In conventional banking, AI applications are widespread – algorithmic trading, credit scoring, and chatbots handle vast amounts of data to streamline operations. However, Islamic finance must ensure that these tools do not inadvertently facilitate prohibited activities.
By SHIRAAJ BUZIEK
THE rapid rise of artificial intelligence (AI) in banking and finance has left no sector untouched – including Islamic finance.
As South Africa’s financial institutions increasingly adopt AI-driven solutions for risk assessment, fraud detection, and customer service, a critical question arises: Can AI be used in Islamic finance, and does it need to be vetted for Shariah compliance?
With AI’s potential to enhance efficiency and reduce costs, the Islamic finance industry – valued at over $3 trillion globally – must carefully navigate its adoption. Unlike conventional finance, Islamic finance operates under strict ethical and religious guidelines, prohibiting riba (interest), gharar (excessive uncertainty), and investments in non-halal sectors. This raises key concerns: Can existing AI models be used as-is, or does the industry need to develop its own ‘Islamic AI’?
AI in conventional vs Islamic finance
In conventional banking, AI applications are widespread – algorithmic trading, credit scoring, and chatbots handle vast amounts of data to streamline operations. However, Islamic finance must ensure that these tools do not inadvertently facilitate prohibited activities.
Here are some examples:
- Algorithmic trading:
AI-driven high-frequency trading may involve speculative behaviour (maysir), which is prohibited in Islam.
- Credit scoring:
AI models trained on conventional loan data may rely on interest-based metrics, making them unsuitable for Islamic banks.
- Fraud detection:
While permissible, AI systems must ensure they do not discriminate unfairly, aligning with Islamic principles of justice (adl).
Does AI need Shariah compliance vetting?
The short answer: Yes. Just as fintech products in Islamic banking undergo Shariah audits, AI models must be scrutinised to ensure alignment with Islamic law.
Key considerations for AI in Islamic finance
- Data Sources:
AI relies on historical data. If this data comes from interest-based transactions, the output may be tainted.
- Decision-making transparency:
Many AI models operate as ‘black boxes,’ which conflicts with Islam’s emphasis on transparency and accountability.
Ethical AI governance: Avoiding bias and ensuring fairness aligns with Islamic finance’s social justice principles.
AI, like any technological tool, should align with the objectives of Shariah (Maqasid al-Shariah). When used to automate halal transactions, strengthen risk-sharing mechanisms, or promote financial inclusion, it can provide meaningful benefits. However, if it leads to exploitation, injustice, or uncertainty, it becomes ethically problematic under Islamic principles
Do we need a dedicated ‘Islamic AI’?
Some scholars argue that existing AI can be adapted with proper oversight, while others believe a purpose-built Islamic AI framework is necessary.
Potential approaches
- Adapting existing AI:
Islamic banks can modify AI models by training them on Shariah-compliant datasets and ensuring algorithms avoid prohibited elements.
- Developing Islamic AI:
A dedicated AI system could be designed from the ground up, incorporating Islamic finance principles into its core logic.
South Africa’s Al Baraka Bank has already begun experimenting with AI-driven Sukuk (Islamic bond) structuring, while other institutions are exploring AI for Takaful (Islamic insurance) risk modelling. However, industry-wide standards are still lacking.
Regulatory and industry response
Globally, bodies like the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) are beginning to address fintech and AI. In South Africa, the Islamic Finance Board (IFB) and fintech startups are advocating for Shariah-compliant AI governance frameworks.
The discussion around AI in Islamic finance goes beyond simply determining whether it is halal or haram; the focus is on how to harness it responsibly. Achieving this requires collaboration among scholars, technologists, and regulators to establish clear and effective guidelines.
The Road ahead for South Africa
As one of Africa’s leading Islamic finance hubs, South Africa is well-positioned to pioneer ethical AI in banking.
Key steps include:
- Establishing Shariah-compliant AI standards:
Regulatory bodies should define permissible AI use cases.
- Encouraging Islamic Fintech innovation:
Startups should develop AI tools tailored for murabaha, mudaraba, and other Islamic contracts.
- Enhancing transparency:
AI decision-making processes must be explainable to comply with Shariah principles.
Conclusion
AI presents immense opportunities for Islamic finance in South Africa – but only if implemented with rigorous ethical and Shariah oversight. The industry does not necessarily need a wholly new ‘Islamic AI’, but it does require careful adaptation and governance to ensure compliance. As fintech evolves, the intersection of AI and Islamic finance will be a critical space to watch, blending cutting-edge technology with timeless ethical principles.
Shiraaj Buziek is with the Islamic Banking and Finance division of MuslimFin, a fintech business that is specifically focused on educating and directing Muslims and non-Muslims on Shariah-compliant finance. For more information visit muslimfin.com
