1 RESPONSIBLE AND OPEN ECONOMIC MODEL
Islamic finance is based on principles and values in which sustainable development and social responsibility play a crucial role in its existence.
In order to comprehend Corporate Social Responsibility (CSR) from an Islamic financial point of view, it is necessary to look into its related principles and values, and aim to deeply understand what are the underlying dynamics as well as identify the similarities between the conventional CSR and Islamic finance.
The Islamic finance model has its foundation and origin in the Quran and in the Sunna, a model founded on ethical and religious values and principles that are very and essentially near the concept of CSR requires responsible actions and protection of stakeholder’s interests. In other words, an economic-financial model requires – in addition to the observance of individual religious obligations – the assumption and fulfilment of responsibility towards the protection of interests of other people, the environment and therefore the balance between one’s own interests and those of the society.
Islamic Finance bases its activities on the real economy, i.e., on goods that can be identified and are tangible, and calls on the parties to support the risks linked to the success or failure of the investments they have undertaken.
This finance is open and within the reach of everybody, Muslims and non-Muslims, because of its ethical, peculiar characteristics.
There are five fundamental ‘pillars’ that oversee the regulation and religious validity (Shari’a compliance) of any Islamic economic and financial activity, as follows:
Starting from theoretical studies to religious principles, underlying the correct functioning of Islamic finance institutions, the main objective of this analysis was that of verifying whether there is any convergence between the religious principles of Islamic finance and the CSR principles proposed for conventional companies.
“The Islamic finance model has its foundation and origin in the Quran and in the Sunna, a model founded on ethical and religious values and principles.”
CORPORATE SOCIAL RESPONSIBILITY IN ISLAMIC FINANCE
Nowadays, CSR is relevant to creating a stable economic environment that aims to safeguard the interests of community. In particular, this has been undertaken and discussed by academics who have studied the conventional economic model.
During the last decade, several studies have been conducted into CSR in the context of Islamic finance. In more detail, these studies have been focused in two parts. One of them tried to analyse the client perception of CSR related to Islamic finance while the other studied the method in which CSR and its outcomes are reached through execution of liable business management by Islamic financial bodies.
Regulations and guidelines have been introduced by several International Accounting Institutions of Islamic Finance to support the development of CSR according to clear and uniform rules and practices at international level.
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) played an important role in 2010, when among other governance standards developed one on CSR. Standard No. 7 “Corporate social responsibility conduct and disclosure for Islamic financial institutions” defines CSR and explains in detail what is meant for each of the responsibilities included in the definition of CSR. In particular, the guidelines regarding CSR shown in Standard 7 of the AAOIFI are subdivided into two categories: mandatory and recommended.
The ‘mandatory’ guidelines on conduct (obligatory for all IFIs with respect to the laws of the country) concern the implementation of a set of internal Islamic bank procedures based on the following: respect for CSR principles; the safeguarding of their interests in the drafting of the contract; supervision of the sharia compliance of earnings and investments; the safeguarding of the personnel’s welfare; and policies defining the conditions for the stabilisation of the zakàh (compulsory alms for Muslims).
The ‘recommended’ guidelines on conduct (recommended for institutes that have the capacity to apply them) concern the following: the definition of the conditions for benefitting from qard hasan (loan without interest) granted for social reasons; the implementation of investment, instrument and operating process selection procedures aimed at safeguarding and protecting the environment, clients, micro and small businesses; policies aimed at setting up charity-oriented social activities; and policies of endowment (waqf) management aimed at reinforcing the company’s commitment to integrate CSR principles into its management activities.
Starting from the CSR concept and the related considerations, it is interesting to investigate and identify the possible common principles, values and objectives, in order to understand the underpinning dynamics and identifying the convergences among the principles underlying conventional CSR and Islamic Finance. The methodological approach is based on case studies (Yin, R.K., 2013), a qualitative method based on data collection acquired from documents and questionnaire interviews. In particular, the analysis has focused on the study of two cases countries. The first country is Morocco, an Islamic country that, in 2017, introduced the first participation bank according to Act 103.12 2015. Moroccan’s case focused itself on “Umnia Bank”, the first participation bank that inaugurated the opening of its first branches in several cities in Morocco. The second country is Germany which is not an Islamic country but it introduced, at experimental stages, the first Islamic bank named KT Bank AG, in 2015.
ISLAMIC FINANCE PRINCIPLES
3. AND CSR PRINCIPLES: WHAT CONVERGENCE?
Nowadays, CSR presents itself as a basic concept that is directly connected to the success of enterprise in terms of sustainable and durable value creation, as well as the achievement of economic, social and environmental results that take into account the protection of stakeholders.
The theoretical studies on the religious principles underlying the concept of CSR of Islamic financial institutions, the studies of CSR definition formulated by the AAOIFI (Standard No. 7) and the analysis of the two case studies mentioned above, show strict convergence between the social responsibility of companies as structured in conventional economic systems and the social responsibility of financial institutes generated from a religious standpoint (Table 1). This convergence becomes manifest in the responsibilities which companies are called to take on, i.e., managerial conduct attentive to the protection of stakeholders and the environment, and the creation of sustainable value (through effective and efficient management of economic activities). All this means having a social role oriented towards justice and sustainable development in the environment in which the company operates.
In particular, the elements of convergence are found in the following responsibilities: economic responsibility, discretionary responsibility, ethical responsibility and legal responsibility. The convergence shows its effects once a company owns up to its responsibility, through managerial conduct that considers stakeholder protection and the creation of sustainable value.
This convergence leads to better integration of Islamic financial institutions in conventional economic contexts and a harmonization of the regulations and directives relative to CSR directed at economic entities operating in the same countries.
Finally, the element of divergence from the conventional CSR concept is the obligation of Islamic financial institutions to assume responsibility of a religious nature, i.e., respecting the principles and obligations established by Islam and applying them in their business activities. The element of non-convergence refers to the nature of Islamic finance itself and this should not prevent the integration and development of both conventional CSR and Islamic CSR because there are several common elements that make both systems compatible despite the existence of such discordant elements.
“Social role oriented towards justice and sustainable development in the environment in which the company operates.”
CONCLUSION
Both conventional and Islamic CSR concepts have several common principles. The convergence between the two systems should encourage the implementation of economic collaboration policies between Muslim and non-Muslim countries, and between Islamic and conventional banks; considering, on one hand, a growing attention of the investor-savers to CSR and the stakeholders’ rights protection, and on the other hand, a strong presence of the Muslim community, especially, in the European context.
This convergence leads to better integration of Islamic financial institutions in conventional economic contexts and harmonization of the regulations and directives relative to CSR directed at economic entities operating in the same countries.
“As a result, we can state that CSR may be the element of convergence for these two systems, an instrument going beyond the traditional concept of marketing strategy in the short term, promoting a sustainable concept to create sustainable value for stakeholders in terms of economic, social and environmental returns. “
An aspect founded in the case studies analysed, specifically in the case of Germany where KT Bank AG aims to offer complete financial products and services compatible with the Shari’a principles and at the same time in compliance with the German Banking Act. This is aimed at all those who are interested, beyond religious ideology, in investing their savings in a business conducted according to principles and values related to CSR. In the Moroccan case study, it is underlined as the Legislator intending to implement the use of participatory Islamic financial instruments (musharaka and mudaraba) based on the PLS principle, which represents reliability, honesty, cooperation, justice and social responsibility as part of Islamic finance purposes.
As a result, we can state that CSR may be the element of convergence for these two systems, an instrument going beyond the traditional concept of marketing strategy in the short term, promoting a sustainable concept to create sustainable value for stakeholders in terms of economic, social and environmental returns.
