The Effect of Capital Regulation Measures and Non-Performing Financing on Islamic Banks' Performance: Evidence from the Post-Crisis Era
Purpose: This paper aims to investigate the relationship between Islamic banks' financial performance and critical external and internal factors, focusing on the complex interaction between capital adequacy regulation and bank profitability. Design/methodology/approach: This study was based on a sample of 81 Islamic banks (IB) over the period 2010-2020. A multiple regression analysis was employed to assess the direct and moderating effects. Findings: The authors have demonstrated that both the regulatory capital ratio and the non-risk-weighted capital ratio have a positive and significant impact on bank performance. The findings of this research demonstrate that when a banking institution is confronted with elevated credit risk, as evidenced by the proportion of non-performing financing, there is a concomitant decline in its profitability. Furthermore, it can be deduced that an enhancement in asset quality is associated with an increase in profitability. Practical implications: These findings may be of significance to the existing literature on IB regulation, particularly with regard to capital adequacy and its effects on performance. The results obtained have significant ramifications for regulators and policymakers, supporting sustained economic growth and financial stability in the Islamic banking sector. Originality/value: This study adds to the current literature on Islamic banking by exploring the impact of Basel III capital adequacy requirements on the financial performance of Islamic banks. It provides novel evidence on both regulatory and non-risk-weighted capital ratios in the post-crisis era.