Islamic ethics commitment and bank outcomes: Evidence in South East Asia

Abstract Ethical values in corporations and businesses are inseparable. Religious norms revise the system and economic law as a code of ethics and discipline applied to solve moral problems in business. This study analyzes the disclosure of Islamic Ethics commitment in the annual report of Islamic banking in South East Asia and the effect on Bank Outcomes. Bank Outcomes in this study are financial performance and business risk during 2012–2019. This study used 29 full-fledged Islamic banks in Southeast Asia. The results showed that Islamic Ethics Commitment (IEC) positively affects financial performance, measured by return on asset (ROA). However, if ROE measures financial performance, IEC does not correlate. The IEC also negatively correlates with business risk measured by banks’ liquidity and financing risk (Deposit to Asset ratio and Non-Performing Financing). The test is robust when financial performance is measured by banks’ Net Interest Margin (NIM), and the financing-to-deposit ratio (FDR) measures business risk.


PUBLIC INTEREST STATEMENT
This paper analyzes the commitment of Islamic Ethics' impact on bank outcomes in fully-flagged Islamic banks in South East Asia. This study uses ethics disclosure in the annual report as a commitment measurement. The research findings show that the commitment to Islamic Ethics' improves bank performance and reduces bank risk.
The relationship between business ethics and financial performance is an exciting focus of study for researchers in various countries. Donker et al. (2008), using a sample of public companies in Canada, found evidence that the disclosure of corporate business ethics positively affects financial performance. Choi and Jung (2008) investigated the effect of corporate ethical commitment on the financial and market performance of public companies in South Korea. The results showed that ethical commitment positively affected market performance but did not impact financial performance.
The same results were also obtained from the effects of Abidin et al. (2017). Using a sample of public companies in Malaysia, they tested the relationship between the company's ethical commitment and financial performance. The results showed that disclosing the company's ethical commitment positively affects financial performance. Porcena et al. (2021) used data from 109 companies on the Fortune 500 list in 2012 to examine the relationship between management diversity and company performance, and corporate ethics as a mediating variable. The study results show that diversity management is internally and externally related to corporate ethics. However, only external ethics has a positive influence on company performance. The test results also show that external ethics partially mediated the relationship between diversity management and company performance. Zaki et al. (2014) conducted a cross-country study to examine the disclosure of corporate ethical identity on the company's financial performance. By using a sample of 9 Islamic banks in 9 Asian countries, they succeeded in proving that several dimensions of corporate ethical identity disclosure have a positive effect on financial performance. Kacem and El Harbi (2022) examine the relationship between risk governance, company code of ethics, and company performance. By using the data of 26 banks that are included in the list of the 50 largest banks in the world, this research is able to prove that the adoption of a company code of ethics has a positive effect on company performance and strengthens the relationship between the effectiveness of risk governance and company performance. Berrone et al. (2007) also conducted a multinational study. They tested the impact of corporate ethical identity disclosure on financial performance using data from 398 companies in 26 countries. In contrast to several previous studies, the results show that corporate moral identity is not related to financial performance measured by market value added (MVA) and return on assets (ROA). Similar findings to Berrone et al. (2007), Shloma (2009) found that the code of ethics did not affect the company's performance in the UK. Roziq (2015) also found that Islamic business ethics did not affect Mudharabah's financing performance. Moreover, Siswantoro (2016) also found that 8 of 9 dimensions of Islamic ethical identity had no relationship with company performance.
There are some previous studies on the correlation between ethics and business risks. Francis and Armstrong (2003) investigated ethics as a risk management strategy in Australia. The results showed that ethics could identify problems, prevent fraud, and maintain the company's reputation. It shows that implementing ethics can reduce the risk that may occur. The finding is in line with the study of Luo and Bhattacharya (2009), which shows that good corporate social responsibility (CSR) disclosure decreases risk. However, Nguyen and Nguyen (2015) found that corporate social responsibility positively affects company risk. Halamka and Teply (2017) examine the influence of ethics on banking performance and risk worldwide. They use the variables ROA and ROE to measure banking performance and the standard deviation of ROA and ROE to measure bank risk. Using more than 80,000 bank-year observations, they found that ethics does not affect banking performance as measured by ROA and ROE. Conversely, the ethical variable is able to reduce the level of banking risk when measured by the standard deviation of ROE.
We explore the impact of companies' ethics commitment on financial performance and business risks. This study is implemented in Islamic banking based on Islamic law/ethics in its vision, mission, objectives, and operations. Because it uses a sample of Islamic banking, the ethical commitment of this company is assessed based on the responsibility to implement Islamic ethics in the company. Based on previous research (Abidin et al., 2017;Berrone et al., 2007;Choi & Jung, 2008;Choi & Pae, 2011;Porcena et al., 2021;Zaki et al., 2014), the company's ethical commitment is measured by disclosing the implementation of ethics in company operations. Disclosure of ethics within the company is usually communicated in the annual report made by the company. This study uses the annual report of Islamic Banking Companies in Southeast Asia from 2012 to 2019.
The inconclusive research results regarding the relationship between ethics and performance make this research enjoyable to develop. The development we carried out in this study relates to different ethical assessment instruments and research objects. This study uses the disclosure of Islamic moral identity to implement company ethics commitment. This study refers to (Haniffa & Hudaib, 2007) for the disclosure of the Ethical Identity Index (EII) implementation on financial performance and business risk in Islamic banking in Southeast Asia. The results of this study are expected to find the influence of Islamic ethical commitment disclosure on financial performance and risk of Islamic banking business. Our study contributes to some existing literature. Previous studies used regional religiosity-based moral measurements (Du et al., 2015;Kanagaretnam et al., 2015;McGuire et al., 2011) and based on the disclosure in annual reports (Abidin et al., 2017;Choi & Jung, 2008;Choi & Pae, 2011;Porcena et al., 2021). Our study provides additional literature on implementing Islamic banking ethical commitment by disclosing Islamic ethical identity in the annual report. Furthermore, this study also uses a sample of companies from three different countries in Southeast Asia. Thus the use of multinational studies can provide an in-depth analysis of the application of ethical commitment to Islamic banking in various countries and its effects on financial performance and risk.

Stakeholders theory
A stakeholder approach can explain the relationship between ethics, financial performance, and company risk. Stakeholders have an essential role in building the ethical identity of the company. In applying stakeholder theory, Berrone et al. (2007) distinguish two almost entirely different methodological approaches: (1) theory-based normative stakeholder approach, which emphasizes ethical and moral standards as the only acceptable means of corporate behavior, regardless of the impact of this behavior on corporate performance and (2) instrumental stakeholder approach, which focuses primarily on stakeholder orientation as a means to achieve company success. Harrison and Wicks (2013) revealed that companies that fulfill stakeholder interests by promoting ethical behavior and being sensitive to the environment tend to gain the trust and loyalty of stakeholders. The formal definition of stakeholder theory is a model of corporate social responsibility which states that business managers have ethical responsibilities to various stakeholders that go beyond the narrow view that managers' primary or sole responsibility is to shareholders (Hartman et al., 2020). Companies that treat stakeholders well would increase the firm value and reduce the risks (Harrison & Wicks, 2013).

Islamic ethics commitment (IEC)
The company realizes its commitment to ethics in its operations by communicating its ethical identity in its annual report (Haniffa & Hudaib, 2007). Balmer and Gray (2000) state that ethical identity is the reality and uniqueness of an organization related to the organization's external and internal image and reputation as a result of corporate communications. From the explanation above, ethical identity is the values and behaviors representing the company's moral beliefs and attitudes related to its image and reputation and how it communicates them.
The ethical identity of Islam, according to Haniffa and Hudaib (2007), is the value and philosophy of the company based on Islam. Its activities are free from usury and based on Islam, aimed at developing social and community. In this study, they only used two features, namely Communicated and Ideal Ethical Identity. Communicated is a corporate identity related to the company's image and reputation, while Ideal is an identity considered by stakeholders as the optimal identity of the company. These features can determine the thoughts of Islamic bank management and whether the demands of Islamic teachings carry out the business.

Financial performance
Financial performance is defined as the determination of specific measures that can measure a company's success in generating profits (Brigham & Houston, 2016). Company performance is a description of a company's financial condition, which is analyzed with financial analysis tools so that it can be known about the good and bad economic situation of a company that reflects work performance in a certain period. The measurement is essential so that resources are used optimally in the face of environmental changes. Financial performance valuation is one way that the management can do to fulfill its obligations to the funders and also achieve the goals set by the company. Performance valuation is also helpful in determining investment policies to increase company efficiency and productivity (Brigham & Houston, 2016).
The profitability ratio is one of the benchmarks of a company's performance that describes a company's ability to generate profits over a certain period. The profitability ratio is also an illustration of the effectiveness of management in the company's operational activities. We use the profitability ratio as an indicator of management's effectiveness in generating profits based on sales and investments made by the company. Since the object of this research is Islamic Banking, we use ROA, ROE, and profit margin ratio to measure profitability/financial performance. Joni and Lina (2018) revealed that business risk is one of the risks faced by the company when carrying out its operations, which indicates the possibility of the company's inability to fund its operational activities. According to Brigham and Houston (2016), there are two dimensions of risk: financial and business. Financial risk is the additional risk imposed on ordinary shareholders due to the company's decision to use debt. In comparison, business risk is the operational risk if the company does not use liabilities. A company faces business risk if it generates profits that fluctuate from one period to another (Joni & Lina, 2018). The company's business risk can be described by measuring the fluctuation of the company's profit-companies that experience small profit fluctuations have more negligible business risks.

Business risk
According to Rustam (2018), risk in the banking sector is a potential event, both anticipated and unanticipated, which has a negative impact on bank income and capital. These risks cannot be avoided but can be managed and controlled. This risk must be addressed in such a way as to minimize its potential occurrence. Like banking in general, Islamic banks also require procedures and governance to identify, measure, monitor, and control risks arising from their business activities, known as risk management.
One of the potential risks faced by the banking industry is credit risk and liquidity risk. Credit risk is related to the possibility of debtor default in paying off bank financing during the agreed credit period. Liquidity risk occurs due to the bank's inability to meet obligations from its cash flow funding or liquid assets without disrupting its daily activities. We use the Non-Performing Loan/ Financing (NPL/ NPF) ratio to assess bank credit risk and the Deposit to Asset (DTA) and Financing to Deposit ratios to measure bank liquidity risk.

Islamic ethics commitment and financial performance
According to Stark (1993), business ethics can be explained as the attitude and behavior of companies to the employees, customers, communities, and shareholders. Thus, business ethics in Islam is the attitude and behavior of Islamic companies in running their business under Islamic values so that there is no worry in doing business since it is believed to be good (Yunanda and Norakma, 2011). In Islam, business ethics are discussed in many kinds of literature, and its primary sources are Al-Quran and Al-Hadist. At every activity, the people charged with business are expected to behave following the ethics taught by Islam. Donker et al. (2008) study relate to ethical code, company values, and performance in Canada shows that company value positively affects the company performance. The company value in the study was measured by a company value index similar to the company's code of ethics. Company performance was measured by the market-to-book ratio (MTB). Of all the tests performed, they concluded that company performance would increase if disclosure of ethical values also increased. The study states that proving the correlation between ethics and performance is still a long way, but rational decision-making to obtain maximum profits should consider ethics. Choi and Jung (2008) examined the effect of ethical commitment on financial performance and companies' valuation. The research was conducted by designing the Ethical Commitment Index (ECI) and conducting a survey about the company's ethical commitment to managers in Public Companies in Korea. The survey was completed in 2004, and the financial data used in this study are from 2003-2004. The results show that the company's ethical commitment has a positive effect on companies' valuation (Price to Book ratio and Tobin's-Q) and has no impact on financial performance (ROA). Zaki et al. (2014) explore whether disclosing Islamic ethical identity in Islamic banking in Asia affects its financial performance. The results showed that product and service disclosure and employee commitment were positively related to financial performance. However, the disclosure of the vision and mission; board of directors and top management; zakat, charity, and benevolent loans; and sharia supervisory boards negatively influence the financial performance of Islamic banking in the Asian region.

Islamic ethics commitment and business risks
Stockholders expect companies to have good performance. However, every business will face its risks. Fombrun and Shanley (1990) argue that a company's reputation reflects high performance with low risk. Leiva et al. (2016) have conducted a further study, reviewing company reputation within the scope of business ethics and its correlation to corporate identity, corporate impression, and corporate social responsibility. The research has shown that ethical disclosure affected the company's reputation with increased performance and was followed by a small risk. Also, the study showed that ethical disclosure was related to CSR disclosure. Researches on Islamic Ethical Identity and business risks are still rare therefore this study also uses several studies related to CSR and management as ethics. Francis and Armstrong (2003) examined ethics as a risk management strategy in Australia. The study showed that organizations that adopted a code of ethics well could influence risk management, in which risk management was unethical decision-making. It is proven to contribute to the life quality of the stakeholders and the organization with profitability and reducing fraud. The study was also supported by (Luo and Bhattacharya (2009)), which showed that good CSR disclosure affected the decreasing risk. These previous studies are captured in our second hypothesis: H2: Disclosure of Islamic ethical identity/ Islamic Ethics Commitment negatively affects credit and liquidity risk

Research methods
This study examines whether the Islamic ethical identity implemented by Islamic banking affects financial performance and business risk. This research takes Islamic banking as the focus of the research subject. This study type is hypothesis testing research, which explains the relationship among the variables. The Dependent variables of this study are financial performance and business risk.
The Islamic Ethics Commitment (IEC) was measured using the disclosure ethical identity index (EII) formulated by Haniffa and Hudaib (2007). In addition, this study uses company size, company growth, bank capital ratio, country inflation, Gross Domestic Product (GDP), and GDP growth of a country as control variables. We use another measurement of financial performance and business risk for the robustness test. According to previous studies (Almaskati, 2022; Gupta et al., 2020;Saleh et al., 2020), we use Net Profit Margin (known as Net Interest Margin/ NIM in the conventional bank) as the measurement of financial performance. Gatev et al. (2009)

and Van den End (2016) use Financing (Loan) to Deposit Ratio (FDR) to measure liquidity risk in Banking
Companies. This study uses FDR for the robustness test to measure liquidity risk.
The data used in this research were secondary data. The data were annual reports and Financial Data of Islamic banks period 2012-2019 taken from the official website of each bank and Bankscope Database. The Macroeconomics variables (GDP, GDP Growth, and CPI) were obtained from World Bank Database (https://data.worldbank.org). The list of variables, their measurements, and the data sources for this research are presented in Table 1.
The populations of this study were all Islamic banks in Southeast Asia. The samples were taken using the purposive sampling method so that the samples were 29 Islamic banks, i.e., 12 Islamic banks in Indonesia, 16 Islamic banks in Malaysia, and 1 Islamic bank in Brunei Darussalam. Table 2 shows the number of research samples used in data analysis.
The technique of data analysis used descriptive statistical analysis and multiple linear regressions. Descriptive statistical analysis used maximum, minimum, mean, and standard deviation. The hypothesis testing in this study uses static panel regression method. For the robustness test, we use different measurements of dependent variables. A robustness test was conducted to test the consistency of the core regression coefficient if modifications were made to the regression model by adding/ removing the regressor or using a different regression method (Lu & White, 2014).

Regression model
This study uses panel regression model for hypothesis testing. The regression models for this study are: Perf ijt ¼ α 1 þ β 1 EII ijt þ β 2 Size ijt þ β 3 CAR ijt þ β 4 Growth ijt þ β 5 GDP jt þ β 6 GDPGrowth jt þ β 7 CPI jt þ ε ijt (1) Risk ijt ¼ α 1 þ β 1 EII ijt þ β 2 Size ijt þ β 3 CAR ijt þ β 4 Growth ijt þ β 5 GDP jt þ β 6 GDPGrowth jt þ β 7 CPI jt þ ε ijt (2) Where: Perf   Table 3 also shows that Islamic banking in Southeast Asia has recorded fairly good financial performance. The profit ratio compared to the average assets/ equity used (ROA and ROE) is 0.618% and 7.387%. Meanwhile, the average profit margin ratio compared to the average assets employed shows 2,223%. The risk level of Islamic banking in Southeast Asia is indicated by credit risk (NPF) and liquidity risk (DTA and FDR). The average NPF value of banks in Southeast Asia is 3.755%, while the average DTA and FDR ratios are 87.5% and 71.1%. Table 4 presents that the correlations between the independent variables used in our study are within the standard range in the literature. The correlation results show that the potential for collinearity problems in the estimation is not severe.

Research results
The table shows that ROA, ROE, NPF, and DTA have different relationships with the independent variables. A positive relationship is obtained by Islamic ethical identity toward financial performance. These results indicate that the higher Islamic ethics commitment is also related to a higher company's financial performance as measured by ROA and ROE. The negative relationships were obtained between EII, NPF, and DTA; this indicates that the higher Islamic ethics commitment is related to lower risk of the Islamic banking business as measured by NPF and DTA.  The capital adequacy ratio (CAR), Firm size, and firm growth as control variables also positively affect firm performance. Other control variables, such as the GDP growth and the inflation rate (CPI), do not affect the financial performance of Islamic banking. Meanwhile, the levels of GDP have different effects on the financial performance of Islamic banking. The magnitude of GDP does not impact financial performance as measured by ROA. Meanwhile, if ROE measures performance, the GDP level has a negative effect.
The impact of Islamic ethics commitment on financial risk is also presented in Table 5. The regression results show that the disclosure of Islamic Ethics Identity negatively affects Non-Performing Financing (NPF) and Deposit-to-Asset Ratio (DTA). Although the effect of EII on NPF is insignificant, the relationship between EII and DTA shows a negative and significant impact at the 5% level. These results indicate that the commitment to the disclosure of Islamic ethics is able to reduce the level of liquidity risk in Islamic banking in Southeast Asia. The analysis of control variables shows that, in general, companies that are growing (Growth), larger banks (size), and have a high level of capital adequacy (CAR) experience a low level of risk. Meanwhile, the country's GDP is generally positively related to Islamic banking risk in Southeast Asia.

Robustness test
We added different regressors as dependent variables to test the consistency of the core regression coefficient. We use other variables that measure bank performance and risk as the dependent variable. The results of the robustness test are presented in Table 6. We use Net Interest Margin (NIM) to measure financial performance and Financing to Deposit ratio (FDR) to assess Islamic bank risk. Our test results are presented in Table 6. Table 6 shows that the EII variable positively affects NIM with a significance level of 1% in RE models. In contrast, the EII variable has a negative effect on FDR at the 10% signification level in the RE method. The regression test showed consistent results with the previous two tests. Commitment to the disclosure of Islamic ethical identity is positively related to financial performance as measured by NIM and negatively affected by banking risk assessed by DER.

Discussion
Attention to applying ethical values in the company is advantageous for management to achieve organizational goals (Jackson et al., 2000). The most important organizational goals to maintain viability is good financial performance and minimizing risk. This study examines the effect of corporate commitment in implementing ethical values in its operations on organizational Note: *, **, and *** are significant at 10%, 5%, and 1%, respectively. Robust t-statistics are in parentheses.
outcomes (Performance and Risk). The companies could show their commitment to moral values by communicating the implementation of the values in their operations (Haniffa & Hudaib, 2007). Effectively communicating is to disclose it in an annual report addressed to the company's stakeholders. As with previous studies (Abidin et al., 2017;Choi & Jung, 2008;Choi & Pae, 2011;Zaki et al., 2014), his study uses disclosure parameters in assessing the company's commitment to the implementation of ethical values.
Islamic bank is a new model that reflects the application of Islamic ethical identity in company operations (Haniffa & Hudaib, 2007). Therefore, research on Islamic banks will provide results in studying religious business ethics. Islamic bank is one of the companies that declare themselves as a company that operates with Islamic religious values , and their operations are always under the supervision of the Sharia Supervisory Board.
The results of this study indicate that the company's commitment to applying Islamic ethics has a positive effect on the financial performance of Islamic banking in Southeast Asia. The regression results generally show that the disclosure of the company's ethical commitment positively and significantly affects financial performance as measured by the ROA value. The results of this test are robust if the regression method uses NIM to measure financial performance. These results align with Zaki et al. (2014), Kacem and El Harbi (2022), and Abidin et al. (2017) that disclosing Islamic ethical identity positively affects financial performance.
However, if ROE measures financial performance, the results show that ethical commitment has a positive effect but is insignificant in the regression model. Choi and Jung (2008) also find the Note: *, **, and *** are significant at 10%, 5%, and 1%, respectively. Robust t-statistics are in parentheses.
same results as this study if ROE measures financial performance. Using a sample of companies in South Korea, they found that ethical commitment did not affect financial performance as measured by ROE. We predict the characteristics of bank income related to financing (assets) activities carried out rather than capital strength, which is considered one of the factors that cause these differences.
The second hypothesis in this study is to examine the influence of Islamic ethics commitment on business risk in Islamic banking in Southeast Asia. The test results show that the commitment to the disclosure of Islamic ethics has a negative effect on the risk of Islamic banking in Southeast Asia. The finding indicates that the higher the company's responsibility in disclosing Islamic ethical identity, the lower the risk the company faces.
The regression results prove that EII has a negative effect on liquidity risk as measured by DTA. These results indicate the owners of the investment fund consider the disclosure of Islamic ethical identity to determine the level of financing made by the company on the funds invested. The higher the financing on the funds invested, the higher the risks the fund owners will face because the bank's liquidity will decrease. The hypothesis stating that the disclosure of Islamic ethical identity negatively affects business risk is supported by the measure of DTA. However, suppose the risk is measured by financing risk (NPF). In that case, the results show that commitment to the disclosure of Islamic ethical identity has a negative but insignificant effect on both regression models (RE and FE). The result indicates that the Islamic Ethics Commitment has no impact on Islamic banks' financing risk in the Southeast Asian region.
We find results that align with FDR in the robustness test using other measures in assessing liquidity risk. The test results using the FDR variable indicate that the Islamic Ethics Commitment has a negative effect on FDR. These results support the previous conclusion, which states that the commitment to disclose Islamic ethical identity can reduce the company's liquidity risk.
The results of this study, except for the NPF result, align with Leiva et al. (2016), Halamka and Teply (2017), and Weitzner and Darroch (2010), who state that ethical disclosure minimizes the risks faced. The better or higher the exposure to Islamic moral identity conducted by banks, the fewer risk banks will meet with the measures of DTA and FDR. Disclosure of EII will assist Islamic banks in managing the adequacy of third parties funds to provide financing and support the bank's liquidity.

Conclusions and recommendation
Based on the study's results, it can be concluded that the disclosure of Islamic ethical identity positively affects financial performance, measured with the ROA period of 2012-2019. In addition, the disclosure of Islamic moral identity also had a negative effect on business risks measured by DTA. These results were robust when we replaced firm performance and risk measurements. The study results show the importance of Islamic banking paying attention to ethical disclosure as part of the company's commitment to implementing Islamic moral values in company operations. The research findings make the role of the sharia supervisory board in Islamic banking essential in sharia compliance. Sharia compliance in Islamic banking also includes implementing Islamic ethical values in company operations. Therefore Sharia Supervisory Board could emphasize the management is disclosing and presenting truthful information about ethical commitment as part of the moral values implementation of the company in the firm's annual report.
This study is limited to applying to Full-fledged Islamic Banking in Southeast Asia, so the results cannot be generalized to all companies implementing Islamic Banking Services. There are two categories of Islamic Banks worldwide: Full-fledged Islamic Banks and Islamic Window Services of Conventional Banks. Further research will be more interesting if applied to today's two types of Islamic Banks. Future research can also use more samples from Asian nations for more valid results.