Summary
The article “Corporate sustainability and financial performance of banks in Muslim economies: The role of institutions” by M. A. Khattak intends to investigate whether institutional quality mediates the relationship between sustainability and financial performance. The author states that during recent years the topic of corporate social responsibility has gained increased attention from various stakeholders.
As a result, more and more top-level corporations disclose their investments in sustainable initiatives. For instance, based on the study conducted by KPMG in 2017, 93% of the 250 largest companies revealed their environmental, social, and corporate governance. However, Khattak maintains that not all managers are convinced that sustainable behavior may lead to certain benefits for the company. Particularly, people doubt that the former may positively impact an organization’s financial performance. In this regard, the scholar hypothesizes that the relationship between those two variables may not be as straightforward as it may first seem. Therefore, Khattak proposes to analyze the role of institutional quality as the mediator of a causal link between sustainable behavior and financial performance.
Methodology
The final panel under investigation included the data of banks from 13 Muslim countries from 2007 to 2016. In order to avoid the problems with heterogeneity, correlation, and endogeneity, Khattak uses the system GMM (generalized method of moments) approach. The author uses financial performance – which consists of two indicators, namely return of assets and returns on equity – as the dependent variable. Independent variables encompassed sustainable performance, institute quality, company capitalization and liquidity, asset quality, GDP growth, and inflation rate.
Results
The regression model revealed that banks that invest more in sustainable practices have better financial performance. It is explained by the fact that high levels of corporate social responsibility positively influence a company’s image, resulting in more people who are willing to use the services of brands that act sustainably. It is argued that, as a consequence, banks that have more customers experience a surge in deposit rates and a decline in loan rates.
Also, it was found that institutional quality serves as a mediator of corporate social responsibility’s impact on financial performance. Results showed that better institutions are associated, firstly, with increased sustainable practices and, secondly, with improved financial performance. However, Khattak notes that pro-environmental behavior translates to monetary benefits only when the company is able to communicate that information to its clients adequately.
Personal Opinion on the Article
In my opinion, this article addresses a very crucial topic for the modern business world. As the popularity of environmentally friendly behavior grows continuously, it is necessary to know how corporate social responsibility can help companies to adapt to new realities and whether it brings additional revenues. In this regard, understanding how the level of institutional development can affect financial performance is important both from the macro- and micro-economical perspectives.
It can be argued that the results are credible as Khattak deliberately considered all the possible problems with the data (such as heterogeneity, correlation, and endogeneity issues) and chose the most suitable model. However, I have certain doubts concerning the usage of an institutional quality variable without controlling for the overall sentiments of the country’s citizens regarding sustainable behavior. I think that in countries with developed institutions, people are generally more concerned with environmental issues. As a result, they would be more attracted to corporates that are socially responsible than individuals from other countries. Therefore, what is considered the institutional impact may, in reality, be explained greatly by people’s priorities.