Corporate Social Responsibility and Financial Performance in the Banking Industry in Ghana

Corporate Social Responsibility and Financial Performance in the Banking Industry in Ghana

Christopher Boachie (Central University, Ghana)
DOI: 10.4018/IJSECSR.2020070106
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Abstract

The purpose of this study is to investigate the effect of corporate social responsibility on financial performance to understand whether and how CSR policies impact the overall financial performance of listed banks in Ghana. Secondary data have been collected, content analysis was used to measure corporate social responsibility and financial performance, and a multiple panel regression approach using eight listed banks was used. Results indicate that corporate social responsibility is found to be positively and statistically significantly related to financial performance. Nevertheless, the effect of CSR is very weak. A significant relationship between size, inflation, and exchange rate and financial performance is found. For CSR to become development tool in Ghana, it is imperative that coordinated and concerted efforts must be undertaken at both private and public sector levels, in realising equitable, inclusive, and sustainable development.
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1. Introduction

For at least the last four and half decades, research on the role and responsibilities of business in society has been searching for the business case for corporate social responsibility (CSR). Following the 2008 financial crisis, the global economy continues its recovery from the worst recession since the 1930s. While there are several positive signs that the world economy is slowly improving, the role the financial industry played in this crisis is widely recognized and discussed. Banks’ goal of obtaining considerable profits has been noted as an important driver of some of the financial innovations thought to have played a large role in the 2008 crisis.

As financial institutions work with governments and other policymakers to restore growth and build public goodwill going forward, the issues of CSR and its impact on financial performance are more relevant than ever. Investors have started questioning the motives and actions of commercial banks as the world economy continues to recover. In the developed economies the concept of business has shifted from profit-making activities towards social welfare activities where businesses are not only responsible to its shareholders but also all of its stakeholders (Crane, Matten & Spence, 2016). CSR is relatively a new concept in Ghana and many institutions try to maintain this responsibility along with other responsibilities.

There is no universally accepted definition of CSR. It is described as an instrument, a concept or even a business model that requires companies to apply a radical change in attitude. The latter assumes a paradigm shift in business, according to which there is more to a company than the return on investment and profit maximisation. It operates in a social and natural environment, the environmental and social impacts of which must be considered (Lentner, Szegedi & Tatay, 2015). One of the best known and most widely accepted definitions of CSR is by Carroll, who says that CSR encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations (Carroll, 1991). The banking sector responded relatively late to the challenges of CSR. First, it considered environmental, and then social issues (Vigano & Nicolai, 2009). CSR as an instrument of the business sector serves to increase and legitimize the sector’s economic performance and also appears as the embodiment of the fundamental principles of business ethics (Scholtens, 2008). Within the service industry, CSR acts as a vehicle to reveal corporate identity and able to have differentiated effects (Bravo, Matute & Pina, 2012; Casado-Díaz, Nicolau-Gonzálbez, Ruiz-Moreno & Sellers-Rubio, 2014). Companies pursuing purely financial initiatives, perform well on those initiatives and poorly on CSR especially in the developing countries (Jackson & Parsa, 2009).

The 2008 financial crisis drew attention to the need for CSR in the banking sector, for increasing for trust, as well as the accountability and transparency that lead to it. Besides the role of an intermediary which channels savings into investments, which is traditionally considered as the main social function of financial institutions, and besides efficient allocation and risk management, the need for ethical and responsible conduct has led to financial and investment processes pointing beyond the protection of the legitimate interests of depositors and owners (Chiu, 2014).

Banks’ stakeholders include the owners, borrowers, depositors, managers, employees, and regulators. Compared to many other sectors, a key characteristic of the banking sector is that it affects a large number and a great variety of people, resulting in considerably more complex information asymmetry. Another feature of the system is that to ensure the stability of the banking sector, it is characterized by much stricter regulation (Yamak, 2005). Since the banking sector differs from other economic sectors, its CSR practices are also different. Here there is more emphasis on responsibility in the areas of bank lending, investment and asset management operations, where combating bribery and money laundering are particularly important issues, being the key elements of anti-corruption efforts, which is a crucial part of the banks’ CSR activities (Vigano & Nicolai, 2009).

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