The impact of digital literacy on the performance of Islamic banks in the ERA of fintech and digital banking transformation

Abstract

This study examines the pivotal role of digital literacy in influencing both the adoption of fintech technologies and the performance of Islamic banks, with a particular focus on financial institutions operating in Bahrain and Pakistan. Drawing from a sample of 125 employees working in Islamic banks, the study employed a stratified random sampling technique to ensure representative participation across gender, job levels (managerial, non-managerial), and technical roles (IT specialists). The structured questionnaire was designed based on validated instruments from the Technology Acceptance Model (TAM) and the Balanced Scorecard framework. Data were analyzed using SPSS and SmartPLS to conduct Structural Equation Modeling (SEM). The findings reveal a statistically significant and positive relationship between digital literacy and fintech adoption (β = 0.525, p < 0.001), as well as between fintech adoption and the performance of Islamic banks (β = 0.507, p < 0.001). Additionally, digital literacy directly enhances bank performance (β = 0.171, p < 0.001), while fintech adoption partially mediates this effect (indirect β = 0.267, p < 0.001). These results validate all four hypothesized paths and underscore the necessity of treating digital literacy as a strategic resource rather than a support function. The study contributes to theoretical discourse by integrating the Technology Acceptance Model (TAM) and Resource-Based View (RBV), and it fills a notable gap in the Islamic finance literature by empirically linking human digital capability with institutional outcomes in a faith-driven banking model.