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Kenc, Turalay
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Economics, Econometrics & Finance

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ESG AND BANKING PERFORMANCE IN EMERGING AND DEVELOPING COUNTRIES: DO ISLAMIC BANKS PERFORM BETTER? Fakhrunnas, Faaza; Kenc, Turalay; Hengchao, Zhang
Journal of Islamic Monetary Economics and Finance Vol 11 No 1 (2025)
Publisher : Bank Indonesia

Show Abstract | Download Original | Original Source | Check in Google Scholar | DOI: 10.21098/jimf.v11i1.2429

Abstract

This paper investigates the effects of Environmental, Social, and Governance (ESG) implementation on banking performance in emerging and developing countries. Applying the Two-step System Generalized Method of Moments (System-GMM) to panel data of 179 banks across 29 countries spanning 2016-2022, we find that ESG implementation significantly enhances overall banking profitability. However, when we assess the implications of ESG on Islamic banks, we find that overall ESG commitment significantly reduces profitability. As for the individual ESG pillar, we note the profit-enhancing effect of environmental pillar on both Islamic and conventional bank profitability. Some evidence is also uncovered for the significant positive effect of social pillar on conventional bank profitability. Finally, we note no significant influences from governance pillar. These results highlight the divergent impacts of ESG implementation on Islamic and conventional banks. We conclude that policymakers should exercise caution in designing and implementing ESG policies, ensuring they are tailored to promote optimal performance across different banking models. This study contributes to the growing body of the literature on sustainable finance and provides valuable insights for regulators and bank managers in emerging and developing economies.
ESG AND BANKING PERFORMANCE IN EMERGING AND DEVELOPING COUNTRIES: DO ISLAMIC BANKS PERFORM BETTER? Fakhrunnas, Faaza; Kenc, Turalay; Hengchao, Zhang
Journal of Islamic Monetary Economics and Finance Vol. 11 No. 1 (2025)
Publisher : Bank Indonesia

Show Abstract | Download Original | Original Source | Check in Google Scholar | DOI: 10.21098/jimf.v11i1.2429

Abstract

This paper investigates the effects of Environmental, Social, and Governance (ESG) implementation on banking performance in emerging and developing countries. Applying the Two-step System Generalized Method of Moments (System-GMM) to panel data of 179 banks across 29 countries spanning 2016-2022, we find that ESG implementation significantly enhances overall banking profitability. However, when we assess the implications of ESG on Islamic banks, we find that overall ESG commitment significantly reduces profitability. As for the individual ESG pillar, we note the profit-enhancing effect of environmental pillar on both Islamic and conventional bank profitability. Some evidence is also uncovered for the significant positive effect of social pillar on conventional bank profitability. Finally, we note no significant influences from governance pillar. These results highlight the divergent impacts of ESG implementation on Islamic and conventional banks. We conclude that policymakers should exercise caution in designing and implementing ESG policies, ensuring they are tailored to promote optimal performance across different banking models. This study contributes to the growing body of the literature on sustainable finance and provides valuable insights for regulators and bank managers in emerging and developing economies.
ESG COMMITMENT AND BANK'S DEFAULT RISK IN EMERGING AND DEVELOPING COUNTRIES: DOES ISLAMIC BANK MATTER? Fakhrunnas, Faaza; Kenc, Turalay; Zhang, Hengchao
Journal of Islamic Monetary Economics and Finance Vol. 11 No. 4 (2025)
Publisher : Bank Indonesia

Show Abstract | Download Original | Original Source | Check in Google Scholar | DOI: 10.21098/jimf.v11i4.2789

Abstract

This paper examines the impact of ESG commitment on banks’ default risk in emerging and developing countries. Using a panel dataset comprising 157 banks from 28 countries over the period 2016-2022 and the Two-Step Generalized Method of Moments (2-Step GMM), it reveals that banks’ ESG commitment reduces banks’ probability of default (PD). Islamic banks also matter for ESG commitments, where Islamic banks have a higher probability of default than conventional banks while committing to the governance pillar. The findings of the study imply that financial authorities and banking institutions in emerging and developing countries need to spur banks’ ESG commitment. However, it must be carefully implemented in Islamic banks, considering that it likely increases Islamic banks' PD. The study contributes to the empirical research concerning the nexus between ESG commitment and banks' default by extending the measurement of the probability of default and delving deep into investigating its relation  to Islamic banks.
Co-Authors Faaza Fakhrunnas Hengchao, Zhang Zhang, Hengchao