Enhancing performance: minimizing risk in Islamic banks in Indonesia

Ahmad Roziq and Zakiyyah Ilma Ahmad

Cogent Business & Management, 2024, vol. 11, issue 1, 2294519

Abstract: This study explores whether risk mediates the relationship between good corporate governance (GCG), Sharia capital structure, and Sharia financing structure on the financial performance of Islamic banks in Indonesia. The research utilized purposive sampling, selecting a sample of nine banks from 2014 to 2021. The data analysis technique employed a licensed Smart Partial Least Squares (PLS) program. The initial findings reveal that GCG significantly reduces risk but does not directly impact financial performance. Second, the composition of Sharia capital structures has a limited influence on risk but significantly hinders financial performance. Third, the Sharia financing structure significantly and negatively impacts risk and financial performance. Fourth, risk has a significant negative effect on financial performance. Fifth, Islamic bank risk mediates the relationship between Sharia financing structure and financial performance. It also mediates the relationship between GCG and financial performance but does not mediate the relationship between Sharia capital structure and financial performance. These results suggest that to enhance financial performance and minimize risks, the management of Islamic banks should prioritize improving financing practices and implementing GCG measures. The findings of this study can be applied by Islamic banks worldwide. The study identifies nine types of Islamic bank risks that can be employed to assess the risk profile of Islamic banks and even to create a comprehensive risk profile. This multidimensional framework illuminates the intricate interplay between these variables within Islamic banks, offering valuable insights for researchers and practitioners in this field.We believe that our research significantly contributes to the public interest and has far-reaching societal impact. This findings can be leveraged by academics, researchers, and practitioners to build upon and refine existing theories and practices.

Date: 2024
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DOI: 10.1080/23311975.2023.2294519

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