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Social responsibility reporting of Islamic banks: Evidence from Indonesia

Article in International Journal of Business Governance and Ethics · January 2014

DOI: 10.1504/IJBGE.2014.066275

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356 Int. J. Business Governance and Ethics, Vol. 9, No. 4, 2014

Social responsibility reporting of Islamic banks:

evidence from Indonesia

Faizah Darus*
Accounting Research Institute (ARI) and Faculty of Accountancy,
Universiti Teknologi MARA,
Shah Alam, Malaysia
Email: faiza634@salam.uitm.edu.my
*Corresponding author

Hasan Fauzi
Faculty of Economics and Business,
Sebelas Maret University, Indonesia
and
School of Accountancy,
Universiti Utara Malaysia,
Sintok, Kedah, Malaysia
Email: hfauzi@icseard.uns.ac.id

Yadi Purwanto
Faculty of Psychology,
Universitas Muhammadiyah Surakarta,
Indonesia
Email: yadipurwanto@ymail.com

Haslinda Yusoff
Accounting Research Institute (ARI) and Faculty of Accountancy,
Universiti Teknologi MARA,
Shah Alam, Malaysia
Email: hasli229@salam.uitm.edu.my

Azlan Amran
Graduate School of Business,
Universiti Sains Malaysia, Malaysia
Email: azlan_amran@usm.my

Copyright © 2014 Inderscience Enterprises Ltd.

Social responsibility reporting of Islamic banks 357

Mustaffa Mohamed Zain and

Dayang Milianna Abang Naim
Accounting Research Institute (ARI) and Faculty of Accountancy,
Universiti Teknologi MARA,
Shah Alam, Malaysia
Email: dmustaff@salam.uitm.edu.my
Email: dayangmilianna@yahoo.co.uk

Mehran Nejati
Graduate School of Business,
Universiti Sains Malaysia,
Malaysia
Email: mehran.nejati@gmail.com
Email: mehran@usm.my

Abstract: There is a growing global interest in social responsibility and

sustainability across all sectors. Other than economic performance,
stakeholders are now also concerned about the social and environmental
impacts of corporations. Additionally, stakeholders are obtaining a higher
salience level and expect organisations to operate sustainably. The banking
sector has not been an exception, as banks can have significant impact on their
customers, employees, and society in various ways. Given the intertwined links
of Islam and ethical principles, it is expected that Islamic banks will show a
high level of commitment towards social responsibility (SR) and ethical
practices. The current study investigates this issue by examining the annual
reports of three fully-fledged Islamic commercial banks in Indonesia over the
period of 2007 to 2011. It was found that only two of the investigated banks
had continuous improvement in their SR disclosure. Additionally, it was
revealed that the highest disclosures have been for ‘corporate vision’ and
‘board of directors and top management’, while the lowest disclosures were
evident for ‘environment’ and ‘product, services and fair dealing with supply
chain’.

Keywords: social reporting; social responsibility; Islamic banks; annual

reports; Indonesia.

Reference to this paper should be made as follows: Darus, F., Fauzi, H.,
Purwanto, Y., Yusoff, H., Amran, A., Zain, M.M., Naim, D.M.A. and
Nejati, M. (2014) ‘Social responsibility reporting of Islamic banks: evidence
from Indonesia’, Int. J. Business Governance and Ethics, Vol. 9, No. 4,
pp.356–380.

Biographical notes: Faizah Darus is a Fellow of the Accounting Research

Institute (ARI) and heads the UiTM-ACCA Asia-Pacific Centre for
Sustainability (APCeS), of ARI, Universiti Teknologi MARA, Malaysia. Her
research is primarily in the area of corporate reporting which includes financial
and non-financial reporting.

Hasan Fauzi is currently the Director of the Indonesian Centre for Social
and Environmental Accounting Research and Development (ICSEARD),
University of Sebelas Maret, Indonesia and now is a Visiting Professor at the
School of Accountancy, Universiti Utara Malaysia. His research agenda consist
358 F. Darus et al.

of various research subjects and has published in areas such as control system
and management accounting, social and environmental accounting and
corporate governance.

Yadi Purwanto is a Senior Lecturer of Philosophy of Science, Advanced

Statistic, Professional Ethics, Industrial and Organisational Psychology, and
Corporate Social Responsibility at the Master of Psychology Programme and
Post Graduate Studies at Muhammadiyah University of Surakarta, Indonesia.

Haslinda Yusoff is currently the Head of the Academic Operation

Management, Academic Affairs Division and the Deputy Head of the
UiTM-ACCA Asia-Pacific Centre for Sustainability (APCeS), of Accounting
Research Institute (ARI), Universiti Teknologi MARA, Malaysia. Her research
is primarily in the areas of corporate social and environmental accounting and
reporting as well as sustainability management and practice.

Azlan Amran is currently an Associate Professor at the Graduate School of

Business, Universiti Sains Malaysia. His research interests are related to
corporate social reporting, corporate social responsibility and sustainability
issues.

Mustafa Mohamed Zain is a Professor of Corporate Social Responsibility

(CSR) at the Universiti Teknologi MARA (UiTM). He is an active writer and
researcher particularly in Islamic accounting and culture, corporate social and
environmental accounting, corporate social responsibility, sustainability and
governance. He is the founder for the Centre for Responsibility and Islamic
Accounting (CeRIA), and an advisor for Asia Pacific Centre for Sustainability
(APCeS).

Dayang Milianna Abang Naim is a senior academic staff of MARA University

of Technology (UiTM), Sarawak and a doctoral student of the Accounting
Faculty, UiTM, Shah Alam. She has accumulated a wealth of teaching
experience in various areas of accounting, with special emphasis on financial
accounting and reporting.

Mehran Nejati is a Senior Lecturer at the Graduate School of Business,

Universiti Sains Malaysia (USM). He holds a PhD in Corporate Social
Responsibility and is a Certified Six Sigma Green Belt by the American
Society for Quality (ASQ). He is also the author of numerous papers in
international peer-reviewed journals and serves as the editorial board member
of several journals. He became a Certified Sustainability Reporting Specialist
(CSRS) in 2012.

1 Introduction

While the topic of corporate social responsibility (CSR) was first officially argued in
1953 (Bowen, 1953), it was only during the 1970s when CSR was publicised. The ever
growing interest in CSR has resulted in a notable increase in the amount of academic
literature on CSR (Crane et al., 2008; De Bakker et al., 2005). Despite the lack of a
common agreement on how CSR is defined, it often refers to “a concept whereby
companies integrate social and environmental concerns in their business operations and
in their interaction with the stakeholders on a voluntary basis” (European Commission,
 Social responsibility reporting of Islamic banks 359

2001). One major motivation to engage in social responsibility is the economic reasons
which encourage strategic social responsibility practices by companies. Results of
empirical studies have indicated the positive link between strategic SR and economic
benefits for the firm (Siegel and Vitaliano, 2007), providing further encouragement for
companies to utilise a strategic approach towards SR. According to stakeholder theory,
such responsible practices can result in improved relations with primary stakeholders and
ensure continued growth and survival of an organisation in the long-run (Khan et al.,
2009). Another motivation for SR is the morally-driven aspect, which includes practicing
the right thing to do (Pedersen, 2007; Pedersen and Neergaard, 2006). This type of
motivation has its roots in belief systems, ethical principles and religion. Hence, it is
expected that Islamic organisations which abide by the Islamic rules and operate in a
culture where Islamic principles are dominant will show a high level of commitment to
engage in social responsibility.
Corporate identity encompasses both tangible and intangible elements of business and
refers to distinct attributes of the organisation, providing an answer to the questions
‘‘what are we?” and ‘‘who are we?” (Balmer and Greyser, 2003). Corporate identity has
been known to have four distinctive types, namely actual, communicated, ideal and
desired (Balmer and Soenen, 1999). While the actual identity is related to the business
strategy, and corporate culture and structure (Gray and Balmer, 1998), communicated
identity is linked to organisational image and reputation, which results in the realisation
of desired (what corporate management wants it to be) and ideal identities (what
stakeholders see as optimal). Overall, corporate identity must be managed in a way to
leave a pleasant impression with key stakeholders (Cornelissen and Elving, 2003).
The research by Alessandri (2001) highlights the role of consistent information
disclosure in corporate annual reports in demonstrating a positive corporate image and
reputation over time. Hence, Islamic banks (IBs), which represent social-oriented
organisations and operate according to an Islamic ethical business framework drawn from
the Shari’ah, are expected to pay attention to their social responsibilities as part of the
desired corporate identity.
Banks play a critical role in supporting the economic development and enhancing the
standards of living. Other than the direct impact of banks on the economy, they can also
influence society and environment through creating jobs and their operational activities.
Additionally, by providing loans to businesses and entrepreneurs, banks provide fuel to
the engine of national economic development. Hence, it is essential for the banking
industry to monitor its social and environmental impacts and ensure sustainable practices
which benefit the economy, people and the environment. Since Indonesia is expected to
be among the top 10 strongest economies in the world by the year 2050 (Jacques, 2010),
the issue of SR among Indonesian banks can be an issue of global interest. As developing
stakeholder relationships are at the heart of the CSR and public relations functions (Wang
and Chaudhri, 2009), engagement in social responsibility and its disclosure can enhance a
corporation’s image and result in public consent for the continued operation of the
organisation.
To this end, the current study aims to examine the social responsibility disclosure of
IBs in Indonesia by investigating the annual reports of three Indonesian IBs over a five-
year time span, to provide a more comprehensive picture of their SR practices and allow
a comparison of the disclosure trend of the banks over a course of time. This longitudinal
study not only provides a good understanding about the type and level of social
responsibility practices by the IBs in Indonesia, but also reveals the trends in their social
360 F. Darus et al.

responsibility initiatives. More specifically, this study aims to answer the following
research questions:
1 What is the current level of disclosure on sustainability themes by IBs in Indonesia?
2 What are the changes in sustainability disclosure by IBs in Indonesia throughout
2007 to 2011?

2 Theoretical foundation

Theory to explain CSR disclosure among Islamic business organisation is still poorly
developed (Maali et al., 2006). Recent research studies in this area are mainly extending
established theories in CSR disclosure to incorporate the Shari’ah principles which is the
main thrust in the Islamic practices. IBs are those banks operating within the Islamic
Shari’ah in their business transaction (Maali et al., 2006). The meaning of Shari’ah
implies that the business transaction should be lawful (halal) and prohibits transactions
involving interest and those involving speculation. In addition, business entity should
also pay ‘zakat’, some of compulsory charity contribution to the poor. Adding to the
understanding of the nature of IBs, another principle which is important in the Islamic
worldview is the concept of Unity (Tawhid) (Farook et al., 2011). According to this
concept, God is the owner, creator and source of all things and God has entrusted
mankind to the use of resources (Farook et al., 2011). At this juncture, human is
accountable to look after the property and resources according to God’s will (Maali et al.,
2006). In this concept, the trustee and ownership principle can be interpreted as
ownership should be exercised for the benefit of society as well as for the benefit of the
owner (Ahmad, 1995). In principle, this concept is embedded in the Shari’ah requirement
and it is central to life.
In the IB context, given the above setting, the main objective of CSR disclosure is to
allow banks to show their compliance with Shari’ah (Baydoun and Willett, 2000). The
current study is grounded in legitimacy theory. Following the logic of legitimacy theory,
IBs disclose their social responsibility information to project a socially responsible image
of themselves as complying with the objective of Shari’ah as derived from the Holy
Quran and Sunnah. This is consistent with the ideologies found in the work of Weber
(1968 cited in Tyler, 2006) which stated that legitimacy ideology are based upon
deference to customs and values (traditional authority), devotion to the actions or
character of an authority (charismatic authority) and also legitimacy linked to the process
of rule creation and interpretation (rational bureaucratic authority) (Tyler, 2006). In this
argument, traditional and rational bureaucratic authorities are able to establish the link
between IB and the religious values.
The principle of legitimacy theory is the ‘social contract’ between business and
society, which expects companies to perform various socially-desired actions in return for
their acceptance as legitimate institutions in society (Dowling and Pfeffer, 1975; Guthrie
and Parker, 1989; Suchman, 1995). According to Dowling and Pfeffer (1975), the
organisational legitimacy concept indicates that corporations strive for establishing
symmetry between the social values related to or implied by their operations and the
social norms of acceptable behaviour in the larger social system or environment they
operate in. If companies do not operate in a manner consistent with community
expectations, they will be penalised. Thus, to ensure success, corporations will adapt their
 Social responsibility reporting of Islamic banks 361

activities according to the community’s expectations (Suttipun and Stanton, 2012). As

organisational legitimacy has also been linked to organisational survival (Bansal and
Roth, 2000), it has become increasingly important and “the necessity to operate in a
competitive global economy” [Neu et al., (1998), p.266].
In the Islamic perspective, the ‘social contract’ has to do with the congruency of the
value system of organisation to the larger value system of Islamic society. The IB should
disclose all necessary information to inform stakeholders about their operations. In
Islamic perspective, the Islamic society (Umma) has the right to know how IB that are
part of the society affect its wellbeing (Maali et al., 2006). Hence, banks which claim to
be Islamic should uphold the Shari’ah principles and hence the disclosure is a way to
discharge their responsibility and to earn legitimacy as an Islamic organisation.
While there are several studies on accounting and accountability of IBs, most of the
prior studies have been concerned with the overall reporting of Islamic businesses (Maali
et al., 2006). Islamic banking has expanded rapidly both inside and outside the Islamic
world during the past few decades. More specifically, in the context of Indonesia, which
is the world’s most populous Muslim nation, the Islamic finance and banking industry
grows at a rate of 30% to 40% annually (Kepli and Yazid, 2013). While the market share
for Islamic banking in Indonesia is only four percent, it is growing twice as fast as the
conventional banking in the country and the Islamic banking industry can largely
contribute to the country’s economic and social development in years to come (Kepli and
Yazid, 2013). Given the significance of Islamic banking for Indonesia as a fast-growing
emerging economy, understanding the level of social responsibility disclosure of
Indonesian IBs can provide invaluable insights on the nature and level of social
responsibility practices by these banks and allow an evaluation of the results from the
perspective of legitimacy bestowed by Islamic principles and Shari’ah. Legitimation
refers to the characteristic of being legitimised by being placed within a framework
through which something is viewed.

3 Literature review

Given the close ties between the concept of IBs and religion, the IBs are expected to have
an ‘ethical identity’, where social goals are as important as making profit (Haniffa and
Hudaib, 2007). However, some researchers argue that IBs are often perceived to be more
of an economic nature than an Islamic nature (Useem, 2002). This is perhaps why there is
a general scepticism towards the purity and sincerity of the motives of IBs. Nonetheless,
IBs and financial institutions are obtaining a growing acceptance by society, regardless of
political, geographical, and religious boundaries (Ahmad, 2004).
Although a number of previous studies have examined the social responsibility
practices and ethical identity of IBs, there is still a dearth of studies to investigate the
commitment of IBs towards social responsibility and the changes in their social
responsibility practices over a course of time. In an effort to explore the ethical identity of
IBs, Haniffa and Hudaib (2007) conducted a longitudinal study of the annual reports of
seven IBs for a three-year period. Through measuring the Ethical Identity Index (EII),
they found a gap between the communicated and ideal ethical identities. Hassan and
Harahap (2010) examined the disparity between corporate social activities disclosed in
the annual reports of IBs and the CSR disclosure index, by examining seven IBs. They
362 F. Darus et al.

found that most of the investigated IBs did not give priority to CSR and had a low score
in CSR disclosure index.
While Dusuki and Abdullah (2007) indicate that the concept of CSR should be
naturally embedded in IBs according to divine revelation, by comparing the CSR
disclosure of Islamic and conventional financial institutions, Aribi and Gao (2010) found
significant differences in their level and extent of disclosure. In a study of Shari’a-
approved companies in Malaysia, it was found that not all of them revealed their social
activities in the annual report (Yahya et al., 2005). Additionally, the study found a
positive relationship between the level of social responsibility disclosure and the number
of Islamic equity funds holding shares in the companies.
In a recent effort to examine the level of compliance with AAOIFI accounting
standards, Vinnicombe (2012) studied Islamic financial institutions in Bahrain and found
that although compliance was higher for some Islamic issues than for others, there was no
indication of an increased level of compliance over the four years for the sample
institutions.
Since banks are experiencing increasing levels of customer dissatisfaction (Arbore
and Busacca, 2009), it is crucial for them to disclose social responsibility information to
present a responsible image of the bank, to legitimise their actions, strategies and
decisions, and to develop connections with their key stakeholders (Branco and Rodrigues,
2006). Social responsibility literature indicates the need for obtaining organisational
legitimacy as a major driving force for social responsibility disclosures (Chen et al.,
2008; Deegan et al., 2002; Rahaman et al., 2004). A number of studies have also
examined the CSR disclosure of companies which operate in accordance with Islamic
principles (Anuar et al., 2004; Yahya et al., 2005).
Cebeci (2012) investigated the degree of social contribution by the Islamic financial
system in terms of social maslahah, which is a concept that requires corporations to go
beyond social responsibility. The study revealed the lack of required structural
mechanisms for fulfilling the social maslahah in a sustainable manner by Islamic
financial institutions. Zubairu et al. (2012) investigated the social responsibility practices
of four IBs in Saudi Arabia over the years 2008–2009. The study could not find the
expected Islamic ethics in the surveyed IBs, and they were found to have much more in
common with the conventional banks than the expected Shari’ah-based ones.
In another study, Musa (2011) examined the relationship between the Islamic
business ethical norms and the practices of IBs in Malaysia, and found that the practices
of the IBs in Malaysia were compatible with the Islamic ethical norm in business. Al-
Sharbati (2005) investigated the methodology and approaches of the Qur’ān in
demonstrating ethics related to financial transactions, while Musa (2007) analysed the
ethics related to business as established by Prophet Muhammad and reported in the major
books of Hadith. Additionally, according to Maali et al. (2006), the social role is
specified or at least mentioned in many IBs’ articles of association which highlights the
importance of Islamic principles in contributing to social issues. The study by Hamid
(2004) investigated the social responsibility disclosure of banks and finance companies in
Malaysia and revealed that product/service related disclosures were more frequent than
environmental and energy, human resources or community-related disclosures. The
findings also suggested that size, listing status and age of business were positively
associated with social responsibility disclosure, whereas profitability was not, hence
indicating that legitimacy theory may be an explanation of social responsibility disclosure
by Malaysian banks and finance companies.
 Social responsibility reporting of Islamic banks 363

Hence, this study is conducted to further understand the current level of disclosure on
sustainability themes by IBs in Indonesia, which is observed through several years from
2007 to 2011. In this way, we would be able to observe changes in terms of the trend with
regards to the observed dimensions. This will provide strong underlying basis to
understand the CSR reporting phenomenon among IBs in Indonesia.

4 Methods

Corporations often use annual reports and websites to communicate their social and
environmental initiatives with stakeholders to legitimise their activities and obtain
approval for their operations in the society. Previous studies have applied various
methods including content analysis of CSR reports, annual reports and websites
(Chaudhri and Wang, 2007; Gill et al., 2008; Sweeney and Coughlan, 2008; Tang and Li,
2009) and interviews with business executives in different national or industry contexts
(Gulyás, 2009; Wang and Chaudhri, 2009) to investigate the CSR discourse of
corporations.
The current study conducted a comprehensive content analysis of the annual reports
of three fully-fledged local IBs operating in Indonesia for the time frame of 2007 to 2011,
which allows investigating the trend in social responsibility reporting of the IBs. Even if
corporations use many other channels for reporting and disseminating information (e.g.,
press releases, meetings with analysts and journalists, interim financial statements, and
other separate reports), the annual statements represent the most important source of
information about the corporation (Adams et al., 1998). Moreover, annual reports have
been used in numerous earlier studies about disclosures (e.g., Haniffa and Hudaib, 2007;
Hassan and Harahap, 2010). The three selected banks represent the total population of
full-fledged IBs in Indonesia. We intend to investigate the extent of their reporting
practice based on the reporting framework that complies with the Islamic principles. This
study merely used annual reports as the source of data as none of the investigated banks
provided comprehensive CSR reports and the information provided on their website
regarding CSR was merely a summary of the content provided in their annual reports.
Table 1 provides the contextual information about the population of this study.
Table 1 Contextual information of the study population

Name of the bank Founded Type Headquarters URL

Bank Muamalat 1991 Public Jakarta, Indonesia http://www.muamalatbank.com
Bank Mega Syariah 1990 Public Jakarta, Indonesia http://www.megasyariah.co.id
Bank Mandiri Syariah 1955* Public Jakarta, Indonesia http://www.syariahmandiri.co.id
Note: *This bank was established under a different name (National Industrial Bank) and
renamed to Bank Syariah Mandiri in 1999.
The following six themes were adapted from guidelines of AAOIFI (2005), Haniffa and
Hudaib (2004), and Hassan and Harahap (2010) and were applied to examine the CSR
disclosure activities of the banks:
1 strategy
2 governance
364 F. Darus et al.

3 product
4 community development and social goals
5 employees
6 environment.
The above mentioned themes have a number of sub-themes which have been listed in
Appendix. For example, there are two sub-themes under governance including Top
management and Shari’ah compliance. As for scoring of the CSR disclosure, an equal-
weighted index was applied, using the following calculation:
mi
dj
∑N
i =1

The index shows the level of disclosure for a company, where N is the maximum number
of relevant items a bank may disclose and di is equal to 0 if there is no disclosure and 1 if
there is disclosure. Table 2 shows the main elements under each thematic category.
Overall, 78 constructs were developed as indicators of the index. The disclosure score
was measured separately for each year for each of the banks providing a platform to
observe the disclosure trends over the years. A detailed version of the constructs for the
CSR Disclosure Index of IBs is available in the appendix.
Table 2 CSR Disclosure Index

Theme Key elements Score

Strategy • Corporate vision 4
Governance • Board of directors and top management 15

• Shari’ah compliant 15
Product • Product, services, and fair dealing with supply chain 8
Community development • Strategic social development 13
and social goals
Employment • Employees 10
• Research, development and training 5
Environment • Environment 8
Total score 78

5 Findings and discussion

Table 3 presents the total score for the social responsibility disclosure for the three banks.
The results from the table indicate that only two of the investigated banks (namely Bank
Mandiri Syariah Indonesia and Bank Muamalat Indonesia) had continuous improvement
in their SR disclosure starting from a total score of 42 and 45 in 2007 respectively and
reached over 55 reported items in 2011. The peak disclosure was achieved by Bank
 Social responsibility reporting of Islamic banks 365

Mandiri Syariah Indonesia which reported a total score of 62 out of the 78 items in 2011.
Surprisingly, Bank Mega Syariah Indonesia did not show a consistent improvement in its
SR practices and according to its disclosed reports, the best SR performance for this bank
was observed in 2009, with a total score of 51. This finding can be explained by
differences in size of the banks, as both Bank Mandiri Syariah Indonesia and Bank
Muamalat Indonesia are larger than Bank Mega Syariah and own the majority of the
market share in Islamic banking compared to Bank Mega Syariah. This finding is
consistent with the notion of Reverte (2009) who argues that one of the most influential
variables for explaining firms’ variation in CSR ratings is size. Larger companies will
always be visible to stakeholders, which can indirectly create a pressure for such
companies to have better reporting.
Table 3 Total score for CSR disclosure of full-fledged IBs in Indonesia

Year
IB
2007 2008 2009 2010 2011
Bank Muamalat Indonesia
Total score (out of 78) 45 46 48 52 56
Percentage (%) 58 59 62 67 72
Bank Mega Syariah Indonesia
Total score 39 48 51 43 44
Percentage (%) 50 62 65 55 56
Bank Mandiri Syariah Indonesia
Total score 42 47 54 61 62
Percentage (%) 54 60 69 78 79

Figure 1 shows a summary of the overall disclosure status by the three investigated IBs
during 2007 to 2011.

Figure 1 SR disclosure by three Indonesian IBs (2007–2011) (see online version

for colours)
366 F. Darus et al.

Table 4 presents the mean score of SR disclosure for the three banks based on themes of
SR disclosure. The results from Table 4 revealed that the highest mean score for all 5
years is for the theme strategy followed by governance. This is an interesting finding as it
shows that SR in all the banks is not just an ad hoc activity, and is embedded in the vision
of the organisation. The findings are in line with the Islamic concept of corporate
governance that stresses three main areas, namely, accountability, transparency, and
trustworthiness (Saroni, 2008). As such, the IBs in Indonesia are disclosing more
information related to their corporate vision and governance structure to ensure
compliance with Shari’ah and to appear legitimate as an Islamic organisation. The lowest
mean score is for environment for all the years. The low mean score for environment
suggests that IBs are not focusing their SR activities on taking care of the environment.
This is contrary to the objective of Shari’ah where managers of IBs, as vicegerent
(khalifah), have a duty to take care of the environment to ensure sustainability of the
ummah. It may also be due to the nature of the bank itself which is human capital based
rather than directly impacting the environment.
Table 4 Mean score of SR disclosure based on key themes (2007–2011)

Mean score
Themes
2007 2008 2009 2010 2011
Strategy 0.87 0.87 0.93 0.93 0.93
Governance 0.73 0.74 0.76 0.77 0.8
Product 0.37 0.4 0.6 0.6 0.67
Community development and social goals 0.31 0.69 0.74 0.64 0.64
Employment 0.58 0.56 0.56 0.62 0.62
Environment 0.13 0.13 0.25 0.38 0.42

Table 5 Percentage of SR disclosure

Banks Dimensions 2011 2010 2009 2008 2007

Muamalat Corporate vision 100% 100% 100% 75% 75%
Indonesia
BOD and top management 93% 93% 93% 87% 93%

Shari’ah compliant 80% 73% 73% 67% 80%

Product, services and fair dealing with 50% 50% 50% 13% 13%
supply chain

Strategic social development 69% 62% 77% 77% 62%

Research, development and training 40% 40% 60% 60% 60%

Employees 70% 60% 20% 50% 50%

Environment 50% 50% 13% 13% 13%
BOD and top management 93% 93% 87% 87% 87%

Shari’ah compliant 80% 80% 67% 67% 60%

 Social responsibility reporting of Islamic banks 367

Table 5 Percentage of SR disclosure (continued)

Banks Dimensions 2011 2010 2009 2008 2007

Mega Corporate vision 100% 100% 100% 100% 100%
Syariah
Indonesia BOD and top management 87% 87% 93% 87% 87%

Shari’ah Compliant 47% 40% 47% 47% 47%

Product, services and fair dealing with 63% 38% 75% 63% 50%
supply chain

Strategic social development 46% 54% 69% 62% 0%

Research, development and training 60% 60% 60% 60% 60%

Employees 50% 60% 70% 70% 70%

Environment 13% 13% 13% 13% 13%
Mandiri Corporate vision 75% 75% 75% 75% 75%
Syariah
Indonesia BOD and top management 93% 93% 87% 87% 87%

Shari’ah compliant 80% 80% 67% 67% 60%

Product, services and fair dealing with 88% 88% 50% 50% 50%
supply chain

Strategic social development 77% 77% 77% 69% 31%

Research, development and training 60% 80% 60% 80% 80%

Employees 80% 70% 70% 30% 40%

Environment 63% 50% 50% 13% 13%

Table 5 summarises the mean score of disclosure for each of the main key elements of the
CSR index for all three banks investigated in the study. The results from Table 5 revealed
that almost all of the disclosure indices have improved over the course of time, except for
the dimension Research, development and training, strategic social development and
employees. The employees dimension constantly decreased for Bank Mega Syariah
Indonesia. Additionally, the research, development and training score was at its lowest
point in 2011 for two of the three banks, namely Bank Mandiri Syariah Indonesia and
Bank Muamalat Indonesia. It is also astonishing to find that the strategic social
development for Bank Mega Syariah is decreasing. Strategic social development can be
considered as an important key element under the theme community development and
social goals which indicates whether the company is really serious about SR to
community or not. Such a trend may send the wrong message to the stakeholders of the
bank.
To gain a better understanding of the social responsibility practices of investigated
banks, the disclosure status for the three IBs was examined using the bar charts (Figures 2
to 4).
368 F. Darus et al.

Figure 2 Disclosure Index for Bank Muamalat Indonesia (2007–2011) (see online version
for colours)

Figure 3 Disclosure Index for Bank Mega Syariah Indonesia (2007–2011) (see online version
for colours)
 Social responsibility reporting of Islamic banks 369

Figure 4 Disclosure Index for Bank Mandiri Syariah Indonesia (2007–2011) (see online version
for colours)

Figure 5 Average SR disclosures in 2011 (see online version for colours)

Notes: Theme 1: Strategy, Theme 2: Governance, Theme 3: Product,

Theme 4: Community development and social goals, Theme 5: Employment,
Theme 6: Environment
370 F. Darus et al.

Table 6 Illustrative examples of social responsibility

SR themes Illustrative example

Strategy Bank Muamalat: Being the pioneer of Islamic banking in Indonesia, Bank
Muamalat Indonesia continues to strive to grow by sticking to the values
and ethics of Islamic finance, as well as contribute to improve the local
economy in a professional manner so as to provide tangible benefits for
the stakeholders and society at large.
Bank Mega: Providing the best Islamic financial services for all people,
through superior organisational performance, to increase the added value
for stakeholders in the welfare of the nation.
Bank Mandiri: It is our vision to be the most trusted and preferred
Shari’ah bank for business partners by maintaining competency and
integrity.
Governance Bank Muamalat: The principles of Islamic corporate governance which
are in accordance with best practices at national and international
standards together with the values that exists in Bank Muamalat
Indonesia, forms the basis for the bank to continue to be the best bank in
the implementation of good corporate governance (GCG).
Bank Mega: Shari’ah Supervisory Board; compliance function is also
supported by personnel who have knowledge and understanding of the
operational Shari’ah banking.
Bank Mandiri: GCG becomes an important element for Bank Syariah
Mandiri (BSM) to maintain sustainable growth and to become world-class
Shari’ah banking company. Further, as one of the biggest and influential
Shari’ah Banks, BSM is committed to be involved in the growth of
Indonesia by contributing significantly to the economy of Indonesia and
to become a model for other companies, especially other banks, in
implementing GCG.
Product Bank Muamalat: The bank has a Shari’ah Supervisory Board to ensure the
good conduct in accordance with Shari’ah principles.
Bank Mega: All products and services are based on the principle for
products and transactions which puts the real sense of justice, goodness,
and help one another in order to realise the benefit of all sections of the
community (rahmatan lil alamin).
Bank Mandiri: All products dealing with the saving activity, chanelling
fund and services offered are in line with the fatwa DSN –MUI and BI
regulation. All new released products have been consulted to Board of
Shari’ah Supervisory due to the principles of Shari’ah.
Community Bank Muamalat: Providing aid to underprivileged patients in hospital
development and Swamp Lumbu, Jakarta, and Signing a memorandum of understanding for
the formation of Zakat Management Units (UPZ)
social goals
Bank Mega: Channelling zakat corporation distributed through some
agencies receiving alms, infak, and charity.
Bank Mandiri: As a form of Bank awareness to the community and
environment, CSR programs are continuously performed and developed
for the common welfare.
 Social responsibility reporting of Islamic banks 371

Table 6 Illustrative examples of social responsibility (continued)

SR themes Illustrative example

Employment Bank Muamalat: Performance management system to assess and reward
employee performance
Bank Mega: Improvements in the field of human resources is also done
through the provision of appreciation and sanctions (reward and
punishment) firmly and consistent to the officer. Competency
development of officers continues to be done through a variety of
training.
Bank Mandiri: Rewards for employee, i.e., quarterly work unit
achievement allowance (TPUK), incentive and bonus; balanced score
card (BSC) implementation for performance management.
Environment Bank Muamalat: GCG to minimise the risk and become a role model
Islamic financial institution with an emphasis on entrepreneurial spirit,
management excellence and innovative investment orientation to
maximise value for stakeholders.
Bank Mega: Good risk management compliance to minimise the impact
of risk as early as possible.
Bank Mandiri: Seed procurement at Cicadas Village Subang.

Furthermore, an in-depth investigation of the bank’s SR disclosure in 2011 (Figure 5)

reveals that Bank Mandiri Syariah Indonesia has a more balanced disclosure across all
the six themes compared to the other two banks which show more fluctuations across
different SR themes. Additionally, the highest average disclosure is on the first two
themes, namely strategy and governance. On the other hand, the weakest social
responsibility reporting belongs to Bank Mega Syariah Indonesia, as it has the lowest
disclosure score in the environment and community development & social goals themes
among the three investigated banks.
Prior literature suggests that in an effort towards strategic CSR, firms should engage
in issues which are more closely tied to the firm’s business and agenda (Porter and
Kramer, 2006). While environmental impact of banking sector is not comparable to other
sectors such as manufacturing, their social impact could be significant. In addition, the
banking sector is highly dependent on their employees. IBs can also positively impact
society through Zakat payment and funding to organisations that provide benefits to the
community. Hence, it is expected that banks especially IBs should show more
commitment towards these sustainability themes and disclose more items in these areas.
Since social responsibility practices were shown to have positive impact on the
organisational image (Amran and Nejati, 2012), the Islamic banking sector might be
encouraged to engage more in responsible practices towards their primary stakeholders.
To provide a better picture of the nature of these practices by the banks, some
illustrative examples of social responsibility practices under each of the investigated
themes will be provided in Table 6 by the three banks.
Table 6 provided some illustrative examples about the social responsibility practices
from each of the three banks under each of the main themes. The next section will
conclude the paper and explain the study limitations and directions for future research.
372 F. Darus et al.

6 Conclusions

Overall, the findings from this study indicate that two of the three fully-fledged IBs in
Indonesia (namely Bank Mandiri Syariah Indonesia and Bank Muamalat Indonesia)
showed a continuous improvement in their social responsibility disclosure over the 5-year
period even though the disclosure made did not cover the whole range of the key
elements for the themes examined. Surprisingly, the key element for Shari’ah
Compliance, which is the core reason for the establishment of IBs, did not have a high,
consistent or improving disclosure score as would be expected. Such findings can
threaten the legitimacy of IBs which were set up on the desire to operate based on the
values and principles of Shari’ah. The overall low disclosure score under Environment
theme implies that the banking industry perceives to have low environmental impacts.
However, such findings are not in line with Islamic principles where, as representatives
of God on Earth, humans are entrusted to ensure that the Earth that is loaned to us will be
sustained indefinitely.
While employees are among the most important stakeholder groups and assets of
banks, this study revealed a relatively low SR disclosure with regards to employees,
which could indicate a lower practice of social responsibility towards this group. Since
practicing social responsibility improves relations with employees (Nejati et al., 2012),
enhances employees’ level of satisfaction, and creates a sense of belonging to the
company for them (Murillo and Lozano, 2006), managers of IBs should carefully revise
their SR policies to reflect the demands of their employees.
In summary, the investigated IBs fail to have a full disclosure on all dimensions and
the level of disclosure for some categories declined throughout the years, indicating the
failure of the respective bank to improve upon or at least maintain their transparency and
disclosure levels. Surprisingly, some of the investigated IBs do not have a high,
consistent or improving disclosure on Shari’ah compliance. This seems to contradict
legitimacy theory and signals a threat for the legitimacy of the IBs. Once an organisation
fails to fulfil society’s expectations, then a company’s actual or perceived behaviour will
no longer be in accordance with social values and norms, resulting in a breach of the
social contract and ultimately developing a legitimacy gap.
The overall low disclosure of the investigated banks on environment can be explained
through legitimacy theory, as previous studies applying this theory indicate that social
responsibility disclosure is proportionate to the level of sector’s environmental impact
(Adams et al., 1998; Campbell et al., 2003; Clarke and Gibson-Sweet, 1999; Patten,
1992, 2002; Patten and Crampton, 2003). Hence, the banking industry, which has a lower
perceived environmental impacts than other sectors, is expected to have a lower
disclosure on environment.
Bank managers and financial policy-makers may observe several implications from
this study. First, there is an inconsistent performance with regards to SR disclosure by
IBs in Indonesia, which could negatively impact their image and performance in the long-
run. Secondly, employees which are often the volunteers and organisers of SR initiatives
at banks should not be ignored by the top management in the banks’ SR policy and
initiatives. Additionally, as results of prior studies reveal that involvement in socially
responsible initiatives enables corporations to gain competitive advantage in terms of
reputation and ability to attract quality employees (Weiss, 2008), HR managers at IBs
may also include a summary of their SR practices in their promotional campaigns.
 Social responsibility reporting of Islamic banks 373

Finally, managers of IBs should view SR holistically from an Islamic perspective and
formulate their SR policies and practices in line with the objective of Shari’ah for the
benefit of the ummah. This will maximise the benefit from the socially responsible
activities (Porter and Kramer, 2002, 2006). Overall, this study provided further insight
about the status and trend of SR disclosure by three large IBs in Indonesia, and offered an
opportunity for IBs (and their stakeholders) to be self-conscious of their actual social role
and the claims they make to that role (Kamla and Rammal, 2013). This study contributed
to the growing body of knowledge on social responsibility reporting by Islamic financial
institutions which is crucial as little is known of SR disclosure practices in the annual
report of IBs (Hassan and Harahap, 2010). Moreover, Southeast Asian banks have
generally been examined only as a small part of the global study of Islamic banking
(Abdullah et al., 2013; Farook et al., 2011). Thus, this study provided a new perspective
from IBs in Indonesia. Additionally, by showing the low level of disclosure by IBs under
the Shari’ah Compliance category, this study raises a new question on the extent to which
IBs might deviate from their core objectives to actively operate in accordance with
Islamic principles.
Since the sample of the study involves the whole population of fully-fledged IBs in
Indonesia, it provides an in-depth insight from an emerging economy. Future studies may
investigate the impact of socially responsible practices and disclosure on primary
stakeholders, specifically employees and bank customers.

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Appendix

Detailed CSR Disclosure Index of IBs

Theme 1: Strategy
Corporate vision
• operates within Shari’ah principles
• FOCUS on stakeholders and distribution of profit
• appreciation to shareholders and customers
• building long-lasting relationships with customers

Theme 2: Governance
Top management
• name of the board of directors
• position of the board members
• academic qualifications of board
• profile of the board of directors
• remuneration of the board of directors
• shareholding of the board of directors
• various sub-committees which exist and number of meeting held
• audit committee exists
• multi-directorship exist among board of directors
• name and position of the management team
• member in the subcommittee of the management team members
• academic qualifications of the management team
• governance structure of the IB including committees under the highest governance
body responsible for specific task, such as setting strategy or organisational oversight
• mechanism for shareholders and employees to provide recommendations or direction
to the highest governance body and annual general body meeting
• risk management practices

Shari’ah compliant
• name of Shari’ahh Supervisory Board (SSB) members
• qualifications of SSB members
378 F. Darus et al.

• number of SSB members

• remuneration of members
• report sign by all members
• number of meetings held
• examination of documents based on sample
• examination of all documents
• no defects in products
• report defects in product
• report of SSB
• nature of unlawful transactions
• certification of distribution of profits/losses complying to Shari’ah
• Zakah calculated according to Shari’ah
• Shari’ah screening during investment

Theme 3: Product
Product, services, and fair dealing with supply chain
• introduction of SSB-approved new product
• basis of Shari’ah concept on new products
• glossary/definition of new product
• no investment in non-permissible activities
• nature of unlawful transaction
• fair dealing with those in supply chain
• promotion of research and development
• market survey and feasibility report

Theme 4: Community development and social goals

Strategic social development

• funding to organisations that provide benefits to community for social equity
• fostering strong links with the community/public service
• creating job opportunities
• amount spent in community activities
• participation in government-sponsored social activities
 Social responsibility reporting of Islamic banks 379

• Zakah payment – monetary

• Zakah payment – beneficiaries
• Qardh-Hassan – monetary
• Qardh-Hassan – beneficiaries
• Sadaqah – monetary
• Sadaqah – beneficiaries
• community cohesion
• debt policy and amount of debts written off

Theme 5: Employment
Employees
• equal opportunities policy
• employees’ welfare
• ensuring diversity
• training: Shari’ah awareness
• training: professional skill
• Encouraging talent
• keeping policy of international labour standard
• reward for employees
• employees’ appreciation
• focus on safety of staff

Research, development and training

• capacity building
• regular performance and career development report
• strategy formulation and decision making support to the top management
• standardize training curriculum
• database management

Theme 6: Environment
Environment
• introduction of green product
• glossary/definition of green product
 380 F. Darus et al.

• investment in recycling bin project (recycling for nature) and other sustainable
development project
• amount of donation in environmental awareness
• financing in any project which may lead to environmental damage
• investment in sustainable development projects
• initiatives to mitigate environmental impacts of product and services, and extent of
impact mitigation
• focus on risk-based corrective actions

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