Sustainability performance of Islamic banks in major D-8 countries and its impact on risk-taking behavior

Abstract

Islamic banking is closely aligned with sustainability principles, as it is rooted in Maqashid Shariah. Despite the increasing importance of intermediary system of Islamic banking in combating social and environmental issues in D-8 countries, they have not been fully accompanied by the optimization of sustainable financing, remaining concentrated in low-risk sectors. Therefore, sustainability performance is considered an important factor influencing bank risk-taking behavior. This study employs content analysis according to the Maqashid Shariah Quadruple Bottom Line (MSQBL) framework, which consists of business sharing, social religious, responsible environment, and ethics and Shariah principles dimensions to obtain the level of the sustainability performance. Using panel data of Islamic banks in D-8 countries over the period 2020–2024, this study employs panel regression analysis to analyze the relationship between sustainability performance according to MSQBL framework and bank risk-taking behavior as proxied by the Financing to Deposit Ratio (FDR), Non-Performing Financing (NPF), and Cost to Income Ratio (CIR), while total assets and capital adequacy ratio are included as a control variable. The overall sustainability performance of Islamic banks in D-8 countries based on MSQBL achieved the score of 52%. The findings reveal that the business sharing dimension significantly reduces FDR, NPF, and CIR values. The social religious dimension also negatively affects NPF, while the ethics and Shariah principles dimension positively influences FDR. In contrast, the responsible environment dimension and total assets do not exhibit significant effects on risk-taking behavior. Furthermore, CAR is found to have a negative effect on FDR but a positive effect on CIR. These findings show that Maqashid Shariah Quadruple Bottom Line (MSQBL) influences Islamic banks' behavior in different ways. Islamic banks in D-8 are encouraged to improve environmental responsibility practices both internally and externally since it recorded the lowest sustainability performance score and not yet significantly impacted risk-taking behavior.