TECHNOLOGICAL DISRUPTION AND THE THREAT TO ISLAMIC BANKING MARKET SHARE IN ACEH: EVALUATING THE ENFORCEMENT OF QANUN LKS NO. 11/2018

Abstract

The Islamic banking industry in Aceh plays a strategic role as the backbone of the regional financial system, especially after the enactment of the Sharia Financial Institution (LKS) Qanun No. 11 of 2018 which requires all financial institutions to operate exclusively based on sharia principles. Normatively, this regulation is expected to be able to strengthen the market share of Islamic banking. However, empirical evidence shows that despite almost fully controlling banking assets, Islamic banks in Aceh still face ongoing challenges in digital penetration, financial inclusion, and competition with fintech. This study aims to examine two main challenges faced by the banking industry in Aceh, namely: the effectiveness of the enforcement of Qanun LKS and the impact of technological disruption on the market share of Islamic banking in Aceh. This refers to the theory that technology can influence customer loyalty which will lead to an increase in the market share of Islamic banking by using an explanatory quantitative approach, data was collected from 120 respondents through purposive sampling and analyzed using Structural Equation Modeling with WarpPLS. The results showed that technological disruption did not have a significant direct effect on the market share of Islamic banking (β = –0.112, p > 0.05). However, the moderation effect of Qanun LKS enforcement was shown to significantly weaken the relationship (β = –0.152, p < 0.05). Factors that affect the market share of Islamic banking are financial literacy, service innovation, and customer trust. This research contributes to the literature by highlighting the paradox between regulatory enforcement and technological disruption in a fully sharia-based financial ecosystem. The findings of this study reveal a paradox in the implementation of Qanun LKS No. 11 of 2018 in Aceh. Normatively, this qanun is supposed to strengthen the dominance of Islamic banking, but the results of the analysis show that the stricter enforcement is carried out, the more market share is under pressure. This happens because the limitations of digital services and the flexibility of Islamic bank products encourage people to switch to more innovative non-bank fintech. This is contradictory, technology should have a significant effect on increasing the market share of Islamic banking, especially supported by the existence of Qanun about Islamic financial institutions, but in reality technology and Qanun cannot increase the market share of Islamic banking in Aceh. These findings confirm that regulation alone is not enough to expand the market; synergy between qanun enforcement, digital transformation, financial literacy, and service quality improvement is needed so that Islamic banking in Aceh is able to maintain its market share sustainability in the midst of technological disruption. This finding actually enriches the insight that the fintech capabilities of Islamic banking are still laggard compared to conventional banks, causing its influence on the increase in market share to be limited.