Do Institutional Environment and Corporate Governance Structures Determine Islamic Banks’ Sustainability Performance? Evidence Across Key Jurisdictions in Islamic Finance Industry

This study examines the impact of the institutional environment and corporate governance structures on Islamic banks' sustainability performance (SP). It applies a two-step System Generalized Method of Moments (GMM) estimator to analyze data gathered on a panel of 32 Islamic banks drawn from nine key Islamic finance jurisdictions from 2016 to 2021. To consistently code and quantify the Islamic banks' SP, we use the Specific Standard Disclosures for the Financial Services Sector introduced by the GRI as a framework of reference. Then, we employ the weighted content analysis method on the sustainability and annual reports of the subjected sample. Our findings indicate that the institutional factors specifically, regulatory guidelines (regulatory isomorphism) and the adherence of Islamic banks to the sustainable finance networks' specifications (normative isomorphism) are not currently determinants of their SP. Contrarily, we observe that the establishment of a sustainability committee and a better experience of sustainability disclosure improve Islamic banks' SP. In contrast to agency theory, board activity is identified to have a significantly negative relationship with SP. An important policy implication of our results is that policymakers should closely monitor Islamic banks' regulatory dependency and enhance their SF ecosystem to positively influence their SP. Finally, future research may leverage on more conducive regulatory frameworks to sustainability transition in these key jurisdictions, more effective normative structures, further disclosure of sustainability committee characteristics, the development of appropriate measures of Islamic banks' digitalisation levels, and the availability of more material sustainability data to provide further insights and better understand the determinants of Islamic banks' SP.