Climate change adaptation: does Islamic banking play a role?

Noordin, Nazrul Hazizi and Fakhrunnas, Faaza (2026) Climate change adaptation: does Islamic banking play a role? Journal of Islamic Monetary Economics and Finance, 12 (2). pp. 229-262. ISSN 2460-6146 E-ISSN 2460-661

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Abstract

This study examines the role of Islamic banking in advancing climate change adaptation. Applying fixed effects and System Generalized Method of Moments estimators to panel data from 29 dual banking countries from 1995 to 2021, we find that a one-standard-deviation increase in the share of Islamic banking assets is associated with a 1.773-point improvement in the climate adaptability index. When climate adaptation is decomposed into its two constituent dimensions, climate vulnerability and climate readiness, we find that Islamic banks contribute significantly to enhancing climate readiness, while their impact on reducing vulnerability is less pronounced. The contribution is particularly salient in countries where Islamic banking is systemically important, underscoring the significance of market penetration and institutional embeddedness. Additionally, Islamic banks are shown to have maintained a consistent, positive contribution to climate adaptation both before and after the adoption of the Paris Agreement in 2015. These findings underscore the normative alignment between the ethical foundations of Islamic finance and the environmental commitment of global communities. This study offers important policy implications, including the need for stronger regulatory support, deeper integration of Islamic finance within national climate strategies, and strengthened climate governance within Islamic banks. It also adds to the literature by providing new empirical evidence on the distinctive and evolving role of Islamic banking in supporting macro-level climate resilience.

Item Type:	Article (Journal)
Uncontrolled Keywords:	Islamic banking, Sustainable banking, Climate change, Climate risk, Climate adaptation
Subjects:	H Social Sciences > HG Finance > HG3368 Islamic Banking and Finance
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button):	Institute of Islamic Banking & Finance (IIiBF)
Depositing User:	Dr Nazrul Hazizi Noordin
Date Deposited:	24 Jul 2026 21:14
Last Update:	24 Jul 2026 21:14
Queue Number:	2026-07-Q4225
URI:	http://irep.iium.edu.my/id/eprint/130147

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