Digitalization and Financial Stability: A Comparative Analysis of Islamic and Conventional Banks in Pakistan

Abstract

Digitalization has a significant effect on the financial stability of Pakistan's banking sector. This study analyzes the influence of digitalization on financial stability in Pakistan, comparing Islamic and conventional banks. Using empirical data, it highlights how digital technologies influence risk management, operational efficiency, and overall financial performance. The results provide valuable information for policymakers and banking professionals aiming to strengthen financial stability through digital transformation. In particular, researchers have found that increasing digital channels tends to improve the financial stability of conventional banks, in line with the view that diversifying and efficient digital operations build resilience. In contrast, Islamic banks experience a modest decline in financial stability with rising digitalization, likely due to their promising digital platforms and the distinctive risk-sharing structure of Islamic finance. In sum, the findings indicate that digitalization supports profitability and stability in Pakistani banks, while technology and macroeconomic variables influence Islamic and conventional banks differently.