Islamic Banks & Corporate Social Responsibility

1. Islamic Banks & Corporate Social Responsibility Dr. Abdelkader Chachi Economist Researcher & Trainer Islamic Research & Training Institute Islamic Development Bank, Jeddah, Saudi Arabia

2. Social ResponsibilityIntroduction Human beings social by nature. The value of social responsibility, individually or collectively, recognised throughout history. Emphasised more recently in corporate businesses. Major organisations realise that corporate social responsibility (CSR) as important part of a company's operations. Positive impact on society, staff members, general public and ultimately on the results of the company in long run. Before we look at CSR in Islamic Financial Institutions, let us first look at what CSR is and what it involves. (http://www.islamic-banking.com/csr.aspx)

3. Corporate Social ResponsibilityDefinitions No universal definition of CSR. common understanding from definitions has been built over the years. CSR concerned with how profits are made and how they are used, keeping in mind the interests of all stakeholders. The concept of CSR is constantly evolving. A widely quoted definition by the World Business Council for Sustainable Development states that: "Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large”. (ficci-sedf.org/compo-csr.htm)

4. Corporate Social ResponsibilityDefinitions (cont.) International Chamber of Commerce defined social responsibility to be all the attempts that contribute to the volunteering of co-operations to achieve development for ethical and social reasons. Hence, the advocated CSR depends on good initiatives of businessmen without any legal obligations. And therefore social responsibility is achieved through convincing and educating(IIBI, islamic-banking.com/csr.aspx). In Islam, however, SR in general and not only CSR has voluntary characteristics like Sadaqat (charity) and Awqaf (endowments) that are encouraged but not compulsory and others that are compulsory like the implementation of Zakat and the prohibition of Riba (interest) that are enforced and need to be done.

5. Social ResponsibilityDifferent Views SR involves acting according to some social principles. Principles differ from one society to another depending on their beliefs, worldviews, rules and attitudes. That is why we find at one end some people who think of CSR as a distraction from the fundamental economic role of business. For example Milton Friedman, Nobel Laureate in Economics and author of several books wrote in 1970 in the New York Times Magazine: “the social responsibility of business is to increase its profits” and “the business of business is business” Sources: http://en.wikipedia.org/wiki/Corporate_social_responsibility & http://www.helleniccomserve.com/papoutsykeynote.html

6. Social ResponsibilityDifferent Views On the other, Christos Papoutsy who believes in a moral capitalism that he considers to be the most appropriate means by which our modern, global civilization can empower people and enrich their lives materially and spiritually. No more than superficial window dressing. Attempt to pre-empt the role of government as a watchdog over powerful multinational corporations. Sources: http://en.wikipedia.org/wiki/Corporate_social_responsibility & http://www.helleniccomserve.com/papoutsykeynote.html

7. Social ResponsibilityDifferent Views (cont.) Continental European vs Anglo-Saxon approaches. Even within Europe, discussion very heterogeneous(http://en.wikipedia.org/wiki/Corporate_social_responsibility). Godfrey et al. (2010) tried to reconceptualise CSR into a number of discrete corporate social responsibilities (CSRs), each of which can have a positive or negative social impact. However, CSR has now some common recognised features that have become trends and adopted by all government agencies, corporations and charities all over the world.

8. Corporate Social ResponsibilityDifferent Approaches An approach for CSR becoming more widely accepted is community-based development approach, Corporations work with local communities to better themselves. Common approach of CSR is philanthropy (monetary donations and aid given to local organizations and impoverished communities in developing countries). Another approach to CSR is to incorporate the CSR strategy directly into the business strategy of an organization. Source: (http://en.wikipedia.org/wiki/Corporate_social_responsibility)

9. Corporate Social ResponsibilityDifferent Approaches (cont.) Another approach: Creating Shared Value, or CSV. The shared value model is based on the idea that corporate success and social welfare are interdependent. A business needs a healthy, educated workforce, sustainable resources and adept government to compete effectively. For society to thrive, profitable and competitive businesses must be developed and supported to create income, wealth, tax revenues, and opportunities for philanthropy. CSV acknowledges trade-offs between short-term profitability and social or environmental goals, but focuses more on the opportunities for competitive advantage from building a social value proposition into corporate strategy. Source: (http://en.wikipedia.org/wiki/Corporate_social_responsibility)

10. Corporate Social ResponsibilityComponents of CSR Emerging concept of CSR goes beyond charity and requires the company to act beyond legal obligations and integrate social, environmental and ethical concerns into company’s business process. Business has a responsibility towards its stakeholders and society at large that extends beyond its legal and enforceable obligations. The triple bottom line (people, planet, profit) approach to CSR emphasizes a company’s commitment to operating in an economically, socially and environmentally sustainable manner. Emerging Concept of CSR advocates moving away from a ‘shareholder alone’ focus to a ‘multi-stakeholder’ focus. This would include investors, employees, business partners, customers, regulators, supply chain, local communities, the environment and society at large. Source: http://indiancsr.wordpress.com/2009/04/27/components-of-csr/

11. Corporate Social ResponsibilityComponents of CSR (cont.) No agreement about the components of CSR but common key components include: Corporate Governance: accountability, transparency and conduct in conformity with the laws which enable the company to realize its corporate objectives, protect shareholder rights, meet legal requirements and create transparency for all stakeholders. Business Ethics: relates to value-based and ethical business practices. Workplace & labour relations:Human resources can help in improving the workplace in terms of health and safety, employee relations as well as result in a healthy balance between work and non-work aspects of employees’ life. Affirmative action/good practices: Equal opportunity employer, diversity of workforce that includes people with disability, people from the local community etc., gender policy, code of conduct Source: http://indiancsr.wordpress.com/2009/04/27/components-of-csr/

12. Corporate Social ResponsibilityComponents of CSR (cont.) Supply Chain: The business process is not just limited to the operations internal to the company but to the entire supply chain involved in goods and services. Customers: With increased awareness and means of communication, customer satisfaction and loyalty would depend on how the company has produced the goods and services, considering the social, environmental, supply-chain and other such aspects. Environment: company to engage in such a way that goes beyond mandatory requirements and delivers environmental benefits. Community: A major stakeholder to the business is community in which the company operates. The involvement of a company with the community would depend upon its direct interaction with the community and assessment of issues/risks faced by those living in the company surrounding areas. Source: http://indiancsr.wordpress.com/2009/04/27/components-of-csr/

13. Corporate Social ResponsibilityComponents of CSR Report October 2009, PricewaterhouseCoopers and Craib Design & Communications released CSR Trends 3, a comprehensive survey of CSR report showing trends, benchmarks and best practices. As part of the report, they offered a list of 8 key components that should be part of any CSR report. They are as follows:  1. Scope of report: "road map" tells what is in report and what is not. 2. Description of company and its operations: who runs the company, what the company does and where it operates. 3. Performance domain: "triple-bottom-line" approach covering three performance domains: social, economic, and environmmental. 4. Specific issues of interest to stakeholders: Once the important issues are identified, they should be clearly presented in the report along with an explanation of why the issue is important and how it relates to the company's performance. Source: http://www.green-business.ca/Sustainability-Reporting/Features/eight-key-components-of-csr-reports-a-general-framework.html

14. Corporate Social ResponsibilityComponents of CSR Report (cont.) 5. Company's policies and perspective: company stands vis-a-vis the issues, that reflects management's perspective. 6. Description of company's processes and initiatives to actually manage issues: Company not only talks the talk, but walks the walk. 7. Performance indicators: quantitative performance indicators related to each issue, measuring performance and showing progress. Management's comments on performance (satisfied or dissatisfied) and factors that contributed to success or failure.  8. Future goals and targets: a brief discussion of future performance goals and targets relating to the issues. Source: http://www.green-business.ca/Sustainability-Reporting/Features/eight-key-components-of-csr-reports-a-general-framework.html

15. Corporate Social ResponsibilityTheImpacts of Different Worldviews A particular worldview, or the way people perceive social and material reality, impacts on how they interpret and respond to the world around them. A worldview embodies beliefs and assumptions about reality and guides personal, corporate and social life in a particular direction. Peoples' goals, aspiration, priorities, strategies, commitments, and likes and dislikes, are all, on the whole, are influenced and forged by the worldview they hold. The way people perceive the world shapes their social and political beliefs, and, thus, a worldview underpins social and economic policies and the culture of a community and business organisations. Source: Parvez & Ahmed (2004) An Islamic Perspective on the Lack of Social Responsibility in Business Organizations, Working Papers Series, University of Wolverhampton

16. Corporate Social ResponsibilityIslamic Worldview Islam, as a way of life that encompasses all aspects of human life (economic, political, psychological, cultural, social, etc..) is full of exhortations guiding the human beings (individually as well as collectively) on how to deal responsibly with each other in all these aspects in a manner that is conducive to achieving Falah (prosperity, well-being, welfare, happiness, success, growth, development, etc..). To achieve Falah, according to Islam, is to believe in the Islamic worldview that adds another dimension to the materialistic worldview and to apply Islamic Shari‘ah. The Islamic Shari‘ah (way, law, guidance) whose sources are the Qur’an, the Sunnah (tradition) of the Prophet Mohammed and the Ijtihad (human reasoning and interpretation) covers, among other things, guidance on how to be individually and collectively socially responsible towards others in all aspects of life and not only in corporate businesses.

17. Islamic Banks & Corporate Social Responsibility SR is embedded in the objectives (Maqassid) of Islamic Shari‘ah which aim at protecting all aspects (economic, political, social, psychological, religious, cultural, etc.) of human beings. These are summarized under the protection of their lives, their beliefs, their minds, their wealth and their progeny. Anything that affects any of these objectives positively is welcomed and anything that affects any of them negatively is rejected. Indeed, as Dasuki & Dar (2006) put it: the philosophy of Islamic business as enshrined by the Shari‘ah requires Islamic banks to operate in morally, ethically and socially responsible manner i.e. Conforming to the Islamic norms of business and economic activities. Thus, the concept of CSR is a natural commitment of Islamic institutions particularly Islamic banks whose objectives are directed towards making brotherhood, social equality and equitable distribution a reality in Muslim societies.

18. Islamic Banks & Corporate Social Responsibility Farook (2007) summarises the major foundational principles for Islamic CSR into the following three: 1- The principle of vicegerency which denotes that mankind is the representative of Allah on earth and as such Allah has entrusted mankind with stewardship of Allah’s possession. 2- The principle of divine accountability which flows from the vicegerency principle and denotes that individuals will be accountable to Allah for all their actions on the Day of Judgment. 3- The principle of enjoining good and forbidding evil which encapsulates the responsibilities that Allah places on Muslims as trustees and vicegerents. Farook, S. (2007) “On Corporate Social Responsibility in Islamic Financial Institutions”, Islamic Economic Studies, Vol. 15, No. 1, July 2007

19. Islamic Banks & Corporate Social Responsibility Corporate Social Responsibility (CSR) and Islamic Financial Institutions (IFIs) should have an obvious fit, given the faith-based ethos of Islamic finance, which also gives prominence not only to wealth creation and economic development, but also to the promotion of social justice and concepts based on hard work, thrift and low or no indebtedness (Arabnews, 13/02/2010). Notions of CSR have been suggested to be consistent with an Islamic view of society. Indeed, values and principles that have been central to Islam since the time of the Prophet Mohammed (Peace be upon him) may serve as a foundation for notions of corporate social responsibility (CSR) similar to those in the West (Jawed, 2007)or in fact far more greater.

20. Islamic Banks & Corporate Social Responsibility CSR is one of the most important areas of the activities of Islamic banks. It is the bridge through which Islamic banks fulfill their duty towards their stakeholders and towards the society . Islamic banks use several means and ways to fulfil their social responsibility, such as: Legitimate Profit Maximization for their shareholders and their PLS account holders within the framework of the Islamic Shari‘ah. Just wages and salaries for their employees without discrimination. Fair dealing with customers by avoiding unlawful transactions based on Riba (interest), Gharar (excessive uncertainty) and other prohibited dealings. Practicing good corporate governance. Participation in the fight against illiteracy and poverty in the society. Participation in the protection of the environment

21. Islamic Banks & Corporate Social ResponsibilityQur’anic Evidence on Aspects of Social Responsibility On Human Rights and Equality: “O mankind! We created you from a single (pair) of a male and a female, and made you into nations and tribes that you may know each other (not that ye may despise each other). Verily the most honoured of you in the sight of God is (he who is) the most righteous of you. And God has full knowledge and is well acquainted (with all things)”. (Q49: 13) On Freedom of Belief: “Let there be no compulsion in religion: Truth stands out clear from Error: whoever rejects evil and believes in God has grasped the most trustworthy hand-hold, that never breaks. And God hears and knows all things”. (Q2: 256).

22. Islamic Banks & Corporate Social ResponsibilityQur’anic Evidence on Aspects of Social Responsibility On Establishing Justice: “O you who believe! Stand out firmly for justice, as witnesses to Allah, even as against yourselves, or your parents, or your kin, and whether it be (against) rich or poor: for Allah can best protect both. Follow not the lusts (of your hearts), lest you swerve, and if you distort (justice) or decline to do justice, verily Allah is well-acquainted with all that you do”.(Q4:135): On Honesty and Kindness in Business: "The truthful and honest merchant is associated with the Prophets, the Uprights and the Martyrs" (Al-Tirmidhi ). "God shows mercy to a person who is kind when he sells, kind when he buys and kind when he makes a claim“. (Al-Bukhari).

23. Islamic Banks & Corporate Social ResponsibilityQur’anic Evidence on Aspects of Social Responsibility On Dealing with Employees: Prophet Mohammed (pbuh) said: “Your employees are your brethren upon whom Allah has given you authority. So if one has one’s brother under his control, one should feed him with the like of what one eats and clothe him with the like of what one wears. You should not overburden him with what he cannot bear, and if you do so, help him in his job.” (Sahih Muslim Vol. 3, Hadith No.4093). “Allah (SWT) says: “I will be an opponent to three persons on the Day of Judgement: One who makes a covenant in My Name, but he proves treacherous, One who sells a free person (as slave) and eats the price, and one who employs a labourer and gets the full work done by him but does not pay him wages” (Sahih al-Bukhari Vol. 3: Hadith No. 2).

24. Islamic Banks & Corporate Social ResponsibilityQur’anic Evidence on Aspects of Social Responsibility On Business and Trade: "O ye who believe! Do not squander one another’s wealth in vanities, but let there be amongst you traffic and trade by mutual good will”.(Q4:29. On Community:“Anybody who believes in Allah and the Last Day should not harm his neighbour, and anybody who believes in Allah and the Last Day should entertain his guest generously, and anybody who believes in Allah and the Last Day should talk what is good or keep quiet (i.e. abstain from all kinds of evil and dirty talk)”. (Sahih Al Bukhari, Vol: 8 Hadith 47.

25. Islamic Banks & Corporate Social ResponsibilityQur’anic Evidence on Aspects of Social Responsibility On Philanthropy: “And fear Allah as much as you can, listen and obey; and spend in charity for the benefit of your own souls. And those saved from the covetousness of their own souls; they are the ones who achieve prosperity”. (Q64:16) the Prophet said: “Every Muslim must pay sadaqah (charity)”. The companions asked, “What about someone who has nothing to give?” The Prophet replied: “Then let him do something with his two hands and benefit himself. That will be charity”. The companions asked, “But what if he cannot do that?”. The Prophet replied: “Then he can help someone who is needy”. Again they asked, “But what if he cannot do that?”. The Prophet replied: “Then he should enjoin the doing of good”. Still again they asked, “But what if he cannot do that?”. The Prophet replied: “Then he should give respite from evil, for that is a form of charity”.(Al-Bukhari’s Adabul Mufrad, Hadith No. 225).

26. Islamic Banks & Corporate Social ResponsibilityQur’anic Evidence on Aspects of Social Responsibility On Environmental Matters: Allah says: “And when he goes away, he strives throughout the land to cause destruction therein and destroy crops and animals. And Allah does not like mischievous act. (Q2:205). He also said: “And do no mischief on the earth, after it has been set in order, but call on Him with fear and aspiration. Indeed the mercy of Allah is near to the doers of good”. (Q7:56). "Every Muslim who plants a tree or plants a crop from which birds, people or animals eat shall have a reward for a beneficent act" (Bukhari, Muslim & Tirmidhi) “If the Final Hour is come, and one of you has a palm seedling in his hand and it is within his power to plant it, then let him do so” (Ahmed, Hadith no. 12689).

27. Corporate Social ResponsibilityAAOIFI Governance Standard No. 7 Corporate Social Responsibility The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari‘ah standards for Islamic financial institutions and the industry, issued its Governance Standard No.7 that deals with guidelines on CSR which include: 1 Screening Clients 2 Responsible dealing with Clients 3 Earnings and expenditures prohibited by Shari‘ah 4 Employee Welfare 5 Zakah 6 QardHasan 7 Reduction of Adverse Impact on Environment 8 Social, Development and Environment based Investment Quotas 9 Customer Service 10 Micro, small business and social savings &investments 11 Charitable Activities 12 Waqf Management Source: http://www.dinarstandard.com/maqasid/Islamic_Finance_CSR_Survey.pdf

28. Corporate Social Responsibilityin Islamic Financial Institutions Based on AAOIFI CSR standards, Two leading Islamic Finance Industry service providers, DinarStandard and Dar Al Istithmar, conducted a Survey that was sent to executives of 160 of the largest full and widow Islamic financial institutions. They announced the release of what they called the first-of-its-kind report on CSR in IFIs where they benchmarked IFIs and announced best practices. Some key findings of the survey were as follows: Charity: 76% IFIs indicated that they had polices for charitable activities whilst 17% had none. Charitable activities remains a strong priority for IFIs, but most do not consider utilising their fund mobilizing capabilities to raise funds for charities or emergency causes (only 34% said they do.)  Source: http://www.pr-inside.com/print1699255.htm

29. Corporate Social Responsibilityin Islamic Financial Institutions (cont.) Responsible Investments: 55% responded yes to having some policy in investment quotas on social, developmental and environment-orientated investments, whilst 38% did not have such policy. However, amongst the three types, environmental related investment quotas had the least focus (38%). Clients: 100% of respondents answered yes to having a policy to screen prospective clients which is actively implemented. Similarly 97% have an organizational policy that deals with client responsibly.  Employees: 83% of respondents’ state having policies that provide equal opportunity to all their employees, 93% have policies that ensures merit-based salary and promotion, and 86% having policies that specifically prohibits any kind of discrimination. However, when it comes to having policy to monitor employees from different backgrounds and gender, the response was mix with only 52% admitting to having such a monitoring policy and 48% not having any such policy.  Source: http://www.pr-inside.com/print1699255.htm

30. Corporate Social Responsibilityin Islamic Financial Institutions (cont.) DinarStandard and Dar Al Istithmar, also announced the awards for the leaders amongst the Islamic financial institutions within the following categories: Best Islamic Bank: Jordan Islamic Bank for Finance & Investment, Jordan Best Islamic Window: HSBC Amanah, Global Best Islamic Insurance: T’azur Company, Bahrain Best Employee Policies: Al Baraka Bank, South Africa Best Investment Policies: Jordan Islamic Bank for Finance & Investment, Jordan Best Charitable Activities: Affin Islamic Bank, Malaysia Source: http://www.pr-inside.com/print1699255.htm

31. Islamic Banks & Corporate Social ResponsibilityConclusion Although the recently advocated CSR is very useful in determining the rights and duties of all stockholders, it remains deficient, because it does not prevent all causes of injustice and abuse, and approves many of the Islamically prohibited transactions and unfair dealings such as gambling, selling debts and selling what one does not own which are detrimental to the community. Islamic Shari‘ah requires that all human beings be socially responsible, at all levels (individually and collectively). Islamic Social Responsibility (ISR), if applied correctly and fully, is more comprehensive than CSR, as it protects all the parties of the contracts and financial transactions and prevents the causes of injustice, exploitation, oppression, etc...

32. Islamic Banks & Corporate Social ResponsibilityConclusion (Cont.) Islam requires detailed contracts, and determine the terms and conditions carefully, including out any fraud, or ignorance, or deception. Islam prohibits usury, deceit, fraud, monopoly, gambling, and all that leads to eating people's wealth unlawfully. Islam encourages people to voluntarily abide by its principles to please God and hope for reward and fearing His punishment and punishes those who infringe on the rights of other people. Islam encourages people to be self-controlled and God-conscious, but if they fail, then the legal application takes its course. Othman IbnAffan said: “Allah deters with the rules of governments those who are not deterred by the Qur’an”. For Islamic banks (IBs) and other Islamic Financial Institutions (IFIs) to contribute more effectively to a sustainable development of their industry in particular and economic development in their respective countries in general, they do not need only to be socially responsible but also to be seen socially responsible.

33. Islamic Banks & Corporate Social ResponsibilityReferences Books and Articles Godfrey, et al. (2010) “Toward a General Theory of CSRs: The Roles of Beneficence, Profitability, Insurance, and Industry Heterogeneity£, Business & Society June 1, 2010 49: 316-344 Jawed, Mohammed (2007) Corporate Social Responsibility in Islam, PhD Thesis, AUT University. Parvez & Ahmed (2004) An Islamic Perspective on the Lack of Social Responsibility in Business Organizations, Working Papers Series, University of Wolverhampton Farook, S. (2007) “On Corporate Social Responsibility in Islamic Financial Institutions”, Islamic Economic Studies, Vol. 15, No. 1, July 2007 Websites http://www.csrsingapore.org/whatiscsr.php http://www.dinarstandard.com/maqasid/Islamic_Finance_CSR_Survey.pdf http://www.ficci-sedf.org/compo-csr.htm http://www.green-business.ca/Sustainability-Reporting/Features/eight-key-components-of-csr-reports-a-general-framework.html http://www.helleniccomserve.com/papoutsykeynote.html http://www.hks.harvard.edu/news-events/publications/insight/management/jane-nelson http://indiancsr.wordpress.com/2009/04/27/components-of-csr/ http://ipezone.blogspot.com/2007/11/islamic-banking-csr-concept.html http://www.islamic-banking.com/csr.aspx http://www.pr-inside.com/print1699255.htm http://en.wikipedia.org/wiki/Corporate_social_responsibility http://www.ficci-sedf.org/compo-csr.htm

34. شكرا جزيلا Thank You Very Much Merci Beaucoup Muchas Gracias E-Mail: achachi@isdb.org