Measuring Sustainable Performance of Islamic Banks: Integrating the principles of Environmental, Social and Governance (ESG) and Maqasid Shari’ah

Abstract

To fulfil the Maqasid Shari’ah of Islamic banks in promoting the welfare of society, Islamic banks are expected to consciously align their performance measurement according to the principles of Islamic banks that are derived from Islamic economic philosophy. In the meantime, in light of the agenda of Sustainable Development Goals (SDG) 2030, the principle of environment, social and governance (ESG) has become part of the sustainability reporting and become a central concern of the investors. The tenets of ESG and Islamic finance basically intersect and share similar principles of responsibility, accountability, and stewardship in providing protection and benefits to the environment and humankind as a whole which is in line with the principle of Maslahah in the Maqasid Shari’ah. Hence, there is ample room for the ESG element to be harmonized with the Maqasid Shari’ah elements in a holistic performance measurement index of Islamic banks. Therefore, the performance of Islamic banks can be measured in a more holistic approach by combining financial and non-financial performance with the ultimate objective of Islamic banks being sought as the primary reference, and the sustainability issue can be well addressed. This paper reviews the previous literature on the performance of Islamic banks, ESG principles in the context of Islamic banks and the Maqasid Shari’ah performance index that has been developed by previous researchers. Fulfilling Maqasid Shari’ah and sustainability agenda in the performance measurement index would further strengthen the performance of Islamic banks in the effort to maintain Malaysia as the leader in the regional and world Islamic financial hub.