Determinants of Financing Risk Dynamics in Southeast Asian Islamic Banking

Abstract

This study aims to analyze the integration of internal fundamental factors, bank performance metrics, and macroeconomic dynamics in determining financing risk among full-fledged Islamic commercial banks across Southeast Asia. A quantitative approach was used with balanced panel regression (2012–2024) of eleven Southeast Asian Islamic commercial banks was conducted in EViews using Chow, Hausman, and Lagrange Multiplier tests. The findings reveal that Internal factors mitigate non-performing financing, whereas asset growth and macroeconomic expansion escalate risk; inflation and systemic pandemic disruptions show no impact. Internal strength absorbs macro-financial volatility, obligating executives and regulators to prioritize operational efficiency and prudent growth. This study integrates Muslim-majority and minority nations, PSFR ratios, COVID-19 shocks, and Business Cycle Theory to reveal Non-Performing Financing dynamics.