Does intellectual capital affect financial stability? Mediation of the credit risk of Islamic banks

Purpose Islamic banks in the Middle East and North Africa nations are encountering challenges similar to those in microfinance, with certain countries, such as Lebanon, seeing stagnation in the growth of Islamic banking and finance. The objective of this study is to examine the effect of intellectual capital on credit risk and financial stability within the context of Islamic banks in the Middle East and North Africa region. Design/methodology/approach This study uses the generalized method of moments and the two-stage least squares method to conduct this research. It uses bank data from 972 observations from 2011–2022 in the Middle East and North African countries. Findings The findings show that human capital efficiency, relational capital efficiency, structural capital efficiency and modified value-added intellectual capital negatively correlate with credit risk. In contrast, all of these variables demonstrate a positive impact on financial stability. It suggests that enhancing intellectual capital is expected to contribute to mitigating credit risk, hence promoting excellent financial strength. Social implications By drawing attention to Islamic banks that require intellectual capital and financial stability, this study offers policymakers important information regarding the economic and social well-being of countries in the Middle East and North Africa region. Originality/value This study furnishes banks with information regarding the role of intellectual capital in enhancing financial stability through the mitigation of credit risk.