Sunday, 29 September 2019

Islamic Banking and the role of Bank of Ghana

Image result for Islamic Banking and the role of Bank of Ghana Prof John Gatsi

The keynote speaker and Dean of the School of Business at University of Cape Coast, Professor John Gatsi speaking during the Islamic Banking and Finance forum organized by the Dubai Chamber International Office in Accra, explained that in the past both the Old Testament and Qorun prohibit lending to neighbors with interest and there is no need to have serious difficulties regarding interest free banking principles in Islamic banking. He quoted from Deuteronomy 23:19 ‘’Thou shall not lend upon usury to thy brother, usury of money, usury of victuals, usury of anything that is lent upon usury........”

The principle of lending without interest (riba) is therefore not a new development. He said both faiths backslided  on these principles due to changes in religious practices , rearrangement  of systems of governance and societal dynamics in centuries of human history.The practice of banking without interest began again in Egypt in 1963 and spread to other Islamic Republics.

Image result for Islamic Banking and the role of Bank of Ghana

The Dean of the UCC Business School explained that conventional banking and finance simply reward savings and investment to motivate mobilization of funds by the financial system through interest which is considered sinful by Islam to the effect that those who earned interests are to remit same to charity . Prof Gatsi explained that the reason why Islamic banking discussions which started in 2004 could not research effect public, governmental and regulatory attention is because of the approach and largely indoor nature of the discussion. He advised that discussion should be open and highlight the prospects for the Ghanaian economy rather than purely on the requirements of one’s religion. Prof Gatsi stated that using the population of Muslims as reason to introduce Islamic banking and finance in Ghana  should be moderated because Ghana is a secular democracy that will not allow state regulator to  promote Islamic Banking to satisfy a particular religion. He advised that in countries such us the United Kingdom, Canada, France Germany and Italy where Islamic Banking penetration was remarkable, was due to the economic and financial market benefits and not Muslim populations. He made reference to the 2010 Global Islamic Banking Report in which the population of Turkey then had 99% Muslims with only four(4) vibrant banks with Islamic products while UK had 2.8% Muslim population with more than twenty (20) banks offering Islamic Banking products and services. He explained that in the same report France had about 5% Muslim population with less developed Islamic Banking industry when compared to the UK.

Prof Gatsi said broader engagement with religious stakeholders, government and regulators of the financial market  to focus on interest free banking is required. He advised that calling Islamic Banking interest free banking does not in any way devalue any religion, it will only provide competition, alternative and choice for Ghanaians. In Islamic law there is prohibition against interest, uncertainty (gharar), gambling and speculation (maysir), investment in prohibited goods and services such as alcohol,pork,tobacco, pornography and illegal drugs. The Islamic Banking space has changed allowing for derivative instruments, bonds among others introduction of Islamic Banking will not collapse alcohol,gambling, lottery and the market for pork.
To some scholars , the difference between the  performance of Islamic banks and conventional banks are not pronounced.The products are almost the same with different approaches. We now have Islamic insurance (takaful), Islamic bond (sukuk) , joint ventures, partnerships. Islamic banking is actually only looking for space to provide additional and alternative products and services that generate dividend, profits and capital gains but not interest (riba). It will not destroy the alcohol industry,. It promises to support more real sector economic activities, enhance project finance in agriculture, pharmaceuticals and traditional infrastructure sectors

The strength of a vibrant financial system is to be able to accommodate new financial products, services, instruments, and approaches to banking. Islamic banking has penetrated North America, Europe Africa and Asia in recent past providing what is termed a “Window”
 As a result many countries practicing Islamic banking do so based on the hybrid model instead of pure Islamic banking rooted in the sharia Law 

The general view is that Islamic banking promises to remove the burden of interest for government, Businesses and households to foster a thriving entrepreneurial economy predicated on profit and loss sharing instead of interest.

 Legal and Regulatory Environment for Islamic Banking

The current economic and regulatory structures for banks favor conventional banking. The regulatory foresight in Banks and specialized Deposit-taking Institutions ACT, 2016 (ACT 930) is to provide safety, soundness and stable banking sector. Clearly our Banking regulatory structure was put in place without Islamic finance and banking principles in mind. Any decision to introduce Islamic banking should be considered such that it doesn’t dilute the potency of bank regulation bordering on investment. This is important because under Islamic banking, Banks invest hugely in real Estate and other property via joint ventures, partnerships etc. which is not encouraged by Act 930.

Section 19 (2) of Act 930”   Subject to the limits that the Bank of Ghana may prescribe, a bank, specialized deposit-taking institution or finance holding company shall not build, purchase or take a lease of immovable property except
(a) For the provision of business premise, or for the purpose of housing the staff of the bank or specialized deposit-taking institution; or
(b) For the provision of amenities for staff

Section 19 (3) of Act 930” Despite subsection (2), a bank specialized deposit-taking institution or financial or financial holding company may accept immovable property as collateral security for a debt or other liability and may acquire an interest which a bank, specialized deposit-taking institution or financial holding company may lawfully acquire in the satisfaction of a debt due that bank, specialized deposit-taking institution or financial holding company.

Section 19 (4) of Act 930” An interest acquired under subsection (3) shall be disposed of by the bank, specialized deposit-taking institution or financial hold company within one year after the acquisition or within a longer period that may be determined by the  Bank of Ghana on application made by the bank or specialized deposit-taking institution or financial holding company.

From the above, specialized deposit-taking institutions or financial holding company shall not build, purchase or take a lease of immovable property except of housing of the staff of the bank or business promise

Profit and loss sharing deposits

Islamic Banking ensures joint investment with depositors.
Where returns are based on proportionate share of profit earned and not on some fixed interest. This implies when the Bank make losses depositors also will lose but Act 930 ensures protection of depositors as articulated in  Section 3 (2) of Act 930” the role of Bank of Ghana

(a) Promoting the safety and soundness of banks and specialized deposit-taking institutions;
(c) Ensuring the soundness and stability of the financial system and the protection of depositors in the country through the regulation and supervision of financial institution;
(d) Developing appropriate consumer  protection measures to ensure that the interests of clients of the banks and the  specialised deposit-taking institutions are adequately protected;

The risk of Islamic Banking

It should be noted that apart from interest all the Islamic Banking products and services are just the same as conventional banking financial products.However while conventional banking is structured to protect customers, clients and investors even in times of difficulty, Islamic banking on the other hand  does not demonstrate clear protection for depositors in times of difficulties such as losses.  Equity based banking just like payment of dividends is not certain as in traditional corporate finance.

Islamic Banking outside Islamic states

For professionals, Islamic banking is an alternative banking system which must be promoted based on the principles of providing alternative banking solution for Government, Businesses, and Households and above all to support entrepreneurial projects.The major strength of Islamic banking is said to be the effective support for entrepreneurs by making an Islamic banks partners in almost all businesses supported. Consumer credits are therefore limited within the flame work of Islamic banking because of its structure and products.

The penetration of Islamic banking in most European countries such as France, Netherlands, Germany and United Kingdom  were driven by the willingness and proactive engagement by the banking sector regulators and Government policies to accommodate Islamic banking to diversify access to alternative banking    for citizens

The Bank of Ghana should demonstrate its readiness to create regulatory window, supervisory structure and corporate governance adjustments, and create the road map flexible enough to embrace Islamic banking.

Prof Gatsi concluded with the following statement “Islamic banking should be promoted on the principle of alternative banking and not the promotion of Islamic faith. The central bank should be proactive and define roadmap for Islamic banking as there are benefits in supporting the entrepreneurial space and government projects. There is the need for proper education and inclusive discussion about Islamic banking. Banking is generally highly regulated whether is is conventional or Islamic hence the need for BoG to be interested. Many aspects of banking will need some adjustments including capital, capital adequacy, audit practices, human resource and corporate governance “