Do Sharīʿah-Oriented ESG Factors Enhance Financial Stability? Evidence from ASEAN Islamic Banks

This study addresses the critical question of how Environmental, Social, and Governance (ESG) performance, through the specific lenses of Islamic Corporate Social Responsibility (ICSR), Sharia Governance, Sharia Compliance, and Zakat, influences the financial stability of Islamic banks in the ASEAN region. The primary objective is to identify which of these Sharīʿah-based ESG factors significantly impact bank soundness, measured by the Capital Adequacy Ratio (CAR). Employing a quantitative approach, the research utilizes dynamic panel data regression (Arellano-Bond GMM) on a sample of Islamic banks from Indonesia, Malaysia, and Brunei Darussalam over a five-year period (2018–2022). The results reveal a clear distinction: while ICSR, Sharia Governance, and Zakat show no statistically significant effect on stability, Sharia Compliance emerges as a pivotal and significant determinant. This leads to the conclusion that strict adherence to operational Islamic principles is the cornerstone of financial resilience for these institutions, whereas other ethical and governance mechanisms remain strategically disconnected from capital adequacy management. A key limitation of this study is its focus on a limited number of banks and specific variable measurements. Its contribution lies in providing evidence-based insights for regulators and bank management to prioritize and strengthen Sharia Compliance frameworks as a core stability tool. Future research should develop more nuanced Islamic finance ESG indicators and explore these relationships across broader geographical and temporal contexts.