Digital Transformation's Moderating Role on Financing and Capital Quality Impacts for Sustainable Islamic Rural Banking in Indonesia

Abstract

This investigation explores the moderating role of digital transformation on the impact of financing and capital quality on the sustainability of business practices within Islamic rural banks in Indonesia. Data were collected from the financial and annual reports of 165 Islamic rural banks across the nation, with a focused sample of 30 banks in the West Java region, spanning the years 2016 to 2021. The analysis, conducted through EViews version 10, employed multiple linear regression analysis on panel data to ascertain the relationships in question. It was found that non-performing financing (NPF) exerts a significant adverse effect on the sustainability of these banks' operations, whereas a positive influence is observed in the case of the capital adequacy ratio (CAR). Furthermore, digital transformation was identified as a critical moderating factor, enhancing the negative impact of NPF and bolstering the positive impact of CAR on business sustainability. The findings suggest that Islamic rural banks in Indonesia embarking on digital transformation initiatives must prioritize information transparency, financial stability, and the cultivation of innovative capabilities. Additionally, the selection of digital transformation strategies should be tailored to the banks' unique characteristics, including property rights, operational scale, and growth potential. This study contributes to the literature by providing empirical evidence of the significant role digital transformation plays in influencing the relationship between financial health indicators and sustainability in the context of Islamic rural banking.