Corporate Social Responsibility, Internal Control Effectiveness, and Financial Performance in Pakistan's Banking Sector: A Comparative Analysis of Islamic and Conventional Banks

Abstract

This research program has already proved that internal control effectiveness mediates and relaxes the connection between corporate social responsibility (CSR) and financial. performance of non-financial firms listed on Pakistan Stock Exchange, and again and again. indicating the regulatory regime in the banking sector as an undecided boundary on those. findings. This paper fills that gap in a direct manner, using the CSR-internal-control-financial-performance chain to banking industry in Pakistan and testing the hypothesis that there is systematic difference. between conventional and Islamic banks. The sample of panel included an unbalanced set of 28 Pakistani banks (22). conventional, 6 full-fledged Islamic) more than 20152024 (246 bank-year observations), CSR and internal control effectiveness were measured by content analysis disclosure indices. adapted to State Bank of Pakistan (SBP) internal-control and CSR guidelines, and with return on assets. As the main performance indicator, (ROA) should be taken. The estimation of System GMM on the pooled banking. sample shows that CSR disclosure is a good predictor of internal control effectiveness, and internal. effectiveness of control is a positive predictor of ROA, which reproduces the findings of this research program in non-financial sectors in banking. The model of a bank-type of interaction indicates that both relationships are. this is much higher in the case of Islamic banks; the six-bank Islamic subsample is too small. to separately estimate system GMM, this trend was supported with fixed-effects panel. driscoll-kraay standard errors regression, which showed significantly larger coefficients of. Islamic banks (CSRD → ROA: β = 0.891 vs. 0.487; ICE → ROA: β = 0.968 vs. 0.541). A moderated-mediation test finds the indirect CSR-to-performance effect through internal control the effect size is approximately two-and-a-half larger in the case of Islamic banks (0.496) compared to. conventional banks (0.195; difference = 0.300, p = .035). An exploratory study limited to Islamic banks also discover that there is a special Shariah Governance Index - which reflects Shariah. Supervisory Board independence and internal Shariah audit activity - positive predictors of internal. efficacy of control that goes beyond conventional CSR disclosure, in line with a Maqasid alShariah-based account of the dual governance structure of Islamic banks. These results are a continuation of this. From research program core mediation and moderation chain to a separate tightly regulated sector, and give initial indication that Shariah governance is a supplementary, complementary mitigating layer as opposed to a backup layer.

Keywords: corporate social responsibility; internal control effectiveness; Islamic banking; Shariah governance; financial performance; Pakistan

https://doi.org/10.5281/zenodo.22873226