An assessment of challenges in digital transformation within Islamic finance
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Background of the Study
Digital transformation is revolutionizing the financial sector, yet Islamic finance faces unique challenges in embracing this paradigm shift. The process involves the integration of digital technologies to streamline operations, enhance service delivery, and drive innovation. However, Islamic financial institutions must navigate these changes while upholding strict Shariah principles, which adds layers of complexity to the transformation process (Hassan, 2023). Recent trends in fintech adoption have accelerated the need for digital transformation, yet the integration of modern technologies with traditional banking models remains a significant challenge for many institutions (Imran, 2024).
The challenges of digital transformation in Islamic finance include technological, organizational, and regulatory dimensions. Many institutions struggle with legacy systems that are incompatible with new digital platforms, while a shortage of digital talent further hampers innovation (Kareem, 2023). Moreover, regulatory uncertainties—especially in regions where guidelines for digital banking are still evolving—complicate the adoption of digital tools. Balancing the drive for technological innovation with the need to maintain ethical standards and Shariah compliance is a critical issue that requires targeted strategies and investments (Saeed, 2025).
This study aims to assess the multifaceted challenges that Islamic financial institutions face during digital transformation. It will explore the barriers to technology integration, the impact of organizational culture on digital adoption, and the role of regulatory frameworks in shaping digital strategies. By identifying the key obstacles and opportunities in this process, the research seeks to offer insights and recommendations for achieving a successful digital transition without compromising the foundational principles of Islamic finance.
Statement of the Problem
Despite the potential benefits of digital transformation, Islamic finance institutions encounter substantial challenges in implementing digital strategies. A primary issue is the integration of advanced digital technologies with existing legacy systems, which often results in operational inefficiencies and increased costs (Rashid, 2023). This integration challenge is compounded by the lack of skilled personnel who can bridge the gap between traditional banking practices and modern digital innovations.
Furthermore, the absence of clear regulatory guidelines for digital banking in many regions creates uncertainty and hinders the adoption of transformative technologies. Islamic banks face the dual pressure of innovating to remain competitive while ensuring that all digital processes adhere to Shariah principles (Noman, 2024). The complexity of balancing technological innovation with ethical requirements not only slows down the transformation process but also exposes institutions to risks such as cybersecurity threats and data privacy issues.
Another critical problem is the resistance to change within organizational cultures. Traditional management practices and risk averse mindsets often inhibit the proactive adoption of digital solutions. As a result, many Islamic financial institutions find themselves lagging behind their conventional counterparts in terms of digital readiness (Hussein, 2025). This study aims to systematically identify and analyze these challenges, providing recommendations that can help Islamic banks overcome barriers and accelerate their digital transformation while maintaining compliance with Islamic ethical standards.
Objectives of the Study
• To identify the key challenges hindering digital transformation in Islamic finance.
• To evaluate the impact of legacy systems and regulatory uncertainties on digital adoption.
• To propose strategies for overcoming organizational resistance and accelerating digital innovation.
Research Questions
• What are the major obstacles to digital transformation in Islamic financial institutions?
• How do legacy systems and regulatory factors affect digital adoption?
• What strategies can be implemented to overcome resistance and facilitate digital change?
Research Hypotheses
• H1: Legacy system integration significantly hinders digital transformation in Islamic finance.
• H2: Regulatory uncertainties negatively impact the pace of digital adoption.
• H3: Organizational change management strategies positively influence successful digital transformation.
Scope and Limitations of the Study
This study examines digital transformation challenges in Islamic financial institutions operating between 2023 and 2025. Limitations include variations in technological maturity and evolving regulatory environments.
Definitions of Terms
• Digital Transformation: The integration of digital technology into all areas of business.
• Legacy Systems: Outdated technology infrastructures that impede innovation.
• Shariah Compliance: Adherence to Islamic legal and ethical standards.
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