Financial technology adoption, financial stability, and financial performance in Islamic rural banks

Purpose This study aims to explain the effect of financial technology (FinTech) adoption on financial stability and financial performance and the influence of financial stability on financial performance in Islamic rural banks (IRBs). Design/methodology/approach The authors selected IRBs in Indonesia that were observed for four years (2020–2023). Data from 260 bank-year observations were analysed using fixed effects. Findings FinTech adoption had a negative effect on financial stability and financial performance. FinTech adoption must be conducted through collaboration with technology or system providers. However, this policy increased bank operating expenses and subsequently reduced financial performance. The IRBs used the profit and loss sharing scheme, increased operating expenses and decreased financial performance to influence a bank’s ability to provide competitive returns to customers, subsequently reducing financial stability. Research limitations/implications The authors used observation years at the initial stage of FinTech adoption, when IRBs needed resources for FinTech adoption, but they did not report the impact of FinTech adoption on the stages after FinTech adoption. Practical implications The IRBs should prepare funding for FinTech adoption. Bank regulators should consider IRBs’ funding ability and recommend FinTech providers who can collaborate with IRBs. Originality/value The authors examined IRBs with limited resources compared with commercial banks. The authors also expanded on previous studies that investigated the impact of FinTech adoption on financial stability and financial performance.