Climate Change and Financing Risks: A Study of Islamic Commercial Banks in Indonesia

Abstract

Climate change has emerged as a critical global issue, creating new and unanticipated risks for the banking industry, including Islamic financial institutions. Climate-related shocks and natural disasters may increase credit default risk, particularly in vulnerable economic sectors. This study examines the impact of climate change—proxied by temperature—along with the Financing to Deposit Ratio (FDR), primary sector growth measured by agricultural GDP, inflation, and a moderating variable on financing risk proxied by Non-Performing Financing (NPF) in Indonesian Islamic commercial banks. Using a quantitative associative approach, secondary panel data from 32 provinces were collected from the Statistics Indonesia (BPS) and the Financial Services Authority (OJK). Panel data regression analysis was employed. The findings reveal that temperature has a significant negative effect on NPF, FDR has no significant effect, agricultural GDP positively affects NPF, and inflation has no significant effect. The moderating variable exhibits a significant positive effect. Jointly, all variables significantly influence NPF. This study contributes by addressing climate-related financing risks in a developing-country context and by introducing a novel model combining climate variables and agricultural sector strength as a moderating mechanism for Islamic banking risk exposure.