With the rising demand for Islamic financial institutions to simultaneously meet the profitability and the ethical, social and sustainable responsibilities based on Shariah principles, Islamic Corporate Social Responsibility (ICSR) has gained significance in the Islamic banking industry. Although ICSR is a key element in supporting socio-economic justice, financial inclusion and sustainable development, there are still many Islamic banks in Malaysia that focus on profitability and reporting for compliance, with limited and fragmented ICSR frameworks. Further, environmental and social disclosures are still not integrated with governance and operational systems and are inconsistent. Hence, this review paper is to critically discuss the problems and potentials of ICSR implementation in the Islamic banking industry of Malaysia. The study uses a qualitative review-based methodology by analyzing existing literature, regulatory reports and scholarly studies, which involved Islamic banking and ICSR practices. The findings show that Malaysia has good potential for enhancing ICSR by having an effective Shariah governance, Islamic social finance mechanisms and sustainability programs. Yet some issues like lack of consolidated reporting, lack of environmental participation and conflicts between commercial and ethical goals persist to affect the implementation. This paper adds to the literature by improving the theory and practice of Islamic banking and understanding of ICSR.
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