Corporate Social Responsibilityof Islamic Banks in Indonesia:
A Religious Responsibility?
1Yuliana Sari, 2IsniAndriana, and 3EvadaDewata
1 Accounting Majoring. State Polytechic of Sriwijaya, Indonesia
2Management, Economics Faculty, Sriwijaya University, Indonesia
3 Accounting Majoring. State Polytechic of Sriwijaya, Indonesia
Address For Correspondence:
ABSTRACT
The paper provides an overview of corporate social responsibility (CSR) in Indonesian Islamic bank. The objective of this paper is to examine the issues of CSR in Indonesian Islamic banking. This paper also explores the status of CSR nation to perform CSR activities from the Shariah law perspective. The growing literature on Islamic banking’s business and products, the effort to analyse the CSR also grow in significant way. This paper is a conceptual in nature, which is based on previous researches to examine the meaning of CSR in the context of Sharia law within Indonesian Islamic banks. The discussion in this paper shows that Islamic bank (IB) has religious obligation to comply with the form and substance of Shariah law in all aspects in their business and operations. It is because IB is an agent and representative religious position, whereby IB has to exemplify the interest of stakeholders and at the same time are models to their stakeholders.It is recommended that central bank of Indonesia (BI) as the regulatory authorities standardize the notions of CSR that are mandatory and recommended for IB in Indonesia. This paper state that the limitation of this paper would be interesting for future study to explore other variables to have in depth understanding about CSR in Indonesian Islamic banks.
INTRODUCTION
Islamic banking’s discussion has become an intense field of study that attracting both academicians and practitioners (Hassan & Harahap, 2010). Islamic banking grows very significantly. For example, there is a stable growth at around 5% in 2016, while there is a decline around 7% starting in 2015 compared with 12% in 2014 (S&P Global, 2016). This growth considers driving force behind creating an alternative financial system, where the customer needs to invest in financial products as being in line with human ethics to the traditional or conventional banking system.
The development of Islamic banking (IB) also shows significant growth in Indonesia. According to S&P Global (2016) showed that the growth of IB has indicated a steady growth over the last 5 years, though it has a slow movement in 2015. However, the Indonesian authorities still support the development of IB through a dedicated roadmap to increase the IB’s market share to 15% by 2023.
Both IB and conventional banking system have some similarities and differences. This systems focus on the stakeholders or corporate values or wealth maximization. On the other hand, IB has a primer goal to achieve their corporate values through Islamic law (Shariah). Comparing with conventional banking, IB is committed to guide using Islamic law based on Quran and Sunnah. IB is expected to guarantee the Shariah banking system is able to comply a different banking system in accordance with the principles of justice, benefit, and spiritual balance.Basically, IB also performs similar functions and operations to the conventional banking. IBIslamic as a rapidly growing financial institution, have a role to improve the function of company social responsibility (CSR), just like in conventional banks. IB as one of business entitiesalso practices the principles of CSR like in conventional banks (Alamer, et al., 2015).
CSR is not a new issue in the IB, because CSR does not only rise in conventional banks but also IB, which run their business and operations based on the Shariah law. In Islam, the concept of Shariah emphasizes the form of the devotion of mankind to Allah. In Shariah law, the company not only serves as a caretaker for the stakeholders, but also for the people as the whole responsibilities of their business and operations (BakarMdYusof, 2015).
The implementation of CSR in Indonesian Islamic bank has increase very significantly. In line with the growing of CSR within context of IB in Indonesia, it is needed that the performance complies with the Shariah principles and rules. The general aim is to provide benefits and wealth to the stakeholders.Based on the argument, theobjective of this paper is to examine the issues of CSR in Indonesian Islamic banking. This paper explores the status of CSR nation to perform CSR activities from the Shariah law perspective. The objective of this paper is significant in obtaining a proper explanation on the religious corporate objective in Indonesian Islamic bank.
The structure of this paper is as follows: section 2 reviews of the previous literature. Section 3 describes briefly on the methodology of this paper. Section 4 offers the discussion to answer the objective of this paper, and section 6 draws the conclusion from this paper.
LITERATURE REVIEW
Corporate Social Responsibility of Islamic Bank from Shariah Law Perspective
The development of IB was due to the weaknesses of conventional banking system (Ahmad & Hassan, 2007; Lewis & Algaoud, 2001). However, there are some business activities from IB, which are similar with the conventional banks, such as CSR. CSR in IB is the Shariah commitment to be translated from the philosophy underlying from their establishment. Further, Dusuki & Abdullah (2007b) pointed that IB has three important values: IB endeavours for a moral, unbiased and balanced society, as envisioned by Islamic economics, IB is developed upon the principles of humanity and cooperation, and a system of equity and risk sharing, and IB as a grounded system for the ethical and moral framework of Shariah law, which is categorised by ethical norms and social assurance.
The IB business and operations are not only based on the government rules and regulations, but also the obligation to comply with the Shariah law. Further, IB financial activities and transactions do not contradict with the Shariah law. For example, IB is forbidden to finance any business, which is involved with pork, pornography, tobacco, gambling, and alcoholic’s liquor. IB must bring ethical values and CSR to their banking practices due to IB are required to comply with Shariah law, which is loaded with religious and moral values (Dusuki & Abdullah, 2007b; Nathan & Ribiere, 2007; Kahf, 1999).
The values in IB show that IB has a unique identity to promote their entrepreneurship, trade and commerce, and bring societal development or benefit. Khan (1987) proposed the core values are one of the primary principles underlying IB. Thus, the contribution of IB to CSR practice is crucial. CSR is developed from a form of ethical finance. The investment in the CSR activities is ethical characteristics. Then, IB can be considered as a form of socially responsible finance, which it chooses legal and lawful financial assets, but both in religious characteristics (Delpachitra, 2013).
IB has some religious obligations (FardKifayah) on the larger society (Ummah). These obligations are to manage a financial intermediary for individuals in the community demanding to comply with Shariah law. As representative organisations of individuals, who: invest their money as investment account holders (IAH) or shareholders, cooperative, partnership or borrowing with the IB, are employed, have other explicit contractual relations, and have an implicit social contract with the IB as part of the larger community (Ummah) (Farook, 2007).
Due to the special position, IB must able to present the obligations and recommended actions that Muslims cannot perform individually. IB must power the ability to influence the justice through the business transactions, which is something beyond the reach of an individual Muslim, but recommended in the structures of Shariah law. Then, IB is categorised as a highly visible institutions in society as financial intermediaries that source and allocate funds. These two reasons are the obligation for IB to perform a FardKifayah and the special duty of social responsibility. This social responsibility is an extension of social responsibility of every Muslim, however, it is a responsibility that Muslim do not have the capacity to perform individually.
The religious explanation of CSR can be argued from an Islamic ethical system, which is Taqwa (God-consciousness) as paradigm to motivate the IB to always operate in a good an socially responsible the financial outcomes whereas the understanding of Maqasid Al-Shari’ah (the objectives of Shariah) and the principle of Maslahah reinforce the importance of CSR (Dusuki, 2006).
The payment of Zakat is also an obligation of IB to CSR. It is because Zakat payment is the important for redistribution of income. Furthermore, Zakat can contribute to better and more efficient economic development of the country. As a result, IB with their religious philosophy must be more ethically founded CSR policies than conventional banks given the additional prerequisites to their activities by using Zakat(Farook, 2007).
CSR itself derives from the holy Qur’an. Farook (2007) state three crucial foundation norms. First is vicegerency norm. This norm represents mankind is the representatives of Allah on earth and Allah commend with stewardship of Allah’s possession. Second is divine accountability, which comes from the vicegerency and symbolizes that individuals will be accountable to Allah for all of their actions on the Day of Judgement. This norm is the basis for all actions of a Muslim, and in turn the representative organisations of Muslims. Finally, enjoining good and forbidding evil as the norm to encapsulate the responsibility that Allah places Muslims as trustees and vicegerents.This liability is overwhelming and encompasses all aspects of a Muslim’s life. In the IB, it ensures that their operational status is avoid negative actions. However, the approach to the positive action has been varied due to the lack of standards in this area.
Corporate Social Responsibility in Indonesian Islamic Bank
The development of CSR practices in Indonesia has been supported by the Indonesian government with the release of regulations on CSR obligations through the Law of Limited Liability Company No. 40 of 2007.For Indonesian Islamic bank, the central bank of Indonesia (BI) has declare the BI regulation (PBI) No.11/33/PBI/2009 about the practice for IB to implement the good corporate governance (GCG) according to the principles of transparency, accountability, professionalism and fairness in carrying out its business activities (Bank Indonesia, 2009). PBI explains that Shariah banking is required to apply GCG principles, one of which is the implementation of CSR.
CSR activities in the Indonesian Islamic bank grow very significantly. The implementation of CSR activities is strengthened by several factors, such as internal and external. The internal factors drives the CSR activities are the company's internal environment, such as the commitment and awareness of all management and employees of IB to create better living conditions for parties around the activities operations of the business. Based on that commitment, IB designs and organizes CSR programs by involving supportfinance and participation of all employees, including Zakat funds, Infaq(Bank Indonesia, 2009).Then, the external factors, which support the implementation of CSR activities, are government support and regulatory guidance legislation that strengthens the practice CSR as well aspositive responses from all shareholders and stakeholders.
PBI explains that IB must apply GCG principles to comply with the principle of accountability. This principle has a in-depth meaning to implement in CSR. The concept and implementation of CSR in IB is a concern to other parties more broadly than just profit orientations. There are some important principles within IB in Indonesia, such as justice, companionship, and Halal. According to PBI, justice in the Indonesian Islamic banks means profit sharing arrangements for business activities and the determination of profit margins. Companionship means procedure of rights and obligations in conducting financial transactions. Then, the definition of Halal in the Indonesian Islamic bank is products and services offered by IB have to comply with Shariah law and BI regulations (Bank Indonesia, 2009).
CSR is not only defined as an ordinary social obligation for the IB but also as a concept of sustainable development. This concept should be seen from human, social, environmental and economic dimensions. CSR in Indonesian Islamic bank is an important process to manage the costs and profit from the business activities with stakeholders, where the process is not just limited to charity. Therefore, the implementation of CSR, which is supported by the Shariah rules and principles, is not only profit oriented but also to build the credibility of IB to the public trust.
METHODOLOGY
This paper is a Shariah qualitative research. This paper is a conceptual in nature. Based on previous researches to examine the meaning of CSR in the context of Sharia law within Indonesian Islamic banks. The discussion and conclusions of this paper as conceptual also describe the meaning of CSR in the context of Sharia law. Thus, the methodologically, this paper is deemed to provide the richest from a literature review and analysis.
DISCUSSION
The responsibility of IB is core form due to a representative organisation. The definition of right and wrong in Islam can come from various dichotomies, which are overlapping. In the legal form, right refers to everything that is permissible or recommended (Halal and Mustahab). On the other hand, wrong represents everything that impermissible or not recommended (Haram and Makruh). IB has a collective FardKifayah, so the definition right and wrong are sometimes takes a different nature than those that apply to individuals. It is due to IB has a special religious and financial position in the society (Farook, 2007).
IB has religious obligation to comply with the form and substance of Shariah law in all aspects in their business and operations. Itis because IB is an agent and representative religious position, whereby IB has to exemplify the interest of stakeholders and at the same time are models to their stakeholders. It suggests that all aspects of IB’s business and operation must be conducted in a permissible or recommended manner while no aspect of their business and operations should ideally be directed in an impermissible or not recommended manner.
IB has been created to avoid form of impermissible financial activities and transactions, such as Riba (interest). Social responsibility is encompassed of a prescription towards positive actions and a prescription against negative actions (Farook, 2007). IB is widely alleged to have generally ensured their operational position by avoiding negative actions or impermissible activities, while minimally and variedly conducting recommended.
CSR in Indonesian Islamic bank has been commanded from BI regulation (PBI) No.11/33/PBI/2009 about the practice for IB to implement the good corporate governance (GCG). This can compose that CSR in Indonesian Islamic bank do not ensure their business and operations from negative actions or impermissible activities. However, based on that Indonesian government commitment, IB in Indonesia designs and organizes CSR programs by involving support finance and participation of all employees, including Zakat funds, Infaq.
These issues can become the overlapping issues. First, IB is doubtful of what is expected of them based on Shariah law other than to avoid Ribaand Gharar. In this puzzlement their approach to CSR widely varies based on individual IB preferences. The next issue is when it is assumed that IB conduct CSR activities, they may not be informing the rest of society through disclosure, leading to an expectations gap. It could be despite the fact that IB complies with the fullest extent of their abilities with Shariah law of CSR.
In this context, it is recommended that BI as the regulatory authorities standardize the notions of CSR that are mandatory and recommended for IB in Indonesia. Mandatory forms of CSR refer to conduct that must be carried out that must be avoided. Recommended form of CSR defines the kinds of conduct that IB in Indonesia must engage in if it has the ability/capacity. It is proposed that any notion of CSR for IB in Indonesia should be designed to meet this divine theory of regulation. Thus, it is proposed that IB must comply with some mandatory principles that are fundamental to their existence, while it is also recommended that they undertake voluntary activities if it is within their capacity.
There are some compulsory and recommended forms of CSR can be proposed to the Indonesian Islamic banks (Farook, 2007; Dusuki & Abdullah, 2007b). First is compulsory form, such as screening of investment, earning prohibited by Shariah, responsible dealing with clients, management or employees and Zakat. Second is the recommended form like QardHasan (type of loan recognized in Islam), reduction of impact on the environment, screening clients and contractors, industry wise investment quotas, social impact based investment quotas, environmental impact based investment quotas, par excellence service, micro and small sized business and social saving investment, employee welfare, charitable activities, and Waqf (religious endowment).
CONCLUSSION
The rapid development of Indonesian Islamic banks requires an urgency of the CSR practices. These issues can become the overlapping issues. First, IB is doubtful of what is expected of them based on Shariah law other than to avoid Ribaand Gharar. In this puzzlement their approach to CSR widely varies based on individual IB preferences. The next issue is when it is assumed that IB conduct CSR activities, they may not be informing the rest of society through disclosure, leading to an expectations gap. It could be despite the fact that IB complies with the fullest extent of their abilities with Shariah law of CSR.
In this context, it is recommended that BI as the regulatory authorities standardize the notions of CSR that are mandatory and recommended for IB in Indonesia. Mandatory forms of CSR refer to conduct that must be carried out that must be avoided. Recommended form of CSR defines the kinds of conduct that IB in Indonesia must engage in if it has the ability/capacity. It is proposed that any notion of CSR for IB in Indonesia should be designed to meet this divine theory of regulation. IB responsibility must include the performance of CSR programmes and initiatives. Therefore, IB is acknowledging legal entity in Islam, which consequently, is accountable for CSR.
The limitation of this paper is this paper only focuses in understanding the construction of the religious meanings of CSR in Indonesian Islamic bank based on the previous research. This paper does not distinguish in depth other variable, such as legal variable, which is connected with the entity of IB in Indonesia. As a result, it would be interesting for future study to explore this aspect.
REFERENCES
Ahmad, A., & Hassan, M. (2007). Riba and Islamic banking. Journal of Islamic Economics, Banking and Finance, 3 (1), 1-33.