Artificial Intelligence and Shariah Governance in Islamic Finance: Institutional Design, Value Creation, and Risk Management

Abstract

This study examines the institutional, ethical, and governance implications of artificial intelligence (AI) adoption in Islamic finance, with a particular focus on Shariah governance, value creation, and risk management. Drawing on a qualitative and conceptual analysis of existing literature, regulatory standards, and Shariah governance frameworks, the paper conceptualises AI not merely as a technological innovation but as a governance-transforming force within Shariah-compliant financial systems. The findings indicate that AI integration necessitates a reconfiguration of traditional Shariah governance structures, moving from ex post product approval toward continuous, lifecycle-based oversight that embeds Shariah principles into algorithm design, deployment, and monitoring. In terms of value creation, AI enhances operational efficiency, risk assessment, and financial inclusion while supporting ethical objectives aligned with maqasid al-shariah, particularly when explainable and human-in-the-loop models are adopted. However, these benefits are contingent on robust governance arrangements that prevent the erosion of moral judgment and institutional accountability. The analysis further reveals that AI introduces new Shariah-specific risks, including algorithmic opacity, data bias, and accountability gaps, which may undermine transparency, fairness, and trust if left unaddressed. Overall, the study demonstrates that the impact of AI in Islamic finance is fundamentally mediated by governance quality. It contributes a holistic institutional perspective that integrates Shariah governance, AI ethics, and risk management, offering policy-relevant insights for regulators, Shariah scholars, and practitioners seeking to balance technological innovation with ethical and religious integrity.