Dr. Md. Touhidul Alam Khan :
The advent of artificial intelligence (AI) marks a transformative era in human history, one that transcends traditional frameworks of knowledge and productivity.
Unlike conventional factors of production in economic models, such as those outlined in the Solow growth model, AI represents a paradigm shift in how we perceive and interact with the world.
Its influence extends across all facets of life, reshaping industries, relationships, and even our understanding of ourselves. Islamic finance, a sector deeply rooted in ethical principles and Shariah compliance, is no exception to this sweeping wave of technological innovation.
AI’s integration into Islamic finance is already evident in areas such as commercial banking, insurance, investment management, and project financing. Its potential applications are vast, with an emerging interest in Shariah supervision and auditing.
However, this rapid diffusion demands a robust conceptual framework to ensure that Islamic finance stakeholders can harness AI’s benefits while mitigating its risks.
Without a clear understanding of AI’s foundations and implications, the sector risks falling into a mimetic trap, where the pursuit of technological advancement overshadows the unique ethical and philosophical principles that define Islamic finance.
The need for a conceptual framework
To fully grasp AI’s role in Islamic finance, it is essential to delve into its primary sources and foundational principles. Contrary to popular belief, AI’s origins do not begin with Alan Turing’s seminal 1950 paper, Computing Machinery and Intelligence.
Instead, the works of Claude Shannon, particularly his 1937 article A Symbolic Analysis of Relay and Switching Circuits and his 1948 paper A Mathematical Theory of Communication, provide critical insights. These works reveal that Boolean logic underpins computational engineering and that mainstream AI models operate on statistical signals rather than meaningful messages.
This distinction is crucial for understanding AI’s performative nature, which often prioritizes data-driven outcomes over human wisdom.
For instance, the rise of big data and large language models has given way to what some describe as a “dictatorship of the crowd,” where collective data points overshadow individual reasoning. This trend risks perpetuating superficial interpretations of information, impoverishing users’ language, and obscuring deeper insights.
In the context of Islamic finance, this raises important questions about the compatibility of AI with the sector’s ethical and philosophical foundations. The DIKW Pyramid (Data, Information, Knowledge, Wisdom), a model often used to represent the progression from raw data to actionable wisdom, falls short of addressing AI’s limitations.
While AI excels at processing data and generating information, it cannot cultivate true knowledge or wisdom-qualities that are central to Islamic finance’s emphasis on ethical decision-making and Shariah compliance.
AI’s current applications in Islamic Finance
Despite these limitations, AI has already made significant inroads into Islamic finance. Chatbots and virtual assistants powered by AI are now commonplace, enabling organizations to enhance customer engagement and streamline communication.
Machine learning algorithms are being deployed for risk management, fraud detection, anti-money laundering (AML) efforts, and relationship management. These applications have demonstrated tangible benefits, including faster financial data processing, reduced operational costs, and improved decision-making accuracy.
For example, AI enables Islamic banks to assess loan applicants more efficiently, identifying high-risk individuals or those with insufficient credit histories. Digital applications also allow for personalized financial products, integrating customer data into the decision-making process. Such innovations align with the sector’s goal of fostering financial inclusion while maintaining ethical standards.
Moreover, AI’s potential for automation offers microeconomic advantages, boosting productivity and efficiency across various processes. Studies indicate that companies adopting AI technologies have reported a 40% increase in financial data processing speed and a 30% reduction in operational costs. In the banking sector, over 30% of institutions are leveraging AI to enhance response times, refine recommendation engines, and implement predictive analytics.
Ethical and epistemological challenges
While AI’s benefits are undeniable, its integration into Islamic finance must be approached with caution. The sector’s unique principles-rooted in Shariah injunctions, Maqasid al-Shariah (the objectives of Islamic law), and ethical maxims-demand a nuanced understanding of AI’s capabilities and limitations. One of the primary challenges lies in distinguishing between what is universally applicable in finance and what is specific to Islamic finance.
Historically, Islamic finance has often sought convergence with conventional finance, driven by a desire for similarity rather than differentiation. This trend risks being exacerbated by AI if its adoption is not guided by a solid scientific and ethical foundation.
For instance, the proposal to extend AI applications to Shariah supervision and auditing reflects a misunderstanding of AI’s epistemological limitations. While AI can process vast amounts of data and identify patterns, it cannot replicate the human judgment and wisdom required for Shariah compliance.
The Turing Trap – a concept referring to the replacement of humans by machines in tasks better suited to human intelligence – serves as a cautionary reminder. In Islamic finance, where ethical considerations and human judgment are paramount, over-reliance on AI could undermine the sector’s foundational principles.
A path forward
To navigate these challenges, Islamic finance must develop a comprehensive framework for AI adoption that aligns with its ethical and philosophical values. This requires collaboration between technologists, Shariah scholars, and industry stakeholders to ensure that AI applications enhance, rather than compromise, the sector’s integrity.
Education and awareness are also critical. Stakeholders must deepen their understanding of AI’s technical and epistemological foundations to make informed decisions about its use. By doing so, Islamic finance can harness AI’s potential while safeguarding its unique identity.
AI’s transformative potential in Islamic finance is undeniable, offering opportunities for innovation, efficiency, and inclusivity. However, its adoption must be guided by a clear understanding of its limitations and a commitment to the sector’s ethical principles. As Islamic finance continues to evolve, it must resist the allure of technological mimicry and instead chart a path that reflects its distinct values and objectives. Only then can AI truly serve as a tool for advancing the noble goals of Islamic finance.
(Dr. Md TouhidulAlam Khan is the Managing Director & CEO of NRBC Bank PLC.)
