Investigating the Performance of the Islamic Banking System and Social Welfare

This study was conducted to investigate further how Islamic Banking Performance may improve social welfare in Malaysia since the bank put one of its objectives to improve livelihood through its Shariah non-compliance fund. Reports highlighted that exceeding Shariah's non-compliance risk will cause force majeure to the bank and even the risk of bankruptcy. This study aims to discuss and clarify the risk of non-compliance with Sharia Law in the Islamic financial system. The data for this research is based on annual financial reports ranging from the year 2014 until 2019, consisting of 8 Islamic Financial Institutions (IFIs) in Malaysia, namely; Affin Bank, Alliance Bank, Ambank, Bank Islam, Hong Leong Bank, Maybank, OCBC Al-Amin bank and Public bank. Three-stage least square method incorporates the mediator variable in the simultaneous equation model. The result of this study pointed out that both variables significantly impact each of them. In short, the Shariah non-compliance funds can indeed affect the main factor of bank failure, capital adequacy ratio, but it has a positive effect on social welfare through GDP at the same time. Therefore, to balance the relationship between the two points, the government must formulate effective maintenance methods for Islamic Financial Institutions (IFIs) in Malaysia. Under the premise of improving social welfare, the IFIs can also safely maintain and operate.