ESG Activities and Bank Efficiency: Are Islamic Banks Better?

Alam, A. W., Banna, H., & Hassan, M. K. (2022). ESG ACTIVITIES AND BANK EFFICIENCY: ARE ISLAMIC BANKS BETTER?. Journal of Islamic Monetary Economics and Finance, 8(1), 65 - 88. https://doi.org/10.21098/jimf.v8i1.1428

26 Pages Posted: 9 Feb 2022 Last revised: 19 May 2022

See all articles by Ahmed W. Alam

Ahmed W. Alam

Kean University

Hasanul Banna

Manchester Metropolitan University

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Date Written: November 22, 2021

Abstract

In this paper, we investigate the differential impact of ESG activities on banks’ technical efficiency for conventional and Islamic banks. We employ a Data Envelopment Analysis (DEA) technique to determine the efficiency scores of the banks. Based on a sample of 14 conventional and 11 Islamic banks from 4 countries over the period 2011 - 2019, we find that average DEA-generated efficiency of conventional (Islamic) banks is about 38.8% (42.45%). Baseline Tobit regressions suggest that ESG has an overall positive impact on banks’ efficiency. Further, we analyze the relationship for conventional and Islamic banks separately. We find that the positive effect sustains for conventional banks but turns out to be insignificant for Islamic banks. Our individual ESG dimension-wise analyses suggest that environmental activities positively influence the efficiency of both conventional and Islamic banks, whereas social activities strengthen the efficiency of conventional banks only. We do not find any significant result in favor of governance-related initiatives. Our baseline results survive the robustness test based on Simar and Wilson (2007) two-stage efficiency analysis. Based on our findings, we argue that Islamic banks lack sufficient investment on ESG friendly initiatives. We recommend that Islamic banks increase their awareness of the benefits of ESG practices and pay attention to improve their overall and dimension-wise ESG scores with a goal to improve their banking efficiency.

Keywords: ESG, DEA efficiency, Islamic banks, Tobit regression

JEL Classification: G21, G29, M14

Suggested Citation

Alam, Ahmed W. and Banna, Hasanul and Hassan, M. Kabir, ESG Activities and Bank Efficiency: Are Islamic Banks Better? (November 22, 2021). Alam, A. W., Banna, H., & Hassan, M. K. (2022). ESG ACTIVITIES AND BANK EFFICIENCY: ARE ISLAMIC BANKS BETTER?. Journal of Islamic Monetary Economics and Finance, 8(1), 65 - 88. https://doi.org/10.21098/jimf.v8i1.1428, Available at SSRN: https://ssrn.com/abstract=4030145 or http://dx.doi.org/10.2139/ssrn.4030145

Ahmed W. Alam (Contact Author)

Kean University ( email )

1000 Morris Ave
Union, NJ 07083
United States

Hasanul Banna

Manchester Metropolitan University ( email )

All Saints
Manchester, M15 6BH
United Kingdom

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

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