The Application of Predictive Learning in Islamic Finance

Abstract

Islamic finance, grounded in Shariah principles, prohibits interest (riba), speculative transactions (gharar), and unethical investments while emphasizing risk-sharing, asset-backed financing, and ethical financial practices. With the rapid evolution of financial technology (FinTech), predictive learning—a subset of artificial intelligence (AI) and machine learning (ML)—has emerged as a transformative tool in modern finance. This paper explores the application of predictive learning in Islamic finance, highlighting its potential in risk assessment, credit scoring, fraud detection, portfolio management, and Sukuk (Islamic bonds) optimization. By leveraging large datasets and advanced algorithms, predictive learning enhances decision-making and operational efficiency while maintaining compliance with Islamic financial principles. Predictive models enable Islamic financial institutions to assess creditworthiness using alternative data sources, ensuring financial inclusion while reducing reliance on conventional interest-based credit systems. AI-driven fraud detection mechanisms can monitor transactions in real-time, preventing financial crime while maintaining transparency and regulatory compliance. Predictive learning improves investment strategies through Shariah-compliant robo-advisors and portfolio optimization tools. Integrating AI in Islamic finance poses challenges, including ensuring Shariah compliance in algorithmic decision-making, maintaining data privacy, addressing regulatory concerns, and improving model interpretability. The study highlights the need for ethical AI frameworks tailored to Islamic finance to enhance trust, transparency, and governance. This paper concludes that predictive learning has the potential to revolutionize Islamic finance by improving efficiency, financial inclusion, and risk management. Future research should focus on developing AI-driven solutions that align with Islamic ethical values while advancing financial innovation in the global Islamic finance ecosystem.