How social is Islamic banking?

Abstract

PurposeThis paper aims to outline the argument for social outcomes as an objective for Islamic banks and investigate whether social failure exists in Islamic banking in Indonesia by assessing it against this performance dimension.Design/methodology/approachContent analysis of the annual reports of a sample of 12 Islamic commercial banks, seven Islamic banking units, and seven Islamic rural banks operating in Indonesia. The social outcomes to be measured employ the social objectives and disclosure measures from the prevailing literature, combined with the Kinder, Lydenberg, Domini Research and Analytics index of corporate social performance, the United Nations’ 17 Sustainable Development Goals and five Environment Social Governance Scorecards developed by Oikocredit, a global cooperative and social investor group.FindingsSocial failure evident in all Islamic rural banks and half of all Islamic commercial banks, but in only one of the seven Islamic bank units where most banks appear to pursue social outcomes at the accommodative level (accepting and doing all that is required). A social outcome-weighted asset formulation reveals Islamic banking has improved in meeting its social objectives over time, but sometimes at the cost of other objectives relating to the environment and customers.Research limitations/implicationsSingle-country context for analysis and limited period of analysis given rapid growth of industry and less stringent reporting requirements in the past.Practical implicationsIslamic banking in Indonesia needs to continue to improve its social outcomes, particularly in relation to the environment and customer benefits.Social implicationsEmphasis on banking supervisory bodies to regulate and provide incentives for the industry to address the social issues upon which consumer support, industry efforts and regulation draws.Originality/valueFew existing studies investigate the social dimension of Islamic banking, not least in Indonesia. Novel quantitative and qualitative application of content analysis.