POLITICAL AFFILIATION AND CORPORATE SOCIAL RESPONSIBILITY OF ISLAMIC BANKS: EVIDENCE FROM INDONESIA VS. MALAYSIA

• Main Author: Wibisono, Raelis
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/47575
• Institution: Institut Teknologi Bandung

Islamic banking is a banking system that is in accordance with Shariah principles and guided by Islamic economics. Reflecting Islam, as a religion, encourages its members to serve the society, Islamic banks are urged to perform a more proactive Corporate Social Responsibility (CSR) as it portrays the true value of Islam. Aligned with the previous studies, one of the most influential factors towards CSR of Islamic banks is politics. Henceforth, this research aims to investigate the relationship between political affiliation and CSR of Islamic banks. In specific, this study analyzes the political affiliation of Shariah Supervisory Board (SSB) and Board of Director (BOD) as the primary decision makers of CSR by focusing on (1) Indonesian Islamic banks, (2) Malaysian Islamic banks, and (3) Indonesian and Malaysian Islamic banks. The selection of these countries is due to their massive Muslim population and ambitions to become Islamic banking hubs in the Southeast Asia. In total, this research employs 14 Indonesian Islamic banks and 12 Malaysian Islamic banks listed on Financial Services Authority (Indonesia) and Central Bank of Malaysia, respectively, for FY 2014-2018. It is believed that political affiliation has a positive significant relationship with CSR of Islamic banks. In line with the previous studies, this research finding reveals a positive and significant relationship between political affiliation and CSR of Islamic banks in Indonesia and Malaysia. This result is robust to alternative measurements of CSR and political affiliation using panel data regression. In particular, CSR in Indonesian Islamic banks is more affected by politically affiliated SSB, while CSR in Malaysian Islamic banks as well as in Indonesian & Malaysian Islamic banks (combined) are more affected by politically affiliated BOD. This finding can be explained by legitimacy theories where in open communities, like in Indonesia and Malaysia, Islamic banks perform CSR as a way to legitimize their positions in the society by showing their compliance within Shariah principles and society’s value systems. Politically affiliated SSB and BOD are proven to increase CSR as they own better access to key resources and latest government policies. Meanwhile, different results between politically affiliated SSB and BOD might happen due to multiple positions that SSB members hold, hence limited monitoring role, allowing BOD to substitute their decisions. Eventually, given the positive relationship between political affiliation and CSR, this research presents new insights for policymakers to appoint politically affiliated SSB and BOD members in Islamic banks in order to improve CSR.