ADVANCING RADICAL INNOVATION IN INDONESIA’S SHARIA BANKING INDUSTRY THROUGH INTELLECTUAL CAPITAL AND KNOWLEDGE ABSORPTIVE CAPACITY

Abstract

Sharia finance remains suboptimal in distributing working capital loans due to the limited features of its financing products compared to conventional banks. This gap underscores the urgent need to develop radically innovative Sharia banking products that enable Sharia banks to compete with conventional banks and highlight their offerings' distinctiveness. This study examines the relationship between knowledge potential, realized absorptive capacity, intellectual capital (IC), and radical innovative performance, forming a strategic framework to advance the Sharia banking industry. Grounded in the Resource-Based View (RBV) theory, the authors propose that knowledge potential and realized absorptive capacity serve as mediators, linking IC to radical innovative performance. Employing data collected from 234 valid questionnaires across Sharia Bank sites in Indonesia, the findings reveal that IC, mediated by absorptive capacity, significantly enhances radical innovative performance in Indonesia's Sharia banking sector. Furthermore, the study extends RBV theory by demonstrating how IC drives innovation through serial mediation of absorptive capacity variables. By integrating knowledge management, aligned governance, and technological investments, Sharia banks can sustainably innovate and preserve competitiveness, thereby shaping the future of the Islamic finance landscape.