The impact of social responsibility disclosure on the financial performance of Islamic financial institutions

Abstract

This paper aims to evaluate the extent of Islamic financial institutions' commitment to social responsibility reporting (SRR) requirements in the Kingdom of Bahrain and to examine the influence of this commitment on their financial performance. The study adopts a quantitative content analysis approach. Annual reports from a selected sample of Islamic financial institutions in Bahrain were analyzed for the period 2018–2022. The independent variable social responsibility disclosure was measured based on compliance with the AAOIFI Standard No. 1 (Presentation and Disclosure in Financial Statements), specifically focusing on the disclosures related to the Zakat and Charity Fund and the Qard Fund. Financial performance, the dependent variable, was assessed using Return on Equity (ROE) as the key performance indicator. The results revealed that, on average, institutions demonstrated a 78% compliance rate with SRR requirements, with a standard deviation of 0.12, indicating a relatively high level of social responsibility engagement. However, ROE varied significantly across institutions, ranging from 0.10 to 0.42. Statistical analysis confirmed a significant positive influence of social responsibility disclosure on financial performance. The findings suggest that greater transparency in social responsibility reporting correlates with improved financial outcomes for Islamic financial institutions. While the sector demonstrates commendable compliance with SRR standards, variability in financial performance underscores the potential for further improvements in disclosure practices. Islamic financial institutions are encouraged to enhance the clarity and consistency of their SRR to foster investor and stakeholder trust. Regulatory bodies should strengthen the enforcement of AAOIFI standards to ensure uniform reporting practices. Increased transparency not only enhances institutional credibility but also contributes to better operational performance and attracts sustainable investment.