Modified and Extracted from the book Beyond Fintech: Technology Applications for the Islamic Economy by Hazik Mohamed recently published by World Scientific Publishing Co Pte Ltd.
It is clear that the digital revolution in financial services is under way, and digital disruption has the potential to shrink the role and relevance of today’s banks, while simultaneously creating better, faster, cheaper services that will be an essential part of everyday life in the new economy.
Over the last decade, disruptive innovation in financial services has emerged from financial technology (Fintech) start-ups. These new firms have been quicker than banks to take advantage of advances in digital technology, developing banking products that are more user- friendly, cost less to deliver and are optimised for digital channels.
In this paper we look at the main building block to enable trust in impersonal financial transactions in a highly globalized society. This innovation called the blockchain will play a crucial role in boosting the financial sector (banking, insurance, investment, etc.) including the Islamic Finance sector. Addressing the digital revolution that is happening right now will foster competitive advantage for the Islamic Finance industry.
Advanced Artificial Intelligence
Artificial Intelligence (AI) is a highly evolved area of computer science that strives to create intelligent machines that can replicate certain human behaviour without its irrationalities for better predictability and consistency.
Advanced AI that utilizes machine learning, enables machines to ‘learn’ from previous data (experience), adjust to new inputs (instructions) and perform tasks through updated algorithms. Through sophisticated algorithms, modern AI systems can be guided to undertake specific tasks by handling huge quantities of data, obtaining insights and recognizable patterns in the data to actupon.
As such AI has become a hot topic, with much interest on its advantages to the digital economy, especially in the highly regulated financial services industry. McKinsey Global Institute estimates that, even with incomplete adoption by 2030, the technology could add US$13 trillion to the world’s economy. This would represent a greater relative contribution to prosperity than those brought by such transformative technologies as steam engines in the 1800s and the rapid spread of IT in recent decades (The EIU, 2019).
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Similarly, blockchain technology also has the potential to both enrich and improve economic processes and management systems, and progressive corporations have invested and devoted resources to utilize and incorporate blockchain into their businesses.
It is clear today that the digital revolution in every sector of the economy is under way, and the world should recognize that these technological advancements are essentially aligned to the principles of the theology that requires and upholds the values of trust, honesty and transparency. For example, the blockchain poses as one of the main underlying components to enable trust in impersonal economic transactions across highly globalized societies.
For one, it will undoubtedly play a crucial role in boosting traceability for fraud prevention. There is a very strong case for decentralized models—for instance, the internet decentralized information and established the Information Age. Blockchain systems along with AI and IoT integration will be the backbone of large-scale implementations of decentralization models, conceived and executed to ascend the intricate multidimensional levels of human activity, including those that are still evolving, which could further establish the Moral Economy. Progressing towards decentralization of economic transactions would make future economic activities less restrictive and increase efficiency.
Centralized systems may exist on top of the decentralized system, but they will be few and will act as forms of governance or administrators.
There is a growing realization of AI+blockchain’s importance, including its “ability to provide competitive advantage and change work for the better. A majority of global early adopters say that AI technologies are especially important to their business success today” (Deloitte Insights, 2019).
Many experts predict that AI+blockchain technology “will exert an enormous impact on economic development and the nature of work which will radically reshape the competitive dynamics of many industries”. Because of this, many leaders believe that using these technologies will move them ahead of their competition, and that AI empowers their workforce.
It is no wonder that governments are rushing to foster AI+blockchain investment, “establish coursework and education programs, pursue specialization, research and development to support businesses within their borders. Numerous nations have developed AI strategies to advance their capabilities, through investment, incentives, talent development, and risk management”.
“Organizations often must excel at a wide range of practices to ensure [AI+blockchain] success, including developing a strategy, pursuing the right use cases, building a data foundation, and cultivating a strong ability to experiment.
These capabilities are critical now because, as [AI+blockchain] becomes even easier to consume, the window for competitive differentiation will likely shrink.” (Deloitte Insights, 2019). An MIT Sloan and Boston Consulting Group joint research (Ransbotham et al, 2017) revealed “large gaps between today’s leaders – companies that already understand and have adopted AI – and laggards.One sizeable difference, they found, is their approach to data. AI algorithms are not natively ‘intelligent’. They learn inductively by analyzing data.
While most leaders are investing in AI talent and have built robust information infrastructures, other companies lack analytics expertise and easy access to their data”. Their research uncovered“several misunderstandings about the resources needed to train AI. The leaders not only have a much deeper appreciation about what is required to produce AI than laggards, they are also more likely to have senior leadership support and have developed a business case for AI initiatives”.
Enthusiasm and experience vary among early adopters from different countries—some are pursuing technology spiritedly, while others are taking a more restrained approach. In some cases, adopters are employing AI+blockchain to improve specific processes and products; others are harnessing this combination of technologies to transform their entire organization.
Regardless of countries’ technology maturity level, we learn from their approaches that by examining countries’ challenges and how their corporations are addressing them, we can garner some essential best-known practices. For example, leaders in some countries are more concerned about addressing skill gaps, while others are focusing on how AI can improve decision-making or cybersecurity capabilities.
There are many paths to technological excellence, and success is not a zero-sum game. Scrutinizing early adopters through a global lens enables a broader perspective for a more balanced approach on their advanced tech-powered journey.
Moving forward, nations and their governments should continue to invest in AI+blockchain and monitor the technology’s ongoing impact on their societies.
All businesses should continue to improve their AI+blockchain capabilities and install a Big Data Analytics department in their organizations which will be central to their competitiveness.
Both will continue to feel a sense of urgency and anxiety as they try to keep up with the rapid pace of tech-driven developments around the world. As such, organizations should contemplate these critical questions when evaluating their own AI and blockchain competitive strategies:
- Should they make small, incremental investments or try to position themselves as AI and blockchain leaders through enterprise-wide initiatives?
- Is it better to develop existing talent or seek talent externally? How do they nurture them?
- How is data viewed, used and analyzed for competitive advantage?
- When considering the inherent risks associated with AI and blockchain, should organizations face the complexities to be first-to-market or take a more cautious wait-and-see approach?
- Do they have adequate security measures in place?
Technology as a Moral Agent
Artificial intelligence, blockchain and other potentially disruptive technologies form the crucial innovation, structural and institutional foundation for, not only economic development, but also moral development and practical ethics.
The integration of blockchain and AI into a decentralized intelligence system has profound possibilities to employ data in innovative ways. An effective amalgamation of both technologies will enable faster and seamless data management, validation of transactions, detection of illegal activities, amongst others.
Good governance is a crucial issue in strengthening the performance of social institutions, viz charities and such foundations and those pertaining to inheritance and wealth distribution. Although past research has found that good governance in these institutions has been well implemented in some respects, they, however, have not been implemented comprehensively.
As a public organization, the performance of social institutions especially in management and service are the benchmark for the growth of public trust. The principles of accountability, duty, justice and transparency are the foundation of shaping the framework in achieving good governance in all public institutions. The ability to audit and monitor the movement and transfer of assets to the intended beneficiaries is crucial in dispensing the duty of the authorities, and subsequently establishing trust and improving social capital between citizens and governing authorities.
Technologies like the blockchain and AI can operationalize the transparency and accountability that is required of important social institutions that govern the dispensation of inheritance law (pertaining to estates, wills and trusts), and the management and distribution of endowment and the various forms of charities in order to eradicate poverty, circulate wealth, enhance micro, smalland large scale infrastructure for social and economic development, and thus share prosperity for a just social system that enables a more secure and sustainable economy.
Reshaping Financial Landscapes
In an era of disruption to long-standing economic and governance institutions, digital technologies can reinforce increased use and broader adoption of mobile apps and intelligent systems for traditional social institutions too. The many digital innovations that have helped reshape the financial landscape can help to remove friction, human errors, fraud and other agency risks from all of the essential steps of charities and other social institutions.
The ability to audit and monitor the movement and transfer of assets to the intended beneficiaries is crucial in dispensing the duty of the authorities, and subsequently establishing trust and improving social capital between citizens, public institutions and the governing authorities. Providing the public with the appropriate information and the performance of charitable or endowed assets are mechanisms where the entrusted authorities can continually improve on to gain support from the public in obligatory charitable contributions and voluntary endowments.
The fall of public trust will result in diminishing pools of endowment assets and reduction in charitable collections which are critical sources of funds for socio-economic development of disadvantaged communities. The challenge of theological morality for technology lies in its human creator and not the responsibility of the created; unlike humans, who were created with the choice to uphold moral responsibility by its Creator.