Ethical Indentity_BD_Rev of Islamic Econ

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ETHICAL GAPS AND MARKET VALUE IN THE ISLAMIC BANKS OF

BANGLADESH

M. Kabir Hassan, University of New Orleans, USA

Mamunur Rashid, National University of Malaysia, Malaysia

Md. Yusuf Imran, Shahjalal Islami Bank Limited, Bangladesh

Abdullah Ibneyy Shahid, University of Saskatchwan, Canada

Address for Correspondence

M. Kabir HassanDepartment of Economics and Finance

University of New Orleans

New Orleans, LA 70148

Phone: 504-280-6163Email: [email protected]

Forthcoming in Review of Islamic Economics, Vol. 14, No. 1



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ETHICAL GAPS AND MARKET VALUE IN THE ISLAMIC BANKS OF

BANGLADESH

Abstract

This study measures the ethical identity of Islamic banks in Bangladesh over the period 2001 to

2006. An index of ethical identity, following Haniffa and Hudaib (2007), is constructed by

drawing information revealed in the annual reports of the banks. The index is composed of the

following eight different dimensions: i) mission and vision statement, ii) board of directors and

top management, iii) product and services, iv) Zakah, charity and benevolent fund, v)

commitment towards employee, vi) commitment towards debtors, vii) commitment towards

society, and viii) Shariah Supervisory Board. Then, the study also investigates the relationship

between the ethical identity index and market value of these banks. Results show that some of

the dimensions of ethical identity are over-communicated and some dimensions of ethical

identity are under-communicated in the annual reports. A significantly positive association has

been observed between the ethical identity index and market value of banks. The study

recommends possible improvements in Islamic banks’ communication of their ethical identity

through annual reports.

Keywords: Ethical Identity Index (EII), Islamic Banks, Stakeholders, Bangladesh

JEL Classification: C83, G21 and L38



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Ethical Gaps and Market Value in the Islamic Banks of Bangladesh

SECTION I: INTRODUCTION

IN 1960s, corporations found themselves increasingly under scrutiny over unethical

business practices. In response, they developed social responsibility programs which usually

involved charitable donations and funding local community projects. As Melvin (2005), points

out, this practice was not only extemporized but was also uncoordinated across the industries and

companies. This marked the genesis of ‘corporate ethical identity’. Business ethics have,

however, attracted renewed attention due to mega corporate scandals such as Enron, WorldCom,

Arthur Andersen, Tyco International, and Adelphia. Other factors such as increased government

regulations, amplified scrutiny by the media, and the increasing demand for accountability by

stakeholders have forced businesses to develop strategic business ethics policy (Ponemon and

Michaelson 2000, Stevens et al 2005, Weaver et al, 1999, Berrone et al., 2005). Berrone et al.

(2005) contend that a firm’s performance is greatly influenced by ethical identity. The ethical

identity embodies an image that should be effectively and properly communicated to all

stakeholders.

Islamic Banking Industry is strictly born on ethical values and principles. Its fundamental

rallying point is the unjust and usury interest rate system followed by conventional banking

system, (CBS). After much promulgation, Shakeel (2004) provides empirical evidence that

Islamic financial system (IFS) is gradually and firmly becoming acceptable beyond political,

geographical and religious divide. Since IFS has to be integrated in other systems, there is

exigent need for a thoughtful development of new ethical dimension of IFS. This is a more

severe challenge for IFS than for CBS. Since IFS ethics are based on commands of Islamic

religion, the communication of the ethical guidelines to clients becomes far much more

important than adoption of Islamic Ethical Guidelines by Islamic Banks. An ethical identity is

achieved not only when the bank adopts and practice the ethical guidelines but also when these

guidelines and effectively and properly communicated to the clients for effective conduct of

business. In the long run, as Berrone et al (2005) suggests, "revealed ethics by itself (i.e.



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decoupled from ethical initiatives) is not sufficient". This view is supported by Stevens et al

(2005) who states that a company that only adopts ethics in a symbolic manner by decoupling

ethics from actions, jeopardizes its own future.

The main function of a bank is to act as an intermediary between surplus economic units

(savers) and deficit economic units (borrowers). Banks lend the deposits it receives and charge

borrowers interest. The clients of Islamic banks are more Islamic law-oriented than profit-

oriented. They will forgo interest income offered by CBS and just deposit their money in banks

perceived to be 'Islamic' or 'more Islamic'. In Bangladesh, Islami Bank Bangladesh Limited

(IBBL) offers the lowest profit rate on savings deposits among both Islamic and conventional

banks yet it receives the highest amount of deposit. This would suggest that corporate image of

IBBL as a Shariah-compliant Bank is much stronger than that of the competitors.

The main objective of this study is to provide an index which objectively measures the ethical

identity of the Islamic banks in Bangladesh. The study also aims to compare how well individual

Islamic banks communicate with their stakeholders via published financial statements. Using

Haniffa and Hudaib (2007) methodology, we provide the Islamic Banks in Bangladesh with a

method of assessing the gap between the ideal and actual ethical identities. We selected the

Islamic banks in Bangladesh for two main reasons. First, the reactions of Islamic banks clients in

Bangladesh towards Quranic Commands mirror reactions of Islamic banks clients in most other

countries. Second, the growth of the Islamic banks in Bangladesh and other countries is strongly

positively correlated.

SECTION II: LITERATURE REVIEW

Corporate Ethical Identity, its formation and its effect:

Markwick & Fill (1997) define corporate identity as the “articulation of what the

organization is, what it does and how it does it, and its linked to the way an organization goes

about its business and the strategies it adopts”. According to Balmer (1998) and Scott and Lane



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(2000), corporate identity deals with the essence of the firm and its enduring characteristics: its

philosophy, values, history, strategy, business scope, and communication while Fombrun, (1996)

contends that the way a firm manages the stakeholder claims contributes to shaping its identity

since its values, actions, and stance differentiate it from other firms. Ferrell (2000) argues that

whether a specific behavior is right or wrong, ethical or unethical, is often determined by

stakeholders, such as investors, customers, interest groups, employees, the legal system, and the

community. Studies by Logsdon and Yuthas, (1997), Mitchell et al., (1997), and Wood (1991)

conclude that the ethical stance of a firm is premised on the expectation of society with which

the firm interacts. Stevens et al. (2005) found evidence that financial executives are more likely

to integrate their firm’s ethics code into their strategic decisions if they perceived the pressure

from market stakeholders.

Fombrun and Foss (2004) and Fritz et al. (1999) define Corporate Ethical Identity as the

posture a firm takes with respect to the ethical demands and claims of all its stakeholders. It

refers to the goals, values, practices, processes, and actions a firm takes and through which

stakeholders consider the firm as ethical.

Berrone et al. (2005) identifies two different dimensions of corporate ethics- Corporate

Revealed Ethics (CRE) which deals with the communication through the corporate statement,

and Corporate Applied Ethics (CAE) which deals with actual practice. According to Jones,

(1995) and Jones and Wicks, (1999), proactive ethical initiatives positively influence financial

performance through creation of intangible assets such as good reputation, trust, and

commitment which drive the long-term success of the business. This subsequently improves the

firm’s ability to attract resources, enhance performance, and build competitive advantages while

satisfying its stakeholders’ needs (Fombrun et al., 2000). Stakeholders Satisfaction mediates the

relationship between Corporate Ethical Identity and the firm’s financial performance.

Ethical identity benefits the firm in various ways. First, Cragg (2002), intimates that the

disclosure of ethical values and objectives in corporate statements and goals enhances the appeal

of the firm’s shares to the ethical and socially responsible investors. Second, it provides a clear



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informational signal about the stance and beliefs of the firm, mitigating uncertainty about long-

term risks and actions. Third, Sethi, (2005) argues that ethical disclosure attends the investors’

need for ethical and social information while Hummels and Timme (2004), say that it provides a

road map for better long-term investment decisions. Forth, Fombrun, (1996), Fombrun and Foss,

(2004) and Hillman and Keim, (2001) explain that it is a valuable tool for creating reputational

capital in form of good corporate image and enhanced reputation, which affords the firm a

competitive advantage. Fifth, a clear statement of what the firm stands for can elicit trust and

commitment between shareholders and top managements, reducing opportunistic behaviors and

transactional costs (Hosmer, 1994). Last, Orlitzky et al (2003) and Waddock and Graves, (1997)

notes that investor may interpret an ethical statement as a positive signal regarding the resources

of the firm. Only companies with sufficient resources can embark in ethical enterprises.

Therefore, ethical identity has an important informational value and investors are expected to

incorporate ethical information on their assessment of the firm’s value.

Balmer and Soenen (1999) identify four distinctive features of corporate identity namely

actual, communicated, ideal and desired. Gray and Balmer, (1998 defines actual identity as the

business strategy, values and philosophy, corporate culture and structure) while communicated

identity is closely linked to image and reputation, which in turn leads to the realization of desired

(what corporate management wants it to be) and ideal identities (what stakeholders see as

optimal). Since, there exists an explicit covenant or a promise (Johansson and Hirano, 1999;

Mitchell, 1999) between an organization and its key stakeholders, corporate identity must be

managed so as to ensure alignment among the four identities. This entails communicating and

behaving in a manner that leaves a pleasant impression with key stakeholders (Cornellisson and

Elving, 2003).

Ethics in Islam

Ethical values are ingrained in Islamic teachings (Anas and Mounira, 2009); however,

they are not properly communicated through appropriate media to the stakeholders (Wilson,

2002), which will facilitate them taking accurate decision. Ethics in Islam can be defined as the



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set of values and principles guided by Islamic Shariah accepted by any person, a group or an

enterprise (Farook and Lanis, 2005). But due to the cultural diversity of enterprises evolving

Islamic framework, it has been very difficult to measure the exact ethical identity of Islamic

banks (Beekun and Badawi, 2005). In addition to that, Islamic banks are reluctant to share the

ethical identities “explicitly”, since they believe in correcting operational deficiencies more with

the fiqh scholars and shariah advisors, rather than being corrected by the market (Wilson, 2002).

However, customer concentration has become a demanding issue among Islamic banks due to

competition. Therefore, there has been an increasing interest to monitor the ethical underpinning

of Islamic banks globally. Beekun and Badawi (2005) explores four reasons for understanding

Islamic ethics. First, global investment by Islamic countries has increased exponentially.

Second, countries like Egypt, Malaysia, Sudan, Iran, Algeria and Indonesia are moving towards a

greater Islamic Trading Block like the European Union. Third, Muslim population globally own

a lion share of energy (crude oil). Finally, globalization has stressed for greater diversity in terms

of social values and religion, which has attracted the largest quantity of investors for last few

decades.

As a result of the religious and moral awareness, a large quantity of investors is seeking

investment that is ethically suitable. Islamic banks are providing this unique opportunity through

justice, partnership and trust. Islamic shariah prohibits interest, investment and financing of

businesses engaged with production of harmful products, prohibits any contract that includes

uncertainty about the product or has taken extensive risk in the process and does not support any

business largely against the environmental and social welfare (Anas and Mounira, 2009). This

clearly states that Islamic finance does not tell anyone to do business for free (Anas and

Mounira, 2009), however, it practices business activity morally and ethically.

Ethical identity in Islam can be explained from a net fair value method by comparing the

haram (prohibitions) and the halal (permissible) issues. Islamic shariah explains the haram and

halal very clearly. An Islamic bank as a business entity should operate optimally with Shariah

guidelines. Islam considers all work to be part of the worship of Allah (Beekun and Badawi,

2005; Anas and Mounira, 2009), therefore, the acts and principles of Islamic banks also should



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be directed towards religious beliefs in their everyday financial dealings. Banks are accountable

to stakeholders. For Islamic banks the intangible stakeholder, compliance to shariah, is the

ultimate monitor. Freeman (2001, p. 59) defines stakeholder as any party who benefit from or are

harmed by, and whose rights are violated or respected by, corporate action. Stakeholders of

Islamic banks are expected to be regulated and controlled by the norms of Shairah. Islamic banks

individually and the Islamic system centrally establish the shairah supervisory board (SSB) that

attaches the legitimate explanations to activities of Islamic banks whether they ethical or not.

Criteria for ethical identity in Islam have been frequently discussed in literature. Among

many, Wilson (2002) describes five major area of general ethical concern: human rights,

armaments, trade and social involvement, environmental impact and animal welfare. However,

his study concludes that Islamic banks are deficient in translating religious justice into economic

justice, are less involved in “fair trading”, falls short of proper communication with its clients

about its aims and objectives.

On the contrary, Beekun and Badawi (2005) explain three major criteria of relevance to

Islamic ethical system: Justice and balance, trust, and benevolence. Justice in the Holy Quran is

explained by a combination of ‘adl and qist , where ‘adl is the balance and qist means share or

proportion. Islam enforces a balance of these two in any social and financial agreement/ contract.

The Holy Quran has expressed the importance of the balanced and fair in different verses (see

Quran 2:279; Quran 49:9). The Holy Quran (see Quran 74:38) has also urged on the importance

of trusteeship: “Every soul will be (held) in pledge for its deeds”. So, Islamic banks have

responsibilities towards the betterment of the employees, shareholders, customers and the system

as a whole. The last criterion of Islamic ethics by Beekun and Badawi (2005) is benevolence

(Ihsaan) or kindness to others. According to the Holy Quran (16:90), “Lo! God enjoins justice

and kindness”. Islamic banks have the tradition of keeping fund for benevolent purposes, which

also represents the inner intention of the banks towards social and economic development of the

underprivileged and destitute (Siddiqui, 1997; Al-Qurtubi, 1966 10.165).



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Although business objectives and moral-social objectives maybe separate from each other

(Usmani, 2002), there has been a number of studies examining the tendency of ethical-social role

of Islamic banks played into business transactions (Metwally, 1992; Aggarwal and Youssef,

2000; Maali et al. 2003). Still, Islamic banks have been found to be less inclined to social causes,

which raise questions about their ethical underpinning. Such lapse of ethical practices among

Islamic banks necessitates a better understanding and examination of values and ethical identity

of Islamic banks.

Islamic Banks in Bangladesh:

According to Khan et al. (2008) Islamic banking in Bangladesh started in 1983 with the

opening of Islamic Bank Bangladesh Limited (IBBL). As of 2007, there were 6 Islamic banks.

Ahmed et al (2006) and Ahmad and Hassan (2007) state that Islamic banks in Bangladesh has

performed better than conventional banks in loan recovery and other financial measures. As a

result, a few domestic and international conventional commercial banks started offering various

financial products/services in accordance with Islamic principles (Hassan, 1999). Most research

in Islamic banking has focused on comparative financial performance of banks and legal issues

(Ahmad and Hassan, 2007; Ahmed et al., 2006; Hassan, 1999; Sarkar, 1999). No extensive

studies were conducted on ethical identity of Islamic banks in Bangladesh before. The studies

conducted include performance analysis, status of Islamic financial services, theoretical

framework of Islamic principles, exploration of regulation supporting Islamic banks in

Bangladesh and so forth. Since Bangladesh is emerging as a supermarket for Islamic financial

services, the absence in literature on ethical identity of Islamic banks warrants studies in ethical

identity.

Ideal ethical identity of Islamic banks:

Haniffa and Hudaib (2007) identify five distinctive features that differentiate IFS form

CBS: (a) underlying philosophy and values; (b) provision of interest-free products and services;

(c) restriction to Islamically acceptable deals; (d) focus on developmental and social goals; and



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(e) subjection to additional reviews by the Shari’ah Supervisory Board (SSB). Ideally, Islamic

banks should show these five aspects of traits, drawn from both Shari’ah and business ethics, in

their economic and social activities.

SECTION III: METHODOLOGY

To analyze presentation of ethical activities of Islamic Banks in Bangladesh and to

categorize them into eight different dimensions, we use published financial statements and

annual reports of five out six Islamic banks. The sixth bank, ICB Islamic Bank is excluded

because it started its operation only in 2008. The five banks are Islamic Bank Bangladesh

Limited (IBBL), Al Arafa Islami Bank (AAIB), Social Investment Bank Limited (SOIBL),

Shahjalal Islamic Bank Limited (SHIBL) and Export-Import Bank Bangladesh Limited (EXIM).

A total of 22 annual reports are analyzed, broken down as follows; for IBBL, SOIBL and AAIB,

six years (2001 to 2006) annual reports each, EXIM bank, three years (2003 to 2006) annual

reports and for SOIBL, one year (2006) annual report. We synchronized information contained

in the annual reports and analyzed ethical standards into eight different dimensions as suggested

by Haniffa and Hudaib (2007). Figure 1 provides details of the eight dimensions with their

operational statements. The annual reports are carefully analyzed by identifying specific

statements describing each dimensions of ethical standard. Specific variables/statements in the

annual report are marked with tick (√) while unavailable variables/statements are marked with a

cross (×) mark (see Table 1 to 8). The page number in the annual report is shown below each tick

and cross. The ticks and crosses were subsequently replaced with “1” and “0” logically to

represent presence and the absences of items in the annual reports. The next step was to calculate

the Ethical Identity Index (EII) for the selected banks across dimensions and years.

N

x

EII

n

i

i

jt

jt ∑== 1 ………………. ………………………………………………….(1)

Where EIIjt = Ethical Identity Index for dimension j and period t.

Xi jt = Variable X from 1 up to n for dimension j and time t.

N = No of variables/statements



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Comparison of average EII for different dimensions conveys vital economic implications.

To relate the index with market performance of the banks, we performe correlation and

regression analysis. Ethical Identity Index (EII) for 22 different periods for five different banks

was taken as the independent variables and share price (MPS) of respective banks was taken as

independent variable. Since EII is generated at the end of each year but publication of annual

reports is done by 30th

June of the following year, we use the share price of the following year

for this analysis. For example, EII of 2001 corresponds to share price of year 2002 when annual

statements were officially published.

Hypothesis and Regression Model

To investigate the association between Ethical Identity Index and market price per share (one

year deferred), we have hypothesized:

Ho = EII and MPS are uncorrelated.

H1 = EII and MPS are correlated.

To analyze the impact of Ethical Identity Index on MPS with one year lag, the following single

equation regression model is run:

( ) t t t e EII MPS ++=+ 101 β α …………………………………………………………..(2)

FIGURE 1: Dimensions of Ethical Identity

Dimension 01: Mission and Vision

Statement

Dimension 05: Commitment towards

Employee

1

Commitments to operate within Shari’ah

principles/ideals1 Employees’ welfare

2Commitments to provide returns within

Shari’ah principles/ideals2

Training and development (especially

on Shari’ah awareness), amount spent

on training, provision of special training



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or recruitment schemes

3

Commitments to engage in investment

activities that comply with Shari’ah

principles

3 Equal opportunity

4

Commitments to engage in financing

activities that comply with Shari’ah

principles

4 Reward to Employees

5

Commitments to fulfill contractual

Relationships with various stakeholders via

contract (uqud) statements

6Current and future directions in serving the

needs of Muslim communities

7 Statements of appreciation to stakeholders

Dimension 02: Board of Directors and Top

Management

Dimension 06: Commitment towards

Debtors

1 Names and Positions of board members

and top management1 Debt policy and type of debt

2Pictures of Board Members and Top

Management2 Amount of debts written off

3

Profile of board members and top

management as indicators of their

knowledge of and competence in banking

and Shari’ah

4 Balanced Board

5 No Role Duality

6 Having an Audit Committee

7Limited Multiple Directorships and

Shareholdings



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Dimension 03: Products and ServicesDimension 07: Commitment towards

Customers

1 Details of investment activities 1 Having a female branch

2

If new products have been introduced,

whether they have been approved by the

SSB (ex-ante) as well as an explanation of

the basis of the Shari’ah concept

legitimizing the new product

2 Creating job opportunities

3Any involvement in non-permissible

activities3

Supporting organizations that benefit

society and participating in Government

social activities

4Sponsoring Islamic educational and

social events

Dimension 04: Zakah, Charity and

Benevolent Funds

Dimension 08: Shariah Supervisory

Board

1 Which party is liable for zakah 1 Names of SSB members

2

If the bank is liable, whether zakah has

been paid, the sources of zakah funds, the

uses of the zakah funds, any balance of

zakah not distributed and the reason for it,

and attestation from the SSB that they have

been properly computed and that the

sources and uses of the funds are legitimate

based on God’s rules

2 Pictures of SSB members

3

The amount and the sources and uses of

Charity Funds, separate from the zakah

funds

3 Remuneration of SSB members

4The amount and the sources and uses of

benevolent funds4 Number of meetings held



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5

The bank’s policies in providing such funds

and how non-repayment of such funds will

be dealt with

5

Whether there are defects in the

products offered and if there are, what

are their recommendations to rectify the

defects and the actions taken by

management

6 Basis of examination of the documents

7Attestation that profits and gained

lawfully

8 Signatures of all members

Source: Hudaib and Haniffa (2007)

SECTION IV: ANALYSIS OF FINDINGS

Mission and Vision Statement

Most Islamic banks in Bangladesh lack a lucid mission and vision statement. The

principle requirement of being an Islamic bank, i.e. commitment to work strictly under Shariah

principle is completely missing in the annual report of EXIM, SHIBL and SOIBL. The

fundamental principles of commitment to engagement in Shariah compliant investment in future,fulfillment of contractual relationship and service to Muslim community were missing points for

all the sampled banks. There is need for new guidelines to direct Board of directors (BOD) and

top management to include such statements in published annual reports. Table 10 shows that

AAIB and IBBL have the highest score in clarifying mission and vision statement.

Board of Directors and Top Management

In this regard, annual reports should document the profile, background, knowledge and

competencies, biography and photographs of BOD and top management. Most of the banks did

not publish the photographs of their BOD while any published photographs were not clearly

visible. No profile analysis was documented. All the banks have audit committee. However,

there was nothing written about the board being balanced, role of conflict, and multiple



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directorships. SHIBL scored highest in providing information on BOD and Top management.

The longest established banks, IBBL and AAIB scored poorly in this category as table 10 shows.

Product and Services

All the banks provided detailed information on products and services but information

relating to approval of products by Shariah supervisory board was missing. Being partly honest,

most of the banks have declared their involvement in non-permissible activities in the eye of

Shariah. Table 10 shows that IBBL, SOIBL and AAIB have scored higher than others.

Zakah, Charity and Benevolent Fund

IBBL, EXIM and SOIBL in their annual reports of year 2006 provide clear details on

who is liable for Zakah, the sources of Zakah fund and process of calculating zakah among other

details. Table 10 shows that all the banks have separated the charity fund from Zakah fund. The

only bank that clearly explain Zakah related-ethical issues is Islami Bank Bangladesh Limited

(score 0.90 out of 1.0). All other banks either provided inadequate and vague information or

information is simply missing.

Commitment towards Employee

All the Islamic banks have ensured their commitment towards employees through

employee welfare, training and development. However, employees were not given equal

opportunities for the betterment of their career, and employee reward system is yet to be

finalized with all the Islamic banks in the country. EXIM bank scored the highest in this

category (Mean EII score of 0.75 out of 1.0). (See table 10)

Commitment towards Debtors

All banks provided detailed information each year on debtors ranging from types of debt,

debt policy to amounts of debt written off. All banks scored 100%. Table 10 provides summary

details.



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Commitment towards Society

Banking is the first choice for most job-seekers in Bangladesh and banks have fulfilled

their commitments towards society in this regard. However, none of the Islamic banks have

started a branch to serve female only clients, a move which would help to foster religious spirit

of female customers in Islamic banking. Most of the banks are, directly or indirectly, heavily

investing in social activities such as education and cultural. This category has been the most

competitive. IBBL scored highest with an average EII score of 0.75 out of 1.0. Table 10 shows

the summary results.

Shariah Supervisory Board (SSB)

Shariah board members continuously visit Islamic banks. However, their individual

photographs and remuneration of the SSB members were missing for all the banks. AAIB, IBBL

and SOIBL have disclosed the recommendations of SSB relating to defects of product and the

extent to which the products are not shariah-compliant. Table 10 show that all banks provided

detailed information on number of meetings held during the year and attestation of profit and

documents (whether lawful or unlawful). However, only AAIB provided the details of basis of

examining the documents. IBBL and SHIBL updated these details in 2006. AAIB scored the

highest (0.52 out of 1.0) in this category.

Ethical Identity Index (EII)

Table 1 (Appendix 1) shows that there has been tremendous growth in ethical standards

in all the eight dimensions. EIIs show that AAIB started from 0.46 out of 1.0 in 2001 and ends at

0.54 in 2006, EXIM Bank started at 0.42 in 2004 and ends at 0.56 in 2006. SHIBL started at 0.47

in 2006 (below industry average of 0.51). IBBL started at 0.60 in 2001 and ends at 0.67 in 2006

while SOIBL started at 0.30 in 2001 and ends at 0.54 in 2006. Years 2004 to 2006 are taken as

benchmark; out of four banks (except SHIBL) SOIBL experienced the highest growth of index

(from 0.39 in 2004 to 0.54 in 2006). The two oldest banks, AAIB and IBBL, registered minimal

improvements in EII. AAIB’s EII remained constant at 0.54 between 2004 and 2006. IBBL’s EII

improved marginally from 0.66 in 2004 to 0.67 in 2006. EXIM recorded the most impressive

improvement from EII of 0.42 in 2004 to 0.56 in 2006. The industry EII average (Table 10)



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shows that banks are more committed to new product development, marketing of new product,

commitment towards employee, society and debtors. Concerted effort need to be mounted to

improve market oriented vision and mission, education of board of management (BOD) and top

management, Zakah and charity management and relationship with SSB.

Relationship between EII and Market Price per Share

Figure 2 shows the correlation and regression results. EII and MPS have a relatively

strong correlation (0.548). The regression model had F value of 8.6021, 1, which is statistically

significant at 5% significance level. These results, however, should be accepted with caution due

to small sample size. Nevertheless, we are sure of significant impact of EII on market values of

Islamic banks. Further research in this field with larger sample size in future is needed.

FIGURE 2: Correlation Coefficient and Regression Output

Correlation Coefficient

EII MPS

EII 1MPS 0.548 1P<0.01

Regression Statistics

R Square 0.30

Adjusted R Square 0.27

ANOVA

df SS MS F Significance

F

Regression 1 18227944.53 1.8E+07 8.60828 0.008206209

Residual 20 42349784.99 2117489

Total 21 60577729.53

CoefficientsStandard

Error t Stat P-value Lower 95%

Upper

95%

Intercept -2313.67 1613.21 -1.43 0.17 -5678.78 1051.43

X Variable 1 9075.10 3093.09 2.93 0.01 2623.02 15527.18 Dependent Variable: Market Price per Share (1 year Deferred)

Independent Variable: Ethical Identity Index



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SECTION V: SUMMARY AND CONCLUSIONS

All the stakeholders of Islamic banks have the right to know the exact ethical standing of the

banks, which can be measured through ethical identity index. Ethical values add value to the firm

and the society. Legal guidelines are not enough towards building business ethics. Corporate

governance, Shariah governance and other risk management principles available in market place

are indispensable in perpetuating ethical standards and values. Ethical identity should be

properly and effectively communicated to all stakeholders in annual reports and in line with the

eight ethical dimensions. The following ethical statements need detailed inclusion in annual

reports in future for effective communication between stakeholders and the banks.

• The banks mission and vision and commitment to compliance with Shariah principles

should be cogently and coherently stated.

• The disclosure about Board of Directors and Top Management can be enhanced by

providing more details on of board members’ and management profile, role of conflict

and multiple directorships

• The approval of the products and services by the SSB and correspondence between the

bank and SSB are yet to be clearly documented in the annual reports.

• Two banks have laid examples of communicating their dealings with Zakat Fund. Othersmay follow suit to improve their disclosures about Zakat Fund.

There is need for a standardized format in presentation of annual reports which make it easier

to carry out comparative and time series analysis and facilitate effective communication to all

stakeholders. There was an ostensible hyperbole about Islamic banks commitment towards

society, employees, debtors, which obviously proves their dedication towards market economy.

Marketing of Islamic financial services is well documented and continuously updated in the

financial statements. However, issues regarding Zakah payment, involvement in non-permissible

activities and the distinct role of Shariah Council beg more attention. Introduction of female

braches, satisfactory employee career progression, and introduction of Ethical Jurisdiction would

improve business ethics in Islamic banks. The BOD and top management and all stakeholders of

Islamic banks should develop ethical standards, their investments should be more attentive in



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ensuring ethical judgment process. The government should also formulate and implement ethical

standards and principles similar to those initiated by AAOIFI through “Standards and

Principles of Ethical Operation for Islamic banks”.

As noted by Haniffa and Hudaib, (2007) information technology (IT) has an important role in

establishment of strong Ethical Identity. IT can be used for advertising banks’ products and

services, and annual reports can be published online. Banks can also host Citizen Charter (ECC)

on their websites. A high EII will improve banks market standing, foster the long-run survival of

the bank, attract new investors/depositors, enhance systematic efficiency in banking sector and

guide regulators and managers to design ethical standards. The rapid expansion of Islamic

banking may require Bangladesh Bank (central bank of Bangladesh) and Securities and

Exchange Commission (SEC) to establish additional compliance relating to Ideal Ethical

Standard.



20

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26

APPENDIX 1

Table 1: Ethical Identity Index (EII) and Stock Prices (MPS)

Bank Time/ Year Time Index EII t=0 MPS t+1

AAIB 2001 1 0.460 1659AAIB 2002 2 0.460 1897AAIB 2003 3 0.550 3061

AAIB 2004 4 0.540 2234AAIB 2005 5 0.570 2685

AAIB 2006 6 0.540 440

EXIM 2004 7 0.420 511EXIM 2005 8 0.480 337

EXIM 2006 9 0.560 391

SHIBL 2006 10 0.470 366

IBBL 2001 11 0.600 2591

IBBL 2002 12 0.630 4104IBBL 2003 13 0.620 5113

IBBL 2004 14 0.660 4544IBBL 2005 15 0.620 3688

IBBL 2006 16 0.670 6630

SOIBL 2001 17 0.300 2427SOIBL 2002 18 0.370 2808

SOIBL 2003 19 0.390 1952

SOIBL 2004 20 0.390 1559

SOIBL 2005 21 0.420 1782SOIBL 2006 22 0.540 507



27



Table 2 to 10: Ethical Identity - Eight Dimensions (1= 2001 through 6=2006 and respectively)

2.0 Mission and Vision Statement

AAIB EXIM SHIBL IBBL

1 2 3 4 5 6 4 5 6 6 1 2 3 4 5 6

Commitments to operate within

Shari’ah principles/ideals√ √ √ √ √ √

× × × × √ √ √ √ √ √P.11 P.12 P.21 P.16 P.24 P.23

P.4

+ 14P.16

P.4

+ 17P.18

P.6

+ 20P.3

Commitments to provide returns

within Shari’ah principles/ideals

√ √ √ √ √ √ × × × ×

√ √ √ √ √ √

P.12 P.12 P.22 P.16 P.25 P.23 P.14 P.16 P.17 P.18 P.20 P.3

Commitments to engage ininvestment activities that comply

with Shari’ah principles

√ √ √ √ √ √ × × × ×

√ √ √ √ √ √

P.11 P.12 P.21 P.16 P.24 P.23 P.14 P.16 P.17 P.18 P.20 P.3

Commitments to engage infinancing activities that comply

with Shari’ah principles× × × × × × × × × × × × × × × ×

Commitments to fulfill contractualrelationships with various

stakeholders via contract (uqud)

statements

× × × × × × × × × × × × × × × ×

Current and future directions in

serving the needs of Muslim

communities

× × × × × × × × ×√

× × × × × ×

P.28

Statements of appreciation tostakeholders

√ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

P.20 P.20 P.39 P.24 P.37 P.36 P.22 P.38 P.16P.4+

40P.28 P.35 P.35 P.39 P.41 P.8

Table 3.0 Board of Directors and Top Management


1 2 3 4 5 6 4 5 6 6 1 2 3 4 5 6

Names and Positions of board

members and top management

√ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

P. 08P. 5+ 07

P.11+13

P.7+9

P. 8+10

P. 8+10

P.

03 –

07

P. 3

+5

+ 8

P.

05 +

10

P. 08 +11

P. 6+ 08

P. 6+ 8

P. 06+ 08

P.6+8

P. 08+ 10

P. 0

+ 1

– 1

Pictures of Board Members and

Top Management× × × × × × × × ×

√

× × × × × ×P. 09

Profile of board members and top

management as indicators of their

knowledge of and competence in banking and Shari’ah

× × × × × × × × × × × × × × × ×



Aspects of good corporate

governance:

Balanced Board × × × × × × × × × × × × × × × ×

No Role Duality × × × × × × × × × × × × × × × ×

Having an Audit Committee × ×

√ √ √ √ √ √ √ √

× ×

√ √ √ √

P.

70

P.

54

P.

66

P.

69

P.

55

P.06 +

82

P.

83P. 10

P. 28

+ 46

P.

50P. 52 P. 9

Limited Multiple Directorships

and Shareholdings× × × × × × × × × × × × × × × ×

Table 4.0 Product and Services


1 2 3 4 5 6 4 5 6 6 1 2 3 4 5 6

Details of investment activities √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

P. 15

– 16+ 29

– 31

P.

14 – 15 +

31

P.

55 – 59

P.

40

P.29

– 30+

54 –

56

P.

52

P.

37 -39

P.

63 – 68

P.

64 -69

P. 49 -

51

P.

17 – 20 +

39

P.

48

P. 20

– 24+ 48

– 50

P.

54

P. 23

– 31+ 58

– 60

P. 9

-10

If new products have beenintroduced, whether they have been approved by the SSB (ex-

ante) as well as an explanation of

the basis of the Shari’ah concept

legitimizing the new product

× × × × × × × × × × × × × × × ×

Any involvement in non-

permissible activities√ √ √ √ √ √ × × × × √ √ √ √ √ √

P. 22 P.

26

P.

41

P.

26

P.

37

P.

38

P.

30

P.

36

P. 36 P.

40

P. 42 P. 8

Table 5.0 Zakah, Charity and Benevolent loans


1 2 3 4 5 6 4 5 6 6 1 2 3 4 5 6

Which party is liable for zakah × × × × × × × ×

√

×

√ √ √ √ √ √

P.

38

P.

38

P.

45P. 44

P.

49P. 51 P. 9



If the bank is liable, whether zakah

has been paid, the sources of zakah

funds, the uses of the zakah funds,

any balance of zakah not

distributed and the reason for it,

and attestation from the SSB thatthey have been properly computed

and that the sources and uses of the

funds are legitimate based onGod’s rules

× × × × × × × ×

√

×

√ √ √ √ √ √

P.

38 +43

P.

38 +46

P.

45

+50

+54

P. 44

+ 56

P.

49

+58

+64

P. 51

+ 68

P. 8

+10+10

The amount and the sources and

uses of Charity Funds, separate

from the zakah funds

√ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

P. 30P.20

P.36

P.23

P.42

P.34+65

P.13+21

P.36

P.37

P. 27P.27

P.33

P. 32P.31

P. 39P.6- 6

The amount and the sources and

uses of benevolent funds× ×

√

×

√

× × × × ×

√ √ √ √ √ √

P.

36

P.

42

P.

26 +

46

P.45

+51

P. 30

+ 45

+56

P.35

+49

+59

P. 38

+ 51

+ 68

P. 9

The bank’s policies in providing

such funds and how non-

repayment of such funds will be

dealt with

× × × × × × × × × × ×

√

×

√

×

√

P.

45

P.35

+49

+59

P. 9

Table 6.0 Commitment Towards

Employee


1 2 3 4 5 6 4 5 6 6 1 2 3 4 5 6

Employees’ welfare × ×

√ √ √ √

×

√ √ √ √ √ √ √ √ √

P.

33

P.

23

P.

33

P.

32

P.

52

P.

37P. 25

P.

26

P.

31P. 29

P.

34P. 38 P. 6

Training and development

(especially on Shari’ah awareness),

amount spent on training,

provision of special training or

recruitment schemes

√ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

P. 18

+ 36

P.

18 +

37

P.32

+66

P.

22

P.34

+62

P.

33

P.21

+53

P.35

+ 80

P.36

+ 37

P. 26 +

58

P.26

+ 46

P.30P. 28

+ 56

P.34

+64

P. 37

P. 5

+

10

Equal opportunity × × × × × ×√ √ √

× × × × × × ×P.12 P.35 P.36

Reward to Employees × × × × × × × × √ × × × × × × ×



P.37

Table 7.0 Commitment Towards Debtors


1 2 3 4 5 6 4 5 6 6 1 2 3 4 5 6

Debt policy and type of debt

√ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

P. 32P.

33

P.

61-

62

P.

45

P.

58

P.

58

P.

20 –

21

+46

P.

30 –

32,

71

P.

70 –

72

P. 53

P.

41-

42

P.

49P. 51

P.

57

P.

23,

62 –

63

P. 4

Amount of debts written off

√ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

P. 32P.

33

P.

61 -62

P.

45

P.

58

P.

58

P.

46

P.

71

P.

70 – 72

P. 53

P.

41-42

P.

49P. 51

P.

57

P.

23,

62 –

63

P. 4

EII

Table 8.0 Commitment Towards Society


1 2 3 4 5 6 4 5 6 6 1 2 3 4 5 6

Having a female branch × × × × × × × × × × × × × × × ×

Creating job opportunities

√ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

P.19P.19

P.31P.22

P.33P.32

P.21

P.35P.36

P. 25 P.25P.30

P.29P.33

P.37 P. 5

Supporting organizations that

benefit society and participating inGovernment social activities

× × × × × ×

√ √ √

×

√ √ √ √ √ √

P.

22

P.17

+ 37

P.

38P.27

P.

33P.31

P.

35 –

36

P.39

P

65

68

Sponsoring Islamic educational

and social events

√ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

P.20P.

20

P.36

+

37

P.

23P.36 P.34

P.

22

P.17

+ 37

P.

38P. 27 P.27

P.

33P.31

P.

35 -

36

P.39P. 6

- 6

EII





Table 9.0 Shariah Supervisory Board

(SSB)


1 2 3 4 5 6 4 5 6 6 1 2 3 4 5 6

Names of SSB members

√ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

P. 07P.06

P.12

P.08

P.09

P.09

P.06

P.07

P.09

P. 10P.07

P.07

P. 07P.07

P. 09 P. 0

Pictures of SSB members × × × × × × × × × × × × × × × ×

Remuneration of SSB members × × × × × × × × × × × × × × × ×

Number of meetings held

√ √ √ √ √ √

×

√ √ √ √ √ √ √ √ √

P.19P.20

P.23P.16

P.25P.24

P.28+ 39

P.31

P. 18 P.30P.17

P.17P.19

P. 20 P. 3

Whether there are defects in the

products offered and if there are,

what are their recommendations to

rectify the defects and the actionstaken by management

× × ×

√ √ √

× × × × ×

√

×

√

×

√

P.

26P.26

P.

25

P.

36

P.

40P. 8

Basis of examination of thedocuments

× ×

√ √ √ √

× × ×

√

× × × × ×

√

P.23P.

16P.26

P.

25P. 18 P. 3

Attestation that profits and gained

lawfully

√ √ √ √ √ √

×

√ √ √ √

×

√ √ √ √

P.23P.23

P.41P.16

P.39

P.

24 -25

P.39P.43

P. 32 -34

P.30 P.36

P.

40 -41

P.42P. 8- 8

Signatures of all members × × × × × × × × × × × × × × × ×



Table 10: Ethical Identity Index (EII)

AAIB EXIMSHIB

LIBBL

Year 2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 6

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 1

Mission and Vision Statements 0.57 0.57 0.57 0.57 0.57 0.57 0.14 0.14 0.14 0.290.57

0.57

0.57

0.57

0.57

0.57 0.14

Yearly Average 0.57 0.14 0.29 0.57

Ranking (based on Yearly

Avg)[1] [3] [2] [1]

BOD and Top Management 0.14 0.14 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.430.1

4

0.1

4

0.2

9

0.2

9

0.2

90.29 0.33

Yearly Average 0.24 0.29 0.43 0.24


Avg)[4] [3] [1] [4]

Product and Services 0.67 0.67 0.67 0.67 0.67 0.67 0.33 0.33 0.33 0.330.6

7

0.6

7

0.6

7

0.6

7

0.6

70.67 0.33

Yearly Average 0.67 0.33 0.33 0.67


Avg)[1] [3] [3] [1]

Zakat, Charity & Benevolent

Loan 0.20 0.20 0.40 0.20 0.40 0.20 0.20 0.20 0.60 0.200.8

0

1.0

0

0.8

0

1.0

0

0.8

0 1.00 0.00

Yearly Average 0.27 0.33 0.20 0.90

Ranking (based on YearlyAvg)

[3] [2] [4] [1]

Commitment towardsEmployee

0.25 0.25 0.50 0.50 0.50 0.50 0.50 0.75 1.00 0.500.50

0.50

0.50

0.50

0.50

0.50 0.00

Yearly Average 0.42 0.75 0.50 0.50


Avg)[3] [1] [2] [2]

Commitment towards Debtors 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.001.00

1.00

1.00

1.00

1.00

1.00 1.00

Yearly Average 1.00 1.00 1.00 1.00


Avg)[1] [1] [1] [1]

Commitment towards Society 0.50 0.50 0.50 0.50 0.50 0.50 0.75 0.75 0.75 0.500.7

5

0.7

5

0.7

5

0.7

5

0.7

50.75 0.50

Yearly Average 0.50 0.75 0.50 0.75 Ranking (based on Yearly

Avg)[2] [1] [2] [1]

Shariah Supervisory Board

(SSB)0.38 0.38 0.50 0.63 0.63 0.63 0.13 0.38 0.38 0.50

0.3

8

0.3

8

0.3

8

0.5

0

0.3

80.63 0.13



Yearly Average 0.52 0.29 0.50 0.44


Avg)[1] [3] [1] [2]

Yearly Average (Individual) 0.46 0.46 0.55 0.54 0.57 0.54 0.42 0.48 0.56 0.470.6

0

0.6

3

0.6

2

0.6

6

0.6

20.67 0.30



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