Corporate Sustainability and Financial Performance of Banks in Muslim Economies: The Role of Institutions

• Published date: 01 February 2021
• Author: Mudeer Ahmed Khattak
• Date: 01 February 2021
• DOI: http://doi.org/10.1002/pa.2156

ACADEMIC PAPER

Corporate Sustainability and Financial Performance of Banks in

Muslim Economies: The Role of Institutions

Mudeer Ahmed Khattak

Department of Finance, Universiti Kuala

Lumpur Business School, Universiti Kuala

Lumpur, Kuala Lumpur, Malaysia

Correspondence

Mudeer Ahmed Khattak, Universiti Kuala

Lumpur Business School, Universiti Kuala

Lumpur, Kuala Lumpur, Malaysia.

Email: mudeerkhattak@gmail.com

Sustainability performance (SP) provides firms with the opportunities that if strategi-

cally handled could improve the financial performance of these firms through reputa-

tion building. This research aims to investigate the impact of SP on the bank's

performance in Muslim countries. This research further investigates the role of insti-

tutions in moderating the relationship between SP and the banks' financial perfor-

mance. It is found that banks with higher SP tend to have better financial

performance. Furthermore, the marginal results suggest that the impact of SP is

greater for banks in countries with greater institutional quality. These findings are

robust to different proxies of financial performance. It is imperative not only to

report sustainability practices, but it is equally important to publicize these activities.

The sustainable business models would create value for the banks if properly man-

aged and communicated well. This can be made more effective with strong institu-

tions in the country. Moreover, the results are suggesting that banks can enjoy more

through contributing to society, doing their part in the equitable distribution of

wealth, social justice, and economic wellbeing.

JEL CLASSIFICATION

M14; Q01; A13; G21; G30

1|INTRODUCTION

Sustainability practiceshave gained much attentionin recent years with

increasing awareness among the stakeholders of the financial system.

Within sustainability practices, social and environmental concerns are

even of more importance amongpolicymakers and theresearchers. The

terms corporate social responsibility (CSR), environmental social and

governance (ESG), and corporate sustainability are often used alterna-

tively. For clarity, the term sustainability is used in this research. Banks

that have greater financial performance are expected to show extra

effort in promoting sustainability practices. Researchers and practi-

tioners are still not sure of the impact of sustainability practices on the

overallperformance of the banks.The increasing globaltrend in the sus-

tainability practices investments and the information disclosures tell a

lot about the importance of sustainability activities. Among the largest

250 corporations in the world, less than80% reported their sustainabil-

ity performance (SP) in the year 2008 (KPMG, 2008), which currently

stands at 93%according to KPMG (2017).

The management might look at investment in sustainability

practices as an expense on banks shoulders where it is tradition-

ally believed that anything beyond the obligatory investments is

the additional costs and these investments reduce firms earnings

or they might capitalize this through reputation building (Clark &

Viehs, 2014; Margolis, Elfenbein, & Walsh, 2009). Kim and

Lyon (2015) suggest, “the entire environmental regulatory para-

digm is built around the idea that firms must be forced to make

environmental improvements because they would otherwise find

them costly or unprofitable, and thus not undertake them on

their own.”

The proponents of sustainability practices argue that adopting

sustainability investments results in greater financial performance,

thus increased firm overall value (Fatemi, Fooladi, & Tehranian, 2015;

Malik, 2015). The disclosures of such investments result in reduced

information asymmetry and adverse selection costs. Moreover, the

banks' management can use these investments as a tool for relation-

ship building (Healy & Palepu, 2001; Jensen, 2002). These

Received: 18 February 2020 Revised: 13 March 2020 Accepted: 9 April 2020

DOI: 10.1002/pa.2156

J Public Affairs. 2021;21:e2156. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of10

https://doi.org/10.1002/pa.2156