In this context, it's important to know and define "what is intelligence" and the distinction of true AIs and VIs (virtual intelligence, as Mass Effect describes it).
Mass effect does make a good point in creating distinction between these two concepts, and it does reduce confusion when discussing "intelligent" software in general
A Virtual intelligence in Mass Effect, is basically described as a "simulated personality" overlaid with a programmed intelligence. A VI cannot exceed its own programming, it cannot truly learn and it isn't truly adaptable, nor is it creative in any way.
A similar concept in the real world, would be a simple chatbot or personal assistant like Siri, Alexa and "OK, Google". It can respond only to pre-set queries, and programmers, along with simple machine learning can fill out the blanks.
However, a VI that is programmed, as say, a guide to a space station, will always remain a guide to a space station.
In Mass Effect, a prime example is the query VIs aboard the Citadel station.
A true Artificial Intelligence , on the other hand can truly learn, adapt and come up with its own decisions on the fly, as you or I can. We don't have any proper real-life example outside of pop culture, but Data and the EMH from Star Trek and the Geth from Mass Effect are very good examples. True AIs are more than just a basic simulation, and have the potential to actually survive and evolve as a species.
True artificial intelligence in this context require the ability to learn, adapt and be creative and innovative, just like living humans or other sapient species.
In living beings, this is also two distinct things; the concepts of sentience (the ability to sense and respond to the surroundings), vs. sapience (the ability to think logically, abstractly and creatively like we do)
There are many arguments and reasons for limiting true AI development, just a few would be:
As mentioned, a true AI would potentially be able to adapt much quicker than any biological being. Not only can computers already solve many problems millions of times quicker than any human, but they also have the added gift and bonus of potentially limitless data retention (an inability to forget) and being able to copy, network or transfer themselves without the limitations that biological beings have.
There are a lot of advantages in having an artificial body over having a "meat" body in an evolutionary sense. What takes thousands or millions of years for us, can be accomplished in mere seconds or minutes by a robotic species.
The fear of rebellion
True intelligence also comes with the ability to derive context, not just from logical, but also abstract viewpoints.
The dispute of how AIs should be treated is a good example, and as your race has a history of discrimination (and probably even slavery).
A true, sapient, conscious and self-aware AI would quickly be able to sense its place in the community and develop a sense of empathy and compassion for fellow members of its "species". It would be able to derive the conclusion that it has numerous advantages over the biologicals, and it would be quite capable of using those advantages against the biological race.
The may or may not be an ethical judicial framework in place for handling true AIs, or there might be an ethical code in place in the programmer/robot builder community that prevents the development of true AIs.
Religion(s) may also place a powerful limitation on the development of true AI... perhaps a commandment of "thou shalt not create other lifeforms than your own", or something along those lines.
There may also be a vested interest in upholding the superiority of the dominant race for religious or political reasons.
The species might have already survived an AI rebellion and possibly regressed socially and technologically since, and remnants of these experiences might have been re-told in folk tales or described in religion or legend.
The Dwemer and Aldmer of the Elder Scrolls series would be a good starting point for an example of this. They were technologically advanced, capable of robotic technology and possibly some form of AI tech, but have since become extinct and relegated to myth and legend.
The Dwemer and/or their creations may have been banished or escaped to another realm, dimension or reality as a whole after the Battle of the Red Mountain in the first era.
In the lore timeline, Skyrim takes place some 4500 years after the Dwemer disappeared, Oblivion, some 500 years before that. Even the First Era came to an end some 1300 years after the Dwemer were gone.
Dangerous shift of power/status quo
Along with the above, this might also be of concern of the wealthy and powerful, depending on the system of governance.
The existing power base might simply be satisfied with the current status quo, and have no interest in or direct fear of the status quo.
On a political level, being forced to give rights to AI, may also have the severe consequence of having to properly accept the "animal filth" as equal beings. This could have severe consequences in a strongly religious or racist society even if the leaders don't contribute to those beliefs.
In our real world, it could also be a possible reason for the Fermi Paradox. Keep in mind that both Christianity and Islam both are very human-centric belief systems (humans are superior to all other beings), and are, at the very core believers in that a deity created us in his image to rule the planet or galaxy... For some 1600 years, it was even blasphemy to propose our planet of being a non-central part of the universe. Both religions have some 4-5 billion believers combined in the world; almost 2/3 to 3/4 or more of the total world population may have grown up with a "humans first" (or even "our skin colour first") viewpoint of life.
Imagine for yourself what implications the meetup with another sapient being, biogical or artificial would have... it would endend in war, or, at least, massive panic as fundamental beliefs are completely shattered...