Part II: Ghana urged adopt to Islamic finance
Adnan Adams
Mohammed
Globally, the
Islamic Finance industry is young and is rapidly growing. For most of the three
decades since its inception (in the modern era), it has grown silently and
mostly without recognition. However, the dynamics have changed in the last
decade, and Islamic Finance is now seen as a viable alternative finance tool in
the world economy and is being strategically adopted by leading financial
institutions (like the World Bank, and the Dow Jones) and also by leading
financial economies (like the United Kingdom, Japan, and France). In the Far
East it is becoming popular in countries like Hong Kong and Mainland China.
The industry is
different in that its financial products and services must be compliant with
the Islamic law (Shari’a) and so all financial products and services available
must pass the “acceptability” test that scholars have laid out.
Critiquing the
interest rate system is more controversial. Most people feel that possessing
money has some inherent value that should be recognised in a zero (or almost
zero) risk way. But with negative interest rates spreading around in the
developed world, interest rates are so low in many countries that they simply
do not fulfil their purpose of incentivising consumers to save any longer. In
short, as Deutsche Bank’s Jim Reid titled his research report last year, we
might be witnessing “The Start of the End of Fiat Money.”
Therefore, our current fiat-based monetary system might require a rethink. After all, in the grand scheme of global economic history, it can still be considered an experiment as the vast majority of human history was based on gold and silver-backed sound money. Current proponents of digital currencies (such as so-called Bitcoin maximalists) are proposing a new form of supra-national sound money based on maths - quasi-“digital gold” for the globalised world.
Islamic economics, on the other hand, can give us clues to solve both these issues. Zakat, or Islamic alms, is a simple, transparent annual wealth tax of 2.5%. Let’s only consider tax havens, where estimated wealth of $10 trillion is held around the world. That means if zakat was paid on these funds (perhaps as some kind of amnesty agreement), there would be $250 billion per year flowing into the world’s poorest areas and worthiest causes.
At the same time, other taxes could be reduced or eliminated. In return for the wealth tax, Islamic economics suggests almost zero tax in every other area, including inheritance.
Solving the interest problem will be more gradual and will require a rethink of the monetary system we currently live in, as I previously mentioned.
Therefore, our current fiat-based monetary system might require a rethink. After all, in the grand scheme of global economic history, it can still be considered an experiment as the vast majority of human history was based on gold and silver-backed sound money. Current proponents of digital currencies (such as so-called Bitcoin maximalists) are proposing a new form of supra-national sound money based on maths - quasi-“digital gold” for the globalised world.
Islamic economics, on the other hand, can give us clues to solve both these issues. Zakat, or Islamic alms, is a simple, transparent annual wealth tax of 2.5%. Let’s only consider tax havens, where estimated wealth of $10 trillion is held around the world. That means if zakat was paid on these funds (perhaps as some kind of amnesty agreement), there would be $250 billion per year flowing into the world’s poorest areas and worthiest causes.
At the same time, other taxes could be reduced or eliminated. In return for the wealth tax, Islamic economics suggests almost zero tax in every other area, including inheritance.
Solving the interest problem will be more gradual and will require a rethink of the monetary system we currently live in, as I previously mentioned.
“I can’t see a
sudden global ban on interest but governments (particularly those with low
interest rates) could incentivise other forms of investment, increasing
regulation around abusive high interest products and businesses to start with”,
Muhammed Yesilhark, a philanthropist, a trustee of the UK National Zakat
Foundation and founder of the Q2Q Foundation in an article published in
www.euronews.com last month.
Mohammed‐Fawzi A. Amadu, Director of Razi’a
Ltd, believes that, “Islamic finance will bring lots of benefit to Ghana. The
benefits depending on how seriously the government understands and commits to
the process will be multi-faceted with the government, financial industry and
the growing Muslim community being larger beneficiaries.”
Among the benefits
of introducing Islamic Finance in Ghana are that: it will unleash the latent
entrepreneurial potential of the Muslims who find no means to realize their
business ideas or who find it distressful to use the system which is available
to them (because they find it unacceptable to ALLAH). When Islamic Finance is
formally recognized, opportunity will be created from various interest groups
to create the Islamic Financial institutions that will create financial
products and services that will be acceptable and attractive to the Muslim
community.
Wealth that is
hoarded at home or put in the banking system but not invested will now be
released for productive ventures. Muslims will also have a financial framework
that would on one hand motivate local entrepreneurs to start productive
ventures knowing that they can have access to funds and on another hand, create
a conducive environment for foreign investment from individuals and organizations
that operate within the Islamic Finance frame work (and who are potential
partners for those interested in Islamic Finance).
The benefit to the
Muslim community will not be limited to the financial industry but will also
benefit the insurance industry. The conventional insurance that is available in
Ghana has elements that are unacceptable within the Islamic framework. The introduction
of Islamic Finance will create the environment for the creation of insurance
products that are acceptable to the Muslims.
Again, the
Government stands to greatly benefit as well. Properly introduced, supported
and used, Islamic Finance will be of considerable use to the government of
Ghana on many levels.
Debt Servicing; a
major element that hampers the socio-economic development of countries that
borrow a lot is debt servicing. Islamic Finance, because it de-emphasizes debt,
will offer the government alternatives to conventional debt-based financing
i.e. equity financing among others. Since money cannot be made from money (in
Islam money is a measure of value and cannot be traded), money in Islam will
have to be invested in economically viable projects in order to realize
returns. The government of Ghana can therefore look to identify those projects
that can be optimally financed through Islamic Finance and then strategically
market those projects to the Islamic finance industry.
Specifically,
sensitive national projects can benefit from Islamic Finance’s bias towards
asset based financing. Various products and services will be available to the
government for use in financing nationally sensitive projects in a way that
retains for the nation its national interest.
By strategically
using Islamic Finance, the government can significantly reduce debt servicing
as a part of its funding structure. Where it uses asset based financing,
government will not have to worry about debt servicing except in the case of
proven negligence on its part.
Inflation, this is
an element of finance that government often seeks to control since it can (at
unhealthy levels) cause instability in an economy. Islamic Finance by its
nature controls inflation; as a fundamental aspect of it is that it uses asset
based financing.
Asset based
financing, this means that, all money that is created must be related to an
existing asset or to a clearly identified and defined asset yet to come into
existence. It is due to this philosophy that an Islamic Financial system
controls inflation; by making sure that all value that is created is related to
a real and existing asset of value (money cannot be created from thin air, as
is done through money creation) or an asset that is certain to be created.
Therefore to the extent that Islamic Finance will be used in Ghana as an
alternative financial system, it can help put a leash on inflation.
Financial and
Economic discipline, Islamic finance when introduced will create a certain
amount of discipline in the Ghanaian financial and economic system. Due to the
fact that Islamic Financial institutions cannot charge interest and can only
benefit by sharing in profit, only economically viable projects with the
potential for profit will attract funding. Spending on leisure by individuals
or politically expedient projects by government are not going to be attractive
to that industry since these are not intrinsically economically valuable
projects and do not promise good returns from which the industry can share.
Furthermore,
projects being undertaken under the umbrella of Islamic Finance will have an
added layer of control. This is because the Islamic Financial institutions will
be directly involved in the day to day running of the project as they are
partners in it and not just simple financiers (like conventional banks).
On the flip side,
money that would otherwise have gone to those spending on leisure or
politically expedient projects would now be channeled to economically valuable
projects.
In this financial
system, simply having collateral or sovereign guarantee does not get you
funding. The economic value of the project and its potential to return profit
is what determines if funding is gotten or not.
Consequently, it
is worthy of note that because money is a measure of value and thus not
intrinsically valuable, debt cannot be traded under Islamic Finance (except at
par). This principle has ensured that Islamic Financial Institutions have
survived “virtually unscathed”xii in the current credit crisis that is
affecting the global financial industry. Thus protecting its stakeholders from
the negative effects of speculation.
Securities; the
government can create securities (asset-based) using its natural resources and
use that to raise money for government expenditure. This for example is what is
being done by the German state of Saxony-Anhalt and by the Deutche Bank.
Maximizing human
resource; because Islamic finance is mostly based on profit and loss sharing
(PLS) principle, it tends to de-emphasize having collateral as a basis for
accessing credit (thus dealing in interest). And because wealth is only created
through profit, the most economically viable projects are the ones with the
best chance of getting funding. Significantly, Islamic Finance will help Ghana
by ensuring that the best ideas of its people whether rich or poor can be
realized and that poor people with good ideas do not despair that they do not
have any means of realizing dreams that are based on their ideas simply because
they have no collateral.
Access to credit –
with Islamic Finance, access to credit will be enhanced because as mentioned
above, a person without collateral and yet with a good and viable business plan
can be hopeful of realizing their plan.
Venture
capitalism; in its pure form Islamic Finance is a form of venture capitalism
and thus its introduction will enhance a culture of venture capitalism that is
still lacking in many ways in Ghana.
Access to external
funding; in introducing Islamic Finance, Ghana can now tap into funding that is
available internationally but that is only given for projects that will be
implemented in a way that meets Islamic regulations.
The government can
also be sure to attract partnerships and investment from practitioners in the
Islamic Finance industry. This is what has happened in Britain where two
Islamic Banks (a third is in the process) and the first Islamic insurance
company have been established since the government openly committed itself to
prioritizing Islamic Finance. Japan and then France, in that order, have
recently announced a move to revise their legal framework to allow Islamic
Finance as well. These efforts are aimed at attracting the vast amount of
funding available in that industry.
Ghana’s effort to
become a major financial hub will be strengthened by the introduction of this
new wave of finance that leading economies of the world (lead by Britain) have
also adopted in the bid to strengthen their image as a financial hub.
The introduction
of Islamic Finance in Ghana will also re-enforce the image of Ghana as a
leader, where positive milestones in Africa are concerned.
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