Special Issue on Social Responsibility Education and Practices
The Relationship between CSR and Banks'
Financial Performance: Evidence from Turkey
Kurumsal Sosyal Sorumluluk ve Bankaların Finansal
Performansları Arasındaki İlişki: Türkiye’den Kanıtlar
Dilvin Taşkın, Yasar University, Türkiye, dilvin.taskin@yasar.edu.tr
Abstract: The aim of this paper is to analyze the bidirectional relationship between CSR practices of Turkish banks and
their financial performance which is proxied by ROE, ROA and NIM for the year 2013. Content analysis is used to analyze
the degree of CSR level based on a CSR index calculation and the link between performance and CSR level is investigated.
The results show that ROA and ROE have no explanatory power in explaining CSR, whereas there is a bidirectional
relationship between CSR and NIMs. The results point to an intuition that the banks are likely to charge the costs of CSR
practices from their customers.
Keywords: Banking, Corporate Social Responsibility, Financial Performance
Öz: Bu çalışmanın amacı Türkiye’de faaliyet gösteren bankaların 2013 yılındaki Kurumsal Sosyal Sorumluluk
(KSS)uygulamalarının, aktif karlılığı, özkaynak karlılığı ve net faiz marjıdeğişkenleri ile ölçüldüğü banka performansı
arasındaki olası çift yönlü ilişkiyi incelemektir.KSS düzeyi içerik analizi yöntemi kullanılarak bir KSS endeksine bağlanmış,
performans ve KSS düzeyi bağlantısı ilişkilendirilmiştir. Çalışmanın sonuçlarına göre aktif karlılığı ve özkaynak karlılığının
KSS faaliyetleri üzerinde herhangi bir etkisi olmamakla beraber, KSS ve net faiz marjları arasında çift yönlü ilişkinin
varlığı tespit edilmiştir. Bu durum ise bize bankaların KSS faaliyetlerinden doğan maliyetleri müşterilerine yansıttığı fikrini
akla getirmektedir.
Anahtar Kelimeler: Bankacılık, Kurumsal Sosyal Sorumluluk, Finansal Performans
1. Introduction
The Turkish banking industry makes up approximately 80% of the whole financial system. Thus,
any development in this sector is crucial for every actor in the society. Following the developments
in the world, the financial system in Turkey started to liberalize with the beginning of 1980s. The
interest rate ceilings were removed, the convertibility of the Turkish Lira was established. With the
liberalization efforts, the rules of the game have changed, but the problem was the policies were
introduced before any proper regulation was imposed. Thus, banking system ended up with two
severe crises in 1994 and 2001.
In 2001 crisis half of the total assets of the total banking system melt down due to depreciation
in Turkish Lira and some of the banks were taken over by Savings Deposit and Insurance Fund. In
order to provide financial stability a stand-by agreement with IMF was signed and also a
“Transition Program for Strengthening the Turkish Economy” was put into action. With the
recovery of the economy, the banking system also improved. The profitability and the capital
adequacy of the total banking system increased to levels that are considerably higher than the
average European bank.
After 2002 the face of the banking system changed radically. Before the crisis, the banks
enjoyed the high interest rates from the treasury bills, by channeling the funds from their
depositors. In the aftermath of the crisis, due to the rapid decrease in interest rates banks started to
perform their traditional banking activities and started to give loans to individuals and firms. Many
Taşkın, D. / Journal of Yasar University, 2015, Special Issue, 21-30
22
banks either merged or acquired, lots of foreign banks entered to the market and there has been a
brisk consolidation in the system. Table 1 provides a general overview about the banking system in
the aftermath of the crisis. These changes started to increase the competition in the system and also
with the recovery and increased profits, the banks started to increase their corporate social
responsibility activities. Especially, the biggest banks publish sustainability reports that are in line
with the global standards. Most of the banks, especially private national banks engage in many
CSR activities that are related to planting forests, increasing energy efficiency, education and arts.
Table 1. General Overview of Turkish Banking System
Year
C3
C5
Share of
Foreign
Banks
Total Number
of
Commercial
Banks
Number of
Com. Bank
Branches
Number of
Personel
2003
0,448
0,643
0,030
36
5949
118607
2004
0,442
0,634
0,032
35
6088
122630
2005
0,472
0,640
0,053
34
6228
127857
2006
0,435
0,623
0,125
33
6804
138570
2007
0,423
0,641
0,150
33
7570
153212
2008
0,426
0,639
0,153
32
8741
166325
2009
0,452
0,663
0,125
32
8983
167063
2010
0,444
0,660
0,132
32
9423
173133
2011
0,420
0,636
0,139
31
9792
176576
2012
0,401
0,624
0,140
32
10192
181197
2013
0,393
0,606
0,153
32
10981
192219
C3 and C5 represent the share of the biggest 3 and 5-banks, respectively. The data is collected
from the web site of TBAT, The Banks Association of Turkey.
The CSR disclosure in Turkey is shaped by the “Corporate Governance Principles” (Nuhoglu
and Wan, 2012: 96) which are established by Capital Markets Board of Turkey in 2003 and later
revised in 2005 and 2011. These principles are based on OECD corporate governance criteria and
they stress the importance of protecting shareholders’ and stakeholders’ rights. They also focus on
social and environmental awareness. The companies which are listed in the Borsa Istanbul should
explain their compliance with those principles and in the case of non-compliance they should
disclose the reasons for it. Ararat (2008) also note that multinational companies are concerned with
the CSR, only if the society asks for it. If that’s the case, the multinationals note the CSR activities
as a profit maximizing differentiator. The latest events in Turkey (Gezi protests and other
environmental protests) show that the society calls for higher social standards especially to protect
the environment. This is idea also links the social and financial performance.
Despite various attempts to define corporate social responsibility (CSR), there is no clear
definition of CSR yet (Turker, 2009). Some researchers define CSR as “strategies for dealing with
stakeholder demands” (Ullmann, 1985: 552). By this definition, CSR is directly in line with
corporate governance. But, this paper adopts a more comprehensive definition, such as the one
made by Carroll (1999). Carroll (1999) defines the CSR in two dimensions; economic and non-
economic. Economic components represent the activities that the company is doing for itself, non-
economic components stand for the activities that the company serves for the society.
The paper proceeds with the aim of analyzing the impact of CSR practices on the financial
performance of Turkish banks; namely return on assets (ROA), return on equity (ROE) and net
interest margins (NIM). Conversely the impact of financial performance on the CSR activities is
Taşkın, D. / Journal of Yasar University, 2015, Special Issue, 21-30
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also analyzed by controlling the size. In order to have a prompt measure of CSR, a score is
calculated for each bank based on their disclosures and the items in GRI index. The next section
presents a brief literature, Section 3 will present the data and methodology, Section 4 will display
the empirical results of the study and finally Section 5 will conclude.
2. Literature Review
Since, the aim of the firm is mentioned as maximizing shareholders’ wealth, there are many papers
linking the CSR practices to financial performance measures. But still, the literature is inconclusive
about the CSR and financial performance relationship. In the traditional view of the corporation,
the responsibility of the firm is limited to serve the needs of shareholders. As Friedman states
(1962: 163) “The responsibility of business is to increase profits”. Despite the harsh regret of
Friedman, many papers still reject his view. McWilliams and Siegel (2001) remarked that based on
a supply and demand theory of the firm, the firms produce at a profit-maximizing level, including
the production of social performance. It is also believed that good management will be performing
well in every aspects of business, even in social performance (Waddock and Graves, 1997).
Preston and O’Bannon (1997) mention that a firm with a superior financial performance has slack
resources which can be directed to social performance.
With the increase in CSR practices, the initial papers started to address the link between the
pollution control disclosure and several measures of performance (i.e. Bragdon and Marlin, 1972;
Belkaoui, 1976).
Some papers point to a positive relationship between social and financial performance.
Frooman (1997) analyzed the market reaction for the firms that are found as socially irresponsible
or illegal were negative. The event studies showed that the investors sold the shares of these firms
when a bad new about the irresponsible behavior or legal misconduct of a firm is heard. Stanwick
and Stanwick (1998) using the Fortune Survey of Corporate Reputation as a proxy for CSR
practices investigated its link with financial performance variables like return on sales and size for
the years 1987 and 1992. The results revealed a positive relationship between CSR and financial
performance. This finding was also supported by Preston and O’Bannon (1997) who examined
three dimensions of Fortune Reputation Survey on 67 large corporations in US for the period 1982-
1992. They also indicate a positive association between the aggregate 3 dimensions on CSR and
return on assets, return on equity and return on investments.
As the earlier studies about CSR focus on only one dimension related to CSR, more recent
studies consider multidimensional features of CSR practices using CSR indices like KLD index,
CSID (Canadian Social Investment Database). These indices provide means to measure CSR level
for each firm by considering several dimensions and assigning a score pertaining the firms’ success
in each dimension.
Despite the vast amount of papers focusing on the impact of CSR on financial performance,
several researchers assert that it’s the financial performance that affects the CSR activities of a
company. Ullman (1985) in his stakeholder model, economic performance is posited as an
independent variable effecting CSR. McGuire et al. (1988) also concluded that the firms with
higher performance are more likely to afford social responsibility projects. Zengin
Karaibrahimoglu (2010) also inferred a similar view with Ullman and proved that in times of global
financial turmoil there has been a decrease in the CSR projects on a randomly selected 100,
Fortune-500 companies.
Taşkın, D. / Journal of Yasar University, 2015, Special Issue, 21-30
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3. Data and Methodology
The analysis covers 11 banks which are private national commercial banks operating in Turkey in
2013
1
. The sample banks constitute the 53.1% of the total assets in the banking system, whereas the
public banks make up the 30.9% of total assets and foreign banks represent 16.0%. The public
banks serve as the bodies that both channel funds between suppliers and demanders and funds and
also they are the means to serve public needs. So their CSR practices are considered more
obligatory than voluntary. The foreign commercial banks represent very small percentages in total
market share and most of them have very few branches. Thus, only very small number of foreign
banks were found to exercise CSR practices, hence they were also ignored from the analysis.
In order to identify the corporate social responsibility practices of the private commercial
banks in Turkey, their financial statements and footnotes, annual reports, corporate social
responsibility reports and sustainability reports have been investigated for the year 2013. Of the
available scales for the measurement of CSR, Global Reporting Initiative’s (GRI) sustainability
report guidelines is adopted as in Nuhoglu and Wan, 2012. The study makes a content analysis
based on the guidelines that are mentioned in GRI.
The GRI focuses on Triple Bottom Line concepts for measuring the degree of CSR, namely,
economic impacts, environmental impacts and social impacts. The social impacts are further traced
into four sub-dimensions: labor practice and decent work, human rights, society and product
responsibility. If the bank discloses all the required information about a dimension, it is given a
score of 10; thus a bank that is fulfilling disclosure requirements about each dimension it will get a
score of 60 in total. Table 2 summarizes the sub-dimensions of CSR practices that were traced in
the content analysis.
Table 2. Dimensions of CSR Practices used in Content Analysis
CSR Dimensions
Score
Content
Economic Information
10
Economic Performance, Market Presence, Indirect Economic
Impacts
Environmental
Information
10
Material, Energy, Water, Biodiversity, Emissions effluents
waste, Products&Services, Compliance, Transport; Overall
Social Information
Labor Practice &
Decent Work
10
Employment, Labor/Management Relations, Occupational
Health&Safety, Training&Education, Diversity& Equal
Opportunity
Human Rights
10
Investment&Procurement Practices, Non-Discrimination,
Freedom of Association and Collective Bargaining, Child
Labor, Forced&Compulsory Labor, Security Practices,
Indigenous Rights
Society
10
Community, Corruption, Public Policy, Anti-Competitive
Behavior, Compliance
Product
Responsibility
10
Product&Service Labeling, Marketing Communications,
Compliance
1
Birleşik Fon Bankası is excluded from the analysis, since it is operating under the review of Savings Deposit
and Insurance Fund.
Taşkın, D. / Journal of Yasar University, 2015, Special Issue, 21-30
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The CSR score for the ith bank is calculated by summing up each of the scores the bank
possesses in each of the three dimensions:
(1)
The score for the social dimension for the ith bank is similarly found by summing up scores in
each of the four sub-dimensions:
(2)
For each dimension and sub-dimension, further items were evaluated in the content analysis
and these items are presented in Appendix. (For a detailed explanation about each item in appendix,
see GRI’s G4 Sustainability Reporting Guidelines, Reporting Principles and Standard Disclosures,
n.d.:43-80).
After calculating the CSR scores for each bank, the paper further investigates the relationship
between the CSR score and the financial performance indicators. Most of the empirical papers that
are analyzing the financial performance of banks consider return on assets (ROA), return on equity
(ROE) and net interest margins (NIMS). ROA and ROE are the most commonly used measures for
bank performance (see for example, Micco etal., 2007; Demirgüç-Kunt, Huizinga, 2011; Naceur
and Goaied, 2001 and for Turkey Taşkın, 2011; Doğan,2013; Demirel etal., 2013). NIM is also
important in the way that it conveys significant information about the performance, profitability
and stability of the financial system (Saunders and Schumacher, 2000: 814). ROA is the ratio of net
profit over total assets, ROE is the ratio of net profit over total shareholders’ equity and NIM is the
ratio of net interest income to total assets. Two regressions are run to understand the two-way
relationship between CSR and performance:
(3)
(4)
For Equation 3, Perfi represents the ROA, ROE and NIM of the ith bank. Sizei represents the
natural logarithm of the ith bank and is kept as a control variable in the regression. Equation 4
keeps the CSR score as the dependent variable and considers size and performance variables as
explanatory variables in three separate regressions.
4. Empirical Results
Before presenting the results of the regression analysis, Table 3 displays average scores of the
sample banks on the CSR practices they possess.
The summary scores show that on average the commercial private banks exhibit an average
score of 30.24 on the aggregate CSR index. It is seen that on average, the banks are doing pretty
good in terms of economic information disclosure. Despite the various projects the banks are
undertaking about the environmental dimension, the average result turns out to be very low; 3.74.
This is actually due to the tendency to support the projects to increase the size of the forestry areas
and use of natural energy resources; whereas projects on biodiversity and water scarcity are mostly
ignored. Among the social dimension, scores on society and human rights stand as very low. It can
be concluded that, the sub-dimensions of these practices are still not considered as critical yet;
hence banks fail to disclose any information about those practices so far.
