Nonlinear econometric analysis of Islamic banks’ performance in emerging markets: The role of operational efficiency

This study investigates the nonlinear effects of macroeconomic variables on the financial performance of Islamic banks in emerging markets, emphasizing the mediating role of operational efficiency. Using panel regression, structural equation modeling (SEM), bootstrapping, and nonlinear autoregressive distributed lag (NARDL) models, the analysis reveals an inverted U-shaped relationship between operational efficiency and both return on assets (ROA) and return on equity (ROE), indicating that efficiency initially enhances performance but declines beyond optimal thresholds (Futaesaku et al., 2025; Lassoued et al., 2025). SEM and mediation analyses confirm that operational efficiency mediates the effects of gross domestic product (GDP) growth and inflation on performance (Istaiteyeh et al., 2024; Eid et al., 2023), while NARDL results highlight asymmetric macroeconomic impacts, emphasizing the need for adaptive and risk-sensitive policies. From a governance and regulatory perspective, the findings suggest that managers should operationalize nonlinear efficiency thresholds, regulators should implement countercyclical supervisory practices, and Sharia governance bodies should integrate efficiency-performance trade-offs into oversight frameworks. Overall, the study provides theoretical and practical insights for enhancing resilience and performance in Sharia-compliant banking systems.