While numerous banking systems exist, Islamic banking stands out for its potential to foster financial inclusion. Despite its promise, it remains notably absent from mainstream banking dialogues.
Islamic banking is a system of banking that operates following Islamic law (Shariah), which prohibits certain activities such as charging interest (riba) and investing in businesses that are considered haram (forbidden), such as those involved in alcohol, gambling, or pork products.
Instead of interest-based transactions, Islamic banking relies on profit-sharing arrangements, risk-sharing, and asset-backed financing to generate returns for investors. Some common Islamic banking products include Mudarabah, Murabaha, Ijarah, and Musharakah.
Mudarabah is a profit-sharing agreement where one party provides capital (the investor) and the other party provides expertise and labor (the entrepreneur). Profits are shared according to an agreed-upon ratio, but losses are borne solely by the investor.
Under a Murabaha arrangement, the bank purchases an asset requested by the customer and then sells it to them at a higher price, allowing the customer to pay in installments. The increased price includes the bank’s profit margin, which is agreed upon upfront.
Ijarah on the other hand is a leasing agreement where the bank purchases an asset and leases it to the customer for a specific period, at an agreed-upon rental fee. At the end of the lease period, the ownership of the asset may be transferred to the lessee according to the terms of the agreement.
Musharakah is a joint venture partnership where both the bank and the customer contribute capital to finance a project. Profits and losses are shared according to the agreed-upon ratio.
By utilizing these types of contracts and arrangements, Islamic banks ensure that investments comply with Shariah principles while still providing opportunities for investors to earn profits.
Professor John Gatsi, an economist and lecturer at the University of Cape Coast, emphasized the important role Islamic banking can play in diversifying the bond market.
He suggested that incorporating Islamic banking principles into banking sector regulations could strengthen market resilience and inclusivity, particularly through the issuance of Sukuk bonds.
Gatsi proposed either revising Act 930 or introducing new legislation to embed the core principles of Islamic banking into the regulatory framework. Additionally, he recommended amending Act 929, which governs the capital market, to facilitate the trading of Islamic financial instruments like Sukuk bonds.
Unlike traditional bonds, Sukuk represents ownership stakes in assets rather than a simple debt instrument.
Professor Gatsi during his inaugural address on the topic ‘Islamic Banking Options: Exploring an Inclusive Alternative or Complement’ said, “There should be an amendment to Act 1061 or enactment of an additional act to accommodate Takaful.”
His analysis revealed the significant potential of Islamic finance to revolutionize global financial systems, stressing the importance of acknowledging and embracing its principles.
Bridging Infrastructure Gaps With Islamic Banking and Financing
He contended that Islamic banking can effectively fill crucial voids in public infrastructure funding by providing an alternative source of financing, especially in the context of public-private partnerships (PPPs) and other large-scale projects.
“The underlying principles of Islamic finance support socially inclusive and development-promoting activities and have the potential to contribute to the achievement of the Sustainable Development Goals (SDGs).”
In 2023, a collaborative report released by the United Nations Development Programme (UNDP) and the Islamic Development Bank (IsDB) shed light on the innovative aspects of Islamic finance.
The report underscored Islamic finance’s potential to enhance financial inclusion, promote more equitable risk-sharing, and prioritize funding for tangible economic ventures.
Moreover, the report projected Islamic finance as a superior means of financing Small and Medium Enterprises (SMEs) and start-up ventures, aligning closely with the objectives outlined in the Sustainable Development Goals (SDGs).
Against this backdrop, Prof. Gatsi urged the Bank of Ghana to create the environment for the adoption of Islamic banking.
He said, “The government should be interested in diversifying sources of infrastructure finance, deepen entrepreneurial supports, and adopt Islamic banking to contribute to meeting the SDGs”.
Prof. Gatsi asserted that an emerging economy like Ghana, with its youthful and expanding population, is facing an increasing gap between infrastructure demands and existing infrastructure capacities. To bridge this disparity, Ghana must broaden its financial horizons to accommodate alternative avenues for infrastructure funding.
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