Impact of Corporate Social Responsibility on Financial Performance with a Mediating Role of Enterprise Risk Management of the Islamic Banks in GCC Countries

Abstract

The incorporating of Corporate Social Responsibility (CSR) factors into managerial decision-making has been shown to mitigate risks and create an "insurance-like" value that protects Financial Performance (FP). However, previous research on the direct relationship between CSR and FP has yielded mixed results, highlighting the need for further investigation. Thus, this study examines the mediating role of Enterprise Risk Management (ERM) in analysing the relationship between CSR and FP. This study examines Islamic banks in the Gulf Cooperation Council (GCC) as a distinctive context for analysing the CSR-ERM-FP dynamics within the banking sector. Drawing on stakeholder, signalling, and agency theories, it argues that strategic CSR practices strengthen enterprise-wide risk management, ultimately enhancing the FP of GCC Islamic banks. This study utilizes a sample of 221 bank-year observations from 23 listed Islamic banks operating in GCC countries between 2011 and 2020. Data were collected from two secondary sources: annual bank reports were utilized to gather CSR data through content analysis and scoring methods for ERM data, and the DataStream database was accessed for FP data. An analysis of multiple panel regression approach was applied to examine the relationship between the study variables. The study finds that CSR practices positively impact both accounting-based and market-based FP in GCC Islamic banks. Additionally, banks with a strong commitment to CSR demonstrate more effective ERM implementation. Furthermore, while ERM implementation shows a significant positive relationship with accounting-based FP, no such link is found with market-based FP. However, ERM implementation does not significantly mediate the relationship between CSR and FP, indicating insufficient evidence to support its mediating role. This study contributes to existing knowledge by providing insights into the relationship between CSR, ERM, and FP within the Islamic banking sector in the GCC. The findings underscore the significance of incorporating CSR as a fundamental element of business model transformation to improve stakeholder engagement. Additionally, the study emphasizes the need for Islamic banks to align CSR with ERM initiatives to maximize the benefits of sustainable business practices while addressing stakeholder concerns for better FP. Furthermore, the findings offer valuable guidance to regulators in strengthening ERM and CSR policies. Lastly, the study provides stakeholders, managers, and scholars with a deeper understanding of CSR-ERM-FP dynamics in GCC Islamic banks.