Islamic finance and Coprate Social Responsibility

Corporate social responsibility (CSR) and Islamic financial institutions 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.

While the contemporary Islamic banking movement is now in its fourth decade, CSR and corporate governance has been slow to take off in the industry and has started to come to the fore only in the last few years. Several Islamic financial institutions and those conventional institutions offering Islamic financial products and services through windows have had sizeable CSR initiatives partly channeled through Zakat funds or through other concepts such as Sadaqah and Waqf (endowments). Kuwait Finance House, Jordan Islamic Bank, Bank Islam Malaysia, CIMB Islamic Bank and other Malaysian Islamic banks have had active CRS programs for years ranging from financing drub rehabilitation programs in Kuwait, to clinics and girls’ colleges in Malaysia.

On the other hand, the Oasis Group in South Africa, which has an active Islamic asset management and pensions business, has spearheaded a unique mix of CSR with Islamic charitable work. The Oasis Group, according to Vice Chairman Nazeem Ebrahim, has two charitable trusts under the Islamic Waqf concept – the Oasis Group Holdings Trust and The Crescent Fund, which are active in funding good causes including projects in hospitals, sports facilities, old people’s homes and in disaster relief both in South Africa and abroad. One of its more offbeat CSR projects is participation as a sponsor in the Timbuktu project, which is supported by the South African government and managed by experts from the University of Cape Town.

The project involves the restoration of Islamic manuscripts and artifacts; and housing these in a new museum, which is being built by funds allocated by the South African government and donated by South African companies. The University of Cape Town is also training Malians in manuscript restoration and librarianship so that they could manage the museum on completion.

On the downside, however, there has been much neglect of the CSR function by many Islamic financial institutions. There have even been a few cases of abuse of CSR and Zakat funds. Part of the problem is that there has been no proper scrutiny, standard or evaluation of the CSR function in the global Islamic finance industry. The Auditing and Accounting Organization for Islamic Financial Institutions (AAOIFI) in Bahrain issued a CSR standard at the end of 2009, but both governments and financial institutions or there regulatory bodies have failed to leverage this important social asset of Islamic finance.

As such, the publication of “The Social Responsibility Trends at Islamic Financial Institutions” report at the end of January 2010 by the US-based DinarStandard and Dar Al-Istithmar, which claim that it is a first-of-its-kind report, is timely. According to the publishers, the report is primarily based on the aggregate results of a survey on Social Responsibility at Islamic Financial Institutions (IFIs) carried out during the summer and fall of 2009.

The survey sample is unfortunately very limited which must impact on the conclusions and the potential for extrapolation on such a basis. This is a common drawback of survey-based methodology. “All, full or subsidiary, IFIs were eligible to participate and the invitation to participate in the survey was sent to the chief executive officers of 154 of the largest IFIs to complete the survey online or submit it through fax, e-mail or regular mail. Twenty-nine institutions completed the survey with a broad degree of representation from across the world,” stressed the report.

According to the report, some key findings of the survey were: a) 76 percent of respondents indicated that they had policies for charitable activities whilst 17 percent had none. Charitable activities remains a strong priority for IFIs, but most do not consider utilizing their fund mobilizing capabilities to raise funds for charities or emergency causes (only 34 percent said they do); b) 55 percent responded yes to having some policy in investment quotas on social, developmental and environment-orientated investments, whilst 38 percent did not have such policy. However, amongst the three types, environmental related investment quotas had the least focus (38 percent); c) 100 percent of respondents answered yes to having a policy to screen prospective clients which is actively implemented. Similarly, 97 percent have an organizational policy that deals with client responsibly; d) 83 percent of respondents stated that they have policies that provide equal opportunity to all of their employees, 93 percent have policies that ensure merit-based salary and promotion, and 86 percent have policies that specifically prohibit 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 percent admitting to having such a monitoring policy and 48 percent not having any such policy.

Given the limited sample and methodology, the conclusion of the report, said author and senior consultant at Dar Al-Istithmar, Sayd Farook, are premature and sweeping. “This report,” he stressed, “demonstrates, within its limited sample, that Islamic finance is a truly ethical solution to the socio-economic issues facing mankind.”

It is also a pity that the report did not even attempt to define what corporate social responsibility is, especially under Islamic concepts. This may sound obvious but there are disagreements over the nature of CSR and its implementation. In the Islamic finance space, for instance, some Shariah scholars are dead against institutionalizing Zakat and insist that it must be distributed immediately to the poor and needy for immediate relief from hunger and poverty. Others have successfully institutionalized the Zakat function which has resulted in impressive gains in efforts toward social and financial inclusion; poverty alleviation; provision of primary healthcare and education; women’s education, drug rehabilitation and so on.

The other missed opportunity of the report is that its independence is undermined because it was done with the support of AAOIFI. Instead, the report should also have critically evaluated the AAOIFI standard 7 on CSR which was issued under its governance standards, and also examined other codes such as Bank Negara Malaysia’s Management Code of Ethics for IFIs in Malaysia.

Indeed, according to the publishers, the survey benchmarked IFIs with the recently released CSR standards by AAOIFI that cover 13 aspects of social responsibility such as client engagement, employee welfare, charity, environment, investment quotas and others.

Nevertheless, both DinarStandard and Dar Al-Istithmar should be encouraged to continue their work in this vital area. The global financial crisis has highlighted some issues between some banking practices and amorality with the society, communities and the real economy in which they operate. Islamic banking would be naïve to think that the industry is immune to the excesses and vagaries of casino capitalism that has brought the global financial system to the brink of collapse. In fact, concomitant with a culture of poor disclosure and corporate governance in a number of markets, and underdeveloped enforcement and a lack of transparency, the global financial crisis should be a reality check for the Islamic finance sector, albeit it has emerged relatively unscathed than its conventional counterpart.

source : arabnews

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s