Green Financing on Profitability in ASEAN Islamic Banks: The Role of Credit Risk and Corporate Governance

Abstract

This study aims to analyze the impact of green financing on the profitability of Islamic banks in the ASEAN region, as well as to examine the role of credit risk and good corporate governance (GCG) as moderating variables, taking into account control variables such as the Financing to Deposit Ratio (FDR), Capital Adequacy Ratio (CAR), and operational efficiency (BOPO). The research method employed is a quantitative approach using secondary data in the form of financial statements and sustainability reports from 28 Islamic banks in ASEAN for the period 2020–2024. The analysis techniques utilize panel data regression and Moderating Regression Analysis (MRA) with the assistance of Eviews 12 software. The results indicate that green financing has a significant positive effect on profitability, as proxied by ROA. Meanwhile, credit risk does not have a significant effect on profitability, whereas GCG demonstrates a significant positive effect on profitability. In its moderating role, credit risk is not proven to moderate the relationship between green financing and profitability, whereas GCG is statistically significant but exhibits a negative direction potentially weakening the relationship. The findings of this study suggest that green financing activities aimed at improving profitability may actually be hindered by the implementation of overly strict and layered corporate governance (CG) practices, which burden banks with additional operational costs. Meanwhile, credit risk levels were found not to affect the success of such green financing. Therefore, Islamic banks in the ASEAN region need to design a more efficient and adaptive GCG system so that compliance procedures and risk management can ensure long-term sustainability without unduly sacrificing potential financial gains.