Assessing sustainability of Islamic banking and its impact on financial performance : evidence from Indonesia and Malaysia using the quadruple bottom line framework

Abstract

Grounded in the regulatory landscape requiring Islamic banks in Indonesia and Malaysia to publish sustainability reports, this study aims to re-evaluate their level of sustainability performance and explores its influence on financial performance. Employing the Quadruple Bottom Line (QBL) framework, which expands the traditional sustainability model by incorporating a spiritual dimension (Prophet), the study applies content analysis to obtain QBL score and ranks the bank based on Reactive, Defensive, Accommodative, and Proactive (RDAP) scale. Furthermore, this study employs panel data regression by selecting the appropriate model among common effect model, fixed effect model, and random effect model. The data used is obtained from annual report, sustainability report, and/ or official website of 24 Islamic banks in Indonesia and Malaysia over the period 2019–2023. The research findings reveal a significant shift where most banks have realized sustainability performance. In addition, each dimension of sustainability has shown to have varying impacts on financial performance, which in this study is measured by Return on Assets (ROA). The results of this research emphasize the need for banks to improve their social performance due to its positive influence on financial performance, even in conditions of economic downturn.