Balancing ethics and innovation: Impact of AI on Islamic financial services

Artificial intelligence (AI) is reshaping Islamic financial services by merging ethical principles with cutting-edge technology, addressing long-standing challenges in compliance, portfolio optimisation, and financial inclusivity.

This synergy is particularly evident in the Gulf Cooperation Council (GCC) markets, where frameworks like Saudi Arabia's Vision 2030 are accelerating AI adoption.

Below, we explore key trends and their implications, supported by insights from leading industry reports and academic studies.

Automating Sharia compliance

One of AI's most transformative applications lies in facilitating Sharia compliance processes. AI algorithms can now screen investments for prohibited activities, such as interest-based transactions or ventures linked to alcohol and gambling, with greater transparency compared to manual audits.

For instance, natural language processing (NLP) tools analyze contractual clauses in real time, reducing human error in Saudi Islamic banks. 

Ethical portfolio optimization

AI-driven predictive analytics are refining portfolio management for Shariah-compliant investment managers by aligning investments with environmental, social, and governance (ESG) criteria.

Arabesque AI is integrating ESG metrics with Sharia compliance, using machine learning to screen global equities for both ethical and financial performance. Alphalytix is using machine learning optimised portfolios that have shown promising performance in emerging markets in the Muslim world.

Retail investors will benefit from upcoming platforms like HalalStocks.Co, which combines screening for Shariah compliance, ESG risk, and BDS criteria with algorithmic portfolios for the US markets.

Vision 2030: A catalyst for AI adoption

Saudi Arabia's Vision 2030 has positioned the kingdom as a leader in ethical fintech, with a number of Islamic finance providers now using AI for compliance and customer service.

The Saudi Central Bank (SAMA) attributes this growth to national AI strategies, which have increased retail banking participation through chatbots and mobile apps.

Challenges and the path forward

Despite progress, hurdles persist. The lack of standardized Shariah datasets limits AI portability and consistency of application while ethical concerns around algorithmic bias necessitate new frameworks for AI powered Fiqh.

A 2024 International Journal of Islamic Finance analysis emphasizes the need for cross-border collaboration to harmonize AI governance standards.

AI's role in scaling ethical services while preserving core principles will define the sector's next decade. The integration of AI technologies promises to enhance operational efficiency, improve risk management, and ensure stricter Shariah compliance.

However, the successful adoption of AI in Islamic finance will require overcoming challenges such as high implementation costs, insufficient structured Shariah datasets, and the need for specialized AI training.

The Global Islamic Fintech Report 2024/25 can be downloaded here.