THE EFFECT OF CORPORATE SOCIAL RESPONSIBILITY ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN NAKURU, KENYA
A RESEARCH PROPOSAL SUBMITTED TO THE SCHOOL OF BUSINESS AND ECONOMICS IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF A DEGREE OF MASTER OF SCIENCE IN FINANCE OF KABARAK UNIVERSITY
This is my original work and has not been presented to any other university or higher institution of learning for credit.
Name Joy Moraa
Registration number: GMF/NE/0849/05/16
APPROVAL BY THE SUPERVISOR
This research project has been submitted for examination with my approval as university supervisor
DR Stephen Oloo Magadi
School of Business and Economics
Dr. Simon Kiprop
School of Business and Economics
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION………………………………….vi
1.1 Background of the Study…………………………………………………vi
1.1.1 Corporate Social Responsibility…………………………………….vii
1.1.2 Financial Performance…………………………………………………..vii
1.1.3 CSR and Financial Performance…………………………………….viii
1.1.4 Commercial Banks in Kenya…………………………………………viii
1.2 Research Problem……………………………………………………………ix
1.3 Objectives of study…………………………………………………………..x
1.3.1 General Objective………………………………………………………….x
1.3.2 Specific Objectives………………………………………………………..xi
1.4 Value of the Study…………………………………………………………..xi
CSR Corporate Social Responsibility
SPSS Statistical Package for Social Sciences
KCB Kenya Commercial Bank
ROI Return on Investment
CBK Central Bank of Kenya
Businesses do not exist in a vacuum. They exist in a society with people who learn to embrace the businesses as part of them. Corporate social responsibility is a way of giving back to the society by the businesses as a way of appreciating the society who are their consumers as well. By doing so, the corporations gain by having favorable public view thus in a way increase their profitability by having more consumers consume their products. This study seeks to establish the effects of CSR on financial performance of commercial banks in Nakuru with focus on education, health and environmental CSR activities. Secondary data will be used which will be collected from the banks financial reports and multiple regression analysis used in the data analysis.Using descriptive research design, the study will test for a linear relationship between corporate social responsibility and financial performance. The data will be based on a five year period from 2013 -2017.Through the study, corporations will understand the importance of CSR and how it affects their financial performance.
Key words: corporate social responsibility, financial performance, commercial banks
Definition of terms
Corporate social responsibility: this is a means through which organizations give back to the society in which they exist in (kotler and Lee 2011 a)
Commercial banks: it is a type of bank that provides services such as accepting deposits from customers, offering loans and other investment
1.1 Background of the study
Since time immemorial, CSR has been in existence paving way for organizations to have moral, philanthropic, ethical and legal responsibilities. It is the constant commitment by firms to contribute to economic development and behave ethically as they improve the quality of life of the members of society in which the company exists in, (Holme and Watts, 2000). (Matterson and Metivier, 2016) argued that CSR is a triple bottom line. The theory assumes that a company is also a member of society which consequently hands it moral responsibility. Some multinational companies have well established CSR programs that operate as independent entities such as MasterCard Foundation, Equity Foundation and KCB foundation. There are many benefits of engaging in CSR such as: it enhances market sustainability, it serves as a building stone upon which the firms’ social progress is able to be seen in a fast changing world (Siegel and Vitaliano, 2007).Good CSR enhances the company and brand reputation, (Philip 2005), increases customer interest as people tend to be involved more with a firm with good social performance. Sectors such as health, education and the environment at large benefits from CSR by improvement of schools, fee funds, medical assistance better recycling and protection of the environment.
1.1.1 Corporate Social Responsibility
CSR can be defined as a means through which organizations give back to the society. It is a promise to improve the quality of life of society members through discretionary business practices and contributions of corporate resources (Kotler and Lee 2011a)
CSR involves four pillars 🙁 a) Legal responsibility whereby the firm has a mandate to follow the set rules and regulations in the area of jurisdiction that the firm exists in. Failure to do so may result to heavy penalties and fines or legal action. (b) Economic responsibility which is the main aim of the firms that is to make profit and increase in value.(c) Ethical responsibility which requires firms to do the right thing at all times.(d) Philanthropic responsibility which is about contributing to the society’s development even if it is independent to the firms activities (Matterson and Metivier 2016)
1.1.2 Financial performance
It is the act of performing financial activities and the extent to which financial objectives are being achieved. Monetary terms are the measure against which the firms policies are measured.
There are accounting tools used to measure the financial performance of a firm such as ROI, which enables the results to be compared against other firms to check how the firm is doing against its competitors in the same or similar market.
1.1.3 CSR and financial performance
Managers believe that constant CSR will enable the firm to have respect in the market place and also it enables the firm to have more sales and also it attracts more qualified staff who would wish to be associated with a firm with good CSR which will subsequently improve the firm’s financial performance (Robins,2015)
(Kanwal et al., 2013) states that, there is a positive relationship between CSR and performance of the organization financially. Thus spending on CSR activities now ensures sustainability of the firm in the long term as well as improvement of financial performance.
1.1.4 Commercial banks in Kenya
Commercial banks in Kenya are regulated by the CBK which oversees the banks to ensure they comply with the law. The banking sector in Kenya has undertaken several regulatory and financial reforms in the past. These reforms have enabled the banking sector to attract many foreign banks to enter the Kenyan market (Irungu 2103)
Commercial banks have embraced CSR in the past few years with some having a major impact as seen in their financial reports and websites where the banks publish the resources they have used towards CSR.Notable examples are Equity’s “Wings to Fly” foundation that helps bright but needy students, Standard Chartered that has a programme to help those with eye problems which is the “Seeing is Believing” programme.
All this programs are in accordance to the law and also help boost the image of the firms to the public eye which in turn helps boost the earnings financially.
1.2 Research Problem
In the East African region, the Kenyan banking system is regarded as the most advanced and very competitive. This means that some banks like KCB and Equity have very well organized CSR systems that are doing very well.
(Levine, 1991) says that, having a long term financial plan that is effective can entice investors both foreign and local who invest in long term projects and at the same time allows access to their funds in a short term notice.
Studies have shown that CSR has an effect on customers attitude towards the products if the firm and as such it has a positive relationship with financial performance (Classon & Dahlstrom, 2006)
In Kenya, a study by Okeyo, 2013, revealed that a correlation study on CSR and loyalty in Standard Chartered Bank showed that CSR influenced the customers loyalty either in an attitudinal or behavioral way
Attitudinal loyalty is manifested in the way the customers how satisfaction to the products offered, their willingness to recommend the same to relatives or friends, and willingness to talk to customer service about the products.
There is flimsy empirical data on how CSR affects financial performance of commercial banks which is why this study aims to find out the extent of the CSR effect on financial performance by posing the question “how do CSR activities affect the financial performance of commercial banks?”
1.3 Objectives of study
1.3.1 General objective
To evaluate the impact of corporate social responsibility on financial performance of commercial banks.
1.3.2 Specific objectives
1. To assess the impact of supporting education on the banks financial performance
2. To determine the effect of contributing towards the community health programs on financial performance of banks
3. To establish the effect of environmental risk management on the financial performance of banks
4. To ascertain the impact of supporting climate risk management on financial performance of banks.
1.4 Research questions
1. What is the impact of supporting education on the banks financial performance?
2. What is the effect of contributing towards the community health programs on financial performance of banks?
3. What is the effect of environmental risk management on the financial performance of banks?
4. What is the impact of supporting climate risk management on financial performance of banks?
1.5. Significance of the study
Carroll, 1991 says that thorough understanding the effect of corporate social responsibility activities on financial performance, is how investors will be able to allocate their portfolio so as to maximize returns and also to make decisions that will also touch on ethical matters.
This study aims to add to the knowledge available on CSR and thus enable the banks executives and managers understand that engaging in CSR activities could be a way of mitigating social risk thus engages in it more.
The study also aims at showing that there can be equilibrium between CSR activities and banks performance in that, by performing CSR activities it is not a loss rather it is a form of investment for the long term.
Findings from the research will add to the existing knowledge of CSR and financial performance of banks and enable better management of the same especially in the commercial banks in Kenya.
1.6 Scope of the study
The study will be conducted in 28 listed commercial banks in Nakuru
1.7. Limitations and delimitations of the study
The research is focusing on financial performance of commercial banks which is measured by profitability.
There may be secrecy as to how much is allocated to corporate social responsibility but to overcome this, the questions will be structured and fashioned in a manner that will distance financial matters from research questions and use the published information such as annual reports to confirm information given by the correspondents.
This chapter highlights various theories on CSR, the empirical studies on CSR, the theoretical framework and a conclusion from literature review.
2.2. Theoretical Review
Some of the theories on corporate social responsibility are; the theory of social costs, agency theory, and relational theory.
2.2.1. The Theory of Social Costs
The focus on corporate non-economic effects on the socio-economic system is the basis for responsibility allocation Marshall (1920). In other words, problems of modern corporate responsibility deal with the fair allocation of social costs. Moreover, the social costs literature influences indirectly attempts at measuring social performance. The terms ‘social cost’ point out, at a very basic level of analysis, the same concept.Problems arise in the literature with regard to the study of ‘external economies’. According to Marshall (1920), external economies have to be secured by the concentration of many small businesses of a similar character in particular localities or by the localization of industry. The location of small enterprise is thought of as a matter of exogenous advantage when they can be placed among a cluster of similar enterprises.There is alwayssome part of the enterprise’s activities that affects the environment. A transition from ‘external’ to ‘social’ is a short logical passage, in fact social forces here co-operate with economic.
Pigou (1920) starts out from Marshall’s intuitions in order to introduce theproblem of thefirm’s social costs, or the ‘real’ theoretical basis of social responsibility. This difference assumes importance in welfare economics, as it can be social revenues or losses. The fact that we can distinguish between social and private profits or losses implies a series of problems in terms of evaluation. The issue of social costs relates to the organization originating the costs and to their coverage. Of the two, the latter produces ahuge debate (Meade, 1973). Based on the fact that the problem is of justifying state intervention in the economy and making it easier to reach a ‘natural’ equilibrium, this assumption has important consequences in terms of social responsibilities. The state’s role in the economic system aims to cover social costs and may be intended as the state assuming responsibilities in order to preserve the national product and citizens’ welfare. Thus, its natural counterpart should be that of leaving no responsibilities to the corporation that produces the cost even if indirectly or involuntarily. This issue makes it clear that paying for social costs is a matter of contracting and that it hasto be assumed by either the firm or by the state (Coase, 1960). From adifferent perspective, Coase (1960) tries to shift the issue to corporateproduction factors. The main thesis is that the costs of the transaction between citizens and government determine whether the state intervenes in the economy or not (Coase, 1988). Paying for social costs is a matter of contracting.
2.2.2. Agency Theory
In this theory, owners are the principals and managers are their agents. The manager bears fiduciary duty towards the owners and is generally subject to strong incentives in order to alienate their economic interests with those of the owners, and with the maximization of shareholder value. Today, it is commonly accepted that under certain conditions the satisfaction of social interests contribute to maximizing the shareholder value and mostlarge companies pay attention to CSR particularly in considering the interests of people with a stake in the firm. In this respect, Jensen (2000) has proposed what he calls ‘enlightened value maximization’. This concept specifies long-term value maximization or value-seeking as the firm’s objective which permits some trade-offs with relevantconstituencies of the firm. To distinguish profitable CSR from others which are not, Burke and Logsdon (1996) proposed the concept of SCSR to refer to policies, programs and processes which yield substantial business related benefits to the firm, in particular by supporting core business activities, and thus contributing to the firm’s effectiveness in accomplishing its mission. From this perspective, there is an ideal level of CSR determinable by cost-benefit analysis and depending on several factors (McWilliams and Siegel, 2001). This requires a careful calculation of the optimal level of social output in each situation for maximizing shareholder value.
2.2.3 Relational theory
Ideally, this theory is about the relationship that a corporation develops with its stakeholders, and therefore, the former has to continuously search for engagement and commitment with the latter. Corporate citizenship, according to Garriga andMele (2004), is an approach used under the integrative and political theories and this is supported by Swanson (1995) and Wood and Lodgson (2002).
This theory is sub-divided into four categories namely business and society, stakeholder approach,corporate citizenship and the social contract.
Business and society implies business in society where CSR is the interacting factor between the two. It is necessary that the Social responsibility of the business need to reflect social power that the business possesses. The approach is bothwithin the interactive and ethical theories, where the former emphasizes the integration of social demands and the later focuses on the right thing to achieve a good society (Garriga and Mele, 2004). Corporations are proactive in publishing reports oneconomic, social and environmental performance following the idea of triple-bottom line(Elkington, 1998). Stakeholder approach is one of thestrategies of improving the management of the firm. Corporate relationship of relational theory depends on the type of community it refers to while the social contract theory explains the fundamental issue of justifying the morality of economic activities in order to have a theoretical basis of analyzing social relations between the corporation and the society. In the stakeholder approach, the purpose of the firm is to create wealth or value for its stakeholders by converting their stakes into goods and services (Clarkson, 1995), or “to serve as a vehicle for coordinating stakeholder interests” (Evan and Freeman, 1988). Stakeholder approach has been developed as one of the strategies in improving the management of the firm. It is a way to understand thereality in order to manage sociallyresponsible behavior of a firm. The term ‘corporate citizenship’ was introduced into the business and society relationship mainly through practitioners (Vidaver-Cohen and Altman, 2000). Since the concept of corporate or business citizenship is increasingly associated with a global sense of business and with a notion of citizenship which go beyond national boundaries, Woodand Logsdon (2002) suggested using the expression ‘business citizenship’ and ‘global business citizenship’ instead of ‘corporate citizenship’ to make clear that this term is not limited to corporate involvement and philanthropy and to present a global sense forcitizenship. A firm is not socially responsible if it merely complies with the minimum required of the law (Eilbert and Parket, 1973). Meade (1973) argues that a society is a series of social contacts between members ofsociety and society itself. He states that the business does not act in aresponsible manner because it is in its commercial interest but because it is part of how society implicitly expects business to operate.
2.4. Empirical Literature
The study by Marcia, Otgontsetseg and Hassan (2013) investigated whether US commercial banks in aggregate were taking substantive steps at beingsocially responsible, if their socially responsible activities had changed since the financial crisis, and whether they were being rewarded for their actions. The study used publicly available data on CSR to analyze CSR strengths and CSR concerns. It found out that the largest banks consistently had higher CSR strengths and CSR concerns during the sample period. Further, this group saw a steep increase in CSR strengths and a steep drop in CSR concerns as the worst of the financial crisis passed. Examining the relation between CSR and bank performance, the researchers realized that the largest banks appeared to be rewarded for being socially responsible as both size adjusted ROA and ROE were positively and significantly related to CSRscores. Thus, after the financial crisis, the biggest banks that had been accused of putting their own interests ahead of their customers and the financial system as a whole worked to repair their reputations by turning to more socially responsible activities.
Carmen-Pilar, Rosa and Lisa (2011) aimed at analyzing the effect exerted by CSR on short-term and long-term corporate financial performance of European companies listed in the Stoxx Europe 600 index and Stoxx Europe Sustainability index from 2007 to 2010. Results revealed that the implementation of a CSR strategy, the level of economic development of the country and firm size determine the ROE of the firm. The study found a positive and significant relationship between the ROA variable and CSP and the classification of the country in which the company’s headquarters wersituated, while the relationship between ROA and firm size was negatively significant.
Kitzmuellery and Shimshack (2012), while studying economic perspectiveson CSR, realized that individual preferences were the ultimate driving force behind any form of CSR. In the presence of social stakeholder preferences, firms may use strategic CSR to maximize profits, while not-for-profit may use CSR to satisfy shareholders’ social ambitions. Only if managers take CSR beyond strategic levels or shareholder preferencesdoes CSR constitute moral hazard. The study revealed that when people make donations or privately provide public goods, such as charity, there may be many factors influencing their decision other than altruism. Social pressure, guilt, sympathy or simply a desire for a “warm glow” may all be important. Within this framework twoopposing perspectives on CSR can be taken. First, CSR may constitute a special form of investment into innovation that may result in negative costs (net benefits) over time. Secondly, shareholder value maximization in general, as well as profit maximization in particular, can motivate CSR. Stakeholders may be endowed with respective social, environmental or ethical preferences. CSR treats the existence of social or environmental preferences as exogenously given and focuses on the interactions between firms andstakeholders.
Ongolo (2012) investigated the relationship between CSR and market share of supermarkets in Kisumu City for the period 2006 to 2010. He sought to determine the factors that motivated the practice of CSR amongst supermarkets in Kisumu City. The findings revealed that there was a strong relationship between CSR and market share. Institutions that had invested more on CSR had high sales revenue. The researcher alsorealized that there was a positive correlation coefficient between market share index andCSR. Larger supermarkets preferred education, water and sanitation while the other supermarkets preferred to support to the less fortunate in society as their CSR activities.
Okiro, Omoro and Kinyua (2013) tested the relationship between investment in CSR and sustained growth of commercial banks in Nairobi County. The researchers sought to establishthe relationship between banks sustained growth and CSR. The findings revealed an increasing positive attitude towards CSR in terms of investment. There was a general agreement that CSR was essential for the success of the firm. Since commercial institutions work to generate profits by offering the best services to customers, they would provide proper care to retain its customers. The researchers found out that investment in CSR activities had a positive effect on a banks’ sustained growth. The findings indicate that there was a weak positive relationship between the variables and that only 11% of bank sustained growth could be explained by investing in CSR activities.
A survey by Gichana (2004) on CSR practice by Kenyan companies sought to identify social responsibility practices by firms listed in the NSE and the factorsthat explain the kind of CSR practices adopted by these firms. The study found out that all the companies practiced long term planning and had strategies or social responsibility inplace
2.5 Conceptual Framework
It’s a systematic system of variable relation between the dependent and independent variable(s) logically designed to present the systematic view of the research problem. Itspecifies the variables to be studied (Orodho and Kombo,2002)Diagrammatically the variable relation between the dependent and independent variables is summarized as follows:-
Independent variable Dependent variable
Corporate social responsibility financial performance
Figure 1.1 Diagram showing the conceptual framework
Source (Author 2018)
2.6 Summary of Literature Review
Some of these studies show a positive correlation, others a negative correlation while others have shown no correlation at all. A closer examination of these studies reveals variations on data sources, measures used on both dependent and independent variables and control variables. The researchers have not been conclusive as to what is the relationship between corporate social responsibility and financial performance. The aforementioned empirical studies have demonstrated that there is a link between CSR and financial performance. Most of the early studies attempting to identify the relationship between CSR and financial performance have focused on subjective techniques to measure CSR. These studies have not, however, demonstrated how a firm’s financial performance would be affected by investing in CSR activities. The studies have not explained the motive for commercial institutions to aggressively invest in CSR activities despite the fact that there is no requirement for them to do so. This constitutes a research gap which this study is seeking to breach.
This section presents the methods in data collection and analysis and forms the blue print for conducting the research. It coveres the research methodology, research design, population of study, data collection and processing methods and data analysis
3.2. Research Design
This will be a descriptive survey of the commercial banks licensed in Nakuru.
According to Mugenda and Mugenda (2006), a descriptive research is a process of collecting data in order to answer questions concerning the status of the subjects in the study.The research design to be used in this study will be the descriptive design.
The descriptive design leads to the discovery of associations among the different variables. An explanatory case study will be used to explore causation in order to find underlying principles. The design is appropriate for carrying out a holistic, in depth andcomprehensive investigation where much emphasis was placed on theanalysis of the effect of CSR on financial performance commercial banks
3.3. Target Population
The total population will 28 banks within Nakuru County some of which are namely; KCB, Barclays, Equity, Transnational, National, CFC Stanbic, Commercial Bank of Africa, Diamond Trust bank, Imperial bank, Bank of Baroda, Family Bank and Cooperative Bank.
3.4 Data Collection
The study will use secondary data for analysis which includes data from the company’s annual reports to shareholders. The nature of data used will include statement of financial position, statement of comprehensive income and annual reports to stakeholders. The study will cover a period of five years from 2012 to 2017.
3.5. Data Analysis
The study will use Statistical Package for Social Sciences to determine the relationship between firm’s CSR investment and profitability. The strength of the relationship between CSR and performance will be tested using covariance correlation coefficient. Regression analysis will be used to determine the relationship between CSR and firm’s financial performance at 5% level of significance.
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