Corporate Social Responsibility of the Banking Sector in Developing and Emerging Countries

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Corporate Social Responsibility

of the Banking Sector in

Developing and Emerging

Countries

Msc International Business and Management Specialization: International Financial Management

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2 ACKNOWLEDGEMENT

I would like to express gratitude towards Professor Dr. L.J.R. Scholtens for providing support, guidance and valuable feedback over the course of my Master research. Furthermore I would like to thank drs. S. Piersma for reading the paper and providing

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ABSTRACT

This thesis is an attempt to determine the level of Corporate Social Responsibility (CSR) of commercial banks in developing and emerging countries with help of the CSR framework of Scholtens (2009). Furthermore it also indicates how the level of CSR is determined by bank and country characteristics. The CSR framework is applied to 402 banks in 31 developing and 13 emerging countries. In order to find CSR information; websites, annual and social reports of 2007 of banks are analyzed. Bank characteristics are: total bank assets, BIS tier 1 capital ratio, age bank, number of shareholders, return on assets, and Stock exchange listing. Country characteristics are the income of a country per capita, degree of openness, bank assets/GDP, and Kaufmann’s (2008) Voice and Accountability (VA) index. There is a significant difference among individual banks, countries, BRIC countries, countries’ income, and regions. Compared to the research of Scholtens (2009), there is also a significant difference between the banks of developed countries and developing and emerging countries. Furthermore, there is a positive and significant association between the level of CSR and the following determinants: bank total assets, return on assets, bank assets/GDP, and VA. However, the variables openness of a country and income country per capita are negatively significant associated with the level of CSR.

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4 TABLE OF CONTENTS I INTRODUCTION 6 II BACKGROUND 9 2.1 HISTORY CSR 9 2.2 CSR IN DEVELOPING COUNTRIES 11

2.3 CSR IN THE BANKING SECTOR 12

2.4 SOCIAL RESPONSIBILITY FRAMEWORK 13

2.5 CSR LEVEL DETERMINANTS 15

2.5.1BANK CHARACTERISTICS 15

2.5.2COUNTRY CHARACTERISTICS 18

III METHODOLOGY AND DATA 22

3.1DESCRIPTIVE STUDY 28 3.2CORRELATION STUDY 28 IV RESULTS 31 4.1REGIONAL ANALYSIS 31 4.2COUNTRY ANALYSIS 34 4.3INCOME ANALYSIS 35 4.4BRIC ANALYSIS 37

4.5INDIVIDUAL BANK ANALYSIS 39

4.6COMPARISON CSR LEVEL WITH THE WESTERN COUNTRIES 39

4.7REGRESSION STUDY 43

V CONCLUSION 47

VI LIMITATIONS & RECOMMENDATIONS 51

LITERATURE 53

ELECTRONIC RESOURCES 57

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List of tables and figures

TABLE 1: Countries categorized in World regions TABLE 2: Countries categorized by income economy TABLE 3: BRIC countries

TABLE 4: Descriptive statistics of the banks

TABLE 5: Correlation coefficients bank and country characteristics and CSR performance of the banks

TABLE 6: ANOVA regions

TABLE 7: Regional performance of the banks in 2007 TABLE 8: ANOVA countries

TABLE 9: ANOVA income

TABLE 10: Income economy performance of the banks in 2007 TABLE 11: CSR scores of the BRIC countries

TABLE 12: Comparison CSR level with the research of Scholtens (2009) TABLE 13: Regression coefficients bank and country characteristics and CSR performance of all banks

TABLE 14: Regression coefficients bank and country characteristics and CSR performance of all banks without insignificant outcomes of table 12

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6 I INTRODUCTION

In the last decade much emphasis is put on sustainability. Events like loss of biodiversity, climate change, CO2 emission and various forms of environmental pollution are the news of the day. Important spokesmen like Al Gore are lobbying for a greener future. Furthermore, the upcoming United Nations’ Climate Change Conference in December 2009 in Copenhagen, Denmark, will discuss the second period of the Kyoto protocol, which will bring more media attention to this topic. One of the most important events in the past that led to a change in the attitude regarding to a more sustainable development in the business area is the United Nations World Commission on Environment & Development (WCED), also known as the Brundtland Commission. This commission published its report “Our Common

Future” in 1987, discussing the ongoing exhaustion of our planet’s resources, caused

by increasing economic growth and an unequal, worldwide distribution of wealth. The report laid the foundation for developing and implementing policy in regard to sustainable development (WCED, 1987). Sustainable development is a development that meets the needs of the present without compromising the ability of future generations to meet their own needs (WCED, 1987). Sustainability is not only about taking care of the environment but also includes social issues like poverty alleviation and equal development opportunities for all. The term that is used for this field in the business sector is Corporate Social Responsibility (CSR).

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following banks from the developing regions signed up for the EP: Industrial Bank (China), Bancolombia (Colombia), Arab African International Bank (Egypt), Standard Bank Group (South Africa), and Access Bank (Nigeria). Nevertheless, the majority of the EP group remains banks from the developed countries. On November 20, 2009, a total of 69 banks had adopted the EP from which 17 banks (24,6%) are from the developing countries (see Appendix A). From 2008, ten banks from the developing countries adopted the EP, which is an increase of more than 100%.

This paper is divided in two parts. First, the level of CSR of 402 commercial banks will be extracted with the help of the CSR framework of Scholtens (2009) (see appendix B). Scholtens (2009) provides a framework in order to assess corporate social responsibility in an easy and clear way and applied the framework to 32 financial institutions worldwide. However, the origin of those banks is from the developed countries. In this research, the same framework is applied but to 402 banks (see Appendix C). From the 402 banks, 322 banks have their origin in developing countries. In total there are 44 countries included in this research, from which 31 countries of the developing regions (see Appendix D). The other remaining 80 banks from 13 countries are from the emerging regions. After gaining CSR information from the banks by checking the websites, social and annual reports, it is possible to make a comparison between the banks, the countries and the regions where the banks are originated.

In the second part, I compare the relative performance of the banks with respect to their CSR in connection with bank characteristics. The bank characteristics are balance sheet, banks’ tier 1 capital ratio, return on assets, age, number of shareholders, and stock exchange listing. Furthermore, country characteristics are also included in order to compare the CSR score of the banks. The country characteristics that are included in this research are income of a country, degree of openness, financial size of a country, and voice and accountability index. The reason to add country specific characteristics is that the developing countries vary substantially in terms of those characteristics, which can have an influence on the performance of CSR.

This research is conducted to answer the following two research question:

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8 How is the level of Corporate Social Responsibility (CSR)

determined by bank and country specific characteristics?

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variables. Due to the differences in terms of income, degree of openness, bank assets/GDP and voice and accountability index among countries, it is valuable to include those variables in this research and to make an attempt to assess the influences on CSR performance. Thus, both bank and country characteristics are selected as variables in order to construct a new model to assess the CSR performance. We used the CSR framework of Scholtens (2009) in order to determine the CSR level of 402 banks.

This research is not only important for the academic world but also for institutions like IMF, World Bank, GRI, and the EP. The research provides an overview of the current CSR situation in the developing and emerging countries, which can be used to determine whether and how to improve the CSR level in those countries. Governmental institutions can compare the CSR level of banks with other countries in order to improve the CSR situation in their own country by implementing CSR laws or by giving incentives to those that incorporate CSR measures.

The remainder of this paper is organized as follows: first I will give an overview of the literature of CSR in the section background. Then I will bring the methodology part where I will explain how I constructed my research. In subsequent sections I will present the data and the results. The final part of this paper contains the conclusion, the discussion, limitations and possible future directions are sketched.

II BACKGROUND

2.1 History CSR

Opposite of what many people think CSR is not a new concept. According to Asongu (2007), CSR is perhaps as old as business itself and in some societies one cannot do business without being socially responsible. Literature about the concept of social responsibility can be traced back to the 1930s. Early references are for example Barnard (1938), The Functions of the Executive, and Krep (1940), Measurement of the

Social Performance of Business. Both refer to the social responsibilities of executives

and business. In the 1950s more attention about, at that time, social responsibility is brought by Bowen. Bowen (1953) published his book, Social Responsibilities of the

Businessman, and describes how CSR can merge with the interests of business in the

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10 of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society”. Other early scholars are for example Friedman (1970) and Carroll (1979)

who have an opposite opinion about how CSR fits in business. From Friedman’s point of view (1962, 1970) there is one and only one social responsibility of business and that is to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game. If managers want to work toward the betterment of society, they should do so as private individuals at their own expense, not as agents of their principals and at their principals’ expense (Friedman, 1970). Carroll (1979), on the other hand, put emphasis on how to integrate CSR in the business strategy and presents a model that can be used to help managers to conceptualize the key issues in social performance, to systematize thinking about social issues, and to improve planning and diagnosis in the social performance realm. Falck and Heblich (2006) add that strategic practice of CSR will involve a long-term shareholder value approach, which implies long-term view of profit maximization as well. Practicing CSR is not altruistic do-gooding, but rather a way for both companies and society to prosper, only possible when CSR is conceived of as a long-range plan of action (Falck and Heblich, 2006). The majority of the authors (e.g. Carroll, 1979; Davis, 1991; North, 1992; Welford and Gouldson, 1993; Burke and Logsdon, 1996) propose that companies should implement a CSR friendly business strategy.

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2.2 CSR in developing countries

The discussion between several authors (Prieto-Carrn et. al., 2006, Blowfield et. al., 2005) is about how to define the concept CSR in the developing world. CSR has broadened its scope to include not only aspects of corporate conduct that impinge on social, environmental and human right issues, but also the role of business in relation to poverty reduction in the developing world (Carrn et. al., 2006). Prieto-Carrn et. al. (2006) believe that a critical research agenda should conduct an in-depth investigation of what actually constitutes ‘business’ and ‘poverty’, and how different types of business may affect different aspects of poverty both positively and negatively. According to Ite (2004), lack of national macro-economic planning and management, backed by equitable resource allocation, have significant implications for the overall performance of CSR initiatives by MNCs in developing countries. It is indeed possible for MNCs to make significant direct and indirect contributions to poverty elimination through CSR strategies and initiatives. However due to governmental failure such as corruption, poor governance and lack of accountability within the political system and public administration, MNCs may fail to achieve the desired outcomes of CSR initiatives (Ite, 2004).

Why is CSR becoming an important topic for the developing countries? For many MNCs, CSR is an outcome of public pressure arising from their operations in developing countries in relation to human rights, environmental pollution and labour issues (Ite, 2004). Multinationals, especially the clothing and the sportswear industries like Nike, Adidas, and Puma, are working with external manufacturing companies in Asia. Due to working condition scandals in the 1990s, multinationals are enforcing the external manufacturers to implement fair labour standards. However, according to an Oxfam report “Play fair at the Olympics: respect workers’ rights in the sportswear

industry” (2004) many suppliers keep fake records and resort to such tactics as

training and bribing workers to lie about working conditions to auditors.

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SIRAN/KLD report: Sustainability Reporting in Emerging Markets, shareholders expect minimal standards in terms of governance and disclosure. These standards help demonstrate that companies are managing risk and stakeholder interests in a manner that secures long-term business sustainability. In order to attract foreign investors, companies in developing countries are changing their policies towards corporate governance and CSR.

2.3 CSR in the banking sector

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for the government in promoting sustainable enterprise: vision/goal setter, leader by example, facilitator, green fiscal authority and innovator/catalyst.

Nevertheless, corporate sustainability will increase cost for screening and monitoring CSR. However, Scholtens and Dam (2006) argue that the cost of CSR screening and monitoring appears to be limited. Additional cost is accrued through missed opportunities to finance other projects. This means that banks will incur opportunity cost by missed opportunities to finance non-EP projects because banks are reducing their potential market for project finance. On the other hand, it is likely that projects that meet the requirements of the EP have larger operational costs that need to be financed, thereby increasing the benefits. Despite the extra costs, banks are increasingly involved with social responsibility strategies. Banks are providing socially responsible saving or investment products.

Several worldwide initiatives are taken by bank corporations in order to achieve CSR. One of the first initiatives was the adoption of the Equator Principles in 2003. The EP was set up by a group of private sector banks, led by Citigroup, ABN AMRO, Barclays and WestLB.

2.4 Social Responsibility Framework

Scholtens (2009) developed a framework to assess the social responsibility of financial institutions. He applied the framework to 32 financial institutions from North America, the Pacific, and Europe; and finds significant differences among individual banks, countries, and regions. Furthermore, he also compared his results with the results of the research of Jeucken (2001) and came to the conclusion that banks paid a lot more attention to their social responsibilities in the year 2005 than in the year 2000. According to Scholtens (2009), policies of banks in terms of CSR have become much more transparent and banks also offer a larger number of sustainable financial products.

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guidelines environmental risk management. The third group indicates in what extent a bank signal its commitment to sustainable development. Corporate sustainability also has a commercial dimension for banks. New (product) market development aimed at the group of savers and investors who specifically choose to use their abundant financial resources to social or environmental ends. From 2005 to 2007, social investing enjoyed a growth rate of nearly 18 percent in the USA. Today, every one out of nine dollars invested is involved in socially responsible investing (Social Investment Forum, 2007). The following products will be included in this research: Socially responsible investing, Socially responsible saving, Sustainable financing, Microcredit, Environmental advice services, Climate products, and other sustainable products (Scholtens, 2009). It is possible that developing countries offer other sustainable products than the developed countries due to different demand from the market. The last indicator is the social conduct, where the internal and the external social commitment of a bank will be assessed. Internal relates to the ways in which it deals with its workforce. External relates to its attitude and behaviour with regard to society. The following indicators will be used: Sponsoring, Community involvement, Training and education, Diversity and opportunities, Feedback from employees, and Business ethics.

In the framework there are a total of 29 different indicators. The scores for the indicators in the framework will be displayed binary as either 1 (yes) or 0 (no). The disadvantage of the digital scoring is that the extent of a variable is neglected. For example, it does not matter how much a bank donates to charity, as long as a bank donates, it will receive a score of 1.

2.5 CSR level determinants

Besides measuring the CSR level of 402 commercial banks, the CSR level will also be connected with bank and country characteristics to see what the influences are of the characteristics on the CSR level. In the following part, the possible relationships between the level of CSR and its determinants, bank and country characteristics, are explained.

2.5.1 Bank characteristics

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number of employees will not be used due to the fact that both variables balance sheet total and the number of employees indicate the size of the bank. Instead, four other bank characteristics are included: return on assets, age, number of shareholders, and stock exchange listing. In the following part the six bank characteristics will be explained.

Total bank assets (SIZE)

Total bank assets is the balance sheet total of a bank stated in USA dollars of 2007 and defines the size of the bank. The information for the bank assets is taken from the Bankscope database. The relationship between CSR and the total bank assets is assumed to be positive. A relatively larger bank has more clients and has a certain status, which in turn is more sensitive to public attention and media. Furthermore, as firms grow, firms attract more attention from stakeholders (Burke et all, 1986). According to Tsoutsoura (2004), larger firms seem to adopt the CSR principle more often. In the research of Scholtens (2009), there was a positively and a significantly relationship between CSR and bank size.

H1: Banks with a higher total bank asset have better CSR performance

Return on Assets (ROA)

Return on assets (RoA) is defined as the net income of a bank related to the average total assets of a bank of one year and defines the financial performance of a bank. Tsoutsoura (2004) found a positive and statistically significant relationship between socially responsible corporate performance and financial performance. Tsoutsoura (2004) used several variables to indicate financial performance among which is RoA.

H2: Banks with a higher RoA have better CSR performance

BIS Tier 1 capital ratio (TIER1)

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H3: Banks with a higher BIS Tier 1 Capital Ratio have better CSR performance

Age (AGE)

The age of a bank is the amount of years that a bank has existed since its establishment. The relationship between CSR and the age of a bank is assumed to be positive. Banks that are older could have gained more experience about how to manage itself in its environment. Furthermore older banks can have enjoyed advantages like learning effect, which can help to have a better and a broader scope of CSR.

H4: Banks that exist longer have better CSR performance

Number of shareholders (NO_SHAREHOLDERS)

The number of shareholders is the amount of shareholders that have shares of the bank. The relationship between CSR and the number of shareholders is assumed to be positive. CSR can play a role in order to attract shareholders to invest in a company. According to Tkac (2006), some investors believe that corporations have the power and responsibility to act to benefit others: workers, the local community, the environment, and even humanity as a whole. Shareholders have the possibility to influence the bank for more participation in CSR. According to Tkac (2006) activist investors use their legal rights as shareholders to place socially responsible resolutions on corporate proxy statements. If the bank has more shareholders, the amount of shareholders, which are pro-CSR will be bigger.

H5: Banks with a higher number of shareholders have better CSR performance

Stock exchange listing (STOCK)

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buy or sell stocks. Thereby a bank can use CSR as a source to give the environment a positive image about the bank, which can influence the investment behaviour of investors.

H6: Banks that are listed on the stock exchange market have better CSR performance

2.5.2 Country characteristics

Except for the bank characteristics, country characteristics are also included in this research. These variables are the income of a country per capita, degree of openness, bank assets/GDP, and Kaufmann (2008) Voice and Accountability (VA) index. As mentioned before, no scientific literature was found to justify the relationship between CSR performance and country variables. Hence, it is not possible to specify relationships between those variables with sources of existing literature. By this means the following four hypotheses are set up, by conceptualizing a subjective analysis in order to set up plausible connections between the variables.

Income (INCOME)

The income of a country is the GNI per capita of 2007 extracted from the World Bank database. CSR level is assumed to be positively related to the income of a country. According to Maslow’s hierarchy of needs (1943), a person needs to take care of their different levels of needs in order to achieve a stable life. The hierarchy of needs is represented as a five-layered pyramid. The lowest level is associated with physiological needs, which contains: breathing, food, water, sleep, etc. The highest level is associated with self-actualization, which contains the following variables: morality, creativity, problem solving, etc. The demand for CSR can be achieved when people have reached the last level of need: self-actualization. Income plays an important role to achieve the last level of need. The basic physiological and safety needs can be met with a certain amount of income.

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Degree of openness (OPENNESS)

The degree of openness is a measure of the extent to which an economy depends on trade with other countries and is calculated as the sum of total imports and exports to GDP. The numbers for imports, exports and GDI of 2007 are extracted from the World Bank database. The relationship between CSR and the degree of openness is assumed to be positive. An open economy is influenced by other countries and regions and is also influenced by international (financial) institutions. Companies or (financial) institutions from abroad can influence the domestic companies, in this case the banks, to pay more attention to CSR. A closed economy on the other side does not have influences from abroad, which could mean that less or none emphasis is put on CSR in its country.

H8: Banks in countries with a higher degree of openness have better CSR performance

Bank assets/GDP (FIN)

Total bank assets to GDP is a financial size of a country. The ratio of 2007 is retrieved from the World Bank database. The higher the ratio, the higher the influence is of the commercial banks on the country. The relationship between CSR and the financial size of a country is assumed to be positive. If a bank, that plays an important role in a country in terms of bank assets/ GDP, has a CSR policy, other banks would imitate the bank that has a CSR policy in order to compete with each other.

H9: Banks in countries with a higher financial size have better CSR performance

Voice and Accountability index (VA)

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from the public, the company would try to balance the demands from its environment and its own business strategy in order to avoid or stop negative publicity. According to Ite (2004), CSR is an outcome of public pressure from the operations of MNCs in relation to human rights, environmental pollution and labour issues.

H10: Banks in countries with a higher voice and accountability ratio have better CSR performance

In total there are ten hypotheses that will be tested. These are as follow: H1: Banks with a higher total bank asset have better CSR performance H2: Banks with a higher RoA have better CSR performance

H3: Banks with a higher BIS Tier 1 Capital Ratio have better CSR performance H4: Banks that exist longer have better CSR performance

H5: Banks with a higher number of shareholders have better CSR performance H6: Banks that are listed on the stock exchange market have better CSR performance H7: Banks in countries with a higher income have better CSR performance

H8: Banks in countries with a higher degree of openness have better CSR performance

H9: Banks in countries with a higher financial size have better CSR performance H10: Banks in countries with a higher voice and accountability ratio have better CSR performance

In all cases, the null hypothesis is that the CSR performance does not have a relation with the variable.

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III METHODOLOGY AND DATA

This research is conducted to answer the following two research question:

What is the current level of Corporate Social Responsibility (CSR) of commercial banks in developing and emerging countries?

How is the level of Corporate Social Responsibility (CSR) determined by bank and country specific characteristics?

The objective of this research is to assess the current situation of the level of CSR in developing countries. As already mentioned in the introduction, until now not much research has been conducted in the CSR field in developing countries, at least not with this amount of banks and countries. It is important to gain more insight in the CSR level due to the growing importance of trade and co-operations between developed and developing economies.

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is domestic when the bank is not owned by a single foreign bank or institution for more than 50%. However there is one exception, if a bank is dominated by a foreign bank or institution for more than 50% but remains independent, which means that the domestic bank keeps its own identity and publish its own annual report, the domestic bank is also included in this research. The difference is the foreign shareholder; a bank can have a shareholder like a large bank such as Banco Santander, Citibank, or HSBC or a smaller bank from a neighbour country. The influence of foreign shareholders is different depending on those characteristics like the size of their assets and the type of institution.

The banks are divided in three different categories in order to do different analyses. The first category is based on the country regions classified by the World Bank (see table 1). The banks are divided in six geographical regions: East Asia and Pacific (7 countries and 94 banks), Europe and Central Asia (11 countries and 101 banks), Latin America (2 countries and 22 banks), Middle East and North Africa (7 countries and 50 banks), South Asia (4 countries and 45 banks), and Sub-Saharan Africa (3 countries and 28 banks). In this category only developing countries are included except for the region Europe and Central Asia. In this geographical region three emerging countries are included: Czech Republic, Hungary and Slovenia.

The second category is based on the income of the country classified by the World Bank (see table 2). The income is divided in four categories: low-income economies (5 countries and 55 banks), lower-middle-income economies (14 countries and 144 banks), upper-middle-income economies (12 countries and 123 banks), and high-income economies (13 countries and 80 banks). In this category all countries are included.

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percent shift in voting power to developing countries at the IMF (Reuters). Due to these events, the BRIC countries are going to play an important role in the economical and political field of this world in the near future. From this point view, it is interesting to take the BRIC countries as a separate group in this CSR research. Besides the three categories, there are also analyses per country, between individual banks and a comparison with the study of Scholtens (2009).

TABLE 1: Countries categorized in geographical regions

Region (World Bank) Country Amount of Banks East Asia and Pacific China 14

Indonesia 9 Malaysia 9 Philippines 14 Taiwan* 19 Thailand 14 Vietnam 15 94 East Europe and Central Asia Belarus 5

Croatia 7 Czech Republic 6 Hungary 4 Kazakhstan 10 Latvia 7 Poland 5 Russian Federation 20 Slovenia 8 Turkey 15 Ukraine 14 101

Latin America Brazil 14

Chile 8

22 Middle East and North Africa Egypt 10

Iran 8 Jordan 7 Lebanon 14 Morocco 3 Syrian 5 Tunisia 3 50

South Asia Bangladesh 7

India 18

Pakistan 14

Sri Lanka 6

45 Sub-Saharan Africa Nigeria 16

South Africa 9

Tanzania 3

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TABLE 2: Countries categorized by income economy

Income World Bank Country Amount of Banks Low-income Bangladesh 7 Nigeria 16 Pakistan 14 Tanzania 3 Vietnam 15 55 Lower-middle-income China 14 Egypt 10 India 18 Indonesia 9 Iran 8 Jordan 7 Morocco 3 Philippines 14 Sri Lanka 6 Syrian 5 Taiwan 19 Thailand 14 Tunisia 3 Ukraine 14 144 Upper-middle-income Belarus 5 Brazil 14 Chile 8 Croatia 7 Kazakhstan 10 Latvia 7 Lebanon 14 Malaysia 9 Poland 5 Russian Federation 20 South Africa 9 Turkey 15 123

High-income economies Bahrain 8

Czech Republic 6

Hong Kong 5

Hungary 4

Israel 9

Korea, South (Rep) 7

Kuwait 6 Oman 6 Qatar 6 Saudi Arabia 9 Singapore 3 Slovenia 8

Trinidad and Tobago 3 80

TABLE 3: BRIC countries

Country Amount of Banks

Brazil 14

Russian Federation 20

India 18

China 14

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The Social Responsibility Framework of Scholtens (2009) is applied to all banks in the final list. The Social Responsibility Framework (see Appendix B) consists of four groups of indicators: (1) codes of ethics, sustainability reporting, and environmental management systems; (2) environmental management; (3) responsible financial products; and (4) social conduct (Scholtens, 2009). In the framework there are 29 different indicators. The scores for the indicators in the framework will be displayed binary either 1 (yes) or 0 (no). In order to have an equal comparison, the information of the annual report of 2007 is used. If the bank does not provide an annual report of 2007, the second choice is the annual report of 2008 and the third choice will be the report of 2006. The website of the banks are checked for extra information about CSR. If an indicator of the framework can be found in the annual report, CSR report, or the website, the bank will receive a score of 1. If it does not correspond the bank will receive for that particular indicator a score of 0. A bank can reach a score of maximum 29 points, which equals to the amount of indicators in the Framework. The end score will be calculated in a percentage score, so a score of 29 is a CSR score of 100%. The CSR score only indicates the CSR policy of banks and do not measure the intensity of the performances of the CSR policy. If a bank, for example, indicates that the bank donates money to charity, it does not matter how much or to which charity the bank donates. As long the bank makes donations, the bank will receive a score of 1 for community involvement.

When the total CSR scores are retrieved from the banks, the CSR scores will be compared to the bank and the country characteristics. The dependent variable is the CSR score and the independent variables will be the bank and the country characteristics. Among the bank characteristics the following variables are included: total bank assets (SIZE), BIS tier 1 capital ratio (TIER1), age bank (AGE), number of shareholders (NO_SHAREHOLDERS), return on average assets (ROA), and stock exchange listing (STOCK). Country characteristics are the income of a country per capita (INCOME), degree of openness (OPENNESS), bank assets/GDP (FIN), and Kaufmann (2008) Voice and Accountability ratios (VA). In the previous chapter the different characteristics are explained.

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Valid Missing Minimum Maximum Mean Median Std

Deviation

Variance Skewness

CSR (%) 402 0 0 72 16 14 11 116.8 1.81

SIZE (million $) 402 0 1 1,188.8 30.28 7.5 99.07 9.81E15 8.45

ROA 401 1 -7 11.68 1.55 1 1.54 2.37 0.15 STOCK 402 0 0 1 0.45 1 0.5 0.25 0.23 TIER1 296 106 0.8 119.8 13.47 11 9.86 97.19 5.45 AGE (years) 398 4 2 201 42.09 34 33.12 1096.81 1.54 NO_ SHAREHOLDERS 392 10 1 129 11.63 6 15.27 233.23 2.88 INCOME ($) 402 0 410 38420 8115 5720 8573.74 7.35E7 1.58 OPENNESS 402 0 0.26 4.33 0.96 1 0.61 0.37 2.9 FIN 336 66 0.18 1.48 0.62 1 0.27 0.07 0.67 VA 402 0 -1.8 1.1 -0.33 0 0.84 0.71 0.02 Valid N listwise 239

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relationship between two variables. The regression analysis tries to find a relationship between the dependent variable CSR and the independent variables the bank and country characteristics. The ANOVA analysis compares means of multiple groups.

For the regression test the following model is used to examine the effect of the bank and country characteristics on the level of CSR.

CSRit =  + 1SIZEit + 2TIER1it + 3ROAit + 4AGEit + 5NO_SHAREHOLDERSit + 6STOCKit + 7INCOMEit + 8OPENNESSit + 9FINit + 10VAit + it

CSRit is the CSR of bank i in year t, in this case the year 2007;  equals the constant term;  are the parameters of the independent variables and  is the error term. The outcome of the regression analysis will be discussed in the next chapter.

3.1 Descriptive study

The descriptive statistics of all banks are provided in table 4. For six variables (CSR, SIZE, STOCK, INCOME, OPENNESS and VA) 402 valid values are found, other variables have missing values. The variable BIS Tier 1 capital ratio has the largest amount of missing values: 106 out of 402. The variable ROA has 401 valid values, AGE 398, NO_SHAREHOLDERS 392, and FIN 336. Valid N would be 239 for all the variables. The variable CSR has a minimum of 0 and a maximum of 72 with a mean of 16 and a median of 14. The bank size varies between a minimum of one million dollar and a maximum of 1,188.8 million dollar. More descriptive studies of different categories: regions, income, and BRIC can be found in the appendices (see appendix F).

3.2 Correlation study

The Pearson correlation test statistics are reported in table 5, which shows the correlation coefficients of CSR and various bank and country characteristics. For the correlation test, a significance level of α = 0.01 is used. CSR is significantly

correlated with the following variables: SIZE, STOCK, AGE,

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CSR SIZE ROA STOCK TIER1 AGE NO_SH AREHO LDERS IN COME OPEN NESS FIN VA CSR 1 SIZE 0.371** 1 ROA 0.045 -0.059 1 STOCK 0.195** 0.085 0.067 1 TIER1 -0.091 -0.087 0.327** -0.003 1 AGE 0.352** 0.111* -0.087 0.201** -0.138* 1 NO_SHARE HOLDERS 0.284** 0.147** -0.043 0.471** -0.109 0.237** 1 INCOME -0.053 -0.018 0.075 0 0.053 0.049 -0.032 1 OPENNESS -0.158** -0.012 -0.108* -0.113* -0.070 0.006 0.119* 0.465** 1 FIN 0.199** 0.255** -0.225** -0.084 -0.199** 0.215** 0.185** 0.331** 0.637** 1 VA 0.206** -0.126* -0.084 -0.065 -0.142* 0.299** 0.089 0.356** 0.060 0.324** 1

** Correlation is significant at the 0.01 level (2-tailed) * Correlation is significant at the 0.05 level (2-tailed)

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IV RESULTS

This study focuses on the current CSR situation in the developing and emerging markets. In this chapter results of analyses of the following categories will be given: region, country, income, and BRIC. Furthermore, a comparison is made between the performances of the CSR level of individual banks. Next, the CSR level of this research will be compared with the CSR level of banks in developed countries (Scholtens, 2009). At the end of the chapter, the results of the regression study are analyzed.

4.1 Regional analysis

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lowest score of the section ‘social conduct’, 19%. Furthermore, feedback from employees, 39% and business ethics, 54% are not as well presented as other social variables.

The analysis of variance (ANOVA) is a statistical method to compare means of multiple groups. The null hypothesis is the means of all groups are equal. In this case the groups are the regions. The significance level that will be used is α = 0.01. The result of the ANOVA test (p = 0.000, see table 6) shows that the null hypothesis can be rejected which means that the CSR means are not all equal.

ANOVA CSR

Sum of Squares df Mean Square F Sig. Between Groups 7610,484 5 1522,097 14,877 0,000 Within Groups 34172,372 334 102,312

Total 41782,857 339

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33 Latin America Sub-Saharan Africa

East Asia

and Pacific South Asia

Europe and Central Asia

Middle East and

North Africa Average Codes, reporting and systems

1. Sustainability report 41 18 10 4 8 4 10

2. ICC Business Charter Sustainable Development 0 0 0 0 0 0 0

3. UNEP FI 0 11 3 0 1 0 2

4. Equator Principles 23 11 1 0 0 2 3

5. Global Compact 36 14 1 7 8 2 7

6. Who Cares Wins 5 0 1 0 0 0 1

7. EMAS 0 0 0 0 0 0 0

8. ISO 14001 9 7 2 0 1 0 2

Environmental Management

9. Environmental policy 64 29 37 16 21 16 27

10. Supply chain management 27 4 1 0 2 4 4

11. Quantitative environmental management targets 32 7 5 0 3 0 5

12. Transparency of performance 32 7 3 0 3 0 4

13. Environmental risk management in lending 27 11 13 2 2 4 8

14. Exclusion of specific sectors 18 0 7 2 3 0 4

15. World Bank guidelines 0 0 0 0 1 0 0

16. OESO guidelines 0 0 0 0 0 0 0

Financial products

17. Socially responsible investing 18 0 10 4 3 0 5

18. Socially responsible saving 5 0 0 0 1 0 1

19. Sustainable financing 36 7 13 11 13 8 13

20. Microcredit 59 54 29 71 20 18 34

21. Environmental advice services 0 0 1 2 2 0 1

22. Climate products 0 0 1 0 0 0 0

23. Other sustainability products 18 0 10 2 3 2 5

Social conduct

24. Sponsoring 100 93 91 67 80 60 81

25. Community involvement 82 96 93 82 77 50 80

26. Training and education 100 100 100 91 92 90 95

27. Diversity and opportunities 59 43 1 7 0 2 9

28. Feedback from employees 77 36 28 24 28 44 34

29. Business ethics 77 39 48 67 41 50 50

Average CSR score in % (340 banks) 33 20 18 16 14 12 17

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4.2 Country analysis

Figure 2 presents the scores in percentages of the countries’ average score on CSR. There are only seven countries that have an average score of 20% or higher, with Brazil on top with a score of 41% followed by South Africa (34), China (30), South Korea (29), Hungary (28), Sri Lanka (25), and Turkey (20). The rest have a lower score than 20%, with Iran and Syrian Arab Republic at the bottom with a score of 5%. Other countries with a score of 10% or lower are Pakistan (10), Bahrain (10), Trinidad and Tobago (9), Belarus (9), Latvia (8), Kazakhstan (7), and Tunisia (7). A large number of countries (31 countries) have a score between the 10% and 20%. Each country scores the highest on the section ‘social conduct’ with Brazil (99%) and South Africa (98%) on the top of the list. Brazil, China and Hungary have, compared to the other countries, the highest scores for the section ‘environmental policy’. The scores for the section ‘codes, reporting, systems’ and the section ‘financial products’ are the lowest in comparison to the other four sections of the framework.

For the country analysis, we have also conducted an ANOVA test. The null hypothesis is the means of all groups are equal. In this case the groups are the countries. The significance level that will be used is α = 0.01. According to the ANOVA test (see table 8), the result (p = 0.000) shows that the null hypothesis can be rejected which means that the CSR means are not all equal.

ANOVA CSR

Sum of Squares df Mean Square F Sig. Between Groups 22965,777 43 534,088 8,012 0,000

Within Groups 23865,968 358 66,665

Total 46831,745 401

TABLE 8: ANOVA countries

ANOVA CSR

Sum of Squares df Mean Square F Sig.

Between Groups 2444,647 3 814,882 7,307 0,000

Within Groups 44387,098 398 111,525

Total 46831,745 401

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4.3 Income analysis

Table 10 reports average CSR scores in percentages of countries classified by the income per capita of 2007. The classification is taken from the World Bank. There are four income levels: low-income economies $935 or less (5 countries and 55 banks), lower-middle-income economies $936 till $3705 (14 countries and 144 banks), upper-middle-income economies $3706 till $11455 (12 countries and 123 banks), and high-income economies $11456 or higher (13 countries and 80 banks). The average scores on CSR of the four income levels are ascending from the low-income to the upper-middle-income economies with the exception of high- income economies. High-income economies have an average of 15%, which is lower than the average of lower-middle-income economies of 16% and upper-lower-middle-income economies of 19%. Low-income economies have the lowest score of 12%. The four income-economies score the highest on the section ‘social conduct’ with upper-middle-income economies on top with a score of 65%. Upper-middle income also scores the highest on the sections ‘codes, reporting, systems’ (5%) and ‘environmental policy’ (9%). Lower-middle-income economies score the highest on the section ‘financial products’ with a score of 10 %. This can be explained by the higher score of the variable microcredit. Microcredit is more needed in lower level economies, thereby causing a higher score for the section ‘financial products’. Other variables of the section ‘financial products’ have a low average score. Investing or saving your money responsibly is hardly the case in those countries, although some banks have possibilities to finance sustainable projects.

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36 0 5 10 15 20 25 30 35 40 45 C S R s c o re i n % B ra si l S .A fr ic a C h in a S .K o re a H u n g ar y S h ri L an k a T u rk ey In d ia In d o n es ia T h ai la n d Jo rd an C h il e M al ay si a Is ra el M ar o cc o S in g ap o re L eb an o n P o la n d R u ss ia C ro at ia P h il ip p in es T ai w an K u w ai t N ig er ia S au d i A ra b ia S lo v en ia E g y p t T an za n ia H o n g K o n g U k ra in e C ze ch O m an Q at ar B an g la d es h V ie tn am P ak is ta n B ah ra in T ri n id ad B el ar u s L at v ia K az ak h st an T u n is ia Ir an S y ri an A ra b Countries

Countries' average score on CSR, 2007

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TABLE 10: Income economy CSR performance in % of the banks in 2007 Low-income

Lower-middle income

Upper-middle

income High-income Average

Codes, reporting and systems

1. Sustainability report 0 9 15 11 10

2. ICC Business Charter Sustainable

Development 0 0 0 0 0

3. UNEP FI 4 2 2 4 2

4. Equator Principles 0 1 7 1 3

5. Global Compact 5 3 14 1 6

6. Who Cares Wins 0 1 1 0 0

7. EMAS 0 0 0 0 0

8. ISO 14001 0 1 4 0 2

9. Environmental policy 5 28 33 31 27

10. Supply chain management 0 2 6 5 3

11. Quantitative environmental

management targets 0 3 8 5 5

12. Transparency of performance 0 2 8 6 4

13. Environmental risk management in

lending 0 8 11 4 7

14. Exclusion of specific sectors 0 6 5 1 4

15. World Bank guidelines 0 0 1 0 0

16. OESO guidelines 0 0 0 0 0

17. Socially responsible investing 0 8 4 3 4

18. Socially responsible saving 0 0 2 0 0

19. Sustainable financing 2 14 14 11 12

20. Microcredit 31 38 31 10 29

21. Environmental advice services 0 1 1 1 1

22. Climate products 0 1 0 0 0

23. Other sustainability products 0 7 7 3 5

Social conduct

24. Sponsoring 75 82 85 84 82

25. Community involvement 89 77 81 83 81

26. Training and education 95 96 94 96 95

27. Diversity and opportunities 7 3 18 10 9

28. Feedback from employees 9 28 51 25 32

29. Business ethics 20 55 61 40 49

Average CSR score in % (402 banks) 12 16 19 15 16

4.4 BRIC analysis

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directly clear why Brazil is doing better in terms of CSR in comparison to Russia, India and China. Therefore it is important to link the CSR level with bank and country characteristics. Brazil and Russia both belong to the upper-middle-income economies, but Russia has the lowest average CSR score of the four countries. The degree of openness is quite similar among the BRIC countries. Brazil has the highest scores for the variables bank assets/GDP and Kaufmann’s VA index (see Appendix C), which can indicate why Brazil has a higher score for CSR.

TABLE 11: CSR performances in % of the BRIC countries

Brazil Russia India China Average

3. UNEP FI 0 0 0 14 3

7. EMAS 0 0 0 0 0

8. ISO 14001 14 0 0 0 3

11. Quantitative environmental management

targets 43 5 0 21 15

lending 43 10 6 64 27

20. Microcredit 57 5 100 14 44

Social conduct

24. Sponsoring 100 90 89 93 92

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4.5 Individual bank analysis

The individual bank analysis compares the CSR scores in percentages of individual banks with each other (see figure 3 and Appendix B). The bank with the highest score is Banco Bradesco (Brazil) with a score of 72% followed by Banco do Brazil (Brazil) 69, UniBanco (Brazil) 66, Banco Itau (Brazil) 62, Bank of China (China) 52, Industrial Bank (China) 52, Standard Bank of South Africa (South Africa) 52, and Nedbank (South Africa) 52. Only these eight banks have a score of above 50%. Banks in the higher-ranking part are predominantly from the countries Brazil, China, South Africa, Republic of Korea, and Hungary. Only 40 out of the 402 banks have a CSR score higher than 30%. The majority of the banks (221 banks) have a score between the 10% and 20%. Banks with the lowest performance on CSR are BelarusBank (Belarus), Arab International Bank (Egypt), Latvian Trade Bank (Latvia), Oman Arab Bank (Oman), and KIT Finance Investment Bank (Russia); all with a score of 0%. Banks in the lower ranking part are predominantly from the countries Belarus, Egypt, Iran, and Kazakhstan. Of the 402 banks, 70 banks have a CSR score of 7% or lower.

4.6 Comparison CSR level with the Western countries

In this section I will compare this study with the study of Scholtens (2009). It is possible to compare the two studies because both studies used the same framework. However, the samples of banks are from different regions: Scholtens (2009) applied the CSR framework in 2005 to 32 global financial institutions in fifteen countries from the regions: Europe, North America, and Pacific. In contrast, this study concentrates on banks in the developing and emerging markets, where banks have a significant lower amount of balance sheet total and have operations in only one or a few countries. Despite the differences among the banks, it is possible to show the differences of the CSR level of banks and give a rough indication of the current CSR situation in different regions.

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TABLE 12: Comparison CSR level with the research of Scholtens (2009) Low-income Lower-middle income Upper-middle income High-income Developed (Scholtens, 2009)

3. UNEP FI 4 2 2 4 77

7. EMAS 0 0 0 0 2

8. ISO 14001 0 1 4 0 54

11. Quantitative environmental

management targets 0 3 8 5 73

lending 0 8 11 4 89

20. Microcredit 31 38 31 10 49

Social conduct

24. Sponsoring 75 82 85 84 98

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42 Individual bank score on CSR, 2007

0 10 20 30 40 50 60 70 80 1 14 27 40 53 66 79 92 105 118 131 144 157 170 183 196 209 222 235 248 261 274 287 300 313 326 339 352 365 378 391 Banks C S R s co re in %

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4.7 Regression study

This regression study aims to assess the effect of various bank and country characteristics on the CSR performance of 402 commercial banks. The dependent variable of the empirical model is the CSR performance and the independent variables are various bank and country characteristics (SIZE, TIER1, AGE, NO_SHAREHOLDERS, ROA, STOCK, INCOME, OPENNESS, FIN and VA), which are explained in the previous chapter.

In order to assess the effect of the independent variables on the dependent variable, a multiple linear regression test will be used. For the regression test, the following model is used:

CSRit =  + 1·SIZEit + 2·TIER1it + 3·ROAit + 4·AGEit + 5·NO_SHAREHOLDERSit + 6·STOCKit + 7·INCOMEit + 8·OPENNESSit + 9·FINit + 10·VAit + it.

CSRit is the CSR of bank i in year t, in this case the year 2007;  equals the constant

term;  are the parameters of the independent variables and  is the error term.

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NO_SHAREHOLDERS. These variables do not have a significant relationship with CSR.

The next step is to do a second multiple linear regression in order to test the results of significant variables of the first regression analysis. The significant variables of the first regression analysis are SIZE, ROA, INCOME, OPENNESS, FIN, and VA. The results of the second regression test can be found in table 14. The model for this test will be as follow:

CSRit =  + 1·SIZEit + 2·ROAit + 3·INCOMEit + 4·OPENNESSit + 5·FINit + 16·VAit + it

CSRit is the CSR of bank i in year t, in this case the year 2007;  equals the constant

term;  are the parameters of the independent variables and  is the error term.

The adjusted R-square for the second regression model is 0.416. The outcome of the second regression analysis is similar to the first one, using the same significance level

 = 0.05 as before. The six independent variables (SIZE, ROA, INCOME,

OPENNESS, FIN, and VA) have again a significant outcome. One difference is that the second regression analysis can be described with a lower significance level  = 0.01. The variable ROA has a result of p = 0.049 in the first regression analysis and in the second analysis a result of p = 0.005.

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TABLE 13: Regression coefficients bank and country characteristics and CSR performance of all banks Unstandardized Coefficients Standardized Coefficients t Sig. SIZE 1.897E-7 0.537 9.847 0.000 ROA 0.863 0.102 1.982 0.049 STOCK 0.628 0.027 0.494 0.622 TIER1 0.053 0.05 1.005 0.316 AGE 0.016 0.051 0.928 0.354 NO_SHAREHOLDERS 0.014 0.022 0.384 0.701 INCOME 0 -0.204 -3.453 0.001 OPENNESS -4.320 -0.290 -3.994 0.000 FIN 8.675 0.222 3.106 0.002 VA 3.143 0.216 3.739 0.000 N 239 Adjusted R Square 0.501

TABLE 14: Regression coefficients bank and country characteristics and CSR performance of all banks without insignificant outcomes of TABLE 13

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In summary the formulated hypotheses and their results:

Supported:

H1: Banks with a higher total bank asset have better CSR performance H2: Banks with a higher return on assets have better CSR performance

H9: Banks in countries with a higher financial size have better CSR performance H10: Banks in countries with a higher voice and accountability ratio have better CSR performance

Not supported:

H3: Banks with a higher BIS Tier 1 Capital Ratio have better CSR performance H4: Banks that exist longer have better CSR performance

H5: Banks with a higher number of shareholders have better CSR performance H6: Banks that are listed on the stock exchange market have better CSR performance

Supported but opposite effect

H7: Banks in countries with a higher income have better CSR performance Should be: Banks in countries with a higher income have worse CSR performance H8: Banks in countries with a higher degree of openness have better CSR performance

Should be: Banks in countries with a higher degree of openness have worse CSR performance

When comparing this overview of results to the early formation of the hypotheses in chapter 2, six out of ten formulated hypotheses are confirmed by a regression analysis. Independent variables that have an effect on the CSR performance are SIZE, ROA, INCOME, OPENNESS, FIN and VA. Two hypotheses with the variables INCOME and OPENNESS are negatively significant related with CSR. Figure 4 summarizes the outcome of the regression analysis of the CSR level and its determinants.

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category. Only 22 banks in Latin America were included, compared to East Europe and Central Asia, where 101 banks were included. The low-income countries category has a total of 55 banks whereas the lower-middle-income countries category has 144 banks.

FIGURE 4: CSR model

V CONCLUSION

The aim of this paper is to provide a clear view of how banks in developing countries score on the concept CSR and how this is affected by bank and country characteristics. The CSR score is assessed by using the CSR framework developed by Scholtens (2009). In this research, a sample of 402 banks is taken from the database Bankscope. 31 developing countries and 13 emerging markets are included in this study. Bank characteristics are: total bank assets, BIS tier 1 capital ratio, age, number of shareholders, return on average assets (RoA), and stock exchange listing. Country

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characteristics are the income of a country per capita, the degree of openness, bank assets/GDP, and the Kaufmann (2008) Voice and Accountability index.

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CSR level of the various income levels are similar to each other but due to higher scores on indicators like “microcredit”, lower-income countries have higher CSR scores than countries with more income. The negative influence of OPENNESS on CSR is already explained in the previous paragraph. At the end, all country variables are significantly related with CSR performance, which indicates that country variables do play a significant (positive and negative) role in the CSR performance of banks in developing and emerging countries. No significance is found with the following variables: STOCK, TIER1, AGE and NO_SHAREHOLDERS. This contradicts the expectations from chapter 2 that these independent variables would have a significant influence on the CSR performance. In this case no clear relation of the variables STOCK, TIER1, AGE, and NO_SHAREHOLDERS to CSR level is found, which means that these independent variables are not good explanatory factors for the level of CSR in developing and emerging countries. In conclusion, there is a positive and significant association between a bank’s CSR performance and its financial size, return on assets, countries’ bank assets/GDP ratio and countries’ Voice and Accountability ratio.

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CSR in developing and emerging countries. This research is also interesting for investors who put more emphasis on CSR and have an interest in investing in developing countries.

VI LIMITATIONS & RECOMMENDATIONS

This research has a number of limitations. The CSR information that is gathered for this research is predominantly from websites, annual reports, and CSR reports, which are publicly available information, provided by the banks themselves. This could cause a certain bias of information.

Furthermore the application of the CSR framework of Scholtens (2009) with the digital score of 1 or 0 does not encounter the extent of a variable but only register whether a variable is present at the bank.

Another limitation is that Latin America and Sub-Saharan Africa are not well presented in terms of the amount of countries and banks in this research. Twelve countries with more than 100 banks from Latin America (e.g. Argentina, Colombia, Mexico and Venezuela) were cancelled out of my prior bank list because these banks only provide information in Spanish. The problem of Sub-Saharan Africa countries is the low amount of domestic banks, the majority of banks are taken over by foreign banks or the country has simply only one or two banks with assets of a minimum of one million dollar. This problem also occurs in some Eastern European countries like Bulgaria, Estonia, Lithuania, Romania and Slovakia.

The last limitation is the data availability. Banks in developing countries do not always uphold the same standards of transparency as more developed markets. Some banks, especially the smaller ones, have a simple website with only basic information of the bank. Reports are difficult to find or websites are under construction for months. These limitations could explain why previously there was not much research of CSR in developing countries. The excess to public information is not well developed and the use of an international language is not common yet due to the lack of foreign investors and shareholders.

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