Islamic corporate sustainability practices index aligned with SDGs towards better financial performance: Evidence from the Malaysian and Indonesian Islamic banking industry

Abstract

Exploring the link of corporate sustainability practices towards financial performance remains an area of interest to many scholars. But still, the Islamic perspective of the nexus is over sighted. In this vein, the main objective of this study is to inquire about the nexus of corporate sustainability practices towards financial performance from an Islamic perspective. However, the major challenge in this regard is the unavailability of an Islamic corporate sustainability index. To cope with the challenge, this study developed a novel Islamic corporate sustainability practices index and aligned it with sustainable development goals for greater generalizability and better financial performance. The study collected 10 years of panel data (2009–2018) for 16 Islamic banks in Malaysia and 12 Islamic banks in Indonesia. Panel corrected standard errors regression technique was used to analyse panel data. Results were first generated on the combined dataset including both Malaysia and Indonesia, and then from individual countries' perspectives to obtain a holistic point of view. Furthermore, results are also generated on Islamic corporate sustainability practices as a formative factor as well as a reflective factor indicating (environmental, economic and social) dimensions. Results of panel corrected standard errors regression analysis show that Islamic corporate suitability practices as a formative factor have a significant positive impact on financial performance from the combined as well as the separate dataset from Malaysia and Indonesia. However, results of the reflective factors of Islamic corporate sustainability practices show variation in the combined (Malaysian and Indonesian) dataset. These results provide insights into various policy formulations at Malaysian and Indonesian Islamic banks in specific. And in general, these results insights into the world Islamic banking industry for ensuring better compliance with sustainable development goals aimed at achieving greater financial performance. More importantly, this study may serve as a launching pad for the development of the global Islamic banking corporate sustainability practices index.