Risk Management Practices and the Performance of Indonesian and Malaysian Islamic Banks: Does Digitalization Mediate This Nexus?

Despite being exceptionally regulated financial institutions, risk management practices (RMPs) of Islamic banking (IBs) have always remained under the limelight due to their impact on financial performance (FP) and the influence of digitalization (DT). This study aims to investigate the impact of RMPs on FP through the mediating effect of DT. To analyze the linkage between these constructs, we created an index for RMPs, five unique proxies (mobile [MB_DEA], big data [BD_DEA], Internet of Things [IoT], cloud computing [CC_DEA], and social media [SM_DEA]) of DT, and Tobin's Q as a proxy of FP and operationalized the theory of contingency. The data between 2009 and 2020 was collected from Indonesian and Malaysian IBs and was analyzed using the two-step generalized method of moments (GMMs) technique. The empirical findings represent that RMPs and DT have a significant positive effect on FP. Simultaneously, RMPs have a significant positive effect on two proxies of DT (MB_DEA and SM_DEA), and an insignificant positive effect on the remaining three proxies of DT (BD_DEA, IoT_DEA, and CC_DEA). Simultaneously, DT as a mediator plays a significant role between RMPs and FP. This study contributes to systematizing the RMPs of IBs by integrating digitalization which eventually will increase the financial portfolios of IBs.