The Nexus of Technological Innovation and Institutional Quality in Shaping the Future of Islamic Finance
DOI:
https://doi.org/10.38073/aljadwa.4578Keywords:
Islamic Finance, Technological Innovation, Institutional QualityAbstract
The development of Islamic finance has become increasingly important in supporting financial inclusion and economic growth in Indonesia. However, the sustainability of its growth is closely related to technological innovation and institutional quality. This study aims to examine the short-run and long-run effects of technological innovation and institutional quality on the development of Islamic finance in Indonesia. Using a quantitative approach, this study employs annual time-series data from the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC), the World Bank, and the Worldwide Governance Indicators (WGI) for the period 2011–2024. The Autoregressive Distributed Lag (ARDL) model is applied to analyze both short-term and long-term relationships among the variables. The results indicate that technological innovation has a positive and significant effect on Islamic finance development in both the short and long run, suggesting its role in improving efficiency, expanding financial access, and strengthening the digital Islamic finance ecosystem. In contrast, institutional quality significantly influences Islamic finance development only in the short run, while its long-run effect is insignificant. These findings imply that technological advancement is a key driver of sustainable Islamic finance growth, whereas institutional improvements require continuous structural reforms to generate lasting impacts. This study contributes to the literature by providing empirical evidence on the dynamic roles of technology and institutions in Indonesia’s Islamic finance sector.
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