Mediating social performance in ethical and operational outcomes: evidence from Indonesian Islamic rural banks

Purpose This study aims to investigate how ethical leadership affects operational performance in Indonesia’s Islamic People’s Economic Banks (Bank Perekonomian Rakyat Syariah [BPRS]), with social performance examined as a mediating factor. Design/methodology/approach This study applies partial least squares structural equation modeling using SmartPLS 4 to analyze survey data from 27 BPRS leaders. Ethical leadership is treated as the main independent variable, operational performance as the dependent variable, and social performance as the mediator. Findings Ethical leadership does not directly affect operational performance, but it significantly improves social performance. Social performance, in turn, strongly enhances operational performance. The indirect effect is marginal at the 5% level, indicating that social performance provides a partial explanatory pathway but does not fully transmit the effect of ethical leadership on operational outcomes. Research limitations/implications The findings are limited to Indonesian BPRS, which operates under distinct regulatory, market, and socioreligious conditions. The sample is small and convenience-based; therefore, the results should be interpreted cautiously and should not be generalized to all Islamic or conventional banking institutions. Future research should use larger samples, compare Islamic financial institutions across regions or countries, and test additional mediators such as Islamic organizational culture, employee engagement, and Islamic work ethic. Practical implications BPRS leaders should strengthen ethical leadership practices, Sharī‘ah-oriented governance and social programs such as qarḍ-based financing, community financial literacy, and microenterprise support. These practices can improve social performance and indirectly support operational outcomes. Social implications The results indicate that ethical and socially responsible rural banking can support inclusive growth, poverty reduction and community welfare when institutional leadership is aligned with Maqāṣid al-Sharī‘ah. Originality/value This study provides evidence from an underexplored rural Islamic banking context by showing that social performance is an important mechanism linking ethical leadership to operational outcomes. It contributes to the literature on Sharī‘ah-based governance by demonstrating that values-driven leadership strengthens organizational effectiveness through social responsibility and community engagement.