Islamic Business Ethics Confronting the Wave of AI in Sharia Finance

Have you ever imagined that the decision on whether you qualify for financing from an Islamic bank might be determined not by an account officer, but by an algorithm working in seconds? That is what is happening now in many Islamic financial institutions. Artificial Intelligence, or AI, has entered workspaces once considered deeply human, from financing risk assessment and suspicious transaction detection to robo-advisory services for Sharia-compliant investments.

This development is actually good news. The Islamic finance industry has often been criticised for being less efficient than conventional banking. AI promises faster processes, lower operational costs, and broader service reach, including to communities previously difficult for formal banking to access. But behind this efficiency, a question arises that cannot be answered by technology alone: the question of ethics.

The Problem Is Not About Sophistication

Business in Islam has never been judged by how sophisticated its methods are, but by how just and honest its processes are. There are fundamental principles always upheld: the prohibition of riba, the prohibition of maysir or harmful speculation, the prohibition of gharar or uncertainty, and the obligation to safeguard maslahah or the common good. The question now is whether the AI algorithms used by Islamic financial institutions are truly designed with these principles in mind, or whether they merely mimic systems from conventional banks and then attach a Sharia label on top.

The most obvious example lies in AI-based credit scoring systems. Many Islamic financial institutions adopt customer creditworthiness assessment models originally developed for the conventional market. Such models are typically trained on historical data full of socio-economic bias. If past data shows that people in a certain area more frequently default due to structural factors like lack of access to education or economic inequality, the algorithm might conclude that the entire group is high risk. Consequently, a person who is actually honest and capable of paying could be rejected simply for resembling the pattern of previous default data. In the technology world, this is called algorithmic bias, and in fiqh terminology, we can liken it to the issue of injustice, because a party is harmed without any fault of their own.

A New Version of Gharar: When Customers Do Not Understand How the System Works

The concept of gharar is usually understood in the context of transactions where the object is unclear. But in the AI era, gharar can emerge in another form: the opacity of the decision-making process. Many AI systems, especially those based on deep learning, work like a black box. Even their developers sometimes cannot explain in detail why the system made a particular decision for one customer and a different decision for another with a similar profile.

Imagine a small entrepreneur applying for murabahah financing who is then rejected by an automated system, with no understandable explanation other than a brief notification in the app. The customer does not know what factors led to the rejection, and the bank officer sometimes can only relay the system’s result without being able to unpack its logic. Such a situation clearly contradicts the spirit of openness always emphasised in Islamic muamalah. A just transaction requires both parties to understand the basis of the agreement, not merely to accept the result of a non-transparent process.

Robo-Advisory and the Question of Responsibility

Another challenge arises with robo-advisory services for Sharia investments, which are increasingly popular among young people through various Islamic mutual fund and stock applications. These systems provide portfolio recommendations based on the user’s risk profile. The problem is, who is responsible if the recommendation turns out to be detrimental to the customer because the algorithm misread market conditions or incorrectly categorised someone’s risk profile?

In fiqh muamalah, the principle of responsibility, or dhaman, is always attached to the party giving advice or carrying out a trust. But when the recommendation comes from a machine, this line of responsibility becomes blurred. Does the responsibility lie with the system developer, the financial institution using the system, or the Sharia Supervisory Board that approved the product? To date, the legal framework and fatwas regarding this matter are still very limited, even though its use is already widespread in the field.

Not About Rejecting Technology

It is important to underline that this writing does not intend to reject the presence of AI in Islamic finance. On the contrary, AI has great potential to expand Sharia financial inclusion, speed up the process of screening stocks according to Sharia principles, and help with the early detection of transactions containing elements of hidden riba or money laundering. What is needed is not rejection, but a clear ethical framework so that this technology truly serves Sharia principles, rather than merely using its label.

Several concrete steps can begin to be considered together. First, Islamic financial institutions must ensure that the data used to train AI has been cleansed of biases that could potentially harm certain community groups. Second, there needs to be a Sharia audit mechanism that specifically targets the algorithmic system, not just its products and contracts as is commonly done now. Third, regulators and the National Sharia Board need to start drafting more specific guidance on algorithmic transparency and the limits of responsibility when AI is used in financial decision-making.

Conclusion

Islamic business ethics always emphasise that the ultimate goal of every transaction is the common good, not merely profit and efficiency. AI can indeed make Islamic finance operate faster, but it must not make it lose its soul.