Toward the development of an Islamic banking sustainability performance index

Abstract

Purpose

The purpose of this paper is to suggest a model that yields a sustainability performance index for Islamic banks (IBs). This index is expected to account for stakeholders’ viewpoints while considering sustainability and Maqasid Al-Shariah as bases.

Design/methodology/approach

First, based on the relevant literature review refined through consultations with academic, banking and Shariah experts, the main stakeholders and their corresponding lists of relevant attributes and sub-attributes are identified. Then, adopting a multi-attribute utility approach and based on a second step of interviews with experts, an aggregated index is suggested. Finally, the developed index is applied to five famous Islamic banking groups over the period 2005–2019.

Findings

Empirical evidence shows that the banks used in the implementation do not achieve high scores of the suggested index. This can be interpreted through a lack of Islamic normative aspects and low adherence to sustainability practices. Specifically, they are not functioning on a justice basis and are deficient in providing sufficient varieties of Islamic products. They are also more interested in economic sustainability and are not involved in environmental and social ones.

Originality/value

The developed index not only considers the compliance of the banking activities with Shariah, but it also addresses their sustainability from the main stakeholders’ perspectives. The suggested model provides a transparent performance evaluation tool for IBs omitting all causes of conflict of interests and certifies the fairness of the resulting assessments.

Citation

Ammar, R., Rebai, S. and Saidane, D. (2023), "Toward the development of an Islamic banking sustainability performance index", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 16 No. 4, pp. 734-755. https://doi.org/10.1108/IMEFM-12-2021-0479

1. Introduction [1]

Sustainability is an evolving concept that was recently introduced in Islamic banking. Two broad complementary perspectives, namely, the institutional and welfarist sides, have been adopted for the sustainability concept (Aliyu et al., 2017a). The institutional angle emphasizes on owners’ value maximization while the welfarist one stresses on society well-being and environment improvement. Sustainability concept has been also modeled through the triple bottom line approach (TBL) (Elkington, 1997). TBL focuses on three pillars, namely, economic, social and environmental dimensions. Both approaches do not consider directly the religious side in the sustainability concept. They implicitly assume reaching Maqasid Al-Shariah through the social well-being and environment improvement. Recently, Hamidi and Worthington (2021) propose an extension of TBL by adding a fourth pillar for Islamic banks (IBs) seeking compliance with Islamic law in their quest of sustainability. In brief, a sustainable IB is expected to ensure the long-term economic prosperity, to positively impact the society welfare, and to protect the environment while being compliant with the spirit of Maqasid Al-Shariah.

In the past decade, the growing awareness about the importance of considering sustainability in banking activity has led several scholars to investigate in the evaluation of banking performance in terms of sustainability. Previous related Islamic banking studies argue that the practice and reporting on sustainability of IBs around the world is still weak. For instance, Nobanee and Ellili (2016) reveal low sustainability practices for IBs as compared to the conventional banks in United Arab Emirates. Moreover, by considering 91 IBs across 13 countries, Mallin et al. (2014) affirm that sustainability practices do not constitute the main issues for most of the IBs. Similarly, Farook et al. (2011) demonstrate for 47 IBs from 14 different countries their inefficiency in sustainability practices. Saleem et al. (2013) point out that while supporting the economic aspect of sustainability, IBs overshadow the negative impacts of their activities on the society and the environment. By exploring 73 papers on Islamic finance and sustainability, Brescia et al. (2021) find that IBs are not involved in environmental and social practices.

Jan et al. (2019) consider that the recorded low sustainability practices of IBs are likely to be explained by the inadequacy of the used assessment frameworks. Most of the proposed evaluation frameworks have focused either on value maximization or on the conformity with Shariah principles to measure social sustainability performance. Furthermore, Aliyu et al. (2017a) state that previous related studies are mainly conceptual in nature without deep empirical exploration. Likewise, the authors underline that most of the earlier empirical studies have neglected information linked to the main stakeholders’ activities in their performance assessment process. Therefore, there is an urgent need for the development of an in-depth IBs sustainability framework yielding a performance index that takes into account not only the economic, the social, the environmental and the religious dimensions, but also the main stakeholders’ interests in the evaluation process.

This study opts for filling this gap by suggesting the development of a framework for assessing the sustainability performance of IBs using an adequate collection of KPIs related to previously identified sustainability dimensions while explicitly articulating the main stakeholders’ points of views in the evaluation process. This framework produces an index, labeled as Islamic banking sustainability performance index (IBSPI) yielding an overall sustainability score obtained by aggregating various sub-scores assessed from different stakeholders’ viewpoints using a multi-attribute utility approach which is used for the first time for IBs performance assessment.

The rest of the paper is structured as follows. Section 2 reviews relevant previous literature. Section 3 develops the suggested framework. Section 4 describes the assessment process. Section 5 offers an empirical case study. Section 6 displays and analyzes the results. Finally, Section 7 concludes.

2. Literature review

Despite the growing recognition of the need to embed sustainability into most businesses, very few studies have considered sustainability dimensions in the evaluation of IBs performance. Moreover, some of them ignore the religious dimension and focus only on corporate social responsibility (CSR) performance to assess their social and environmental involvement such as Mallin et al. (2014), Platonova et al. (2016) and Hanic and Smolo (2022).

The others tackle the problem by developing indexes derived from Maqasid Al-Shariah. Two main conceptual frameworks of Maqasid Al-Shariah have been developed: Al-Ghazali’s and Abu-Zaharah’s frameworks. The former divides Maslahah (promoting welfare) objective into three categories: Daruriyat (necessities), Hajiyaat (complements) and Tahsiniyaat (embellishments). Further, Al-Ghazali decomposes necessities into five dimensions: religion (alDin), life (al-Nafs), intellect (al-Aql), progeny (al-Nasl) and wealth (al-Mal). From his side, Abu-Zaharah (1997) adds two more objectives to that of Al-Ghazali, namely, education and justice.

Some studies adopt a combined version of both frameworks (Tarique et al., 2021). Recently, Monawer et al. (2021) propose an attempt actualizing Maquasid Al-Shariah framework. Ibrahim et al. (2004) develop an Islamicity disclosure index to assess IBs’ ability in providing relevant information to their stakeholders in terms of Shariah compliance, corporate governance and environmental involvement. Moreover, they suggest some Islamic quantitative ratios related to Maqasid Al-Shariah achievement. Haniffa and Hudaib (2007) and Belal et al. (2015) establish an ethical identity index to examine real IBs’ identities as mirrored in their annual reports in comparison to their ideal benchmark. Mohammed et al. (2008) are the pioneers in designing Maqasid Al-Shariah index (MSI) by using a simple additive weighting method. They propose an index based on two Shariah objectives [educating individual and establishing justice (EJ)] from Abu-Zaharah’s framework. Antonio et al. (2012), Mohammed and Taib (2015) and Rusydiana and Al Parisi (2016) conduct similar studies while adding the third objective (EJ).

Mohammed et al. (2015) establish an MSI using the five dimensions: preservation of religion, life, intellect, progeny and wealth from Al-Ghazali’s theory. By developing a pentagon-shaped performance scheme structure based on these five dimensions, Bedoui and Mansour (2015) examine the relationship between ethics and performance from Islamic law perspective. Then, Asutay and Harningtyas (2015), adopting this scheme, conduct an empirical study for IBs from different countries, revealing their low performance. Likewise, Mergaliyev et al. (2019) use this scheme to assess IBs’ ethical, social, environmental and financial performance through a disclosure analysis. Considering the progeny objective as less important regarding the banking industry, Zaheer and Rasool (2017) establish their MSI index, including the four remaining objectives.

Adopting the five ethical dimensions of Al-Ghazali, Hudaefi and Noordin (2019) attempt to harmonize previous developed indexes to design a new index concealing both spiritual and financial facets to assess IBs’ performance. Mursyid et al. (2021) use an extended version of MSI index by incorporating additional measures.

From a methodological standpoint, most of the previous studies adopt a simple additive method to evaluate the suggested indexes. Only few scholars propose more elaborated approaches for their indexes. For instance, Ascarya and Sukmana (2016) apply analytic network process method for their suggested index. Nofianti and Okfalisa (2019) and Tarique et al. (2020, 2021) adopt an analytic hierarchy process approach to develop their respective indexes.

Siddiqui et al. (2019) argue that previous studies lack insight on IBs’ ability in ensuring the well-being of their stakeholders. Antonio et al. (2012) conjecture that for a sustainable growth, IBs should adopt a benefit approach not only for their shareholders, but also to the wider stakeholders, including the community and the environment. Moreover, they even encourage the practitioners to prepare various bank activity reports displaying data related to various stakeholders. Furthermore, Aliyu (2014) and Aliyu et al. (2017b) claim the necessity of considering the relationship between banks and their stakeholders in the sustainability conceptual framework.

To sum up, the above discussion underlines that developing an in-depth sustainability performance index for IBs still remains highly desirable. Further, it highlights the need for the design of a win-win paradigm that not only benefits shareholders’ and Shariah advisors’ but also all the other IB’s main stakeholders.

3. Suggested framework

This paper suggests a framework composed of a set of indicators that can help in assessing the performance of IBs in terms of sustainability. The advocated model considers seven key stakeholders, namely, regulators, customers, managers, employees, civil society, shareholders and Shariah advisors. For each stakeholder, a collection of attributes and sub-attributes is identified as shown in Figure 1. Details about adopted measures are given in Table A1 in the Appendix.

3.1 Regulators

Controlling banks’ risk level is considered as an important task for regulators. To evaluate the performance of IBs from regulators’ viewpoint, we use four major risk categories: liquidity risk, insolvency risk, credit risk and Shariah non-compliance risk. The first three risks are similar to those faced by conventional banks. However, the fourth is an operational risk related to IBs’ compliance with Shariah. It is linked to the loss that may happen from IBs’ failure to comply with the Shariah principles.

3.2 Civil society

Civil society includes all individuals, non-governmental organizations and institutions revealing will of citizens. To evaluate IBs’ performance from civil society’s perspective, the apparent commitment to sustainable development (SD) and the real involvement to SD are considered. The first attribute indicates whether an entire report is dedicated to sustainability or not. The second one focuses on practices related to governance quality, economic, social and environmental dimensions.

IBs’ corporate governance has been sufficiently debated but no clear consensus has been reached for the definition of this concept (Ajili and Bouri, 2018). Good governance aspiration calls for providing the managers with a guide of good practices that warrant maximum protection to all parties. Habitually, three key mechanisms are involved: a board of directors (BODs), an audit committee (AC) and a Sharia supervisory board (SSB). Each of these teams has a major role to ensure. BOD monitors and controls the conduct of executive managers. AC certifies a better quality of revealed financial reporting. SSB ensures the compliance of IBs activities with Shariah. According to AAOIFI governance standards and the corporate governance codes of GCC countries, some specificities are reported for these mechanisms. For example, BOD must meet at least six times a year. Additionally, most members must be non-executive and at least one-third must be independent. AC should be composed of at least three members and should meet at least four times a year. The SSB should consist of at least three members with academic qualifications, experience and knowledge in the field of Islamic finance (ICD-Refinitiv, 2020). Herein, to evaluate governance quality, we focus on the assiduity of BOD members, the percentage of non-executive independent directors, AC and SSB sizes and the annual numbers of BOD, AC and SSB meetings.

To estimate the economic contribution of IBs, we propose three proxies. The first one appraises the immediate contribution of IBs to the overall economic growth. The second proxy gauges the involvement of IBs in the economy through its financing activity. The third proxy evaluates the coherence level between the implemented financing strategies of the bank and that of the host country. To achieve sustainable economic growth, policy actions at different levels need to be coherent. We argue that IBs can better contribute to the prosperity of the economy by adopting financing policies in line with the economic strategies of the host country.

Moreover, it is well recognized that funding various economic sectors fits better with some financing modes than others. For instance, it would be preferable to fund agriculture and industry using profit and loss sharing financing (PLSF) and Ijara, and services using non-profit loss sharing financing (NPLSF) (IIRF, 1997). For the third proxy, we develop an assessment process through experts’ judgments to appraise the harmony between banks financing activities and the adopted economic policy of the host country.

The social dimension refers to IBs’ involvement in the society’s well-being. Within the suggested framework, we adopt diversity and inclusion measures. Diversity may be evaluated through the proportion of the international employees, the gender or/and the racial mixture in BOD. Inclusion may be assessed through microfinance and philanthropy funds in all its forms of charity such as Waqf, Qard-Hasan, Zakat and Sadaqah. As far as it is known, a common minimum Zakat to wealth ratio of 2.5% is a required annual payment on one’s total wealth for people in need. That is why, to better appraise the real commitment of IBs to social causes, the net excess with respect to this threshold is considered.

Safeguarding environment is related to life and posterity preservations. A particular attention is expected to be given to air pollution, land and water pollution and energy restoration for the coming generations. Borthakur (2014) claims that the banking sector is among the foremost producers of electronic waste because of its massive usage of computers. Furthermore, as intermediaries, IBs can be precious tools for emerging green awareness and environmental concerns by swinging financing to climate-sensitive sectors and stopping being only profit-oriented at the expense of nature’s resources durability. To assess the involvement of IBs in environmental sustainability, we propose to use the amount of carbon emission, the proportion of consumable environment-friendly products, the quota of socially responsible investment and a 0–1 variable indicating whether or not an environmental committee has been established. This committee indicates the board’s orientation and commitment toward SD (Birindelli et al., 2018).

3.3 Customers

To appraise sustainability performance from the customers’ side, we suggest four attributes: accessibility, service quality, staff–customer relationship and competitive advantages, each of which includes a set of indicators. Regarding the first three attributes, we adopt comparable measures to those proposed in Rebai et al. (2016). Accessibility is appraised through branch density and ATMs density. For service quality, we use the evolution of Islamic financing and the evolution of deposits as relevant indicators. To measure staff–customer relationship, we consider two sub-attributes: the number of related staff trainings and the number of customers per counsel for personalized treatment. Obviously, the lower this latter number, the better the sustainability for this relationship.

For the fourth attribute, we focus on Islamic products. A performing IB is expected to have portfolio with dominant PLSF in its activities because it should help reduce income inequality and generate funds. Previous empirical studies show that IBs financing seems to be dominated by NPLSF (Hassan and Aliyu, 2018). Definitely, NPLSF activities are less risky and more liquid than participatory financing modes. Nevertheless, the implementation of such products should rely on normative rulings deduced from the sources of the Shariah (Alziyadat and Ahmed, 2019). To evaluate competitive advantages, we propose three indicators. The number of Islamic products indicates the breadth of choice available to customer; PLSF mirrors the entrepreneurs’ satisfaction level; and Qard-Hasan is designated to finance micro-projects and poor customers’ consumption.

3.4 Employees

Employees’ satisfaction is related to the quality of their daily life and work. We advocate the use of the following three attributes: remuneration and incentives, retirement pension and training. The monetary benefit indicates the effort provided by IBs in boosting the loyalty of their employees and hence in building a sustainable relationship with them. Retirement pension yields a feeling of security to the employees. Training reveals IB’s involvement in improving the knowledge and the expertise of their employees. It offers employees better opportunities for promotion and aspiration to attractive positions.

3.5 Managers

In addition to obeying Islamic finance regulations and standards, managers are expected to make efforts to enhance the adoption of sustainability practices. To evaluate performance from managers’ perspective, we use three attributes: profitability referring to their ability in generating income, cost management indicating their aptitude in controlling costs and annual remuneration so that the higher the remuneration, the higher the managers’ satisfaction. Indeed, managers should be sufficiently inspired via judicious wages. Nevertheless, it should be noted that giving huge wages is an unethical practice.

3.6 Shareholders

To assess the performance of IBs from shareholders’ standpoint, we adopt two indicators. The first one is the return on average equity indicating profitability level in relation to the average provided equity. The second one is dividends payout quantifying the profits paid to shareholders. Nevertheless, having high levels does not certify IBs’ soundness. Indeed, a high profitability is usually accompanied by a high risk level. Sustainable IBs must continuously oversee the risk level with profitability indicators. Also, the dividend payout ratio may reveal the bank sustainability status. A high payout ratio may indicate absence of reinvestment opportunities that may argue against sustainability.

3.7 Shariah advisors

Shariah advisors are defined as an independent body of specialized experts in Islamic commercial jurisprudence and in Islamic finance. Their main role is to provide know-how and supervision in all matters involving the Shariah. They must oversee the compliance of IBs’ activities with the Shariah principles. In other words, Maqasid Al-Shariah should be incorporated in the examination of contracts applied in the Islamic banking business (Rosly, 2010). To assess IBs’ performance from Shariah-advisors’ perspective, we adopt the three main Abu-Zaharah’s objectives: EJ, promoting welfare and educating individual.

The Shariah advisors is expected to keep an eye on IBs’ practices in terms of fairness. To evaluate justice, we consider fair dealings with employees, with civil society and with customers. Fairness with employees (FE) is appraised through directors to employees welfare ratio pinpointing how much the bank has been fair in distributing wages to its directors and employees. A high ratio reveals the IB’s unfairness in wages distribution. Justice with civil society is gauged via CSR expenditure to total expenses. This ratio indicates whether IBs have been fair with the community through their involvement in environment protection. CSR expenditure means the amount of money spent on social activity. Finally, fairness with customers (FC) is assessed by PLSF to total financing ratio, revealing how far the IBs have been successful in sharing the risk with their customers because this relationship should not be limited to lending money but should also generate mutually beneficial partnership relations. Akin et al. (2016) provide a thorough discussion about risk-sharing instruments in an Islamic finance context.

IBs aim to give benefit for both banks and society in all aspects of life. To assess IBs’ contribution in promoting welfare objective, we use three attributes: profitability, redistribution of income and wealth and investment in real sector. Wealth redistribution is estimated through social funding mechanisms such as Qard-Hasan and Zakat. Investment in real sector indicates the amount of funds dedicated to vital sectors such as agriculture, mining, fisheries, construction and manufacturing. These funds may affect the living standard of the wider population and the long-term capital formation of a country.

To appraise the involvement of IBs in educating individuals, we adopt the three attributes proposed by Tarique et al. (2020). The first attribute “advancement of knowledge” assesses IBs’ contribution in allowing grant to research and scholarship. The second attribute “instilling new skills” gauges their involvement in training and in introducing new talents. The last attribute “creating awareness of Islamic banking” evaluates IBs’ effort engaged in informing people about their products.

4. Assessment process

The suggested framework aims at generating an IBSPI index that may be used to assess the sustainability performance of IBs. This index accounts for multiple criteria identified from the main stakeholders’ perspectives while integrating the three well-recognized pillars of sustainability (economic, social and environmental dimensions) and the religious dimension to be coherent with Maqasid Al-Shariah. Given the diversity of the proposed criteria and the conflicting objectives at stake, it is imperative to design an appropriate quantitative tool to produce this index. Multi-attribute utility theory is an effective multicriteria decision-making method in balancing multiple objectives and uncertainty. For more details on multi-attribute utility theory, the reader may refer to Keeney and Raiffa (1976). After validating the mutual utility independence assumption regarding all attributes, we adopt the generalized multiplicative form to design the related multi-attribute utility functions (MAUFs). Each MAUF allows combining multiple, sometimes conflicting criteria. Two steps in the assessment process involve the recourse to experts’ opinions with whom several preference elicitation interviews are conducted as displayed in Figure 2.

The hierarchical framework in Figure 1 displays the need for four major levels of evaluation to generate the IBSPI index. First, we assess a single-attribute utility function (SAUF) for each sub-criterion appearing at the bottom of the framework using the well-recognized approach (the five-points assessment method) proposed by Keeney and Raiffa (1976) (some details are given in Figure 2). Second, we assess a MAUF for each criterion by aggregating the corresponding SAUFs after appraising the associated scaling constants. Third, we assess a MAUF for each stakeholder by combining the previously developed related MAUFs. Each of these later MAUFs plays the role of SAUF in the appraisal of the relevant stakeholder’s MAUF. Finally, we generate the IBSPI laying at the first level of the framework hierarchy by gathering the assessed stakeholders’ MAUFs through the same approach. IBSPI allows to calculate an overall score indicating the IB’s sustainability performance. A score of 1 is reached when all the attributes are at their best levels. An illustrative example of assessment of MAUF is provided in the next section.

5. Case study

The data cover the period from 2005 to 2019. They are collected from BankScope (renamed as Orbis Bank Focus since 2017) and the published annual reports of five famous multinational Islamic banking groups: Al-Rajhi Bank, Albaraka Banking Group, Qatar Islamic Bank (QIB), Maybank Islamic Berhad and Kuwait Finance House (KFH). It should be noted that because of shortage of data, we ignore in the empirical study some of the sub-attributes introduced in the developed framework. These missing data are mainly related to environmental indicators.

Empirical applications of multi-attribute utility theory involve the recourse to some experts with whom a series of interviews are performed. In this study, we solicit six experts selected based on their experience in banking and their background in Islamic finance and in sustainable finance. The details of the experts’ profiles are given in Table A2 in the Appendix. We primarily accomplish some examination about the utility independence assumption and we found that it roughly holds regarding all attributes at the different steps of the evaluation process.

5.1 Single-attribute utility function and multi-attribute utility functions assessment: an illustrative example

For illustrative purposes, we provide an overview of the MAUF evaluation implementation for the attribute “EJ.” As discussed earlier, three associated sub-attributes “FE,” “FC” and “fairness with civil society” (FCS) have been chosen. Because of lack of data related to FCS, we consider only FE and FC in this assessment. FE is appraised through directors to employees welfare ratio and FC is measured by PLSF to total financing ratio. In a first step, we need to evaluate the SAUFs of FE and FC (U_FE and U_FC) applying the five-point approach. For example, to appraise the FC utility function U_FC, we start by identifying the best and the worst PLSF ratios as viewed by the experts and argued by the relevant literature. Next, we perform a series of trial-and-error tests with experts to highlight three intermediate PLSF values for which experts assign utility scores of 0.25, 0.5 and 0.75, respectively. Subsequently, we use these five identified points to assess U_FC (Figure 3). By using the software package LabFit, we get the best fit for the obtained curve through the expression given by equation (1):

(1) UFC(XFC)=−0.085851+0.020099×e0.044038×FC

We use similar approach to assess the marginal utility function U_FE. Then, we write the MAUF of the attribute EJ (U_EJ) as expressed by equation (2):

(2) kEJU(XEJ)+1=[kEJkFEUFE(XFE)+1][kEJkFCUFC(XFC)+1]

where X_EJ is the vector of the sub-attributes X_FE and X_FC. k_EJ, k_FE and k_FC are the scaling constants.

Afterward, we carry out preference elicitation interviews with experts using the standard approach of multi-attribute utility theory and accounting for experts’ opinions to obtain the two scaling constants k_FE and k_FC (k_FE = 0.3 and k_FC = 0.8). Subsequently, we solve equation (3) to obtain k_EJ = −0.416667.

(3) kEJ+1=(kEJkFE+1)(kEJkFC+1)

The MAUF of EJ is then deduced from equation (2):

(4) UEJ(XFE, XFC)=[(−0.125*UFE(XFE)+1)(1−0.3333*UFC(XFC))−1]−0.416667

5.2 Islamic banking sustainability performance index assessment

The previously illustrated process is repeated as many times as necessary until all the required MAUFs are evaluated. In particular, we develop a MAUF function for each considered stakeholder. Then, we design the global index IBSPI [Equation (5)] by aggregating all the stakeholders’ MAUFs. This index generates scores reflecting sustainability performance levels for IBs. It can also serve for ranking IBs in terms of their sustainability engagement:

(5) IBSPI=[(0.267*UR(R)+1)(0.267*UCS(CS)+1)(0.267*UC(C)+1)(0.267*UE(E)+1)(0.267*UM(M)+1)(0.267*US(S)+1)(0.533*USA(SA)+1)−1]/(5.333)

6. Results and analysis

Figure 4 shows the evolution of the IBSPI scores for considered IBs over the period 2005–2019. Accordingly, none of these IBs seems to be sufficiently sustainable from all stakeholders’ viewpoints. All scores are rather low. Al-Rajhi Bank appears to be relatively the best bank with an average score around 0.31 attaining a peak of 0.38 in 2018, followed by QIB with an average score of 0.26. Because some stakeholders’ objectives are contradictory, achieving high scores of IBSPI seems to be often difficult, if not impossible. Nevertheless, if a better balance is undertaken among stakeholders’ expectations, reaching higher scores may be anticipated. Fixing a threshold level for sustainability is arduous; still, it is obvious that the higher the IBSPI score, the more sustainable the IBs are.

Figure 4 displays also quite constancies in the performance of most banks except Maybank. This latter shows an average score of 0.23 with an upward trend taking the second place instead of QIB. AlBaraka and KFH mirror similar constant trends with average scores of 0.15 and 0.14, respectively. A deeper analysis can explain the factors leading to the recorded results.

Maybank’s uptrend in sustainability appears to be mainly driven by improved employee compensation (Figure 5). It should be noted that these IBs being hosted in different countries, the remuneration is normalized by the purchasing power parity. Figure 5 reveals that Al-Rajhi Bank achieves its relatively high average score particularly by satisfying fully its employees (0.92) through the distribution of high salaries, and moderately its customers (0.76) through good accessibility. Furthermore, the registered peak in 2018 may be explained by the peaks in the performances scores assessed from shareholders’ and civil society’s perspectives. Indeed, an important increase in the dividends payout from 44.5% to 97.03% happened in 2018. Also, there was an improvement in banking inclusion through the provision of a fairly large level of Zakat and an enhancement in SD reporting. Note that IBs have become aware of the need for SD reporting from 2011; nevertheless, Al-Rajhi Bank continues exhibiting the lowest average score (0.17) in terms of SD disclosure.

A wider analysis of the practices devoted to sustainability confirms the rarity of the involvement of IBs in social actions. Figure 6 displays very feeble scores of social sustainability for all banks except Al-Rajhi and AlBaraka with 0.32 and 0.47, respectively. Indeed, the lack of data related to environmental issue may also certify a total absence of interest on this matter from IBs.

Regarding economic sustainability, Figure 6 shows that Maybank, AlBaraka and KFH occupy the first places with average scores of about 0.96, 0.92 and 0.81, respectively. QIB displays an upward trend with an average score of 0.46 and Al-Rajhi bank maintains a constant tendency with an average score of 0.41. A further investigation reveals that the high performance of the first three banks may be principally justified by their important contribution to the GDP of the host countries (Figure 7). QIB and Al-Rajhi bank have improved their contribution to the global growth of their respective host countries. However, more efforts seem to be needed for IBs to strengthen their respective Islamic finance activities.

Figure 7 also discloses that all IBs present a lack of harmony between their financing activities and the economic policy of the host countries. Almost all IBs adopt financing portfolios that are incompatible with the funding policies implemented by the host countries for their various economic sectors. To assess the coherence level between an IB’s financing portfolio and the funding strategy of the host country, we use again a multi-attribute approach as previously illustrated. More specifically, we assess a coherence function for each economic financing policy orientation in terms of assets percentage allocated to PLSF. For example, IBs in countries having service orientation are expected to assign high percentages of assets to NPLSF; however, those in industrial countries are expected to assign high percentages to PLSF.

Table 1 exhibits for each IB the composition of their financing portfolio in 2019. Table 2, however, gives the 2019 distribution of the weighted GDP of the host countries for each considered IB among the different economic sectors.

Note that, because each studied bank is hosted in more than one country, we weight each host country’s GDP by the percentage of the bank assets in this country to its total assets. A quick glance at these tables shows that the highest assets percentage is assigned to NPLSF mode independently of the host countries’ economic policies. Table 2 displays that all the considered host countries have adopted similar policies half service oriented and half industry and agriculture oriented. To be coherent, all IBs are expected to allocate approximately 50% of their respective assets to PLSF and the remaining percentage to NPLSF and Ijara modes together, which is particularly clearly non-respected by Al-Rajhi bank, Albaraka, QIB and KFH.

Concerning governance quality, Figure 6 depicts also high performance for almost all banks with average scores of 0.87, 0.97, 0.94 and 0.95 for AlBaraka, Maybank, Al-Rajhi Bank and KFH, respectively. QIB registers a relatively low average level (0.54), which can be justified by its ensured low number of SSB meetings.

With reference to Shariah advisors, findings reveal relatively low average performance scores varying from 0.08 to 0.14. Because of lack of data related to educating individuals, we limit our empirical study to the two remaining objectives. Figure 8 displays that all IBs fail to achieve the EJ goal in terms of fairness in the distribution of salaries to employees and directors and fairness in sharing risk with their customers by adopting NPLSF mode for most of their activities, as shown in Table 1.

Concerning promoting welfare objective, Figure 8 demonstrates that Al-Rajhi bank and KFH have better contributed to upgrading the society welfare with average scores of 0.53 and 0.42, respectively, followed by AlBaraka and QIB. Conversely, Maybank has almost ignored this objective with an average score of 0.11. A deeper analysis reveals that Al-Rajhi bank, KFH and Albaraka have reached these scores particularly through their payment of Zakat. It should be noted that almost all IBs often do not offer Qard-Hasan.

This empirical study relies on the suggested multi-dimensional framework for assessing the sustainability performance of IBs. According to this framework, key stakeholders’ standpoints are taken into account to generate IBSPI index yielding sustainability scores for IBs. Four perspectives, economic, social, environmental and religious, are integrated in the evaluation. Findings confirm that sustainability policies and disclosure are not the main issues for most IBs as argued in previous related studies (Mallin et al., 2014). Furthermore, the outcomes confirm Brescia et al.’s (2021) findings specifying that IBs are not involved in social practices. However, despite revealing a lack of coherence between IBs’ financing activities and host countries’ economic policies, results show that IBs are more involved in economic sustainability practices as stated by Jan et al. (2019).

Moreover, similarly to Tarique et al. (2020) and Asutay and Harningtyas (2015), results reveal that IBs are not fully adhering to Shariah objectives. Notably, IBs are not functioning on a justice basis. They lack fairness in distributing salaries to their employees and directors and in sharing risk with their customers. Furthermore, they weakly contribute to the promotion of wealth mainly through Zakat distribution. All other forms of contribution are rather nonexistent. Finally, the outcomes show a fairly similar service quality for all IBs; nevertheless, they fail to provide their customers with a wide variety of Islamic products.

7. Conclusion

This paper develops a sustainability performance evaluation framework for IBs. This framework yields IBSPI that incorporates, in addition to the economic, social, environmental and religious dimensions, the key stakeholders perspectives. The assessment approach relies on sequentially applying multi-attribute utility theory at the various hierarchical levels of the framework. The generated index allows scoring the IBs in terms of their sustainability engagement. The proposed framework can be used to guide IBs in choosing adequate financing strategies that might help them improving their sustainability performance. It may assist in tracking high IBSPI scores using in-depth analyses. The assessed scores can detect strengths to be confirmed and weaknesses to be revised at the various performance dimensions. Moreover, the advocated model is a preestablished system that avoids all sources of conflict of interest and offers governments a transparent and objective assessment tool that may be used to rank IBs in terms of their sustainability.

The lack of data prevents us from including further items in the empirical implementation, which might have distorted the accurate picture of the real IBs’ sustainability performance. More efforts should be made in reporting practices to encourage banks disclosing relevant information. A focus on other kinds of data sources in addition to IBs’ reports may enhance the empirical study.

The suggested IBSPI seems to be an interesting attempt toward a universally adopted index for IBs’ sustainability performance through additional improvement and validation. One avenue of future research consists on further collaborations and exchanges with experts to develop a more robust model of sustainability assessment. Moreover, additional discussions with experts may lead to the identification of more relevant attributes. Future research may emphasize more on accomplishing further collaborations and exchanges with experts to develop a more elaborated and validated IBSPI.

Figures

Figure 1.

Suggested framework

Figure 2.

Experts’ involvements in the assessment process

Figure 3.

Curve of the fairness-with-customers’ function

Figure 4.

IBSPI scores evolution over 2005–2019

Figure 5.

Evolution of the performance scores according to each stakeholder over 2005–2019

Figure 6.

Practices related to sustainable development according to civil society over 2005–2019

Figure 7.

IBs’ contribution to economic sustainability over 2005–2019

Figure 8.

IBs’ contribution to Shariah objectives over 2008–2019

Table 1.

Distribution of funding activities among various modes of financing in 2019

Islamic banking group	Murabaha and deferred sales	Ijara	Istisna	Mudarabah	Musharakah	Other
Al-Rajhi Bank	91.48	0.00	0	8.52	0.00	2.66
Albaraka Banking Group	74.23	0.66	0.93	12.56	7.06	1.80
Qatar Islamic Bank (QIB)	81.48	16.14	0.68	0.01	0.00	1.68
Maybank Islamic Berhad	79.26	12.32	0.03	6.85	0.89	0.64
KFH	81.19	18.00	0.82	0.00	0.00	0.00

Table 2.

Distribution of weighted average GDP for host countries in 2019

		Weighted average GDP among sectors
Banks	Host countries	Services (% of GDP)	Industry (% of GDP)	Agriculture (% of GDP)
Al-Rajhi Bank	Saudi Arabia, Malaysia, Jordan	51.51	45.90	2.59
AlBaraka Bank	Bahrain, Algeria, Egypt, Jordan, Lebanon, South Africa, Sudan, Syria, Tunisia, Turkey, Morrocco, Saudi Arabia, Pakistan	59.41	32.12	8.47
Qatar Islamic Bank	Qatar, Lebanon, Malaysia, UK	44.54	57.68	0.17
Maybank	Malaysia, Indonesia, Singapore	59.61	34.7	5.69
Kuwait Finance House	Kuwait, Bahrain, Turkey, Malaysia	49.97	48.54	1.49

Table A1.

Selected criteria, sub-criteria and measures

Stakeholders	Criteria/sub-criteria		Measures
Regulators	Liquidity risk		Liquid assets/deposits and short-term funding
			Islamic financing/deposits and short-term funding
			Money lent to other banks/money borrowed from other banks
	Credit risk		Impaired Islamic financing/gross impaired Islamic financing
			Regulatory capital/credit risk
			Impaired Islamic financing/gross Islamic financing
			(impaired Islamic financing – reserves)/equity
	Insolvency risk		Global solvency ratio
			Coverage degree of banks’ assets/equity
	Shariah non-compliance Risk		Shariah non-compliance income/net income
Civil society	Apparent commitment to SD		Yes/no criterion concerning the devotion of a SD report
	Governance quality	Bord of directors	Assiduity of board directors
			Annual number of board meetings
			Percentage of independent non-executive directors in BOD
		Audit committee	Number of audit committee members
			Number of audit committee meetings
		Shariah supervisory board	Number of Sharia supervisory board’s members
			Number of SSB Meetings
	Economic sustainability	Immediate contribution to GDP	Islamic financing/GDP
		Islamic financing	Islamic financing/total assets
		Coherence with the adopted economic policy	A score between 0 and 1 obtained using an elicitated marginal function by experts
	Social sustainability	Diversity	Proportion of the international employees in the BOD
			Gender
			Racial mixture in the BOD
		Inclusion	Zakat/net assets
			Qard-Hasan/net assets
			Waqf
			Sadaqah
	Environmental sustainability	Socially responsible investment	Amount of socially responsible investment/total investment
		Carbon emission	Amount of Carbon emission
		Eco-Friendly Products	Proportion of consumable products which are friendly to the environment
		Environmental committee	Establishment of an environmental committee (yes/no)
Shareholders	Profitability		Return on average equity
			Dividends payout
Customers	Accessibility	Branches Density	Number of branches per 1,000 inhabitants in the host countries
		ATMs	Number of ATMs per 1,000 inhabitants in the host countries
	Service quality	Deposits	Customers’ deposits/liabilities
		Islamic financing	Islamic financing/Assets
	Competitive advantages	Islamic products variety	Number of Islamic Products
		Risk-sharing financing	Profit-loss sharing financing/ total Islamic modes of finance
		Microfinancing	Qard-Hasan/total Islamic modes of finance
	Staff–customer relationship	Training	Proportion of training cost per employee allocated to staff–customer relationship
		Counsel	Number of customers per counsel
Employees	Remuneration and Incentives		Total remunerations/number of employees
	Training		Training expense/total expense
	Retirement pension		Retirement pension/total expense
Managers	Profitability		Return on average assets
	Cost management		Operating expenses ratio
	Managers’ remuneration		Average salaries and bonuses
Shariah advisors	Establishing justice	Fairness with employees	Average directors’ remuneration/average employees’ remuneration
		Fairness with customers	PLSF/total financing
		Fairness with civil-society	CSR expenditure/total expenses
	Promoting welfare	Profitability	Net income/total assets (ROAA)
		Redistribution of income and wealth	Zakat/net income
			Qard-Hasan/total financing
		Investment in real sector	Investment in Real Economic Sector/ Total Investment
	Educating individuals	Advancement of knowledge	Education grant/total expense
			Research grant/total expense
		Instilling new skills	Training expense/total expense
		Creating awareness of Islamic banking	Publicity or marketing expense/total expense
			Product disclosure sheet available? (yes/no)

Table A2.

Experts’ profiles

Experts	Profile
Expert 1	Member in SSB of Zitouna Bank Professor in “Fiqh al-Muamalat” in Zitouna university, Tunisia
Expert 2	Full Professor of economics Ex-senior research economist at the Islamic Development Bank Institute
Expert 3	Financial analyst, expert in the banking sector Former President of the French society of financial analysts
Expert 4	Full Professor of finance, expert in sustainable finance at Paris campus Member of an advisory committee at the central bank of Tunisia Member of the sectoral commission in Islamic finance in the Tunisian Ministry of Higher Education
Expert 5	Independent administrator and chairman of risk committee in a conventional bank Economic analysis advisor to the Head of the Tunisian Government
Expert 6	PhD in Finance having worked for a long time on customer demand for Islamic banking products

Notes

1. An earlier version of this paper was presented at the 1st Annual Tunisian Operational Research Society (TORS) Conference, Sousse, Tunisia, June 12-14, 2015.