice. This was confirmed in the Conservation of natural resources
content analysis through lower CSRI scores in the cate- Employee The policy on wages and other remuneration
gories of employees, debtors and environment. There is The policy on education and training
significant evidence of voluntary financial transfers by IFIs, The policy on equal opportunities
which implies a bigger voluntary role for these institutions
in social welfare.
Globally, IFIs have been experiencing an exponential
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