Despite mounting evidence on the ecological impacts of damming for biodiversity, little is known regarding its consequences in the hyper-diverse Southeast Asian tropical forests. Here we assess the effects of habitat loss and fragmentation on the diversity and activity of insectivorous bats within the hydroelectric Kenyir Lake in peninsular Malaysia. We surveyed bat assemblages on 26 islands and two mainland continuous forest sites using passive acoustic monitoring. Echolocation calls were classified into sonotypes, each corresponding to either one or multiple species, and grouped into foraging guilds. We then examined bat overall assemblage (sonotype richness, activity, and composition), guild- and sonotype-specific activity. From 9360 h of recordings, we identified 16 bat sonotypes, including 10 forest (2854 bat passes), three edge (13703) and three open-space foragers (3651). Sonotype richness increased towards denser canopy structures, as indicated by higher Normalized Difference Vegetation Index values (NDVI). Sonotype composition varied across the gradient of forest area. Forest foragers were positively affected by NDVI and negatively affected by distance to the closest neighbour, whereas edge foragers' activity increased in smaller islands. Of the six sonotypes analysed, the activity of one forest sonotype increased with forest area, while that of one edge sonotype decreased. Ensuring habitat quality within insular forest remnants, in addition to their functional connectivity, maximises bat diversity, including the persistence of forest foraging species. Future hydropower development should therefore avoid the creation of a myriad of small, isolated, and habitat-degraded islands further characterised by altered levels of bat diversity and guild-level activity.