<![CDATA[Purpose – This study examines the relationship between financing diversification and the stability of Islamic Rural Banks (IRBs) in Indonesia.Methodology – The study employs panel data from 154 Indonesian Islamic Rural Banks covering 2015 to 2023. Financing diversification is measured using the Herfindahl Hirschman index (HHI), while bank stability is proxied by the Z-Score and risk adjusted return on assets (RAROA). Panel regression techniques were used to estimate the relationships.Findings – Financing diversification is positively associated with bank stability but exhibits an inverse U-shaped relationship. Moderate diversification enhances stability, whereas excessive diversification weakens it. Market power and the capital adequacy ratio (CAR) have positive and significant effects on stability, while bank size negatively affects it. The interaction between financing diversification and CAR is negative and significant, indicating that banks with concentrated financing portfolios remain vulnerable to stability pressures despite strong capital positions. Robustness tests confirm these findings across alternative model specifications.Implications – The findings highlight the importance of maintaining an optimal balance between financing diversification and capital adequacy to enhance IRBs stability. Bank managers should avoid excessive financing concentration and over-diversification while maintaining sufficient capital buffers to absorb risks. Regulators should strengthen supervision of larger IRBs due to their greater exposure to operational and financing risks.Originality – This study extends the literature by providing evidence from Indonesian Islamic Rural Banks, an underexplored sector. It examines the linear and non-linear effects of financing diversification on bank stability and assesses the moderating role of capital adequacy during the Covid-19 period.]]>
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