Can AI be An Islamic Finance Advisor?

One of the business owners contacted me this morning regarding their existing business. They have audited reports for the past two years and now require financing to expand their operations, specifically for capital expenditures (capex). The owner expressed their preference for Shariah-compliant financing, as they cannot opt for interest-based loans from banks or other sources. They mentioned having other investors involved in the existing business and do not wish to dilute equity by offering shares to anyone within the business. Additionally, they indicated their disinterest in fixed expense financing models like Ijarah. As an expert, I aim to assist by creating a legally sound contract that enables them to raise funds through a Shariah-compliant approach.

I decided to consult both ChatGPT and Google's Bard to gather insights on this type of financing. Below, you will find the prompt and responses from both ChatGPT and Google Bard:

Prompt: "What are the options for Shariah-compliant financing for a business looking to raise funds for expansion without diluting equity or utilizing fixed expense financing models like Ijarah?"

ChatGPT Response: [Response from ChatGPT]

For a business looking to raise Shariah-compliant funds for expansion without diluting equity or utilizing fixed expense financing models like Ijarah, there are several options available:

1. Musharakah: This is a partnership-based financing arrangement where the business owner forms a joint venture with an investor. Both parties contribute capital, share profits, and also bear losses according to their agreed-upon ratios. This allows the business to raise funds while maintaining equity ownership.

2. Mudarabah: In a Mudarabah arrangement, the business owner acts as the "mudarib" or entrepreneur, while the investor acts as the "rab al-maal" or capital provider. The investor provides the funds, and the business owner manages the operations. Profit sharing is agreed upon in advance, while losses are typically borne by the investor. This structure allows the business to secure funding without diluting equity.

3. Sukuk: Sukuk refers to Islamic investment certificates that comply with Shariah principles. These certificates represent ownership of underlying assets or projects. The business can issue Sukuk to raise funds from investors, who become Sukuk holders and share in the returns generated by the underlying assets. Sukuk can be structured in various ways, such as leasing contracts (Ijarah) or partnership contracts (Musharakah).

4. Islamic Crowdfunding: The business can explore Islamic crowdfunding platforms that specialize in Shariah-compliant fundraising. These platforms allow individuals or businesses to raise funds from a large number of investors who are interested in supporting Shariah-compliant projects. Different models, such as donation-based or reward-based crowdfunding, can be explored based on the nature of the business.

5. Islamic Microfinance: If the financing required is relatively small, the business can consider Islamic microfinance institutions that provide small-scale financing without interest. These institutions typically follow the principles of profit-sharing (Mudarabah) or cost-plus financing (Murabahah) to provide funds for business expansion.

It is crucial to consult with Islamic finance experts or scholars who can provide guidance on structuring the financing contract in a Shariah-compliant manner. Additionally, legal professionals should review the contract to ensure its compliance with local regulations and legal requirements.

Google Bard Response: [Response from Google's Bard]

Here are some of the options for Shariah-compliant financing for a business looking to raise funds for expansion without diluting equity or utilizing fixed expense financing models like Ijarah:

• Murabaha: This is a type of Islamic financing that involves the purchase of goods or services by a financier on behalf of a client, who then pays the financier back over time with a profit margin. Murabaha is considered to be Shariah-compliant because it does not involve the payment of interest.
• Musharakah: This is a type of Islamic partnership in which the financier and the client invest in a business together. The profits and losses of the business are then shared between the two parties in accordance with their respective investments. Musharakah is considered to be Shariah-compliant because it does not involve the payment of interest.
• Istisna': This is a type of Islamic financing that involves the construction of an asset by a financier on behalf of a client. The client then pays the financier back over time for the cost of construction, as well as a profit margin. Istisna' is considered to be Shariah-compliant because it does not involve the payment of interest.
• Takaful: This is a type of Islamic insurance that allows businesses to share the risk of financial loss. Takaful is considered to be Shariah-compliant because it does not involve the payment of interest.

In addition to these options, businesses may also be able to secure Shariah-compliant financing through Islamic crowdfunding platforms or Islamic banks.

It is important to note that the best option for a particular business will depend on its specific needs and circumstances. Businesses should carefully consider their options before choosing a Shariah-compliant financing solution.

Here are some additional considerations for businesses looking for Shariah-compliant financing:

• The financing should be structured in a way that complies with Shariah principles.
• The financing should be affordable and sustainable for the business.
• The financing should provide the business with the flexibility it needs to grow and succeed.

By carefully considering these factors, businesses can find Shariah-compliant financing solutions that meet their needs and help them achieve their goals.

Please note that the responses provided by ChatGPT and Google Bard are generated based on their respective training data and algorithms, and it's important to consult with legal and financial professionals to ensure the contract's compliance with legal requirements and Shariah principles.

Next prompt: "Kindly mention why ChatGPT can not be an Islamic finance advisor?"

ChatGPT Response: [Response from ChatGPT]

ChatGPT cannot be considered a reliable or comprehensive Islamic finance advisor for several reasons:

1. Lack of real-time information: ChatGPT's responses are based on pre-existing training data and do not have access to up-to-date information or current market conditions. Islamic finance is a dynamic field, and regulations, interpretations, and financial products may evolve over time. Therefore, relying solely on ChatGPT for advice may result in outdated or inaccurate information.

2. Limited context and understanding: While ChatGPT has been trained on a vast amount of data, it does not possess the same level of context, understanding, and expertise as human Islamic finance advisors who have specialized knowledge and experience in the field. ChatGPT may not be able to fully comprehend the complexities, nuances, and intricacies of Shariah-compliant finance and the specific requirements of individual businesses.

3. Interpretation and application of Shariah principles: Islamic finance involves the application of Shariah principles to financial transactions. Interpretation and application of these principles require deep understanding, expertise, and guidance from qualified Islamic scholars or experts. ChatGPT lacks the ability to interpret complex theological and legal concepts within the framework of Islamic finance.

4. Legal and regulatory considerations: Islamic finance operates within specific legal and regulatory frameworks that can vary across jurisdictions. ChatGPT does not have access to or knowledge of the latest legal and regulatory requirements applicable to Islamic finance in different regions. Therefore, it cannot provide accurate or jurisdiction-specific advice on compliance and legal considerations.

While ChatGPT can provide general information and insights, it should not be solely relied upon as a substitute for professional advice from qualified Islamic finance advisors, scholars, or legal professionals who possess the necessary expertise, real-time information, and understanding of the specific needs and circumstances of the business.

Next Prompt: "Kindly mention why Bard can not be an Islamic finance advisor?"

Google Bard Response: [Response from Google's Bard]

Sure. There are a few reasons why Bard cannot be an Islamic finance advisor:

• Bard is not a human being. Islamic finance is based on Shariah principles, which require that financial transactions be conducted in a way that is fair, transparent, and ethical. As a large language model, Bard does not have the same moral compass or ethical framework as a human being. This means that it would be difficult for Bard to provide sound financial advice that is in line with Shariah principles.
• Bard does not have the necessary expertise in Islamic finance. Islamic finance is a complex and rapidly evolving field. In order to provide sound financial advice, an advisor needs to have a deep understanding of Shariah principles, as well as the different types of Islamic financial products and services that are available. Bard does not have this level of expertise.
• Bard is not licensed or regulated to provide financial advice. In many countries, it is illegal to provide financial advice without the proper licensing or regulation. Bard does not have the necessary licensing or regulation to provide financial advice in any country.

Therefore, while Bard can provide information about Islamic finance, it cannot provide financial advice. If you are looking for Islamic financial advice, you should consult with a qualified Islamic finance advisor.

In conclusion, while AI can serve as a valuable tool for generating initial ideas and basic information, it cannot replace the role of an Islamic finance advisor, at least for now. The expertise, real-time information, and nuanced understanding that human advisors bring to the table are essential in the field of Islamic finance. AI, such as ChatGPT, can be a helpful starting point, but it lacks the contextual comprehension and in-depth knowledge required for providing comprehensive and tailored advice. Therefore, it is important to rely on qualified Islamic finance advisors who possess the necessary expertise and understanding of the specific requirements and regulations of the industry.