International Journal of Islamic Economics and Finance (IJIEF)

A Proposed Mathematical Model to Assess the Potential Impact of Generative AI Adoption in Islamic Financial Institutions

Hassnian Ali — 2025-01-28

As the financial industry increasingly adopts advanced technologies, Islamic financial institutions (IFIs) face both opportunities and challenges in integrating innovations such as Generative AI within Sharia-compliant frameworks. This study develops a comprehensive mathematical model to assess the potential impact of Generative AI adoption in Islamic financial institutions (IFIs), focusing on operational efficiency, regulatory compliance, financial inclusion, competitive advantage, and adherence to Sharia law. The model integrates economic theories, such as Diffusion of Innovation Theory, Endogenous Growth Theory, and Principal-Agent Theory, with Islamic finance principles, addressing how AI can enhance decision-making, automate compliance processes, and optimize financial services while mitigating risks like riba (interest) and gharar (excessive uncertainty). A key contribution of this study is its game-theoretic framework, which demonstrates that early adopters of Generative AI in IFIs gain strategic advantages, such as cost reductions, enhanced compliance efficiency, and increased market share, whereas late adopters face diminishing returns and competitive disadvantages. The study also underscores AI’s role in financial inclusion, aligning with Maqasid al-Sharia by expanding access to Sharia-compliant financial services for underserved populations. Additionally, the study examines the regulatory implications of AI integration in Islamic finance, emphasizing the need for Sharia supervisory boards and regulators to establish ethical AI governance frameworks. The model provides quantitative insights into how IFIs can strategically leverage AI adoption, ensuring both efficiency and ethical compliance. Ultimately, this research contributes to the evolving literature on technological innovation in Islamic finance, offering valuable guidance for practitioners, policymakers, and regulators.

The Interplay of Education and Age on Happiness: Bridging Analysis with Islamic Values

Rakhmawati Rakhmawati — 2025-01-28

Building upon the growing interest in the determinants of subjective well-being (SWB), this study analyzes the interaction between education and age on subjective well-being (SWB) in Indonesia. The novelty of this research lies in the finding that the relationship between age and SWB depends on education. This finding has yet to be widely discussed in the literature on the relationship between age and SWB, which mostly concludes that age and SWB exhibit a U-shaped pattern. Happiness, the dependent variables, is used as proxy for SWB. The data is the latest wave of the Indonesian Family Life Survey (IFLS), provided by RAND Corporation. Generalized ordinal logistic regression, or the partial proportional odds model, is employed as the estimation method, considering the ordinal nature of the dependent variables in this study and the violation of the proportional odds assumption. The findings indicate that increased level of education strenghten the positive the relationship between age and SWB, up to a certain point. However, the results suggest that for individuals with higher levels of education, the probability of feeling very unhappy may increase with age, particularly after age 70. Based on the findings, it is recommended that policies aim to provide educational opportunities for individuals, especially in their earlier years, to promote well-being and reduce the likelihood of negative outcomes such as feeling very unhappy in later life. From an Islamic perspective, the balance between worldly knowledge and spiritual well-being is emphasized. As individuals age, particularly those with higher education, managing expectations becomes crucial. Islam encourages individuals to be content (shukr) with their life circumstances and to find peace in their trust in Allah (tawakkal). This study found that religiosity and contentment significantly influence happiness. Therefore, policies should focus on educational opportunities and integrate support for spiritual well-being, helping individuals cultivate gratitude and inner peace as they age.

The Effect of Real Business Cycle on Islamic Capital Market Resilience in Indonesia

Muhammad Yusuf Ibrahim — 2025-01-28

In an era of increasing economic volatility and financial uncertainty, understanding the impact of the Real Business Cycle (RBC) on the Islamic Capital Market (ICM) is crucial for enhancing the resilience of Islamic financial systems, which are increasingly significant in global finance. This research is important because understanding the impact of the Real Business Cycle (RBC) on the Islamic Capital Market (ICM) is crucial for enhancing the resilience of Islamic financial systems, which are increasingly significant in global finance. The research aims to investigate the extent of co-movement and the effect of the Real Business Cycle (RBC) on the Islamic Capital Market (ICM) in Indonesia. The methodology begins with the Hodrick-Prescott (HP) Filter to identify trends and cycles in the RBC and ICM data. Next, cross-correlation analysis is used to measure the co-movement between the two, determining how RBC fluctuations affect the Islamic capital market. Finally, the Vector Autoregressive (VAR) and Vector Error Correction Model (VECM) are applied to explore both the short-term and long-term causal relationships between RBC and ICM, offering insights into immediate and persistent effects on the market. The findings reveal a significant relationship between Real Business Cycle (RBC) indicators and the Islamic Capital Market (ICM), with notable shifts in investor behavior and varying impacts of GDP, unemployment, and exchange rates on Islamic financial instruments like Jakarta Islamic Index (JII) and Sukuk.

The Determinants of Islamic Rural Banks’ Efficiency in Indonesia

Wahyu Wastuti — 2025-01-28

Given the critical role of Islamic Rural Banks (IRB) in supporting financial inclusion and economic stability in Indonesia, this research urgently highlights the need for strategic improvements in IRB efficiency to ensure sustainable growth and resilience in the face of economic uncertainties. This research aims to assess the effectiveness of Islamic Rural Banks (IRB) in Indonesia. In the second phase, the study examines the impact of Risk Profile, Good Corporate Governance (GCG), Earnings & Capital (RGEC) factors on IRB efficiency. Additionally, the research analyzes the influence of the Maqasid Sharia Index (MSI) on IRB efficiency. The methodology involves employing Data Envelopment Analysis (DEA) followed by a Multinomial Logistic Regression test, using a sample of 119 IRB across Indonesia. The research period of this article is from the fourth quarter of 2019 to the fourth quarter of 2021. The DEA results categorize 516 and 693 data observations as high efficiency for intermediation and production approaches, respectively. Risk Profile factors (NPF & FDR) significantly affect IRB efficiency. GCG factors, specifically Board of Directors’ Ownership & Board of Commissioners’ Ownership, have a significant impact on IRB efficiency, but only in the intermediation approach. Earnings, represented by ROA, significantly influence both approaches, while ROE yields opposite results. Capital, represented by CAR, significantly affects the intermediation approach. The Sharia factor, MSI, demonstrates a significant impact on IRB efficiency in both intermediation and production approaches. These findings serve as an academic reference for IRB managers, guiding decision making to enhance efficiency in the future.

Is There a Proclivity Among Muslim Millennials to Engage with Sharia Digital Pawnbroking Services?

Windari — 2025-01-28

PT. Pegadaian has recorded increased digital application users, especially Sharia digital pawnshop service. This study examines the primary elements that enable using Sharia pawnshop digital service applications. Modeling UTAUT technology adoption as an approach to this investigation and providing trialability and efficiency to assess objectives to employ digital service Sharia pawnshop tools. The data was acquired from 218 millennial Muslims in Indonesia using a questionnaire. This research relies on AMOS Partial Least Squares Structural Equation Modelling (PLS-SEM) to forecast a collection of latent variable indicators generated through numerous dimensions and indicators. Statistically, millennial Muslims' desire to benefit from virtual Sharia pawnshop services is substantially impacted by circumstances of facilitation, trialability, and efficiency. The foundation of the UTAUT model (performance expectations, effort expectations, and social impact) has not been able to nurture the desire to comply with the digital service Sharia pawnshop platform. Then, the purpose of use immensely impacts the behavior of utilizing online resources in Sharia pawnshop applications. This study reveals untapped areas of trialability and efficiency, notably technology adoption. Sharia internet pawnshop services are relatively new, which is why these two factors are used. PT Pegadaian Shariah (Pawnshop Shariah - Persero) must scrutinize its operation so that lapses do not arise and make consumers feel safer conducting transactions using this application. Remember that the Sharia Digital Pawnshop Service (PSDS) aims to broaden the target market, particularly the millennial generation, and the market competition.

Exploring Green Banking Performance of Islamic Banks in Indonesia

Dwi Retno Widiyanti — 2025-01-28

The sustainable movement in the financial sector, known as green banking, has emerged as a global standard that obligates the financial industry to adhere to social and environmental responsibilities. Indonesian Islamic banks' green banking initiatives are examined in this study. Green Banking Disclosure Index (GBDI) indicators for 13 Islamic commercial banks were collected from their five-year sustainability reports. Bose et al. (2018)'s 21 GDBI indicators were thoroughly analyzed. Jeucken's typology measurement showed banks' four-stage movement from defensive and preventative to aggressive and "sustainable" in 2004. Jeucken's Typology of Banking and Sustainable Development functioned as the assessment framework for evaluating green banking performance. Among the 13 Islamic banks analysed, only six have chosen to publicly disclose their sustainability reports. The banks in question include Panin Dubai Syariah Bank, Muamalat Bank, Aladin Syariah Bank, Aceh Bank, BTPN Syariah Bank, and Mega Syariah Bank. The data reveals that no Islamic banks have reached the "sustainable" stage. Currently, two out of six Islamic banks are positioned in the offensive stage, while the other four are in the preventive stage. It can be posited that these financial institutions have commenced the shift towards a "sustainable" phase. The findings of this study on disclosure indicators in green banking indicate that Indonesian Islamic banks must revise their reporting methods concerning environmentally friendly banking practices. Moreover, considering their crucial role in advancing green banking in relation to sustainable development, Indonesian Islamic banks need to enhance the quality of their publicly accessible sustainability reports.