As quantum computing becomes a reality, opportunities for Islamic finance are emerging. At present, two uses seem very real for the changing banking sector: risk anticipation and financial product valuation. This article sheds light on the opportunities that quantum computing offers in solving these problems and sensitizes Islamic finance stakeholders and players to intelligently elaborate a long-term future vision for the use of technology and not run blindly behind technology bubbles such as the digital one.
Review 2022
Traditional computers operate on a binary system of 1s and 0s and store information in bits. Quantum computing is based on the principles of quantum physics. It involves processing information stored in the form of quantum bits or qubits that can be either 0, 1 or both 0 and 1 simultaneously (according to the quantum concepts of matter duality and the uncertainty principle). This superposition eliminates the binary constraints and opens up the field of possibilities in terms of calculation.
Quantum computing, which was born in the 1970s, is beginning to show promise in the areas of financial markets and risk management. Islamic banks could exploit this opportunity to introduce quantum computing into everyday financial applications. Quantum computing is attracting interest as its capabilities are infinite and open up a field of possibilities, particularly in terms of enormous computing capacities. The key advantages of quantum computing in terms of data processing speed, accuracy and predictive analysis could offer unimaginable opportunities for stakeholders and players of Islamic banks and financial service providers.
To broaden their solution set through an open dynamic system that does not depend on a single technology, no matter how promising, Islamic banks should partner to develop new approaches that combine traditional and quantum computing in the areas of capital markets and risk management, including Shariah risk and reputation risk.
One way forward is for Islamic banking to partner with technology companies to introduce quantum computing into everyday financial applications. This partnership will be with, for example, a company that develops cutting-edge technology for the manufacture of industrial quantum computers and a company specializing in quantum algorithms that can be run on both quantum and conventional computers. This partnership would offer a competitive advantage based on improved algorithms in the areas of capital markets and risk management. A great advantage is in terms of reduced implementation time for use in the Islamic financial industry.
While quantum computing is likely to have a major impact on Islamic finance if harnessed wisely, the aforementioned partnership aims to introduce quantum computing into everyday Islamic finance applications. It would bring together many different skills from people such as bankers, physicists, mathematicians, computer scientists, computer designers, and also researchers specializing in the history of technology and the ethics of technology so as not to fall into the thorny trap of realization of entropic closed systems doomed to self-destruction.
Quantum computing could be used for the Islamic financial services sector, where quantum algorithms could be applied to computationally dense models that use a large number of variables. Islamic financial services institutions can thus use quantum computing for calculations that are not feasible with traditional computing, resulting in greater accuracy, faster decision-making and redesign of business processes.
Among the applications of quantum computing that could give a competitive advantage to the Islamic financial industry (Figure 1) which includes financial markets, banks, insurance companies and investment firms, the following should be noted:
1. Solving problems perceived as intractable in the sense that many complex financial procedures involve lengthy mathematical calculations that become more tedious and time-consuming as the number of variables increases. By leveraging machine learning and quantum algorithms that can decode patterns in large amounts of data, quantum computing can make highly complex predictions and forecasts.
2. Profiling and risk management as Islamic financial institutions need to constantly manage risk and assess compliance. While traditional information technologies can minimize risk to a certain extent, some areas such as liquidity management, product pricing and risk measurement require complex computing. Quantum computing can help these companies create advanced economic models with more variables and variances to best fit the risk profile.
3. The impact on trade finance in the sense that quantum computing could contribute significantly to trade finance. By leveraging technologies such as blockchain and cryptography, quantum computers will significantly speed up verification processes and trade finance and benefit trade finance by using a more resilient form of security than existing encryption algorithms.
4. Cybersecurity and next-generation cryptography in the sense that the Islamic financial sector will need to proactively design a post-quantum cryptography strategy. Deterring quantum cybercriminals will need encryption.
Preview 2023 and conclusion
Despite being very sophisticated, the commercial application of quantum computing technology is still some years away. However, major banks have already started experimenting with it to reap its benefits.
While there are many avenues to explore, three of them seem promising: Monte Carlo simulation, optimization, and finally artificial intelligence and machine learning. As regards simulation, a quantum approach could reduce the complexity of pricing. The idea is the same for portfolio optimization in particular, made difficult by the multiplication of assets and constraints. For its part, current machine learning has limitations in terms of speed and efficiency, which could be erased by quantum computing, thus providing a major time saving for the deployment of artificial intelligence in Islamic finance.
The promise of rapidly improving quantum technology continues to drive investment. And the ecosystem of quantum start-ups is thriving. One study estimates that the quantum computing market will grow at an average annual rate of 56%, reaching nearly US$65 billion by 2030.
Prof Dr Abderrazak Belabes is a senior researcher and professor at the Islamic Economics Institute, King Abdulaziz University, Saudi Arabia. He can be contacted at [email protected].