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Al-Azhar Journal of Islamic Economics
Volume 3 Nomor 1, Januari 2021
ISSN Online: 2685-6522 | ISSN Print: 2654-5543
DOI: 10.37146/ajie.v3i1.50
Penerbit: Program Studi Ekonomi Syariah, Sekolah Tinggi Agama Islam (STAI) Al-Azhar
Gowa
Al-Azhar Journal of Islamic Economics (AJIE) is indexed by Google Scholar and licensed under a
Creative Commons Attribution 4.0 International License.
Comparative Analysis of CSR Disclosure and Its Impact
on Islamic Banks Financial Performance
Riza Aulia Azhary.
Universitas Islam Negeri (UIN) Ar-Raniry
E-mail: rizaaulia.azhary@ar-raniry.ac.id
Abstract
Corporate Social Responsibility (CSR) is one of indicators reflecting not only a firm financial performance
but also their connection to the stakeholders. This study will analyse the CSR disclosure between two
Islamic Banks in MENA Countries; Boubyan Bank from Kuwait and Ithmaar Bank, a Bahrain origin. By
employing a mixed qualitative-quantitative method, the paper will contrast both financial reports for 5
consecutive years (2011-2015), and utilise CAMEL rating, as the indicators for financial performance.
Furthermore, the data will be analysed intensely using Belal, et al (2015) CSR index. For the non-financial
performance, a deeper analysis of the Chairman’s statement will be conducted through text analysis
software (DICTION and LIWC). The result showed a consistent output, between financial and non-
financial performance, for both banks. Boubyan Bank performed better in terms of financial state, and in
addition, avoided impression management procedure. In contrast, Ithmaar Bank indicated the opposite
result.
Keywords: Corporate Social Responsibility; Financial Performance; CAMEL Rating
1. Introduction
Human-beings as the God’s vicegerent on earth have a responsibility to protect the
nature and the living things covered by the environment. This obligation is embedded
in daily management activities as they turn into homoeconomicus in fulfilling their need
in order to reach prosperity. In accounting and economics perspective, the phenomenon
materialized as the result of deforestation, carbon emission, pollution and climate
change are the responsibility of an entity involved in those environmental area.1
Corporate Social Responsibility (CSR) has become the first priority in business and
competition that indicates a relation and impact between organization’s activities to the
society and surroundings (Mustafa et al, 2012). Under the Sharia perspective, it is a
mandatory for a company, bank in this case, to perform well, followed by a responsible
disclose on their CSR report. Hence, it is important to analyse whether the banks
operated under Sharia are upfront in their activities towards the environment and
completely fulfil their obligation based on Sharia compliance.
1M.S. Ismail, A.Ramli, F. Darus, “Environmental Management Accounting Practices and Islamic Corporate
Social Responsibility Compliance: Evidence from ISO 14001 Companies”. Procedia – Social and Behavioural
Sciences. Vol. 145, 2014. pp. 343-351.
1Al-Azhar Journal of Islamic Economics, Vol. 3 No. 1, Januari 2021
Meanwhile, accountability has a broader meaning for Islamic Financial Institutions
(IFIs), since IFIs need to disclose their activities horizontally, to the board of director and
management, and vertically to the Creator, under the Islamic principles and Sharia
regulation. Thus, full disclosure is urgently needed to share financial, social
performance, and environmental assessment and information to the stakeholders and
specific Islamic Bank’s clientele, namely Investment Account Holders (IAHs), as well as
future investment and risk management prevention and other business decisions. Since
it has a unique structure and product, IFIs need to fulfil two types of disclosure;
universal, which is applied to all banking industry, and particular, a reporting subjected
to the sharia compliance issues.2
The Islamic banking principles obligate the product providers, in this case Islamic Banks,
to fulfil not only the financial disclosure of their annually work period, but also full non-
financial disclosure of Corporate Social Responsibility, Sharia Compliance,
Environmental and Corporate Governance.3 This paper aims to make a comparison
between two Islamic Banks, Ithmaar Bank from Bahrain, and Boubyan Bank from
Kuwait, related to their financial and non-financial disclosure of their annual report,
websites and other reliable sources.
Research Gap
Although there are numbers of literature about how CSR disclosure reflecting on bank’s
financial performance, there is only a single literature that used content analysist as a
measurement to determine the score of CSR. More importantly, in most previous
research, CSR disclosure reporting is mixed with Corporate Governance and Ethical
disclosure as the determinants. However, this paper will only concern in the disclosure
of CSR and the impact of bank’s financial performance.
Focus and Purpose
This paper will analyse the CSR disclosure between two Islamic Banks; Ithmaar Bank
from Bahrain, and Boubyan Bank from Kuwait, for 5 consecutive years starting from
2011 until the recent years, through their annual reports, and thus comparing the result
to the slope of their financial performance, using CAMEL ratios and profitability as the
financial indicator.
The analysist will be undertaken to evaluate several CSR disclosures, such as:
environmental disclosure, social sustainability disclosure, and economic sustainability
disclosure.
2. Research Methodology
Strategy, Sample and Data Collection
The most crucial step in undertaking any kind of research or observation is to pair the
methodology to the research questions.4 Although the CSR disclosure is generally
measured using qualitative method, but in this case, using Belal et al index, the
measurement is translated into binary code, marked 1 for disclose items and 0 for the
2A. Belal, O. Abdelsalam, S. Nizamee,“Ethical Reporting in IslamiC Bank Bangladesh Limited (1983-2010)”.
Journal of Business Ethics. Vol. 129 No.4, 2015. pp. 769-784.
3B. Maali, P. Casson, C. Napier,“Social Reporting by Islamic Banks”. Abacus. Vol. 42(2), 2006. pp. 266-289.
4M. Saunders, P. Lewis, A. Thornhill, “Research Methods For Business Students”. 5th Ed. (England: Pearson
Education Limited, 2009).
2Al-Azhar Journal of Islamic Economics, Vol. 3 No. 1, Januari 2021
contrary, using content analysist.5 Thus, this paper will use both, quantitative and
qualitative approach, since it is perfectly match to numerical measurement to examine
relationship or cause and the effect of phenomena.6
Furthermore, this research will use purposive sampling, as the data is subjective to
Ithmaar Bank and Boubyan Bank.7 To conduct a comprehensive research, annual reports
from both banks for 5 consecutive years (2011-2015) will be analysed intensely using
Belal et al CSR index. Additionally, financial ratios and profit throughout the years will
be generated via BankScope database, from Durham University Library. And finally, to
obtain a deeper analysist, the paper will also analyse the Chairman Statement and
contrast it to the profitability using the text analyser software.
3. Result and Analysis
3.1Financial Performance
1. CAMEL Analysis
Recognized as one of the first pioneer of Islamic Bank in Bahrain, Ithmaar Bank,
established in 1984, indicates a struggling effort to performing well year by year. On the
contrary, Boubyan Bank, one of Kuwaiti Islamic Leading Institution, ranked 9 in the
country Islamic Bank’s Industry. To conduct a deeper analysis related to overall bank
performance, this essay will utilise CAMEL rating system that covers capital adequacy,
asset quality, management quality, earnings ability and liquidity to evaluate bank’s
robustness and quality.8 The supervisory information that analysed through CAMEL
approach is an effective way to determine the bank’s current condition with further
insight since its combine managerial and financial performance assessment.9 The table
describing the information of CAMEL rating of both banks are presented in the first table
of Appendix 1, collected from Bankscope database.
Appendix 1: CAMEL Rating
Ratio Ithmaar Bank Boubyan Bank
2015 2014 2013 2012 2011 Avg 2015 2014 2013 2012 2011 Avg
Capital Adequacy
Total Capital Ratio 12.81 12.11 12.77 12.64 12.88 12.64 17.04 18.05 17.43 24.39 25.06 20.39
Assets Quality
Loan Loss Prov / Net Int -
Rev 414.85 -367.25 -264.67 -351.60 -128.24 -305.32 12.03 16.72 28.15 30.34 26.17 22.68
Management Adequacy
Cost to Income Ratio 71.31 87.93 98.19 85.38 120.56 92.67 43.15 45.48 45.67 47.12 55.34 47.35
Earnings Ability
Net Interest Margin -0.34 0.00 -0.02 -0.19 -0.30 -0.17 3.36 3.22 3.47 3.51 3.23 3.36
Return on Avg Equity
(ROAE) -6.95 -1.18 -10.15 -5.23 -7.27 -0.62 11.32 4.83 9.99 3.77 3.24 6.63
Return on Avg Assets
(ROAA) -0.58 -0.12 -1.11 -0.86 -0.91 -0.72 1.22 1.18 0.62 0.55 0.55 0.82
Liquidity
Net Loans / Dep & S T
Funding 67.28 73.81 70.56 68.24 63.96 68.77 78.07 78.16 78.10 79.17 80.39 78.78
5A. Belal, O. Abdelsalam, S. Nizamee, “Ethical Reporting in IslamiC Bank Bangladesh Limited (1983-2010)”.
Journal of Business Ethics. Vol. 129(4), 2015. pp. 769-784.
6R. Dixon, K. Milton, A. Woodhead, “An Investigation Into the Role, Effectiveness and Future of Non-executive
Directors”. Journal of General Management. Vol. 31(1), 2005. pp. 1-21.
7J.M. Guarte, and E.B. Barrios, “Estimation Under Purposive Sampling”. Communications Ins Statistics –
Simulation and Computation. Vol. 35, 2006. pp. 277-284.
8H.Dincer, G.Gencer, N.Orhan, K. A Sahinbas, “Performance Evaluation of The Turkish Banking Sector After
the Global Crisis ia CAMELS Ratios”. Procedia Social and Behavioural Sciences. Vol. 24, 2011. pp. 1530-1545.
9A.A. Sarker, “CAMELS Rating System in the Context of Islamic Banking: A Proposed ‘S’ For Shariah
Framework”. Journal of Islamic Economics, Banking and Finance. Vol. 2 (2), July – December 2006.
3Al-Azhar Journal of Islamic Economics, Vol. 3 No. 1, Januari 2021
2. Capital Adequacy
The financial strength of one bank is measured by Capital Adequacy Ratio (CAR), which
is determined by bank’s availability of capital to support bank’s risk assets (Dincer et al.,
2011). Both Boubyan and Ithmaar Bank are regulated under one comparable standard
BASEL III that obligates a minimum of 12% of total capital for a safe indicator. Ithmaar
Bank has moderately stable total capital ratio for all the five years. In addition, the bank
scored above the minimum requirement. However, Ithmaar is below the global Islamic
Bank’s capital ratio that scored 26% in average.
In contrast with the Bahraini, Boubyan Bank has a slightly declining trend for the CAR.
It has a good score in 2011 (25.06%), but then the rating plunged to 17.04% for the last
year. Although this result shows no distress to the financial performance, since the bank
scored above the determined requirement. Along with Ithmaar Bank, Boubyan Bank’s
CAR rating is below the world-wide Islamic Bank standard for the consecutive years
(Figure 2, Appendix 1).
3. Asset Quality
Asset Quality is another significant indicator vis-à-vis to Capital Adequacy since the
depreciation of asset become the determiner of solvency risks for most of the time.10 To
calculate the asset quality, the method used by this paper is to compare loan loss
provisions to net interest revenues. Ithmaar Bank reveals minus score on this rating, as
the result of their policy to provide high provision to overcome the global crisis. Aside
from the Bahraini, Boubyan Bank shows a significant decreasing in their provisions,
indicated that they managed to mitigate their loan’s risk (Figure 3, Appendix 1).
4. Management Quality
For some researcher, management quality is determined by a non-financial performance
such as the expertise and educational level of the management,11 or by calculating
operating expense as a percentage of total assets.12 However, this essay will rate
management quality through cost to income ratio that the lower the score, the better the
performance will be. Despite they score above the global standard, Ithmaar Bank has a
downward trend movement from 2011-2015. Boubyan Bank on the counterpart curved
a better slope for all the years and scored below the globe’s standard. Thus, both banks
were success in maintaining their efficiency level. (Figure 4, Appendix 1).
4. Earnings Ability
In this part, the bank’s efficiency is measured by three ratios; Net Interest Margin, Return
on Average Assets (ROAA) and Return on Average Equity (ROAE). For NIM, Ithmaar
Bank scored negative for the consecutive years, whereas Boubyan Bank contrarily
showed positive score even though they cannot achieve the world wide IB’s standard.
As for ROAA, whilst Ithmaar Bank keep scoring far below expectation, Boubyan Bank
scored a remarkable return above the global standard in 2014 and 2015. And for ROAE,
Boubyan Bank made a significant result in the recent year with more than 4 points gap
10A.Roman, A.C. Sargu, “Analysing the Financial Soundness of the Commercial Banks in Romania: An
Approach Based on the CAMELS framework”. Procedia Economics and Finance. Vol. 6, 2013. pp. 703-712.
11H.Dincer, G.Gencer, N.Orhan, , K. A Sahinbas, “Performance Evaluation of the Turkish Banking Sector After
the Global Crisis via CAMELS Ratios”. Procedia Social and Behavioural Sciences. Vol. 24, 2011. pp. 1530-1545.
12A. Roman, A.C. Sargu “Analysing the Financial Soundness of the Commercial Banks in Romania: An
Approach Based on the CAMELS framework”. Procedia Economics and Finance. Vol. 6, 2013. pp. 703-712.
4Al-Azhar Journal of Islamic Economics, Vol. 3 No. 1, Januari 2021
with the world wide, while Ithmaar Bank acknowledged losses as well as the two latter
points as the consequence of their strategy in increasing the provision, peculiarly in non-
performing loans.
5. Liquidity
This measurement is considered as the most vital component since it shows the ability
of the banks to settle their short-term liabilities and deal with the unexpected
phenomenon such as sudden withdrawal from the depositor.13 Thus, to calculate the
liquidity of a bank is to compare the liquid asset to total deposit and short-term funding.
Both banks have a contrast result for this point, as Ithmaar Bank indicated a slightly
increasing trend, Boubyan Bank showed vice versa. They plunged down revealed that
have been succeed in maintaining their liquidity level. But, both Ithmaar Bank and
Boubyan Bank are indicated a lower standard than the global requirement (Figure 8,
Appendix 1).
3.2 Financial Impact on Operational and Policies Changes
Although suffered losses from the analysed years, Ithmaar Bank has made some
significant changes that affected their financial performance. They changed their group
structure by involving the creation of holding company which will be listed on the
Bahrain Bourse and the Kuwait Stock Exchange. This structure will assist them to lower
the risk profile and enhance shareholder value. Another key decision made as well, such
as; initiative for increased revenue, improved margins, the divestment of non-core
assets, and cost reduction across Ithmaar Group. On the contrary, Boubyan Bank has not
made any vital decision or policy that influence their financial performance throughout
the years.
3.3 Islamic Financial Reporting (Zakah, Qard Hassan, Charity Fund)
Related to zakah, Ithmaar Bank does not collect or pay zakah on behalf of its owners and
its investment account holders. But the Independent Auditor and Sharia Supervisory
Board claimed that the Bank has fulfil the requirement of zakah reported in annual
report, comply with AAOIFI FAS-9. As for Qard Hassan, this is a new product launched
in 2015 and has no record for the recent year. In addition, gains made from sources
prohibited by sharia and all the amount collected from customers’ late payment and
penalties were posted to Charity Fund. Conversely, Boubyan Bank is compulsory to pay
zakah, as their local law act no 46/2003, all listed company should pay zakah.
3.4 Non-Financial Performance
1. Narrative Reporting Analysis
The narrative analysis conducted in this essay is utilised DICTION and LIWC as the
tools to find out whether both Banks, Ithmaar Bank and Boubyan Bank, are performing
a bias disclosure, reflected on their Chairman’s Statement, to neglected negative
outcome or to emphasize positive achievement that might led to impression
management.14 Moreover, it can be seen that most of the time the management lack
13A. Roman, A.C. Sargu “Analysing the Financial Soundness of the Commercial Banks in Romania: An
Approach Based on the CAMELS framework”. Procedia Economics and Finance. Vol. 6, 2013. pp. 703-712.
14C.H. Cho, R.W. Roberts, D.M. Patten, “The Language of US Corporate Environmental Disclosure”. Journal
of Accounting, Organizations and Society. Vol. 35, 2010. pp. 431-443; M. Cecchini, H.Aytug, G.J. Koehler, P.
Pathlak,“Making Words Work: Using Financial Text as A Predictor of Financial Events”. Journal of Decision
Support System. Vol. 50, 2010. pp. 164-175; S. Leung, L. Parker, J.Courtis, “Impression Management Through
Minimal Narrative Disclosure in Annual Reports”. Journal of the British Accounting Review. Vol. 47, 2015. pp.
5Al-Azhar Journal of Islamic Economics, Vol. 3 No. 1, Januari 2021
conscientious and might set an asymmetric information that could led to the agency cost
problem.15 This notion is based on agency theory to manipulate the attribution to appear
more favorable for investors as manager have contractual utility maximization
obligation to them.16 As Islamic banks imposed the value amanah they are expected to
disclose their financial statement without impression management.17 Impression
management is indicated by six indicators generated by two software; optimism,
certainty, positive and negative emotion, word count and complexity. These
components will be compared to the Bank’s profitability from year to year.
2. Optimism and Certainty (DICTION)
Optimism is defined as “Language endorsing some person, group, concept or event or
highlighting their positive entailments”. This indicator represents egocentric bias and
used during negative profitability to cover current performance as predictive future
positive performance.18 Meanwhile, certainty is indicating resoluteness, inflexibility, and
completeness to speak ex-cathedra. Impression management is identified when the
company experienced negative profitability and use less certain language to cover their
real performance.19
Language and tone that describe someone’s positive implication is defined as optimism
factor, while certainty is refer to “a language that indicates resoluteness, inflexibility,
completeness, and a tendency to speak ex cathedra”.20 When the company gained a
negative output from their financial performance, profitability in this case, they will use
less words to disclose about that losses and use certain language to cover it.21
Figure 1: Ithmaar Bank and Boubyan Bank Chairman Statement Text Analysis
275-289; J. Godfrey, P. Mather, A. Ramsay, “Earnings and Impression Management in Financial Reports: The Case
of CEO Changes”. ABACUS. Vol. 39 (1), 2003. pp. 95-123.
15S.Leung, L. Parker, J. Courtis, “Impression Management Through Minimal Narrative Disclosure in Annual
Reports”. Journal of the British Accounting Review. Vol. 47, 2015. pp. 275-289.
16D.M. Merkl-Davies, N.M. Brennan, “Discretionary Disclosure Strategies in Corporate Narratives:
Incremental Information or Impression Management?”. Journal of Accounting Literature. Vol. 26, 2007. pp. 116-
194.
17M. Ayub, “Understanding Islamic Finance”. (Chichester: John Wiley & Sons Ltd, 2007).
18A.K. Davis, J.M. Piger, L.M. Sedor, “Beyond the Numbers: Measuring the Information Content of Earnings
Press Release Language”. Contemporary Accounting Research. Vol. 29 (3), 2012. pp. 845-868.
19C.H. Cho, R.W. Roberts, D.M. Patten, “The Language of US Corporate Environmental Disclosure”. Journal
of Accounting, Organizations and Society. Vol. 35, 2010. pp. 431-443.
20Cho, C.H., Roberts, R.W., Patten, D.M. “The Language of US Corporate Environmental Disclosure”. Journal
of Accounting, Organizations and Society. Vol. 35, 2010. pp. 431-443.
21J. Godfrey, P. Mather, A. Ramsay, “Earnings and Impression Management in Financial Reports: The Case of
CEO Changes”. ABACUS. Vol. 39 (1), 2003. pp. 95-123.
6Al-Azhar Journal of Islamic Economics, Vol. 3 No. 1, Januari 2021
In the period of 2012-2013, Ithmaar Bank was suspected to perform in impression
management, since they incurred losses three time bigger than last period, while their
level of certainty is raised. The repetition of such involvement took place between 2014
and 2015, when their losses increase into five times bigger compared to previous year,
whilst both of their certainty and optimism level climbed up to a positive slope.
Compare to Bahraini, Boubyan Bank’s profit is increasing from time to time. As the
result, they are spared from the impression management implementation.
3. Positive and Negative Emotion, Word Count and Complexity (LIWC)
Positive emotions are used by management as a tool for impression management by
emphasizing positive outcome. Meanwhile in reality they incurred loss, and vice versa
with negative emotion.22 In addition, the management will consider in choosing a
complex and long narrative statement to cover the losses.
Figure 2: LIWC Text Analysis of Boubyan Bank
Based on the generated result of DICTION and LIWC, Boubyan Bank has no intention
to involve in impression management act, although their positive and negative emotion
considered as stable and their word count is increasing through times, but those are in
correlated with their profit that raised progressively. On the opposite, Ithmaar Bank
performed impression management during 2011-2013, reflected from their incremental
losses from one period to another, compare to their positive and negative emotion, and
word count and complexity that increase to the opposite slope.
4. Voluntary Disclosure Discussion
In briefly, Ithmaar Bank has a better voluntary disclosure than the counterpart, Boubyan
Bank. Thus, Boubyan Bank might retain their capital since they reveal more financial
disclosure to the annual report, and this is aligned to the capital need theory.23
22D.M. Merkl-Davies, N.M. Brennan, “Discretionary Disclosure Strategies in Corporate Narratives:
Incremental Information or Impression Management?”. Journal of Accounting Literature. Vol. 26, 2007. pp. 116-
194.
23O. H. Abd-Elsalam, & P. Weetman, “Introducing International Accounting Standards to An Emerging
Capital Market: Relative Familiarity and Language Effect in Egypt”. Journal of International Accounting,
Auditing and Taxation, vol. 12(1), 2003. pp. 63-84.
7Al-Azhar Journal of Islamic Economics, Vol. 3 No. 1, Januari 2021
5. Corporate Social Responsibility
Based on Belal et al checklist under corporate social responsibility part, Ithmaar Bank
has proved that they provide more disclosure on the annual report, for CSR and Sharia
Compliance part, vis-à-vis to their reputation from Bahrain, which is adopted AAOIFI
as the guideline and regulation for accounting and financial disclosure. CSR disclosure
is not mandatory originally, but since the Banks are on the Islamic Finance industry, it
has become a social mandatory obligation to give such information to the shareholders.24
Figure 3: LIWC Text Analysis of Ithmaar Bank
4. Conclusion
CSR disclosure is a vital information represented a firm regarded their activities to
connect to stakeholders. Based on analysis on financial performance, utilizing CAMEL
rating as indicators, Boubyan Bank indicated a better performance rather than their
Bahraini counterpart. They showed a significant decreasing in their provisions to net
interest revenues (indicator of asset quality); curved a better slope for all the years in
term of management quality; scored a remarkable return above the global standard for
Net Interest Margin (NIM), Return on Average Assets (ROAA) and Return on Average
Equity (ROAE) for Earnings’ standard; and had been succeed in maintaining their
liquidity level. In the other hand, Ithmaar Bank led in Capital Adequacy indicator by
performing moderately stable total capital ratio for all the five years.
Align with the financial performance, Ithmaar Bank indicated an employment of
impression management, corresponded with their losses over the years. It proved by
their certainty and optimism level that raised steadily following the financial losses.
Additionally, their positive and negative emotion (reflected on Chairman’s statement on
Financial Report) increase to the opposite slope (negative). To sum up, it is mandatory
for firms to disclose their CSR report within Financial Report. Furthermore, a good
performance financially should be subsequently followed by an astonishing managerial
routine described by avoidance of unnecessary, or even manipulative, management
strategies.
24B. Maali, P. Casson, C.Napier, “Social Reporting by Islamic Banks”. Abacus. Vol. 42(2), 2006. pp. 266-289.
8Al-Azhar Journal of Islamic Economics, Vol. 3 No. 1, Januari 2021
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