The Relationship between Corporate Social Responsibility (CSR) and Financial Performance: Evidence from Pakistani Banks

Abstract

This study investigates the impact of Corporate Social Responsibility (CSR) expenditure on the financial performance of selected commercial banks operating in Pakistan. The banking sector was selected due to its significant contribution to economic development, financial intermediation, stakeholder engagement, and the preservation of public trust. The analysis is based on panel data obtained from nine Pakistani banks covering the period from 2013 to 2023. Financial performance is assessed using two accounting-based indicators, namely Return on Equity (ROE) and Return on Assets (ROA), while CSR engagement is measured by the natural logarithm of charitable donations and contributions. In addition, several bank-specific factors, including bank size, capitalization, liquidity, non-markup income ratio, and net interest margin, are incorporated as control variables. To examine the relationship between the variables, the study employs descriptive statistics, correlation analysis, and panel least squares estimation with cross-sectional fixed effects. The empirical results demonstrate that CSR expenditure has a positive and statistically significant effect on ROE, suggesting that investments in CSR activities may improve shareholder returns by strengthening corporate reputation, enhancing stakeholder confidence, and improving public perception. Conversely, although CSR expenditure exhibits a positive association with ROA, the relationship is not statistically significant, indicating that CSR spending does not have a direct and measurable impact on asset-based profitability during the sample period. Among the control variables, net interest margin is found to have a positive and statistically significant effect on financial performance, whereas liquidity is negatively and significantly associated with both ROE and ROA. The findings indicate that banking institutions should not consider spending on CSR as a financial strain, because it may raise the returns for the shareholders. But asset efficiency is little improved. This study extends the literature as it examines actual CSR spending, instead of CSR disclosure and provides new empirical proof from the Pakistani banking sector.