What Differentiates Islamic Bank Health? Profitability, Liquidity, Risk, and Governance in Indonesia

Abstract

Islamic bank soundness is a prerequisite for resilient intermediation and for maintaining the financial capacity needed to support long-term strategic and sustainability commitments. This study examines which internal financial and governance dimensions are most strongly associated with the health classification of Indonesian Islamic commercial banks under the Risk Profile, Good Corporate Governance, Earnings, and Capital (RGEC) framework. Using a quantitative explanatory design, the study analyzes 50 bank-year observations from 10 Islamic commercial banks during 2021-2025, compiled from annual financial, governance, and sustainability reports. The RGEC composite rank is used as the dependent variable, while Return on Assets (ROA), Non-Performing Financing (NPF), Financing-to-Deposit Ratio (FDR), and the Good Corporate Governance self-assessment are examined as diagnostic dimensions. Multiple linear regression shows that ROA (B = -0.190, p < 0.001) and FDR (B = -0.014, p = 0.004) significantly differentiate the RGEC rank, whereas NPF (p = 0.812) and governance (p = 0.051) do not meet the 5% significance threshold. The model is jointly significant (F = 16.283, p < 0.001) and yields R-squared = 0.591. Because a lower RGEC rank denotes a healthier bank, the results indicate that stronger profitability and, within the observed range, higher FDR are associated with healthier classifications. The findings are interpreted as diagnostic associations rather than causal effects because several predictors also contribute to the composite RGEC outcome. The study contributes by positioning Indonesian RGEC evidence within the Islamic-bank stability literature while distinguishing prudential soundness from directly measured sustainability performance.