TKBI, Greenwashing, and the Test of Islamic Banking Growth Quality

Amid growing public scrutiny of greenwashing practices, financing for mining sectors in violation of regulations, and suspected flows of funds from formal financial institutions to high-risk extractive activities, a fundamental question arises: how robust is our banking system in ensuring that financing growth truly aligns with sustainability principles?

This issue is no longer abstract. When the financial sector faces reputational risks from financing that potentially flows to sectors violating sustainability principles, the quality of growth becomes an agenda that cannot be delayed.

Islamic banks, with their financing characterised by real sectors that provide benefits and principles of prudence, are in a strategic position to demonstrate that financing growth can go hand in hand with business integrity, asset quality, and long-term sustainability.

This is where the Indonesia Taxonomy for Sustainable Finance (TKBI) finds its relevance. For the Islamic banking industry, TKBI is no longer merely a classification instrument, but a test of growth quality, portfolio integrity, and business model resilience.

Test of Integrity Amid Expansion

The success of Islamic banks is no longer sufficiently measured by asset growth and financing expansion alone. The real test now shifts to a far more fundamental question: is that growth healthy, high-quality, and able to support long-term business sustainability?

This momentum becomes even more relevant as the total national banking credit and financing related to environmentally conscious business activities has surpassed Rp2,047 trillion by the end of 2025. This figure underscores that the sustainability agenda is no longer on the sidelines of industry strategy but has become the mainstream of national banking transformation.

For Islamic banks, the question now is not whether to follow that agenda, but how to make it a source and compass for healthy growth. Amid pressures to expand market share, growth quality becomes a central issue. High growth based on sectors with reputational risks, transition risks, or even environmental regulation violations can become a time bomb for asset quality.

It is in this context that the greenwashing issue becomes highly relevant. When the “green” or “sustainable” label does not truly reflect the quality of the financed economic activities, the risks faced by banks are not only reputational but also financing risks that ultimately affect growth stability.

TKBI as Guardian of Growth Quality

In the bank lending channel theory, policy changes and information will influence financing behaviour through adjustments to credit standards, risk appetite, and portfolio composition. This perspective is highly relevant in reading TKBI.

TKBI is not merely a regulatory tool but an information framework that influences how banks assess the quality of economic sectors. With more structured classification, banks can identify which sectors have better long-term prospects, are more resilient to climate change pressures, and have lower transition risks.

For Islamic banks, this is very important. Over the past few years, the Islamic banking industry has still faced the dilemma between financing expansion and asset quality. Aggressive growth drives are not always followed by improvements in underwriting quality, so the Non-Performing Financing (NPF) risk remains a highly watched market indicator.

This is where TKBI has strategic value. The better a bank’s ability to integrate TKBI classification into screening processes, credit scoring, and portfolio monitoring, the lower the potential for problematic financing. The ripple effect is clear: healthier productive asset quality, more sustainable growth, and stronger business resilience. In other words, TKBI must be read as an instrument for guarding growth quality.

Greenwashing and Risks of Illusory Growth

Actual cases making headlines in the public sphere, including financing suspected of flowing to mining sectors violating regulations, provide important lessons for the banking industry. PPATK revealed money circulation related to illegal gold mining (PETI) reaching Rp992 trillion in 2023-2025, including suspicious transactions of Rp185 trillion. This figure, of course, does not include funds related to violations in the nickel and coal sectors.

Large financing growth is not always synonymous with healthy growth. If portfolio expansion flows to sectors that do not meet sustainability principles or even potentially violate regulations, what occurs is illusory growth.

In the short term, financing figures may grow. However, in the medium term, reputational risks, increased NPF, provisioning pressures, and declining market confidence can become significant consequences.

Various studies highlight that the sustainable finance agenda does not stop at classification and reporting functions but also directly impacts financing quality, risk indicators like NPF, and banking industry growth sustainability. In this context, TKBI must be positioned as a strategic instrument to improve portfolio structure and strengthen Islamic bank growth quality.

International lessons also point in the same direction. China’s green credit policy experience shows that strengthening green financing portfolios can reduce problematic loan ratios. This means sustainability taxonomy is not just a compliance agenda but a business instrument for maintaining growth quality.