Islamic Banking and Income Inequality: The Role of Corporate Social Responsibility (Perbankan Islam dan Ketaksamaan Pendapatan: Peranan Tanggungjawab Sosial Korporat) Nurul Muna Mohamad Universiti Sains Malaysia Tajul Arifn Masron Universiti Sains Malaysia Risna Wijayanti Universitas Brawijaya Muslimah Mohd Jamil Universiti Teknologi Mara ABSTRACT The objective of this study is to analyse whether engaging more actively in corporate social responsibility (CSR) enhances the efectiveness of Islamic banks in narrowing income inequality in the selected Organization of Islamic Cooperation (OIC) countries. Both fxed-efect and random-efect models representing static model as well as generalized method of moments approach of dynamic model are employed to estimate the sample of 24 OIC countries for the period from 2006 to 2013. The results suggest that Islamic banking has potential to reduce income inequality via Islamic fnancing and CSR further helps to reduce income inequality. In addition, the fndings suggest that Islamic fnancial institutions able to reduce income inequality further if they actively engage in CSR. However, small size of CSR activities is unlikely to be efective in reducing income inequality.. Keywords: Islamic banks; corporate social responsibility; OIC countries; dynamic model ABSTRAK Tujuan kajian ini ialah untuk mengalisis sama ada tanggungjawab sosial korporat (CSR) yang lebih aktif oleh bank- bank Islam meningkatkan kecekapan bank-bank Islam dalam mengecilkan ketaksamaan pendapatan di negara-negara Organisasi Kerjasama Islam (OIC) terpilih. Kedua model kesan tetap dan rawak mewakili model static dan panel momen teritlak dari model dinamik untuk mengukur sampel 24 negara OIC bagi tempoh dari 2006 hingga 2013. Keputusan kajian mencadangkan bahawa perbankan Islam berpotensi untuk mengurangkan ketaksetaraan pendapatan melalui pembiayaan dan CSR membantu mengurangkan ketaksetaraan pendapatan. Tambahan lagi, dapatan kajian mencadangkan bahawa institusi kewangan mampu untuk mengurangkan ketaksetaraan pendapatan jika aktif dalam CSR. Namun, aktiviti CSR yang kecil tidak begitu berkesan. Kata kunci: Bank-bank Islam; tanggungjawab sosial korporat; negara-negara OIC; model dinamik INTRODUCTION Income inequality is a gap of income between the rich and the poor. It occurs due to the discrepancy between outcomes and opportunities even without the intervening of human’s control like gender, ethnicity, family history and birth of place. It is because fair income equality can avoid social illnesses such as deprived health, short life expectancy, unbelievable social trust, stumpy status of women, mental disorders, killings, teenage pregnancies, illiteracy, intoxication, drug exploitation and delinquency (Zagorski et al. 2014). In addition, it also can impair the community’s condition through child bullying, more disorganisation of housing conditions, erosion of the social trust, deterioration of the political participation, and declination of life satisfaction (Werfhorst & Salverda 2012). That is why income inequality is an importance issue to the economists and governments around the world. In order to curb this issue, banking industry could play role in changing the unequal distribution of income of the individuals (Stiglitz 2012). As time Jurnal Ekonomi Malaysia 54(2) 2020 77 - 90 http://dx.doi.org/10.17576/JEM-2020-5401-7