Balancing Digital Innovation and Sharia Compliance in Islamic Banking: A Legal and Governance Perspective

Abstract

Objective: This study aims to examine how Islamic banks balance digital innovation with strict adherence to Sharia principles, focusing on the legal and governance mechanisms that support sustainable technological adoption in Islamic finance. Theoretical framework: The research is grounded in Islamic economic jurisprudence, Sharia governance theory, and regulatory compliance frameworks, integrating principles of ethical finance with contemporary financial technology governance. Literature review: The literature review analyzes prior academic studies on digital transformation in Islamic banking, FinTech regulation, and Sharia compliance, highlighting gaps related to legal governance and institutional coordination in a rapidly evolving digital environment. Methods: The study adopts a qualitative analytical approach based on doctrinal legal analysis and comparative review of selected case studies from Islamic banks implementing digital tools such as blockchain, artificial intelligence, and mobile banking platforms. Results: The findings indicate that effective Sharia governance structures, regulatory clarity, and collaboration between technologists, Sharia scholars, and regulators are essential for enabling innovation without compromising Sharia compliance. Digital transformation enhances operational efficiency, customer engagement, and financial inclusion when supported by robust legal frameworks. Implications: The study underscores the need for adaptive regulatory policies and strengthened Sharia supervisory mechanisms to manage legal and compliance risks associated with digital technologies in Islamic banking. Novelty: This research contributes a legal and governance-based perspective to the discourse on digital innovation in Islamic banking, emphasizing the integration of Sharia compliance within modern financial technology frameworks.