The Bank of Ghana is in the process of licensing Islamic Bank, which is expected to provide interest free loans to its customers across the country.
The Central Bank Governor, Dr Henry Kofi Wampah, told journalists at a press conference in Accra that the Banking Supervision Department of his outfit is working assiduously to issue new banking licenses to Islamic Bank, as well as the Ghana Armed Forces Bank by the close of the year.
Islamic banking, which implies the avoidance of interest, has become a substantial industry during the last four decades. The industry, which exists in more than 50 countries, is estimated to be worth around $1 trillion and has the potential to eventually be worth $5trillion in the next three years, according to international credit ratings agency, Moody’s.
Spread across the Middle East and other parts of the world, a slew of Islamic financial institutions have been offering interest-free services that advocates say can provide a more sustainable alternative to conventional banking practices.
Charging and paying interest is not allowed in Islamic finance because it is prohibited under Sharia law. Instead, if a bank is providing finance for an infrastructure project, for example, the bank and customer agree to share the risk of investment and divide any earnings.
Madam Hajara Adeola, Managing Director of Lotus Capital, one of the groups helping to pave the way for Islamic finance in Nigeria told Business Day: “One of the most well-known principles is the lack of interest, so you can’t own a return simply for having money. You would have to somehow employ that money into productive use and then you can earn a return on that money.”
Research from Lotus Capital Limited in Nigeria shows there is a growing appetite for Islamic finance as approximately 30 per cent of the Muslim population around the world would be interested in Islamic finance.
Islamic banks are also not allowed to trade in financial risk areas or deal in mortgage-backed securities or credit-default swaps. Investing in Islamically unacceptable businesses such as alcohol and cigarette makers, casinos and adult-entertainment companies is also forbidden.
According the International Monetary Fund (IMF), Islamic finance assets grew at double-digit rates during the past decade, from about $200 billion in 2003 to an estimated $1.8 trillion at the end of 2013.
A new IMF study compares the performance of Islamic banks and conventional banks during the recent financial crisis, and finds that Islamic banks, on average, showed stronger resilience during the global financial crisis. For instance, Islamic banking outperformed conventional banking over the past decade, increasing its penetration rate above 15 percent in a dozen countries in the Middle East and Asia.
Ernst & Young, a consultancy and accounting firm, estimates that Islamic banking assets grew at an annual rate of 17.6 percent between 2009 and 2013, and will grow by an average of 19.7 percent a year to 2018.
Nevertheless, the operations of Islamic banks give rise to a unique set of risks, in addition to the standard risks associated with banking activities such as credit, market, liquidity, operational and legal risks. The industry also faces additional risks related to the business model and the nascent nature of the industry. For instance, managing liquidity risk is more difficult for Islamic banks when there are limited or no Shari’ah compliant financial markets and Lender of last resort facility.
According to IMF, Islamic banking also has the potential to foster greater financial intermediation and inclusion, especially among Muslim populations that may be underserved by conventional banks, and to facilitate lending in support for small- and medium-sized enterprises.
The Fund however said, for this potential to be realized and to allow the industry to develop in a safe and sound manner, it will be important, among other measures, that countries adapt their regulatory, supervisory, and consumer protection frameworks to address the unique risks in Islamic finance, take further steps to develop Shari`ah-compliant financial markets and monetary instruments, and strengthen the international architecture for the growing cross-border operations.
