Mudharabah adoption as institutional risk governance: evidence from coastal livelihoods in Indonesia

Purpose This study aims to examine the adoption of mudharabah financing in high-risk coastal livelihoods by reframing Islamic financial contracts as instruments of institutional risk governance rather than purely normative or religious arrangements. It seeks to explain how institutional processes shape adoption decisions under conditions of environmental and income uncertainty. Design/methodology/approach A quantitative research design is employed using survey data from 440 coastal economic actors in Indonesia. The proposed framework is tested through a serial mediation model using partial least squares structural equation modeling (PLS-SEM). Multi-group analysis is further applied to capture contextual variations across geographic settings and fishing-asset ownership structures. Findings The findings indicate that access to capital and perceived fairness do not directly influence the intention to adopt mudharabah. Their effects are fully transmitted through a sequential institutional pathway involving the institutional role of Islamic financial intermediaries, risk-management practices addressing weather and price volatility and the formation of institutional trust. Multi-group analysis reveals that these institutional pathways are significantly stronger in mainland coastal areas and among individual asset owners, suggesting that institutional risk governance operates unevenly across contexts. Practical implications The results suggest that strengthening mudharabah adoption requires more than expanding access or emphasizing Shariah compliance. Islamic financial institutions should prioritize institutional capacity for risk governance, including contract clarity, distributive fairness and operational risk-management mechanisms, particularly in vulnerable coastal environments. Originality/value This study contributes to the Islamic finance and development literature by reconceptualizing mudharabah adoption as an outcome of institutional risk governance. It positions trust as an endogenous result of institutional performance and offers a context-sensitive framework for designing Islamic microfinance interventions in high-risk livelihood settings.