The association of Islamic bank ethical identityand financial performance: evidence from Asia

Ahmad Zaki & Mahfud Sholihin & Zuni Barokah

Received: 21 May 2013 /Accepted: 3 May 2014# Springer Science+Business Media Dordrecht 2014

Abstract This study aims to explore whether a discrepancy exists between the idealand communicated (disclosed) ethical identity of Islamic banks in Asia and, further,whether there is any association of communicated ethical identity with financialperformance. To achieve the objectives, the study analyses data derived from annualreports of Islamic banks in Asia for the period 2006–2010. The results suggest that outof the seven banks studied, three of them are above average and the rest suffer fromdisparity between the ideal and communicated ethical identities. Further, the studyshows that the disclosure of a vision and mission statement; board of directors and topmanagement; zakah, charity, and benevolent loans; and Shari’ah supervisory boards arenegatively associated with performance, while the disclosure of products and servicesand commitment toward employees are positively associated with performance.

Keywords Ethical identity . Islamic banks . Financial performance . Asia

AbbreviationsBOD Board of directorsCAE Corporate applied ethicsCEI Corporate ethical identityCI Corporate identityCRE Corporate revealed ethicsEII Ethical identity index

Asian J Bus EthicsDOI 10.1007/s13520-014-0034-7

A. Zaki :M. Sholihin : Z. BarokahAccounting Department, Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta,Indonesia

M. Sholihine-mail: mahfud@ugm.ac.id

Z. Barokahe-mail: zuni.b@ugm.ac.id

A. Zaki (*)Faculty of Economics and Business, Universitas Gadjah Mada, Jl. Sosio Humaniora No. 01, Bulaksumur,Yogyakarta 55281, Indonesiae-mail: ahmadzaki@ugm.ac.id

GDP Gross domestic productROA Return on assetSSB Shari’ah supervisory board

Introduction

This study explores the corporate ethical identity (CEI) of Islamic banks in Asia for theperiod 2006–2010 and examines the association of CEI with financial performance.This study replicates and extends the work of Berrone et al. (2007) and Haniffa andHudaib (2007). Berrone et al. (2007) examined whether, and if so how, CEI affectsfirms’ financial performance. Using a sample of 389 companies from 26 countriesincluded in the 2002 SiRi ProTM database, Berrone et al. (2007) categorised CEI intocorporate revealed ethics (CRE) and corporate applied ethics (CAE). Their resultsshowed that CRE carries informational worth and has a positive effect onshareholder value. They also found that CAE indirectly enhances shareholder valuevia the improvement of stakeholder satisfaction. The study of Berrone et al., however,excluded financial firms, particularly Islamic banks.

Focusing on the Islamic banks in the Arabian Gulf region, Haniffa and Hudaib(2007) explored the extent of CEI disclosure (i.e. communicated CEI) and compared itto the ideal CEI. Using a sample of seven Islamic banks in the region that publishedannual reports in the English language through the Internet for the period 2002–2004,they found that only one of the seven banks’ CEI disclosure is above the average, whilethe rest of the banks suffer from disparity between the ideal and communicated CEI.Whilst Haniffa and Hudaib’s (2007) study advanced our understanding on CEI ofIslamic banks, the important question of whether CEI of Islamic banks associates withfinancial performance remained unanswered. Also, since Haniffa and Hudaib’s studyfocused on the Arabian Gulf region, studies in other areas are needed to confirm theresults. Therefore, this study aims to fill in the gap by examining the CEI of Islamicbanks in Asia and, further, whether the CEI is associated with financial performance.

Our study differs from those two studies in the following ways. First, whilst Berroneet al. (2007) examined the effect of CEI on financial performance, they excludedfinancial institutions from the study. Accordingly, our study extends that of Berroneet al. (2007) by focusing on the examination on Islamic banks, particularly whether theCEI of Islamic banks is associated with their financial performance. If our results aresimilar to the Berrone et al. (2007) study, our results might imply that the disclosure ofCEI is important both for manufacturing organisations and financial institutions,particularly the Islamic banks.1 Second, our study extends the work of Haniffa andHudaib (2007) by using more diverse samples and a longer period. While Haniffa andHudaib’s study used a sample of Islamic banks in the Arabian Gulf region for a 3-yearperiod, we use a sample of Islamic banks in Asia for a 5-year period. If our findings aresimilar to their results, it would confirm that Islamic banks need to enhance theircommunicated (disclosed) corporate ethical identity. Further, we also extend Haniffaand Hudaib’s study by examining whether the CEI of Islamic banks is associated withfinancial performance. Hence, we contribute to the literature by providing empirical

1 CEI may represent a firm’s voluntary disclosure of narrative information (See, for example, a discussion byBeattie et al. (2004) on the voluntary disclosure of narrative material).

A. Zaki et al.

evidence on whether the results of Berrone et al. (2007) can be generalised to thefinancial industry, particularly Islamic banks.

Furthermore, this study also contributes to the disclosure literature. Whilst previousstudies on voluntary disclosures (e.g. Mohd Ghazali and Weetman 2006; Gul andLeung 2004; Haniffa and Cooke 2002) showed consistent findings on the associationbetween disclosure level and firm performance, to the best of our knowledge, none hasinvestigated the disclosure of CEI. From a practical perspective, our study may provideinsight into which dimension of CEI should be managed more seriously by Islamicbanks.

The rest of the paper is organised as follows. The next section is the literature reviewand hypothesis. This part will be followed by research design and then findings anddiscussions will follow. The paper ends with conclusions, limitations, and suggestionsfor future research.

Literature review and hypothesis

Corporate identity (CI)

CI has been defined in many ways by experts, which varies from tangible to intangibleand from tactical to strategic dimensions (Alessandri 2001). These diverse definitionsexist due to disagreement between practitioners and academicians. Hancock (1992) andvan Rekom (1997) agreed that these definitions need to be operationalised together.Alessandri (2001) classified these definitions into conceptual and operational defini-tions. Conceptually, CI can be defined as the strategic plans and the company’sdisclosure about itself to present a positive image to the public. Operationally, thisconcept can consist of various ways of CI (name, logo, architecture, etc.) that differ-entiate one company from another. Researchers agreed that the term should answer thequestions of ‘what are we’ and ‘who are we’ (Balmer and Gray 2003, p. 979) or ‘what acorporation is’ (Portugal and Halloran 1986, p. 43). Balmer and Soenen (1999)categorised corporate identity into four types: actual (the organisation strategy, valuesand philosophy, and organisation structure and culture), communicated (usually linkedto corporate communication and reputation), ideal (what organisation sees as optimal),and desired (what corporate management states as vision and mission).

The development of CI cannot be separated from the rising volume of academic andpractitioner contributions by initiating several research centres around the world(Melewar 2003). This development is also supported by the publication of manyconceptual and empirical studies pertaining to this issue. Otubanjo (2011) showed thatthe development of CI can be categorised in three eras which have different character-istics. The era of implicit and explicit conceptualisation of CI (late 1950s–late 1960s)came first. This era was marked by introducing CI conceptually by Walter Margulies inthe late 1950s which was followed by the use of CI in academic literature (see Pilditch1967). Second is the era of planning, management, and challenges of managing CI(1970s and 1980s). This era was supported by the recovery of the German and Japaneseeconomies and their return into the international market after the Second World War(Langlois 2003). The resulting competition supported the rising number of CI consul-tant firms (Carls 1989) and articles published about this issue (Otubanjo 2011). Third is

Ethical identity of Islamic banks in Asia

the era of benefits of CI, CI mix, CI change, and CI management (1990 to date). Thisera was marked by the publication of Sternberg (1991) which argued that CI cansupport a company in the redefinition of long-term goals, boosting image, and assistingin product differentiation.

Corporate ethical identity (CEI) and voluntary disclosures

Corporate ethical identity can also be explained from the perspective of disclosures. Afirm’s incremental information on CEI may represent a firm’s voluntary disclosure ofnarrative information2. Within this context, a firm’s decision to voluntarily disclose itsCEI may be explained by a number of motivations. A stream of literature on voluntarydisclosure suggests that companies have incentives to disclose more than the minimuminformation required when the benefits of reducing information asymmetry outweighthe associated costs (Healy and Palepu 2001; Marston and Shrives 1991; Verrecchia1983).

Prior studies discuss several motivations for firms’ decisions to voluntarily disclosemore information (Amihud and Mendelson 1986; Diamond and Verrecchia 1991;Verrecchia 1983). Firms with better performance are motivated to disclose greaterfinancial information to distinguish themselves from firms with poor performance(Verrecchia 1983). Further, firms may decide to provide greater disclosures to lowertransaction costs, increase liquidity, and reduce cost of capital (e.g. Amihud andMendelson 1986; Diamond and Verrecchia 1991). Furthermore, Amihud andMendelson (1986) contended that a firm’s commitment to voluntarily disclose privateinformation is likely to reduce information asymmetry and increase the liquidity offirms’ securities. Empirically, Sengupta (1998) found that firms with a higher degree ofdisclosure details and clarity are likely to have lower debt issuing costs. Additionally,Armitage and Marston (2008, p. 315) found that managers are motivated to makegreater disclosure because they want to increase firms’ ‘reputation for openness’ andshareholder confidence which may lead to higher performance or commercial benefits.

Previous studies have found that the level of voluntary disclosure practices differsacross companies. A number of firm-specific factors have been found to be associatedwith companies’ disclosures. Those factors include firm size, profitability, type ofauditor, and industry type (Cerf 1961; Cooke 1989, 1992; Robb, Single, andZarzeski 2001; Taplin, Tower, and Hancock 2002; Vanstraelen, Zarzeski, and Robb2003; Wallace, Naser, and Mora 1994). Focusing on the non-financial disclosures, astudy by Robb et al. (2001) found that the level of disclosures is associated with firmsize, industry classification, degree of geographic dispersion, and country of domicile3.Extending the study of Robb et al. (2001) to include three more countries, Vanstraelenet al. (2003) found that bigger companies with global operations are likely to provide ahigher level of non-financial disclosure.

2 See, for example, a discussion by Beattie et al. (2004) on the voluntary disclosure of narrative material. “Thenarratives to be analysed are those voluntary disclosures contained in the company annual report andaccounts”, which includes “highlights, chairman’s statement, CEO’s review, OFR, people, community,directors and advisors and captions from pictorial material” (Beattie et al. 2004, p. 215).3 Robb et al. (2001, p. 72) defined non-financial disclosure as the ‘qualitative information included incompany annual reports, but outside the four financial statements and related footnotes’.

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Islamic bank and CEI

The Asset Securitization Report (2008), which summarised the discussion results offinancial consultants around the world about ‘The Promise of Islamic Finance’, showedsome views about the definition of Islamic finance. It has been revealed they agreedthat Islamic finance is a kind of financial system which is compatible with the basis ofIslamic culture and society. They described Islamic finance as follows:

The only thing I would add is that Shari'a is more than just law—it's ethics, it'sreligion and it's law, and I think of Islamic finance as focusing on the law partmore than the religion. It is really an attempt to bring the finance and the law intosync with the religion and the ethics (Asset Securitization Report 2008, p. 13).

The Islamic Banking Act 1983 specifically defined an Islamic bank as ‘…a com-pany which carries on Islamic banking business. Islamic banking business meansbanking business whose aims and operations do not involve any element which isnot approved by the religion of Islam’ (Islamic Banking Act 1983). The main goal ofIslamic banks is to implement this financial system in banking (Khir et al. 2008).

The definition leads us to an understanding about the obligation of Shari’ah in everyIslamic bank’s activity. Some Islamic bank principles can be formulated from the abovedefinitions which include avoiding usury, prohibiting gharar, concern about legalactivities, and focusing on creating justice (Khir et al. 2008).

Compared to conventional banks, the prime differences between these two kinds ofbank are based on their operational activities. Islamic banks firmly obey the Shari’ahprinciples as the basis of every activity (Khan and Mirakhor 1994). More specifically,Haron and Yamirudeng (2003) stated that the difference between Islamic andconventional banks is the prohibition of usury which is followed by the focus onsupporting the social and economic goals of the society.

Haniffa and Hudaib (2007) argued that the ideal identity of Islamic banks should beethical organisations which rely on Islamic principles, such as promoting justice andwelfare in society. They have developed the ethical identity index to measure the ethicallevel of Islamic banks. The instrument has 78 indicators under eight dimensions: visionand mission statements; board of directors (BODs) and top management; products andservices; zakah, charity, and benevolent loans; commitments toward employees; com-mitments toward debtors; commitments toward society; and Shari’ah supervisoryboard. Those dimensions are derived from the five principles which differentiateIslamic banks from conventional banks: (1) underlying philosophy and values; (2)provision of interest-free product and services; (3) restriction to Islamically acceptabledeals; (4) focus on development and social goals; and (5) subjection to additionalreviews by the Shari’ah supervisory board (Haniffa and Hudaib 2007).

Previous studies suggest that communicating corporate (ethical) identity may pro-duce a positive corporate image and corporate reputation (Alessandri 2001) which maylead to competitive advantage and assurance of business survival. Empirical evidenceprovided by Berrone et al. (2007) supports the contention that corporate ethical identitypositively affects financial performance. In the disclosure area, previous studies focus-ing on voluntary disclosures (e.g. Mohd Ghazali and Weetman 2006; Gul and Leung2004; Haniffa and Cooke 2002) consistently found the positive association between

Ethical identity of Islamic banks in Asia

voluntary disclosure and a firm’s performance. Sengupta (1998) found that firms with ahigher degree of disclosure details and clarity are likely to have lower debt issuingcosts. Additionally, Armitage and Marston (2008) found that managers are motivated tomake greater disclosure because they want to increase firms’ ‘reputation for openness’and shareholder confidence which may lead to higher performance or commercialbenefits. Particular in Southeast Asia, Mitton (2002) found that firms which havehigher disclosure quality showed higher performance during the 1997–1998 financialcrisis.

Based on the preceding arguments, the following hypotheses are proposed:

H1 CEI disclosure of vision and mission statements is positively associated withfinancial performance.H2 CEI disclosure of board of directors and top management is positively associatedwith financial performance.H3 CEI disclosure of products and services is positively associated with financialperformance.H4 CEI disclosure of zakah, charity, and benevolent loans is positively associated withfinancial performance.H5 CEI disclosure of commitments toward employees is positively associated withfinancial performance.H6 CEI disclosure of commitments toward debtors is positively associated withfinancial performance.H7 CEI disclosure of commitments toward society is positively associated withfinancial performance.H8 CEI disclosure of Shari’ah supervisory board is positively associated with financialperformance.

Research design

The population of our study is the best Islamic banks in Asia. Our sample was initiallybased on the list of Islamic banks in nine Asian countries published by Asiamoney(2011). The banks are from Bahrain, Brunei Darussalam, Indonesia, Kuwait, Malaysia,Pakistan, Qatar, Saudi Arabia, and United Arab Emirates. The list of the banks and theircountry of origin is provided in Table 1. To explore the extent of CEI disclosure and toexamine its effect on financial performance, we gathered data of annual reports of thebanks for the period 2006–2010 via their websites. Our final sample, however, consistsof seven banks as the complete data set for Bank Islam Brunei Darussalam (from BruneiDarussalam) and Dubai Islamic Bank (from United Arab Emirates) are not available.Hence, we have pooled data of 35 bank-years (seven banks and 5 years each).

We select Islamic banks in Asia as our sample because Asia is a continent with thehighest percentage of Moslems in the world. This is consistent with the Japan Com-mercial Banking Report (2011) which advocates the importance of such study becausethe region plays an important role in the development of Islamic banks in the world.Another reason is because the economic growth in Asia has been consistently above6 % for the past few years.

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Financial performance, as the dependent variable in this study, is measured usingreturn on assets (ROA). Our measure is different from a study by Berrone et al. (2007)which employed both market-based performance (market value added) and accounting-based performance (ROA). We do not use market-based performance because themajority of the banks in our study are not listed on the stock exchange. We use ROAbecause of its popularity and as it is often used by financial analysts as the proxy ofperformance (Jewell and Mankin 2011). Al-Tamimi (2010) also noted that ROA iswidely used to measure bank performance. Indeed, a survey conducted by Gibson(1987) found that more than 90 % of their respondents who are chartered financialanalysts contend that ROA is one of the main measures of performance. To calculateROA, we divide net income with total assets.

The independent variable in this study is CEI measured using ethical identity index(EII) developed by Haniffa and Hudaib (2007) with the following formula:

EII j ¼X

t¼1

n j

X ij

where EIIj is the ethical identity index, nj the number of constructs or items disclosedby jth firm, nj<=78, and Xij=1 if ith construct or item is disclosed, 0 if ith construct oritem is not disclosed, so that 0<=Ij<=1.

Our regression model to test the hypothesis is as follows:

FPit ¼ a0 þ a1vision and mission statementsit þ a2BODs and top managementitþa3products and serviceit þ a4zakah; charity; and benevolent loansit

þa5commitments toward employeesitþa6commitments toward debtorsit þ a7commitments toward societyitþa8shari

0ah supervisory boardit þ a9log company sizeit þ a10riskit

þa11GDP per capitai þ a12number of branchesit þ uit

In our model, we include company size, risks, number of branches, and grossdomestic product (GDP) per capita as control variables. GDP is included becauseprevious studies (e.g. Wu et al. 2007; Wang 2009) found that GDP per capita ispositively associated with bank performance. With regard to company size, Berger

Table 1 List of the Banks Studied and their Origins

Country Name of the bank Code

Bahrain Al Baraka Banking Group ABG

Brunei Darussalam Bank Islam Brunei Darussalam BIBD

Indonesia Bank Syariah Mandiri BSM

Kuwait Kuwait Finance House KFH

Malaysia CIMB Islamic CIMB

Pakistan Meezan Bank Meezan

Qatar Qatar Islamic Bank QIB

Saudi Arabia Al Rajhi Bank ARB

United Arab Emirates Dubai Islamic Bank DIB

Ethical identity of Islamic banks in Asia

(1995) and Shaffer (1985) found that a big company will reduce costs, which eventu-ally improves performance. Branches and risks are important variables which affectIslamic bank performance (Al-Tamimi 2010).

Findings and discussions

Ethical identity index of bank Shari’ah in Asia

Table 2 shows the EII index and the ranking of seven Islamic banks discussed in this researchbased on the 5-year average of every single bank (last bottom row of the table). The tablereveals that the highest EII is that of Bank Syariah Mandiri (BSM) and the lowest is that of(Chinese, India,Malay, Bangla) CIMB Islamic. Three of the banks surveyed (BSM,Meezan,and Al Baraka Banking Group (ABG)) are above the average. The table also indicates thatthe range of the EII is about 0.38–0.63. This means that BSM reaches 63% of all dimensionsproposed by Haniffa and Hudaib (2007) in its annual report while CIMB only fulfils 38 %during the 5 years examined. In otherwords, whilst BSMhas theminimumdisparity betweenthe ideal and the communicated ethical identity, CIMB has the maximum (62 %).

Table 2 also shows the variability of EII disclosures in each dimension studied (row1 until 8). The last column of this table describes the average of each EII dimension for35 observations in this research. Four dimensions are above average (commitmentstoward debtors; BODs and top management; commitments toward employees; andcommitments toward society) while the rest are below average (zakah, charity, andbenevolent loans; products and services; Shari’ah supervisory board; and vision andmission statement).

Vision and mission statement is the lowest dimension among all eight EII dimen-sions. This dimension spreads between 0.00 and 0.42 which means that Islamic banks inAsia have not realised the need for this kind of disclosure which shows the moralresponsibility in running their business. ABG goes to be the highest while KuwaitFinance House (KFH), CIMB, and Al Rajhi Bank (ARB) do not disclose anything here.

All of the banks which make disclosures in this dimension state their commitment inoperating within Shari’ah principles and focusing on maximising shareholders’ returns.ABG, as the leader in this dimension (average 0.42), stated its vision and mission asfollows:

Our mission is to be the leading Islamic banking group with a worldwidepresence, offering retail, commercial, investment banking and treasury servicesstrictly in accordance with the principles (ABG annual report 2007, p. 1).

An interesting finding in this dimension is that none of the banks examined in thisstudy achieve the given standard. For example, ABG as the leader can only reach 0.33for 2008–2010 which is the same as the disclosure made by Meezan and Qatar IslamicBank (QIB) for 2006–2010 (0.33). This score was followed by BSM’s disclosure(0.22). QIB showed its vision:

A leading, innovative and global Islamic bank adhering to the highest Shari’a andethical principles; meeting international banking standards; partnering with the

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development of the global economy and participating in the advancement of thesociety (QIB annual report 2010, p. 2).

Different to the previous dimension, the disclosure of BODs and top management isin the second highest rank among all dimensions. While this dimension reaches 0.70,there is only 30% disparity between the ideal and communicated ethical identity amongall Islamic banks in Asia. This score shows the understanding of Islamic bank managersabout the importance of informing the people taking responsibility for the business.

BSM disclosed this dimension perfectly for 2009 and 2010 which consisted of thename of the BODs and top management, the profiles, and the shareholding of boardmembers. BSM also described the multiple directorships among board members (indica-tors which are rarely disclosed). On the other hand, ARB only disclosed the name of theboardmembers and their positions in the audit committee. There is no disclosure about thenames of top management. BSM stated:

None of the members of Board of Commissioners, Board of Directors orExecutive Officers has multiple job titles in 1 (one) non-financial institution/company, or membership in the Board of Commissioners, Board of Directors orExecutive Officer with a supervisory function at 1 (one) non-Bank subsidiarycompany controlled by the Bank (BSM annual report 2009, p. 67).

Disclosure about the product consists of all information about the product proposedby the bank. In this dimension, all Asia’s Islamic banks still have disparity between the

Table 2 Corporate ethical identity index and ranking according to each dimension

Ethical identity index (EII) Corporate EII for the year 2006–2010 mean (rank) Overallmean(rank)ABG BSM KFH CIMB Meezan QIB ARB

1. Vision and mission statements 0.42(1)

0.22(4)

0.00(5)

0.00(5)

0.33(2)

0.33(2)

0.00(5)

0.19(8)

2. BODs and top management 0.85(2)

0.95(1)

0.54(6)

0.85(2)

0.69(4)

0.58(5)

0.46(7)

0.70(2)

3. Products and services 0.42(3)

0.46(2)

0.36(5)

0.38(4)

0.66(1)

0.24(7)

0.28(6)

0.40(6)

4. Zakah, charity, and benevolentloans

0.39(3)

0.73(1)

0.69(2)

0.27(5)

0.15(7)

0.35(4)

0.27(5)

0.41(5)

5. Commitments towardemployees

0.42(6)

0.82(2)

0.64(4)

0.36(7)

0.67(3)

0.62(5)

0.83(1)

0.62(3)

6. Commitments toward debtors 0.75(4)

0.75(4)

0.70(6)

0.69(7)

0.90(1)

0.90(1)

0.88(3)

0.79(1)

7. Commitments toward society 0.66(4)

0.66(4)

0.77(1)

0.07(7)

0.43(6)

0.69(2)

0.68(3)

0.56(4)

8. Shari’ah supervisory board 0.33(4)

0.44(2)

0.33(4)

0.41(3)

0.58(1)

0.24(6)

0.18(7)

0.36(7)

Ranks of corporate EII 0.53(3)

0.63(1)

0.50(4)

0.38(7)

0.55(2)

0.49(5)

0.45(6)

The data in bold showing the final score for every bank and dimension.

Ethical identity of Islamic banks in Asia

ideal and the communicated by 60 % on the average. Meezan is the only one whichreaches the above average score, that is, 66 %. Meezan stated in its annual report thatthe products offered in the market are free of non-permissible activities and approvedby the Shari’ah supervisory board. Furthermore, Meezan also described the glossaryand definition of the product specifically while others still focused on introducing newproduct and the information about the investment and financing activities. On average,Asia’s Islamic banks need to disclose more in this dimension.

The four next dimensions are related to the role of Islamic banks in developmentaland social goals which consist of zakah, charity, and benevolent loans; commitmentstoward employees; commitments toward debtors; and commitments toward society.The highest score in zakah, charity, and benevolent loans goes to BSM, followed byKFH with 0.73 and 0.69, respectively. The lowest goes to Meezan which only reaches0.15. On average, all Islamic banks are under the average with the disparity about 59 %.

BSMprovides full information about zakah, its source and beneficiaries, but did not statethe role of Shari’ah supervisory board (SSB) in approving the congruence of the compu-tation with Shari’ah. Different to BSM, KFH which follows BSM’s score did not providethe information about the amount of zakah paid but, on the other hand, provided the role ofSSB discussed. KFH stated that ‘the calculation of Zakat is based on Shariah principles andthe resolutions of the Shariah Board’ (KFH Annual Report 2010, p. 10). Meezan, as thelowest score, only disclosed the source and uses of charity in its annual report.

Commitment to the employees is led by ARB (0.83). According to this score, ARBgives great support to the employees by providing them with all kinds of training andwelfare. On the other hand, CIMB only shows some trainings (0.36). This dimensionhas an average of about 62 %.

Commitment to debtors is greatly shown by Meezan and QIB with a score of 0.90.This score is also followed by others, with the average 0.79. This commitment can bedescribed by clear debt policy, amount of debts written off, and type of lendingactivities. Meezan showed the commitment as follows:

Non-performing financings are written off only when all possible courses ofaction to achieve recovery have proved unsuccessful. The Bank determines write-offs in accordance with the criteria prescribed by SBP vide BPRD Circular No. 6of 2007 dated June 05, 2007 (Meezan Annual Report 2010, p. 77).

Furthermore, CIMB is the worst bank with regard to commitment to society disclosure(7 %). This score compares unfavourably with the other banks examined in this research(overall dimension average is 56 %). Having this score indicates that CIMB does not playits role in creating job opportunities, sponsoring community activities, or holding confer-ences on Islamic economics. QIB showed its role in this dimension by stating that:

We are committed to CSR activities and seek a progressive role in this area. OurCSR strategy aims to sponsor health care, educational, social, cultural, environ-mental and charity activities as well as conferences. The Bank has contributedQR 13 million towards various CSR activities (QIB Annual Report 2010, p. 17).

The Shari’ah supervisory board is the last dimension examined in this research. Thebanks are required to show the name, picture, and remuneration of SSB members.

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These banks are also expected to disclose the number of meetings held by SSB, reportof products approved, and the congruence of profit distribution with Shari’ah princi-ples. The result shows that only one bank (Meezan) reached the good score (0.58).

The effect of EII on financial performance

Table 3 provides the results of regression analysis. The table shows that the disclosureof vision and mission; BODs and top management; zakah, charity, and benevolentloans; and SSB dimension negatively affect performance. On the other hand, thedisclosure of products and services and employees positively affect performance. Withcontrol variables, the table indicates that size and risk negatively affect performanceand GDP per capita positively affects performance.

It is clearly noted that, from 2006 until 2010, Asia’s Islamic banks still focused onproducts and services proposed to the customers in addition to the commitment towardemployees. Ahmad et al. (2010) found that among all customers of Pakistan IslamicBank, these two variables have strong positive relationships to the financialperformance of Islamic banks through the service given by the employees. Theresearch done by Hanzaee and Mirvaisi (2011) that associated customer orientationof service employees and customer satisfaction confirmed the result of this research.

Compared to previous studies on the disclosure topic, whilst previous studiesfocusing on voluntary disclosures (e.g. Mohd Ghazali and Weetman 2006; Gul and

Table 3 Results of robust regression analyses on the association between the ethical identity index (EII) andfinancial performance

Variables Coefficients

Ethical identity index

Vision and mission statements −0.008889**BODs and top management −0.005349***Products and services 0.007511***

Zakah, charity, and benevolent loans −0.005630***Commitments toward employees 0.006472***

Commitments toward debtors −0.003854Commitments toward society −0.001599Shari’ah supervisory board −0.006673**Control variables

Size −0.009006***Risk −0.052931**GDP per capita 0.000000829***

Branches 0.0000316

Constant 0.293517***

R2 0.966427

F test 33.58364***

*p<0.10; **p<0.05; ***p<0.01

Ethical identity of Islamic banks in Asia

Leung 2004; Haniffa and Cooke 2002) consistently found a positive associationbetween voluntary disclosure and a firm’s performance, this current study can onlyprovide partial support. Only the disclosure of products and services and employeespositively affect performance.

Conclusions, limitations, and suggestions for future research

This study aims to explore the communicated ethical identity of Islamic banks in Asiafor the period 2006–2010 and to compare it with the ideal one. In addition, this studyexamines the association of communicated ethical identity with the financial perfor-mance of Islamic banks in Asia. The population of our study is the best Islamic banks inAsia. Our sample was initially based on the list of Islamic banks in nine Asian countriespublished by Asiamoney (2011). The banks are from Bahrain, Brunei Darussalam,Indonesia, Kuwait, Malaysia, Pakistan, Qatar, Saudi Arabia, and United Arab Emirates.

To explore the extent of CEI disclosure and to examine its effect on financialperformance, we gathered data of the English version of annual reports of the banksfor the period 2006–2010 via their websites. Our final sample, however, consists ofseven banks as the complete data set for BIBD (from Brunei Darussalam) and DIB(from United Arab Emirates) are not available. Hence, we have pooled data of 35 bank-years (seven banks and 5 years each). To provide empirical evidence on whether CEIdisclosure affects performance, we measure CEI disclosure using EII and then regress iton the eight dimensions of EII (vision and mission statements; BODs and top man-agement; products and services; zakah, charity, and benevolent loans; commitmenttoward employees; commitments toward debtors; commitments toward society; andShari’ah supervisory board).

The results show that three of the seven banks surveyed (BSM, Meezan, andABG) are above average in disclosing their corporate ethical identity. The highestEII is that of BSM and the lowest is that of CIMB Islamic. The disclosure ofvision and mission statement; BOD and top management; zakah, charity, andbenevolent loans; and SSB dimension negatively affect performance. On theother hand, the disclosure of product and services and commitments towardemployees positively affects performance.

The results, however, should be interpreted cautiously as the study only uses annualreports of the banks published on their websites. We understand that corporate identitymay be published in other forms. Therefore, future study should consider those otherforms of publication. Further, this study only uses a sample of the best Islamic banks inAsia published by Asiamoney (2011) and only over a 5-year period. Future studyshould use more samples and a longer period. Notwithstanding the limitations men-tioned, our study may provide additional insights into the CEI of Islamic banks.

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