Financial Innovation and Islamic Financial Institution’s Performance: Examining the Mediating Role of Corporate Social Responsibility

Abstract

The study focuses on the role of financial innovation on the performance of Islamic financial institutions (IFIs), with CSR being a mediator. Islamic financial institutions are increasingly embracing novel financial practices to become more competitive, efficient and sustainable in the changing financial environment. But there is not much empirical evidence on the direct and indirect effect of financial innovation on institutional performance via CSR. The study uses positivist research philosophy and quantitative research approach with a cross sectional research design to overcome this. Primary data was collected from 532 employees at managerial level from simple random sampling of Islamic financial institutions (IFIs) which included Islamic banks (full-fledged) and Islamic bank branches (conventional banks) in Pakistan. Data analysis was conducted using SPSS and Smart PLS-SEM 4 for preliminary data analysis, measurement and structural model analysis. The findings indicate that the financial innovation has a positive impact on the performance of Islamic financial institutions and that it also positively contributes to enhance the CSR practices. Further, the CSR positively impacts the institutional performance and it is also an important mediator between financial innovation and institutional performance. Based on the findings of this study, it can be concluded that financial innovation and CSR complement each other, both of which are strategic approaches to sustainable growth in the Islamic finance sector. The study contributes to the existing knowledge by conceptually integrating the notions of innovation and social responsibility into one and provides relevant insight for managers and policy makers for enhancing the competitiveness and social legitimacy of institutions. The study makes a few recommendations for Islamic financial institutions to consider to ensure long-term sustainable performance; these recommendations include focusing on technological innovations and enhancing CSR initiatives.

Keywords:

Islamic Finance, Islamic Banking, Performance, Financial Innovation, Corporate Social Responsibility, SMART PLS-SEM.