AI and Fintech Synergy: Strengthening Financial Stability in Islamic and Conventional Banks

Artificial intelligence (AI) has played a pivotal role in enhancing the efficiency of financial technology (Fintech), ultimately contributing to the stability of the banking sector. The advancements in Fintech driven by AI tools are significantly improving risk management within the banking industry. This paper investigates the mediating role of AI in the relationship between Fintech and financial stability in the context of Islamic and conventional banks across selected countries in the Organization of Islamic Cooperation (OIC). It employs structural equation modeling (SEM) to explore the causal linkages across time domains. The results of this research identify that AI is a significant mediator, playing a critical role between Fintech and stability. It either mitigates or amplifies risks, depending on the regulatory framework and implementation practices in place. The analysis indicates that AI has a weak mediating effect in the short run, but a strong mediating effect in the long run between Fintech and stability. This research paper emphasizes the importance of developing robust, forward-thinking policies to leverage the benefits of AI. It also addresses the risks to financial stability in both Islamic and conventional banking systems.