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.

“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.