Investment as a mediating variable between macroeconomic indicators and the optimization of Islamic banking financing and funding

Purpose This study aims to examine how macroeconomic and governance factors influence financing optimization in Islamic banking, with investment positioned as a central transmission mechanism within a dual banking system. Design/methodology/approach This study uses a quantitative approach using Partial Least Squares Structural Equation Modeling. The model incorporates financial supervision (proxied by the Capital Adequacy Ratio), management quality (Non-Performing Financing), interest rates and inflation as exogenous variables, investment as a mediating variable and financing optimization as the outcome variable. Findings The results of this study reveal a non-linear intermediation structure. Financial supervision exhibits a negative direct effect but a positive indirect effect through investment, indicating a prudence–efficiency trade-off. Management quality positively affects financing, yet its impact is weakened through investment, reflecting competitive mediation. Interest rates demonstrate a paradoxical positive influence – both directly and indirectly – confirming benchmark dependence within a dual banking system. In contrast, inflation consistently exerts a negative effect on both investment and financing. Importantly, investment emerges as a central transmission channel that determines the direction and strength of intermediation. Research limitations/implications This study is limited by its focus on a single mediation framework and a restricted set of variables, which may not fully capture institutional and behavioral dimensions. Future research should incorporate additional mediators, governance factors and cross-country or longitudinal data to enhance generalization and theoretical development. Practical implications The findings of this study suggest that Islamic banks should balance capital regulation with financing expansion, align management practices with investment strategies and strengthen risk-sharing instruments. Regulators are encouraged to develop Sharia-compliant benchmarks independent of interest rates and implement policies that mitigate inflationary pressures to sustain investment and financing performance. Social implications This study highlights the societal role of Islamic banking in enhancing financial stability, protecting depositors and promoting inclusive economic growth. By strengthening investment as a transmission channel, Islamic banks can improve the allocation of funds into productive real-sector activities, supporting employment and community welfare. Reducing reliance on interest-based benchmarks and improving resilience to inflation further contribute to a more equitable and ethical financial system. Ultimately, the findings support the development of a sustainable Islamic financial ecosystem aligned with Sharia principles of justice, transparency and socio-economic balance. Originality/value This study proposes a dual-mechanism framework of Islamic financial intermediation, where macroeconomic exposure and governance constraints interact through investment dynamics. This study advances the literature by positioning investment as not merely a mediator but also a structural transmission channel shaping financing outcomes in a hybrid Islamic–conventional financial system.