Vulnerability of Islamic banking in ASEAN

Purpose This research evaluated the impact of credit risk, liquidity risk, profitability, economic growth and good governance on the vulnerability of the Islamic banking system in the Association of Southeast Asian Nations (ASEAN). Design/methodology/approach The panel regression analysis was used to obtain data from five ASEAN countries that had operated Islamic banks from 2010 to 2019. Findings The results obtained from the vulnerability model indicated that bank liquidity risk, profitability and good governance have significant impacts on vulnerability. Conversely, credit risk and economic growth showed an insignificant effect on susceptibility. Good governance helps increase investment attractiveness for economic growth and development in Islamic banks in ASEAN. Research limitations/implications Some of the limitations of this research include its focus on the vulnerability of Islamic banks in ASEAN countries. The average value of six indices is used as a single index per country with good governance. Therefore, further research needs to consider using all six indices of good governance as factors affecting the vulnerability of Islamic banks, such as control of corruption, government effectiveness, political stability, absence of violence, regulatory quality, the rule of law voice and accountability. Practical implications This research describes banking financial circumstances and their internal activities. Furthermore, it helps managers or banking practitioners in the proper management of finance, specifically at the vulnerability level, to aid in the early detection of crisis to enable early aversion or minimal impact. Social implications This research is expected to assist governments in ASEAN countries to establish public policies and build good governance to increase investment interest in the Islamic banking industry. Originality/value This research is the author's first attempt at discussing the issues of bank vulnerability related to good governance faced by the Islamic banking system in ASEAN.