An Analysis on the Behaviour of Corporate Social Responsibility towards Profitability of Islamic Banks: Asean and Europe

Abstract

This study aims to investigate the stability of profitability of Islamic banks resulted from the behaviour of corporate social responsibility in the short term as well as long term taking Indonesia as representative for Asean perspective and Turkey for Europe perspective. The study employs Vector Autoregression (VAR) and followed by Vector Error Correction Models (VECM) if there is co-integration. The IRF (Impulse Response Function) denotes different findings whilst Variance Decomposition emphasizes the most affected profitability variables resulted from the behaviour of corporate social responsibility. IRF result shows only return on asset of Islamic bank in Turkey found to have stability whether in the short terms or long terms. The other variables concluded to have similar pattern for Turkey and Indonesia as they tend to decline even very sharp in the long terms except return on equity for Indonesia has positive response where it tends to increase regardless of the changes in the behaviour or shock of corporate social responsibility. The behaviour of corporate social responsibility in Indonesia mostly influenced return on asset while it influences greatly towards return on equity for Islamic banks in Turkey. The application of corporate social responsibility varies depending on the policy of respective banks that linked to normative and perception of the bank and appears to be more important in disclosing of non-financial information in the annual report. The findings reveal that quite a few challenges lie ahead in shaping proper behaviour of corporate social responsibility that affect profitability of Islamic banks in Indonesia and Turkey. This needs to be taken on promptly by management teams of Islamic banks especially in Indonesia that focus on corporate social responsibility for Muslim society. While profitability variables in Turkey would affect the proper function of corporate social responsibility that aimed for social benefit. This paper is one of few studies which employ VAR/VECM model to investigate and forecast the shock or behaviour of corporate social responsibility towards profitability of Islamic banks in a country who adopt dual banking systems.