This study aims to investigate how global economic policy uncertainty (EPU) and domestic macro-financial risks influence the short- and long-term performance of Indonesian Islamic banks.
Using monthly data from January 2015 to March 2025, this study uses a vector error correction model, supported by impulse response functions and forecast error variance decomposition, to analyze dynamic relationships among profitability, operational efficiency and financial stability.
Indonesian Islamic banks exhibit strong short-term resilience, as global and domestic uncertainty has limited immediate effects on banking performance. In the long run, however, spillover effects are significant and heterogeneous. EPU from the US, Japan and India negatively affects profitability, efficiency and stability, whereas EPU from China and Russia generates positive long-run effects. Domestic liquidity strengthens banking performance, while economic growth (EG) exerts persistent negative effects across all performance indicators. Post-pandemic structural adjustments improve operational efficiency and financial resilience. Financial stability also appears more sensitive to prolonged global uncertainty shocks.
Pandemic risk is modeled using a structural regime dummy that captures macro-financial shifts but not variations in infection intensity. EG is proxied by the Industrial Production Index, which reflects short-term industrial activity rather than broader macroeconomic conditions, potentially limiting measurement precision.
Strengthening Sharia-compliant liquidity management, integrating global EPU indicators into macroprudential surveillance, and supporting digital transformation are essential to enhance long-term resilience.
This study provides new empirical evidence of asymmetric and horizon-dependent resilience in Indonesian Islamic banks, extending global spillover theory within the Islamic finance context and highlighting the role of financial stability in transmitting long-run global uncertainty shocks.
