DIGITAL FINANCIAL COMPETITION AND ISLAMIC BANK STABILITY: FINANCING RISK, CAPITAL BUFFERS, AND INSTITUTIONAL QUALITY

Abstract

The rapid expansion of fintech firms and digital financial platforms is reshaping competitive dynamics in banking, yet the implications of digital financial competition for Islamic bank stability remain insufficiently understood. This study proposes an integrated framework to examine the relationship between digital financial competition and Islamic bank stability, focusing on financing risk as a mediating mechanism and bank capitalization and institutional quality as moderating factors. Drawing on the competition-fragility and competition-stability perspectives, the study distinguishes digital financial competition from digital financial inclusion and technology adoption. The proposed empirical analysis employs annual panel data from eight Islamic banks in Indonesia and Malaysia over 2015–2025, subject to data availability and consistency. Bank stability is measured using the Z-score, financing risk using the non-performing financing ratio, capitalization using the capital adequacy ratio or a comparable measure, and institutional quality using selected Worldwide Governance Indicators. Panel regression, mediation analysis, interaction effects, and robustness tests will be used to evaluate the proposed relationships. The study aims to contribute to the Islamic banking literature by clarifying the potential mechanisms through which digital competitive pressure may be associated with financial stability and the conditions under which these relationships may vary. Its practical implications concern capital planning, financing-risk management, and institutional oversight amid the digital transformation of Islamic banking. The proposed relationships and contributions remain subject to empirical validation.