Why we must embrace Islamic finance
Ghana is among Africa’s largest untapped Islamic finance markets. Despite the growing potential of Islamic finance and its impressive growth in other parts of the world such as the Middle East, South East Asia (which primarily include Malaysia and Indonesia) and Europe, it is yet to find favor with Ghanaian authorities.
The Islamic finance industry comprises banking, insurance, bonds and capital markets and as a financial system it promotes risk sharing, connects the financial sector with the real economy, and emphasizes financial inclusion and social welfare. Islamic finance is equity-based, asset-backed, ethical, sustainable, environmentally-and socially-responsible finance and prohibits interest bearing and related transactions. This system is based on the principles of the Sharia (Islamic Law), which are derived from the Holy Quran and the “Hadeeth”, a compilation of the noted sayings of Prophet Mohammad. Islamic Banks everywhere follow these principles in their business.
Basic tenets of Islamic finance.
- Payment and receipt of interest (known as Riba) is strictly prohibited (haram).
- Financing is based on profit and loss sharing and returns must be linked to risks
- Financing must be linked to real assets (materiality)
- Certain industries, such as alcohol, armaments, gambling and other immoral or ethically problematic businesses are “haram” (disallowed by Sharia) and prohibited for investment. This is why Islamic finance is also referred to as Ethical finance.
- Islamic financial Institutions may not lease or lend any product that they do not wholly own.
- Trading in debt is also not allowed, which is why Islamic financial institutions do not deal in traditional bonds; rather they have their own version of such instruments called Sukuk (Islamic Bond).
- Interest free loans (Qard Hasan) are encouraged to spread financial inclusion.
Islamic finance in global economy
Over the past decade Islamic finance has emerged as an effective tool for financing development worldwide, including non-Muslim countries. Major financial markets are discovering solid evidence that Islamic finance has already been mainstreamed within the global financial system – and that it has the potential to help address the challenges of ending extreme poverty and boosting shared prosperity.
The Global Islamic finance industry has expanded rapidly over the past decade, growing at 10-12% annually. Today, Sharia-compliant financial assets are estimated at roughly US$2 trillion, covering bank and non-bank financial institutions, capital markets, money markets (Sukuk) and insurance (“Takaful”), representing a little of over 1.27 of the total global market, and projected to reach US$2.610 trillion by 2020. In many majority Muslim countries, Islamic banking assets have been growing faster than conventional banking assets. There has also been a surge of interest in Islamic finance from non-Muslim countries such as the UK, Luxembourg, South Africa, and Hong Kong.
Many developed countries of the world, such as Germany, United Kingdom, USA, France and Singapore have embraced Islamic finance as an alternative or complementary financial system, and Islamic finance is now operational in over 75 countries. The robust performance of the Islamic finance sector during the recent financial downturn has attracted the attention of several major multinational financial institutions including HSBC Amanah, Standard Chartered Saadiq, Lloyds TSB Bank and Citigroup who offer products in accordance with Islamic finance principles.
Western nations like UK are promoting Islamic Finance following the principle of “no favor, but no discrimination”. Former Prime Minister Gordon Brown, who was Finance Minister when Islamic finance was introduced in the UK, was so confident of the system that he predicted London would become its future gateway. The results today vindicate his predictions. This is why, at a time when other financial institutions are facing closure, the Islamic Bank of Britain is expanding its network in the UK and being asked to do the same in Europe.
Why Ghana needs an Islamic finance model
While Islamic finance originates from religious principles, it is also a workable model of investment, based on risk sharing. The nations, which have adopted Islamic finance, have done so because it makes business sense. Islamic finance is all about encouraging and facilitating investment in real economic activity and societal welfare, while prohibiting investment in reckless businesses such as gaming, alcohol, and other value destroyers or risky financial products like derivate contracts of the kind which led to the 2008 sub-prime crisis.
Apart from being a viable alternative to the capitalist financial system which is prone to extreme risks, the interest-free solutions of Islamic finance could restore equilibrium in the Ghanaian society by providing succor to debt-ridden farmers, laborers and other marginalized groups. Hence, Islamic finance has potential as a tool of financial inclusion.
As per the Pew Research Centre, Ghana was home to nearly 4 million Muslims in 2010 (even though this figure stands to be disputed), and it is projected to reach 5.3 million by 2020. A recent survey suggests that considerable number of Ghanaian Muslims would prefer to invest in non-interest bearing instruments or products or donate the interest from interest-bearing accounts to charity. There is therefore an opportunity for Islamic financial institutions to attract funds that interest paying conventional financial institutions cannot. Traditionally, Ghanaians have always practiced participatory financial activities by creating cooperative societies, non-banking financial institutions and micro credit programs; the same platform can be used to introduce Islamic finance.
According to Ghana’s finance minister at a recent public event, Ghana is currently facing a huge infrastructural funding gap, and requires about US$1.5 billion annually to close this gap. Following the example of countries such as Malaysia, Indonesia, UK, France and Germany, Ghana could use Islamic financial products such as Sukuk (long term bond) to fund infrastructure and other sectors. Specifically, Ghana could attract the Middle East’s high investible surplus through Islamic banking and finance.
Challenges for Islamic finance in Ghana
- Ghana’s financial system is currently governed and regulated by laws that are clearly in opposition to the basic tenets of Islamic banking.
- Lack of a robust regulatory framework to govern and regulate the operations of Islamic finance.
- The interest earned on fixed deposits is subject to income taxes, whereas the profit on Islamic banking deposits is treated differently.
- Conventional financial institutions borrow from other banks and financial institutions to meet their short term funding requirements, but Islamic financial institutions cannot do so because it involves interest.
- Islamic financial institutions are required to closely monitor their investments in various businesses, as well as ensure that the investee firms are managed properly. This calls for expensive supervisory infrastructure.
Dearth of Islamic Finance Professionals:
There is a serious dearth of Islamic finance experts and trained personnel in Ghana.
Lack of awareness
- There is a lack of awareness about Islamic finance. Most people mistakenly believe that it is only meant for Muslims, whereas in Malaysia, Nigeria, Kenya, UK and elsewhere, about 40% of the customers of Islamic financial institutions are Non-Muslims.
- Islamic financial institutions should educate customers regarding the benefits of Islamic finance. Admittedly, this is a herculean task, given that Islamic Deposits like Mudarabah Deposit, do not guarantee principal, nor pay a fixed return.
- Ghana needs to follow the examples of Nigeria and UK and create new and enabling laws to govern and govern Islamic finance business.
- More effort is required in the area of training and education; the Government and private sector organizations can play a pivotal role in promoting this subject by including it in the curriculum of professional courses.
- The myth that Islamic finance is only for Muslims must be dispelled, and awareness of Islamic finance as a complementary, alternative and ethical form of finance should be created. Public seminars and discussions are a good way to do this.
The growth of Islamic finance depends on two important factors: domestic demand and Ghana’s role in the globalization of the financial sector. By not introducing Islamic finance, Ghana is losing the opportunity of garnering capital from a large section of the Muslim population as well as from Islamic nations in the Middle East and elsewhere.
Islamic finance is an idea whose time has come. It is time the Ghanaian Government and the general public embrace this significant opportunity.
Baba Yunus Muhammad is President of the Africa Islamic Economic Foundation, Tamale, Ghana. He can be reached on: email@example.com.