FinTech adoption and tail risk in MENA Islamic and conventional banks: evidence from expectile-based causality analysis

Abstract

Purpose – This study examines the bidirectional and asymmetric relationship between FinTech adoption and downside banking risk for Islamic and conventional banks across ten MENA countries. It explores whether FinTech development exacerbates or mitigates financial fragility during market stress and whether financial risk, in turn, drives digital innovation. By comparing both banking systems, the study captures how FinTech interacts with different business models, risk-sharing principles and regulatory environments. Design/methodology/approach – A novel FinTech index is constructed using a text-mining approach, while downside banking risk is captured through the expectile value-at-risk (EVaR), a tail-sensitive risk measure. The study employs an expectile-based Granger causality model to detect nonlinear and asymmetric predictive relationships between FinTech and risk under varying levels of market stress (t = 0.01, 0.05 and 0.10). Findings – Results reveal that the FinTech–risk nexus is heterogeneous across MENA countries and bank types. For conventional banks, FinTech tends to amplify downside risk under severe stress in Egypt, Bahrain and Turkey, while in Saudi Arabia and Kuwait it acts adaptively. For Islamic banks, stronger two-way causality emerges in Pakistan and Tunisia, reflecting their asset-backed, participatory structure and sensitivity to technological shocks. Practical implications – The study suggests that policymakers and regulators should adopt flexible, risk-based frameworks that account for the dual nature of FinTech as both a stabilizing and destabilizing force. For Islamic banks, this implies enhancing Sharia-compliant digital governance and cybersecurity standards, while for conventional banks, it underscores the need for improved risk analytics and crisis-response mechanisms. Social implications – Policymakers should adopt flexible, risk-based frameworks recognizing FinTech’s dual role as stabilizer and disruptor. For Islamic banks, enhancing Sharia-compliant digital governance is essential, while conventional banks require stronger analytics and crisis-response tools. Originality/value – This paper is among the first to jointly assess Islamic and conventional banks’ FinTech–stability dynamics in the MENA region using an expectile causality approach.