Islamic banking financing resilience and sustainability support: a regime-switching analysis on Indonesian banking

Purpose Recent regulations imposed on the banking industry to promote sustainable finance have allowed Islamic banks to compete with conventional banks while adhering to Islamic principles. This study aims to examine the impact of economic changes on support for sustainability practices in Islamic banking financing in Indonesia. It provides strategic recommendations by economic sector through regime-switching and income statement analysis. Design/methodology/approach This study uses a unique approach that combines a regime-switching model with income statement analysis. This approach examines how effectively the financing strategy of Indonesian Islamic banking supports resilience and sustainability practices across various economic sectors, compared to the total banking industry. Findings The study shows that economic sectors that directly support sustainability goals account for 62% of the total financing volume. These sectors are also more resilient than the banking industry as a whole, creating an opportunity to boost Islamic banking’s profitability by up to 38% in one year. Recommended sectors include agriculture, education, health and consumer financing. Research limitations/implications As Islamic banks share many similarities across markets and countries, this study is expected to serve as a reference for them to develop financing strategies and increase profitability. Originality/value This study examines economic sectors that contribute to the resilience and sustainability of Islamic banks compared to the total banking industry. Using a unique combination of a regime-switching model and income statement analysis, the study provides recommendations for specific economic sectors that have been proven to improve profitability.