Examining the moderating effect of bank size on the financial risk and performance linkage of Islamic commercial banks

Abstract

Financial performance is very important for Islamic banks to ensure the sustainability of their business in providing banking products and services according to Sharia principles or Islamic law. This research examines the impact of financial risk on the financial performance of Indonesian Islamic commercial banks (ICBs), with bank size as a moderating variable. The research was conducted on all Indonesian ICBs from 2017–2021. Fixed effects models are employed to account for potential heterogeneity across banks and control for time-invariant unobserved factors. These models allow for estimating the within-bank variation over time, capturing constant bank-specific characteristics over the study period. The results of this research state that financing and operational risks significantly negatively impact financial performance. In contrast, liquidity risk does not significantly negatively impact financial performance. Furthermore, from testing the moderation hypothesis, the results of this study state that total financing reduces the significant negative effect of financing risk and operational risk on ICB Indonesia’s financial performance. However, total financing does not reduce the significant negative effect of liquidity risk on the financial performance of Indonesian ICBs.