The effect of Fintech innovation on Islamic bank efficiency through capital and liquidity

Purpose Fintech innovation has revolutionized the banking sector, including Islamic banks in the ASEAN region. However, its impact on the efficiency of Islamic banks, as well as the role of moderating variables such as capital ratio and liquidity ratio, are not fully understood. This study aims to evaluate the effect of fintech innovation on the efficiency of Islamic banks in ASEAN, and to analyze how capital ratio and liquidity ratio moderate the relationship. Design/methodology/approach The study population includes Islamic banks in five ASEAN countries (Indonesia, Malaysia, Brunei, Singapore and Thailand) with a total of 234 observations in the period 2018–2023. The analysis was conducted using the panel data method with Eviews 13 software. The Hausman, Chow tests and fixed-effect model testing were used to analyze the data. Findings The results show that fintech innovation has a positive but statistically insignificant effect on the efficiency ratio, indicating that its direct impact on improving the efficiency of Islamic banks is limited. However, the interaction between fintech innovation and capital ratio has a negative and significant moderating effect, suggesting that higher capital ratios strengthen the role of fintech in reducing operating inefficiency. Conversely, the interaction between fintech innovation and liquidity ratio has a positive and significant moderating effect, implying that excess liquidity may weaken the efficiency gains from fintech adoption. Research limitations/implications These findings contribute to Islamic bank efficiency theory by emphasizing how fintech innovation influences operational efficiency, particularly through the moderating roles of capital and liquidity ratios. This study highlights the unique challenges faced by Islamic banks in balancing technological adoption with sharia compliance, providing a nuanced perspective on efficiency theory in the context of Islamic finance. Practical implications Practical implications include recommendations for Islamic banks to strategically manage capital and liquidity ratios to maximize the efficiency gains from fintech adoption. Policymakers, including regional financial regulators such as Bank Negara Malaysia, Bank Indonesia, the Monetary Authority of Singapore and other ASEAN financial authorities, can use these insights to design supportive frameworks for technology integration and financial stability. For investors, this study highlights the importance of evaluating a bank’s liquidity and capital structure when assessing its readiness to implement fintech and sustain operational efficiency. Balancing risk management with innovation is essential to enhance efficiency without compromising financial stability. Social implications The adoption of fintech innovation in Islamic banks – particularly when supported by adequate capitalization – can enhance access to affordable and inclusive financial services for underserved populations. In such conditions, improved operational efficiency enables Islamic banks to contribute to economic empowerment, reduce economic inequality and support broader social and sustainability goals in the ASEAN region. This approach strengthens financial inclusion while ensuring that fintech adoption remains aligned with sharia compliance. Originality/value This study provides new insights into how fintech innovation affects the efficiency of Islamic banks, particularly by examining the moderating roles of capital and liquidity ratios. By focusing on Islamic banks in the ASEAN region, this study addresses a notable gap in the literature on Islamic finance and fintech. The findings contribute to the limited body of knowledge by offering a detailed exploration of how Islamic banks can leverage fintech innovation while maintaining compliance with sharia principles.