The subject of introducing Islamic Banking in Ghana started about two decades ago but only gained momentum and attracted the attention of Ghanaians in the last few years, probably due to strong advocacy works by groups like GM Ambassadors and others. A lot of research has been carried out on the subject by both local and foreign researchers, and the findings by most of them see Ghana as a fertile environment for the establishment of fully-fledged Islamic banks.
On the global stage Islamic finance is expanding very rapidly; and its assets are projected to exceed US$3.8trillion by 2022, supported by its increasing global appeal and consumer demand. This presents important opportunities to strengthen financial inclusion, deepen financial markets, and mobilise funding for development by offering new modes of finance and attracting the unbanked populations which have not previously participated in the financial system.
Expectations from Act 930
In Ghana, many interested parties were very optimistic that the new Banking Act, Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) would lay the legal foundation on which the regulatory framework and guidelines for the introduction of Islamic banking to Ghana’s financial space would be built. Although the Act has provided for non-interest banking services as contained in section 18(1), a clear-cut regulatory framework is yet to be provided to finally pave the way for including Islamic banking in Ghana’s financial sector.
A regulatory framework would give the needed level of comfort and confidence to investors who have been waiting over the years to tap into this sector. It would also enable existing conventional banks to add Islamic banking products to their suite of products through the concept of Islamic Windows as happens in other jurisdictions.
In the UK for example, apart from the five fully-fledged Islamic banks providing purely Islamic banking services, there are 15 conventional banks offering Islamic financial services through the Islamic Windows concept. Notable among these banks are Barclays plc, BNP Paribas, Citigroup, Deutsche Bank, Lloyds Banking Group, Standard Chartered Bank, UBS, etc.
In South Africa, ABSA Bank and FNB, well-established conventional banks with presence in Ghana, are leading providers of Islamic banking services through Islamic Windows. During the process of taking over Barclays Africa some years ago, ABSA Bank announced its desire to introduce Islamic Banking services to a number of African countries, including Ghana.
Lessons from other jurisdictions
There is no need reinventing the wheel when it comes to the area of providing a regulatory framework and guidelines for Islamic banking by Bank of Ghana. How has the UK been able to fully integrate Islamic Banking into its financial sector? The most important reason is provision of the needed regulatory framework. In recent times the Bank of England, which is the central bank of the UK, has been looking at ways to make Islamic finance work even better by undertaking to provide Shariah-compliant liquidity facilities to ensure that Islamic Banks operating in the UK can work on a solid footing.
In neighbouring Nigeria, the central bank of Nigeria provided a framework for the regulation and supervision of institutions offering non-interest financial services in Nigeria that eventually paved the way for the operations of Islamic Banks.
The provision of regulatory and supervisory frameworks will have the added advantage of further enhancing the integration of Islamic financial markets and international financial markets. The London Stock Exchange, for instance, has listed over 60 Islamic bonds (sukuk) with a total value of over US$51billion. The UK government in 2014 issued a sovereign sukuk, which was 10 times oversubscribed, and is expected to reissue a new one when the current one matures.
Distinctive features of Islamic Banking and Products
A distinctive feature of Islamic finance is that money is viewed not as a commodity but as a medium of exchange with no intrinsic value, and therefore cannot give rise to more money via fixed interest payments simply by being deposited in a bank or lent out. The human effort, initiative, and risk involved in a productive venture are considered more important than the money used to finance it.
Interest (Riba) is forbidden under Islamic law, and it is for this reason that paying and receiving interest on both sides of the balance sheet is proscribed under Islamic finance. Profit is earned through real economic activities such as trading, earning fees for providing services, etc.
Islamic finance does not also allow the creation of debt through direct lending and borrowing of money or other financial assets. Debts can only be created through the direct sale or lease of real assets through lease-based financing schemes. Apart from these, the banks also avoid investing in businesses related to alcohol, tobacco, pork products, pornography, gambling, weapons of mass destruction, cloning, etc. Because of these prohibitions, Islamic Banks use carefully selected products, which are deemed compliant with Islamic law, to raise deposits and create assets on both sides of their balance sheets.
On the liabilities side of their balance sheets, Islamic Banks use Wadia (safe keeping) and Qard Hasan (benevolent loans) contracts to provide sharia-compliant current account and savings account services whereby deposits are guaranteed, but the banks do not pay any interest on them as interest is forbidden in Islam. The banks also do not share with the customer profits earned from the use of their funds. In practice, however, they may give depositors some return, upon its discretion, after profits have been distributed to the Mudaraba (investment) accounts.
Investment accounts operate on Mudaraba contract, with banks accepting deposits from customers for either a fixed or an unlimited period. These types of accounts are also known as profit-and-loss-sharing deposits. Any profit generated from the bank’s investment activities is shared between bank and customer at a pre-agreed ratio. Mudaraba deposits are not guaranteed and the investor bears the risk of loss on the deposit if the investment by the bank suffers a loss.
Mudaraba accounts can be categorised into a general account and a restricted account. In the former, the depositor does not have a say in the bank’s investments; while in the latter the depositor can restrict the bank to investing in certain types of businesses or industries. In both cases transparency is key, as the bank has to tell the depositor where his or her funds are invested.
The products and the contracts with which Islamic banks create assets on their balance sheets include Mudaraba and Musharaka, which are equity-based; and Murabaha, Ijara, Salam, Istisna etc., which are non-equity-based or asset-based.
A Mudaraba contract is based on the relationship between investor and fund administrator. The Islamic bank is the investor in this case, and provides the capital to the working partner for investment in a business venture. The profit is shared between the bank and working partner in a pre-agreed ratio. With a Musharakah contract, both parties become involved in a joint venture project by contributing capital and entrepreneurship and share the profit and loss generated by the activity based on an agreed ratio. The Islamic banks invest with the client as a partner, contributing capital and entrepreneurial skills to a specific project or purchase of assets.
Murabahah contracts, which are sales-based, are often referred to as cost-plus financing or markup financing. In this type of financing, the bank agrees to fund the purchase of a specific asset or goods from a supplier at the request of the customer. Upon acquiring the asset, the bank sells it to the customer at a predetermined markup or profit, often on deferred payment basis to be repaid over a period. This is akin to a conventional bank loan for the purchase of an asset or goods by a customer. Murabahah financing has become the backbone of contemporary Islamic banking, and is commonly used for financing the purchase of raw materials, machinery, equipment, and consumer durables.
An Ijarah financing contract is akin to a conventional leasing contract. Under Ijara, the bank purchases a tangible asset based on the client’s specifications – such as plant, motor vehicle, office automation etc. – and leases it to the client for a stream of rental and purchase payments, so that the leasing period end coincides with completion of the purchase payments and ownership is transferred to the lessee.
Salam is a contract in which full payment is made in advance by the Islamic bank for specific goods (often agricultural produce) to be delivered at a future date. This product is ideal for agricultural finance, but can also be used to finance the working capital needs of the business customer.
Istisna financing involves a contract of exchange providing for deferred delivery of the asset that is being financed, and is most often used to finance construction, development of housing, manufacturing, turnkey infrastructural projects, etc.
Aside from the ethical issues of avoiding interest (Riba) and other prohibited activities, Islamic banks perform essentially the same functions as conventional banks. That is, acting as financial intermediaries as well as administrators of the economy’s payment systems. The products offered by Islamic banks, apart from sounding exotic to many readers and being carefully designed to be sharia-compliant, basically perform the same functions as the conventional banking products we are familiar with.
Time for action to be taken
We have looked long enough and the time to leap has come. There are numerous examples from other jurisdictions, both far away and close by, to guide us. For example, the central bank of Nigeria first provided regulations that mainly covered conventional banks which opted to offer non-interest banking services, either as a product or by way of opening some of their branches for the rendering of full non-interest banking services.
Later down the years, it came out with enhanced regulations which provided for fully-fledged Islamic banks that are not subsidiaries of any existing conventional bank. The Bank of Ghana can start by coming out with regulations and guidelines to, in the meantime, cover conventional banks desirous of providing Islamic Banking services via the Islamic window. The BoG can set up an Advisory Council of Experts whose duty would be to advise it on matters relating to the effective regulation and supervision of institutions offering Islamic banking services in Ghana.
The Islamic window concept as a starting point, I believe, will provide the best opportunity for the eventual introduction of full-scale Islamic banking – because capacities would have been built, obstacles addressed and misconceptions about this alternative system of banking erased with the successful piloting of this concept in the Ghanaian financial space.
An Islamic window is a separate department or a dedicated unit of a conventional bank that develops and offers Islamic financial products to clients demanding such products. This model relies on the existing conventional infrastructure wherein all the processes, operations, sales, channels, finance, compliance, audit and all other functions are provided by the conventional bank.
The Islamic window churns out the products and services and delivers them to the conventional team as part of a suite of products offered by the conventional bank. In this case, the Islamic window is just a segment of products on offer – just like Corporate Banking products, Wholesale Banking products, Private Banking products, Retail Banking products….and Islamic Banking products.
Core Banking Applications for Islamic banking
Due to the global nature of Islamic banking, almost all off-the-shelf core banking applications have Islamic banking functionalities with Islamic products processing capabilities, with interfaces to the general ledger systems and reporting tools. The World Finance Magazine, for instance, recently awarded Temenos as the ‘Best Islamic Banking and Finance Technology Provider’ for the year 2019. Incidentally, Temenos is also a leading provider of core banking applications in Ghana – providing Temenos T24 application to many banks in Ghana including the Bank of Ghana. This will obviously make life a lot easier for banks which opt to provide Islamic banking services for their customers and clients.
Benefits expected to be derived from Islamic banking
The benefits Islamic Banking is expected to bring to the Ghanaian banking space and economy at large cannot be overemphasised. The introduction and availability of Islamic finance products, instruments and services will deepen market competition among financial institutions, which could lead to greater availability of less expensive long-term capital for businesses. It could increase financial inclusion and attract a large number of the unbanked population looking for alternative ways of investing their funds.
These individuals and businesses would have access to useful and affordable financial products and services that meet their needs and are delivered in a responsible and sustainable way. Islamic Banking would bring about stability in investments by eliminating companies whose financial practices are deemed too risky and excessively speculative. It would accelerate economic development by choosing to invest in businesses based on their potential for growth and success; and as result encourage new ideas, creative thinking and entrepreneurial spirit.
Government could also tap into the bond (sukuk) market, by issuing sovereign sukuk to raise the needed funds for some of the country’s major infrastructure projects. This would enable government to diversify its source of funds, leading to cheaper cost of borrowing.
Countries that have successfully introduced Islamic finance have also benefitted tremendously from foreign direct investments by investors looking for alternatives ways of channelling their investment funds other than the conventional methods.
A major milestone was achieved with the passage of Act 930, which laid the legal foundation and made it permissible for banks to provide non-interest banking services to customers and clients. The onus is now on the regulator to provide a regulatory framework to direct banks interested in providing these alternative banking services. They can pilot this in the beginning by targetting a few selected existing conventional banks interested in providing these services via the Islamic window. This period can be used for building capacities of staff for effective supervision of this area. If this proves successful, it can be replicated to cover the other banks and finally open the door for the entry of fully-fledged Islamic banks.
The writer is a Ghanaian Banker, an Associate of the Chartered Institute of Bankers, Ghana; and holds a PGD in Islamic Finance from the Geneva School of Business and Economics. He can be reached at firstname.lastname@example.org