The Iranian Association of Islamic Finance held an international webinar on “Legal and Ethical Challenges of Using AI in Islamic Financial Markets”, on December 14.

Speaker:

Prof. Dr. Nor Razinah Mohd. Zain,

Kulliyyah of Economics and Management Sciences (KENMS), International Islamic University Malaysia

Artificial intelligence or AI is rapidly transforming global financial markets. It is recorded that the value of the AI market stands with a projection of approximately US$189 billion in 2023 to US$4.8 trillion by 2033 (UNCTAD, 2025). The Islamic Financial Market (IFM) is pivotally influenced with this technological trend in adapting AI in their financial services and operations. Generally, AI is defined as “the intelligence of machines or software as opposed to the intelligence of humans. The ultimate goal of AI is to create technology to enable machines to function in an intelligent manner.

AI services are primarily used in the IFM for operational efficiency, risk management, and improving legal compliance and Shariah governance. The most common AI services among Islamic banks include (i) identity verification (67%), (ii) chatbots and virtual assistance (56%), and (iii) digital footprint analysis (44%) (IFSB, 2025).

The integration of AI in Islamic financial markets presents both opportunities and challenges, which can be analysed from macro and micro perspectives. At the macro level, the effectiveness of AI adoption depends on the dynamic interaction among regulators, financial institutions, investors, and customers, as well as the maturity of a country’s legal and regulatory framework. At the micro level, AI adoption hinges on the institutional capacity of individual Islamic financial services institutions (IFIs), particularly their readiness to integrate AI into internal systems while maintaining compliance with existing laws and Shariah principles.

Examples of legal and ethical challenges of using AI can be traced from (i) digital ijtihad or ‘AI’ Fatwa (Islamic rulings), and (ii) AI scammers. In digital ijtihad or ‘AI’ Fatwa, AI acts only as a decision-support tool for qualified muftis or Qadi by analysing sources and simulating reasoning, but lacks the necessary niyyah (intention) and authority to generate a legally or religiously valid Fatwa without human review and validation. Furthermore, the rise of AI Scammers using deepfakes and automated communications presents a growing threat of convincing digital fraud and techno-based financial crime which need a stronger legal enforcement, which may be different from traditional financial crime.

In conclusion, AI may posit possible advantages in enhancing Islamic financial market. Simultaneously, without the regulatory readiness of the IFM itself, AI may open a possible floodgate of potential legal and ethical risks.