Sustainable Business Practices and Firm’s Financial Performance in Islamic Banking: Under the Moderating Role of Islamic Corporate Governance

Amin Jan,Rohail Hassan,Maran Marimuthu,Mehreen Mehreen

doi:10.3390/su11236606

Amin Jan, Rohail Hassan + Show 2 more

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https://doi.org/10.3390/su11236606

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Abstract

This paper examines the moderating role of Islamic corporate governance on the link between sustainable business practices and the firm’s financial performance. A post-crisis period sustainability data for the decade of 2008–2017 was collected by the study. For data collection, this study used the weighted content method. The Generalized Method of Moments (GMM) statistical test was used for empirical testing. The results of the study found that the link between sustainable business practices with the firm’s financial performance measured from the shareholders’ and the management’s perspective is positive, while the subjected link measured from the market perspective was found to be insignificant. This implies that the market stakeholders of the Islamic banks are reluctant for their bank’s spending on sustainable business practices. Interestingly, the insignificant link between sustainable business practices and market performance became significant with the moderating role of Shariah governance and managerial ownership. It shows that the moderating role of Shariah governance and managerial ownership is giving confidence to market stakeholders of Islamic banks for receiving a higher financial return through sustainable business practices initiatives. These results may provide insights for several policymakers of the Islamic banking industry about integrating vital sustainability practices in their business models and about the balanced moderating role of Islamic corporate governance in the link between sustainable business practice and the firm’s financial performance. It provides a roadmap to the Islamic banking industry for efficient management of sustainability practices from an Islamic perspective and subsequently improvement of financial performance through it.

Highlights

The world is frequently facing drastic economic, environmental, and social challenges of great impact due to the unsustainable business models of firms
The link became significant with the moderating role of Shariah governance. It implies that Shariah governance is giving confidence to the market stakeholders along with the other stakeholders for obtaining a higher financial return through strong Shariah governance. This is because the strong Shariah governance (Shariah Supervisory Board (SSB) size in this case) facilitates professionals like bankers and economists—even with little religious knowledge—to sit on the board and provide expert opinions on technical matters like sustainability
This paper examined the moderating role of Islamic corporate governance on the link between sustainable business practices and the firm’s financial performance

Summary

Introduction

The world is frequently facing drastic economic, environmental, and social challenges of great impact due to the unsustainable business models of firms. In order to cater for sustainability risk the United Nations UN launched the “UN Sustainable Development Goals” (SDGs) program, formally known as “Transforming our world: the 2030 Agenda for Sustainable Development”. According to the 17 sustainable development goals, business firms are required to enrich their business models with factors such as reducing poverty in the society, improving education and public health, clean water and affordable energy, decent labor practices, global climate change, and to reduce inequality among others. In line with those requirements, many businesses have domestically linked their business policies to the UN’s sustainable development goals. Instead of recognizing the importance of religion in a multi-dimensional approach to development, the practical development of this alternative Islamic model is still lacking [7]

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