Doing well while doing good: Moving Islamic banking beyond the CSR paradigm

Financing the SDG agenda internationally requires trillions of dollars. Obviously, governments’ investments are not enough to provide the needed financial resources. Thereby, the private sector in general and the financial sector in particular are required to bridge the financing gap and support the achievement of SDG’s. To illustrate, Arab countries would need a minimum of 230 billion USD a year to finance sustainable development. Unfortunately, corporate social responsibility initiatives are not only ineffective but also unsustainable because such initiatives approach social and environmental issues from the sidelines. Indeed, when corporate sustainability is managed outside a firm business model, its performance and even its existence tend to rely strongly on the firm’s financial performance. Not surprisingly, financial objectives are usually prioritized when they conflict with other goals.

It is true that many Islamic banking institutions undertake several social initiatives ranging from Qard Hassan and energy conservation to zakat payment and charities support. Yet, on average, Islamic banks’ social and environmental initiatives have been rather weak or poor. Islamic banks’ performance in this field is even lower than conventional banks. Many research reports also point out to the low levels of disclosures of Islamic banks with respect to ethics and sustainability. Today, Islamic banks need a paradigm shift by embedding sustainability into their core business model and reconcile their positioning with their ethical roots. In other words, doing well while good instead of doing well and later doing good (sometimes).

Based on an international benchmark of companies that pursue financial and social goals simultaneously, a recent research article sheds light on key success factors to succeed in this paradigm shift and reconcile profitability and sustainability. The benchmark identified four best practices.

• Setting goals and monitoring progress: Well-constructed goals are important to for dual-purpose companies. Key performance indicators can be built using metrics developed by international NGO’s such as the Global Reporting Initiative and the Sustainability Accounting Standards Board and B-Lab.

• Structuring the organization: It is impossible to succeed both on financial and sustainable fronts if the organization structure is not designed to support both perspectives. More specifically, the company has to supplement traditional organizational structures with mechanisms for surfacing and working through tensions created by the economic and social perspectives.

• Hiring and socializing employees: Embedding a dual-purpose focus in the organization DNA requires a workforce with shared values and behavior. Hiring, training and socializing are crucial to get that right.

• Practicing dual-minded leadership: The board and the management have to manage the tensions that rises when trying to align impact and finance. The company’s governance and leadership must manage tension proactively while committing to the dual goals

Islamic banks engaged in blending profitability and sustainability need to be aware that tensions and trade-offs are inevitable especially when ecosystems supporting such a transition are embryonic or inexistent. Taken together the four levers presented above can make the endeavor more likely to succeed.