Technology Investment Intensity and Financial Performance of Islamic Banks in Indonesia

Abstract

Financial performance in Islamic banks is influenced not only by financing structures but also by banks’ ability to develop technological capabilities that strengthen information management, monitoring, and financing risk management. This study examines the effects of musharakah, mudarabah, murabaha, ijarah, and istisna financing on Islamic banks’ financial performance and investigates the role of Technology Investment Intensity (TII) as a mediating mechanism in profit-sharing financing. The study employs an unbalanced panel dataset comprising 120 bank-year observations from 10 Islamic commercial banks in Indonesia over 2012–2022. Financial performance is proxied by Return on Assets (ROA), while TII is measured as the ratio of capital expenditure to total assets. Panel data regression with bank-specific and year fixed effects is employed, while mediation effects are assessed through indirect effects using 95% bootstrap confidence intervals. The results show that musharakah, murabaha, and ijarah financing have positive and significant effects on ROA, whereas mudarabah and istisna financing have no significant direct effects. Musharakah and mudarabah financing positively and significantly affect TII, which positively and significantly affects ROA. TII does not mediate the musharakah ROA relationship but significantly mediates the mudarabah–ROA relationship. These findings indicate an asymmetric technology-mediated performance mechanism contingent on financing contract characteristics.