FinTech and AI boost bank stability with Islamic banks benefiting most

FinTech and AI adoption is not a straightforward path to immediate efficiency. Instead, it is a complex process where investment in innovation often precedes visible returns, creating an uneven landscape between banks with differing governance and risk frameworks.

Global banking is entering a decisive new phase where technology is rewriting the rules of efficiency and resilience. A new study reveals that while conventional banks race ahead in adopting FinTech and artificial intelligence, Islamic banks are quietly gaining a stability advantage that could redefine their competitive edge.

Published in the International Journal of Financial Studies, the research draws a sharp contrast between the two models. The study “Islamic vs. Conventional Banking in the Age of FinTech and AI: Evolving Business Models, Efficiency, and Stability (2020–2024)” maps how digital transformation is reshaping the balance of power across dual-banking systems.

Which banks lead in FinTech and AI adoption?

The analysis covers a balanced panel of 26 listed banks, 13 Islamic and 13 conventional, across 11 jurisdictions in the Middle East, North Africa, and Southeast Asia. Using data from 2020 to 2024, the study introduces a FinTech Adoption Index that scores banks on seven components, including digital banking apps, open banking APIs, AI-driven customer service and risk management, biometric e-KYC, blockchain applications, and strategic FinTech partnerships.

Findings reveal a consistent gap: conventional banks score between 0.5 and 0.8 points higher than Islamic banks on this index. While adoption more than doubled between 2020 and 2023, reaching an average of 3.65 components before plateauing in 2024, Islamic banks remained slower to implement cutting-edge digital tools. Conventional banks, larger in scale and often better resourced, showed greater agility in embedding AI and FinTech into their systems. Islamic banks, though advancing, were more conservative in integration, reflecting governance structures and compliance frameworks specific to Shariah principles.

This divergence underscores how dual banking systems are evolving differently under technological pressure, with implications for competition, customer experience, and long-term positioning in digital finance.

Does digital adoption improve efficiency and profitability?

The study investigates whether FinTech and AI adoption translates into measurable improvements in operational efficiency and profitability. Results suggest a nuanced picture. Each additional digital component raises operating costs by roughly 0.8 percent, primarily due to integration and changeover expenses. At the same time, profitability indicators, such as return on assets, increase only marginally, by about 0.03 percent per component.

This shows that in the short run, banks bear higher costs before fully realizing efficiency benefits. Conventional banks appear more focused on leveraging technology to enhance profitability, while Islamic banks prioritize stability and compliance over aggressive efficiency gains. The data suggests that larger banks, with stronger capitalization, are better positioned to absorb short-term cost burdens while pursuing digital transformation.

Overall, the research finds that FinTech and AI adoption is not a straightforward path to immediate efficiency. Instead, it is a complex process where investment in innovation often precedes visible returns, creating an uneven landscape between banks with differing governance and risk frameworks.

How does technology adoption affect stability?

The results indicate that FinTech and AI adoption increase banks’ stability, measured by Z-scores, by an average of 3.6 points. At the same time, non-performing loan ratios decline by 0.1 percent. These improvements suggest that digital technologies enhance risk management, strengthen credit assessment, and support more resilient business models.

Islamic banks, despite adopting fewer technologies overall, show stronger stability gains than conventional counterparts. Their inherent risk-sharing and asset-backed financing principles amplify the stabilizing effects of digital innovation. By contrast, conventional banks, while achieving modest stability benefits, emphasize profitability and efficiency. This creates an efficiency–stability trade-off across the two banking models, with Islamic banks leaning toward resilience and conventional banks toward profit maximization.

The study also highlights a broader shift: as digital adoption grows, banks transition from experimental rollout to optimization. The plateau in adoption levels after 2023 signals that the next stage lies in refining, scaling, and standardizing FinTech and AI solutions rather than simply expanding their presence.

Implications for Banking and Policy

For managers, the evidence underscores that digital adoption must be matched with strategic planning. Short-term cost increases may be inevitable, but stability gains make long-term adoption worthwhile. For regulators, the study suggests that policies should encourage balanced innovation that safeguards systemic resilience while promoting efficiency.

In dual-banking markets, the divergence between Islamic and conventional institutions will likely shape competition. Conventional banks may gain the upper hand in digital customer experiences, while Islamic banks may consolidate reputations for stability and trust. Both trajectories highlight the importance of aligning technological adoption with institutional identity, governance, and customer expectations.