ISLAMIC FINANCE & CAPITAL MARKETS

Ghana’s Long Journey to Islamic Finance

Published

1 year ago

February 6, 2023

Editor

Spread the love

By Baba Yunus Muhammad

Islamic finance today has become a global growth phenomenon that no region or country can afford to ignore. According to the State of the Global Islamic Economy Report 2020/21, an annual industry report produced by Thomson Reuters, the global market for Islamic financial services, as measured by Shariah compliant assets, is estimated to have reached US$2.88 trillion, and projected to reach US$3.69 trillion by 2024. Islamic commercial banks account for the bulk of the assets with investment banks, Sukuk issuances, funds and insurance making up the balance. With over 500,000 Islamic financial institutions operating around the world, Islamic finance is set to become a major global player in the world of finance. The factors that drive the growth of Islamic finance range from increased petrodollar investments from the Gulf, growth in Muslim population and the ethical character and financial stability of Islamic financial products.

Currently, the Middle East and South East Asia and some few African countries, are the primary locations for Islamic capital. In particular, Malaysia, Iran and the majority of countries from the Gulf Co-operation Council (GCC) such as Kuwait, Bahrain and Qatar are seen as the main centers of Islamic finance, with significant activity also taking place in the UK and more recently in countries such as Turkey, Sudan, Nigeria, Egypt, South Africa, Kenya, Senegal, Jordan and Syria and some Asian countries such as Indonesia, Hong Kong, Singapore, Bangladesh, Pakistan and China.

Islamic finance in Ghana

However, amidst all the talk of bubbling Islamic finance hubs globally, there remains much to be achieved on purely a domestic basis in certain key countries. Ghana is a clear example. With the exception of Nigeria, there is probably, no country in Africa that offers greater potential for the growth of Islamic finance than Ghana!

Ghana is among Africa’s largest untapped Islamic finance markets. Despite the growing potential of Islamic finance and its impressive growth in other parts of the world such as the Middle East, South East Asia and Europe, it is yet to find favor with Ghanaian authorities. Ghana has a significant Muslim population of about 7 million of its 32,623,337 population. Yet, there are no Shariah compliant financial products and services currently available in Ghana. There is also, no fully-fledged Islamic bank or Islamic banking window currently operating in Ghana. A recent survey however, suggests that a considerable number of Ghanaian Muslims and non-Muslims as well, would prefer to invest in non-interest bearing instruments or products or donate the interest from interest-bearing accounts to charity.

Government’s lukewarm attitude

Successive Ghanaian governments’ attitude towards Islamic finance can be described as “lukewarm” and “cautious”. Although, there are always unfounded rumors about Ghana’s formal embrace of Islamic finance, but there is nothing on the ground to physically demonstrate the government’s seriousness. It appears the government lacks the political will to fully embrace Islamic finance.

No Islamic financial institution can operate in any given jurisdiction without an effective regulatory framework in place. To start with, there are issues of governance, regulatory, taxation, Shariah compliance and others, like recognizing the principle of profit sharing and allowing Islamic contracts to avoid certain terms which are not permitted, such as interest, to contend with.

These issues, of course, cannot be effectively addressed or tackled without the necessary amendments in Ghana’s financial laws. It should however, be noted that Ghana has a dominant and sophisticated Christian majority population, and this means the legislative arm of the Government is also dominated by Christian members of Parliament. The terrorist activities by some fanatical Muslim elements and criminal gangs in some predominantly Muslim countries, particularly, Mali, Burkina Faso and Nigeria have unfortunately dented the impression majority of Ghanaians has about Islamic finance, particularly, when it has to do with amending the country’s laws to accommodate aspects of the Shariah.

Challenges

The real challenge now for proponents of Islamic finance in Ghana is how to win the support and confidence of the Christian majority population, and by extension, the Parliament to effect the necessary legislative changes in Ghana’s financial laws that will pave the way for the formal accommodation of Islamic finance as an alternative financial system in Ghana. This may take time, probably, a longer time. These basic challenges which readily come to mind must be overcome:

Regulatory framework:

Ghana’s current financial system is currently governed and regulated by laws that are clearly in opposition to the basic tenets of Islamic banking.
Lack of a robust regulatory framework to govern and regulate the operations of Islamic financial institutions.
The interest earned on fixed deposits is subject to income taxes, whereas the profit on Islamic banking deposits is treated differently.
Conventional financial institutions borrow from other banks and financial institutions to meet their short-term funding requirements, but Islamic financial institutions cannot do so because it involves interest.
Islamic financial institutions are required to closely monitor their investments in various businesses, as well as ensure that the investee firms are managed properly. This calls for expensive supervisory infrastructure.

Dearth of Islamic finance professionals:

There is a serious dearth of Islamic finance experts and trained personnel in Ghana.

Islamic finance literacy

Islamic finance literacy among Ghanaians generally is very, very low. There is a lack of awareness about Islamic finance. Most people mistakenly believe that Islamic finance is only meant for Muslims, whereas in climes like Malaysia, Nigeria, Kenya, UK and elsewhere, about 40% of the customers of Islamic financial institutions are non-Muslims. A great deal of hard work has to be done to dispel the myth that Islamic finance is only for Muslims and the notion that Islamic finance is associated with terrorism. Much harder work must go into raising the awareness among the professional and intellectual class that Islamic finance is a complementary, alternative and ethical form of finance. Public seminars and discussions are a good way to do this.

Conclusion

Islamic ﬁnance, with its widely recognized strengths in retail and commercial banking and experience in infrastructure, property, SMEs and agricultural ﬁnancing, has considerable potential to become an important element in Ghana’s aspirations to be an Islamic ﬁnancial services center in West Africa. Secondly, Islamic finance has the potential to facilitate further innovation and competition in the wholesale and retail banking sectors and to support Ghana Government’s commitment towards credit market diversiﬁcation.

According to official sources from Ghana’s ministry of Finance, Ghana is currently facing a huge budget deficit of US$1.375 trillion, and requires a dose of foreign injection of funds to close this gap. Following the example of countries such as Malaysia, Indonesia, UK, France and Germany, Ghana could use Islamic financial products such as Sukuk (long term Islamic bond) to fund its budget deficits, infrastructure and other sectors.

Specifically, Ghana could attract the Middle East’s high investible surplus through Islamic banking and finance. The institutionalization of soft and hard Islamic finance infrastructure in Ghana may help attract foreign Islamic banks and conventional banks with Islamic windows to establish operations in Ghana; attract investments in Ghanaian assets and businesses from overseas Shariah investors and tapping into new funding sources through Sukuk and other securitized issues; fund managers establishing Shariah compliant funds for Asian and Gulf institutional and high net worth individual investors; local Exchanges providing Islamic listings platforms for domestic and international issues of Shariah compliant instruments; and Ghanaian based financial firms, professional services providers and educational institutions exporting their services into Asia and the Gulf.

Baba Yunus Muhammad is the president of Africa Islamic Economic Foundation. He can be contacted at president@afrief.org.

This article was first published in IFN Volume 20 Issue 4 dated the 25^th January 2023.

Spread the love

ISLAMIC FINANCE & CAPITAL MARKETS

IsDB Forecasts $15 Trillion Needed by 2040 for Global Sustainable Infrastructure

Published

2 days ago

April 30, 2024

Editor

Spread the love

By Aamer Yaqub

At the Islamic Development Bank’s (IsDB) 2024 Annual Meetings in Riyadh, President Dr. Mohammed Al-Jasser articulated a compelling vision for addressing the global infrastructure deficit, which demands an estimated $15 trillion by 2040 to meet burgeoning needs. This statement aligns with the headline: “World needs $15 trillion to bridge the financing gap for sustainable infrastructure projects by 2040: IsDB”. This gathering, which also marked the bank’s Golden Jubilee, was themed “Cherishing our Past, Charting our Future: Originality, Solidarity, and Prosperity.”

Dr. Al-Jasser’s comments, as the Saudi Press Agency reported, emphasized the critical inadequacies of current public financing mechanisms in keeping pace with the escalating demands for sustainable infrastructure. He underscored the urgency of rethinking financing strategies to effectively support long-term investment in infrastructure, particularly in the world’s least developed countries.

These nations, hardest hit by resource depletion exacerbated by the COVID-19 pandemic, face a stark reality. The pandemic strained their development efforts and posed significant risks to their future growth and stability. Dr. Al-Jasser pointed out that these countries are at risk of enduring further economic and social degradation without immediate and decisive action.

Highlighting the unique position of Islamic finance in this scenario, Dr. Al-Jasser noted its suitability for funding substantial, long-term infrastructure projects. Islamic finance, known for being asset-based and embracing risk-sharing, dovetails with sustainable and environmentally responsible investing principles. This makes it an ideal approach to tackle these countries’ infrastructural challenges, ensuring that development aligns with ethical financing principles.

Dr. Al-Jasser called for a global mobilization to leverage the principles of Islamic finance to not only bridge the financing gap but also catalyze prosperity, solidarity, and equitable growth across the least developed nations. His vision extends beyond financial growth, aiming to foster enhancements in healthcare, education, and job creation, thus attacking the roots of poverty.

This focus on sustainable and responsible finance underscores a broader shift in global development priorities, where ethical considerations are increasingly becoming as significant as economic factors. Dr. Al-Jasser’s advocacy for a strategic reorientation in financing reflects a deep understanding of Islamic finance’s challenges and transformative potential in the contemporary global economy. This strategic shift is crucial as the “World needs $15 trillion to bridge the financing gap for sustainable infrastructure projects by 2040: IsDB,” emphasizing the urgency and scale of the financial challenges ahead.

Spread the love

ISLAMIC FINANCE & CAPITAL MARKETS

How Islamic Social Finance Contributes to Poverty Alleviation

Published

2 weeks ago

April 22, 2024

Editor

Spread the love

By the ISA

The global Islamic economy has burgeoned to an impressive $2.29 trillion in 2023. A significant part of this growth story is the transformative role of Islamic social finance. Rooted in principles of equity, charity, and social welfare, Islamic social finance is a beacon of hope and a practical solution in the fight against poverty. The Islamic economy isn’t just thriving in the newer modest fashion and digital entrepreneurship sectors, but it is also making substantial strides in ethical and socially responsible finance. Leveraging mechanisms such as Zakat (almsgiving), Sadaqah (voluntary charity), and Waqf (endowment), Islamic social finance has shown its potential to significantly impact poverty alleviation, especially in regions with substantial Muslim populations. In this article, we’ll explore how this ancient yet evolving financial system addresses one of humanity’s most persistent challenges: poverty.

Mechanisms of Islamic Social Finance

Islamic social finance, deeply rooted in Islamic principles, offers unique mechanisms for wealth distribution and social welfare. These instruments align with religious teachings and provide practical solutions for poverty alleviation and community development. Here, we explore the key instruments of Islamic social finance:

Zakat

The Pillar of Islamic Giving Zakat, one of the five pillars of Islam, is a mandatory charitable contribution calculated as a fixed proportion of a Muslim’s savings and wealth. As a compulsory act of worship, Zakat profoundly redistributes wealth and aids people in need.

Halal saving techniques.

It is estimated that if properly collected and distributed, Zakat has the potential to reduce poverty levels in Muslim-majority countries significantly. Today, Zakat is collected and distributed through various channels, including government bodies, NGOs, and digital platforms, ensuring a broader and more efficient reach.

Sadaqah: Voluntary Charitable Acts

Unlike Zakat, Sadaqah is a voluntary charity without any fixed amount or percentage, making it a flexible tool for social welfare. Sadaqah contributions often fund community projects, emergency relief, and other social welfare initiatives, directly impacting living conditions and providing support in times of crisis.

Waqf: The Endowment System

Waqf, an Islamic endowment of property or money for a specified philanthropic cause, has historically played a crucial role in developing Islamic societies. Modern Waqf systems are evolving, with initiatives like cash Waqf and corporate Waqf emerging, allowing for more diverse and sustainable social projects.

Qard Hasan: Interest-Free Loans

Qard Hasan refers to an interest-free loan provided for welfare purposes or to help someone in need, embodying the Islamic principle of helping others without seeking personal gain. These loans are particularly impactful in empowering low-income individuals or entrepreneurs who lack access to traditional banking services, thereby fostering economic growth and self-reliance.

Muslims give away a lot.

Each instrument plays a vital role in the Islamic social finance ecosystem. They not only adhere to Islamic principles but also offer practical, ethical, and sustainable means of supporting social welfare and poverty alleviation. As the Islamic economy continues to grow, these mechanisms are increasingly being integrated with modern financial practices, expanding their reach and impact in addressing global socio-economic challenges.

Islamic Social Finance in the Modern World

Adopting technology in Islamic social finance has streamlined processes, from the collection of Zakat to the distribution of funds. Digital platforms have enabled faster, more transparent, and more accountable transactions. Technology has also democratized participation in Islamic social finance, allowing individuals worldwide to contribute easily to Zakat, Sadaqah, and Waqf.

Fintech innovations in the Islamic finance sector have been pivotal in mobilizing resources. Digital platforms facilitate the efficient collection and allocation of funds, ensuring they reach the intended beneficiaries promptly and effectively.

Islamic fintech platforms play a vital role in financial inclusion, offering services tailored to the needs of the unbanked or underbanked populations, who often need financial support.

Muslims give charity a lot.

Case Studies: Islamic Social Finance in Action

As a crowdfunding platform focused on the global Muslim community, LaunchGood.com has been instrumental in supporting various causes, from disaster relief to community projects, showcasing the power of collective, community-based support. Platforms offering Islamic micro-financing and crowdfunding have opened new avenues for small-scale entrepreneurs and individuals in need. These platforms directly contribute to poverty alleviation and economic empowerment by providing interest-free loans and investment opportunities.

Platforms like Malaysia’s Ethis and Indonesia’s Evermos are prime examples of how Islamic social finance can be integrated into the business world. These platforms adhere to Islamic principles and support small and medium-sized enterprises (SMEs), fostering job creation and sustainable economic growth.

Impact on Poverty Alleviation

Islamic social finance has a tangible impact on poverty alleviation, addressing both immediate needs and long-term economic stability.

Direct Impact on Poverty Reduction

Zakat and Sadaqah provide immediate financial assistance to those in dire need, helping to alleviate poverty at the grassroots level. For example, in many Muslim-majority countries, Zakat collections amount to significant sums, directly supporting millions of impoverished individuals. Waqf endowments have historically funded educational institutions, healthcare facilities, and other community infrastructure, contributing to sustainable poverty reduction. Modern Waqf projects continue this legacy, often focusing on long-term community development. For example, the Waqfeyat Al Maadi Community Foundation (WMCF) in Egypt aims to create sustainable social impact through a longstanding but part-forgotten Islamic tradition.

Helping those in need is sunnah.

Indirect Impact through Economic Empowerment

Islamic microfinancing and crowdfunding platforms have empowered countless entrepreneurs, particularly in underprivileged communities. These platforms enable individuals to start or grow businesses by providing interest-free loans and investment opportunities, creating jobs, and fostering economic independence. A study conducted in Indonesia showed that Islamic microfinance institutions helped increase the income levels of small business owners, demonstrating the indirect impact on poverty alleviation.

Challenges and Opportunities

While Islamic social finance has made significant strides, it faces several challenges that must be addressed to maximize its impact.

Challenges in Islamic Social Finance:

Regulatory Hurdles: One of the primary challenges is the lack of a unified regulatory framework across different countries, which can hinder the efficiency and scalability of Islamic social finance initiatives.
Limited Awareness and Understanding: There is still a significant gap in awareness and understanding of Islamic social finance mechanisms among both Muslims and non-Muslims, limiting participation and support.

Opportunities for Growth and Innovation:

Technological Integration: The continued integration of technology offers immense growth opportunities. For instance, blockchain technology can enhance transparency and trust in the distribution of Zakat and Sadaqah.
Global Partnerships: There is a growing opportunity for global partnerships between Islamic and conventional financial institutions to expand the reach and impact of Islamic social finance.
Educational Initiatives: Increasing educational efforts to raise awareness about Islamic social finance can lead to greater participation and support, furthering its impact on poverty alleviation.

Conclusion

The unique combination of traditional Islamic principles and contemporary financial practices positions Islamic social finance as an effective tool for addressing poverty and promoting social development. Integrating Islamic social finance principles can create a more inclusive and equitable global economy. The path ahead for Islamic social finance is filled with potential and essential for fostering a balanced and just economic system worldwide.

Courtesy: The Islamic Services of America (ISA) is a leading authority in Halal certification within the United States and North America.

Spread the love

ISLAMIC FINANCE & CAPITAL MARKETS

The Historical Evolution of Zakat Practices

Published

1 month ago

April 1, 2024

Editor

Spread the love

As the gentle light of dawn pierces the darkness, heralding the start of a new day, so too does the practice of Zakat illuminate the lives of millions around the globe. This pillar of Islam, rooted deeply in the sands of time, has woven its way through centuries, evolving and adapting, yet steadfast in its purpose: to cleanse wealth, assist the needy, and bind the community in a fabric of generosity and care. Today, let’s embark on a journey through the historical evolution of Zakat practices, tracing the golden threads that connect the past to the present.

The Dawn of Zakat: Its Origins and Early Implementation

Picture a time when the concept of social welfare was as vast and empty as a desert night sky. Into this void, Zakat emerged as a guiding star, introduced by Prophet Muhammad (peace be upon him) as a mandatory act of charity. It was more than charity; it was a divine injunction, a means to redistribute wealth and ensure no member of the community was left wanting.

Zakat in the Early Islamic Society

In the nascent days of Islam, Zakat served as the cornerstone of the Islamic economy and social system. It was a direct, person-to-person means of support. Imagine a society where the rich directly supported the poor, the well-fed ensured the hungry were nourished, and those with surplus shared with those in lack. This was the essence of early Zakat practices—a tangible expression of faith and brotherhood.

The Caliphates and Institutionalization of Zakat

As Islam spread across continents, the practice of Zakat evolved. Under the rule of the Rashidun Caliphs and subsequent Islamic empires, Zakat transitioned from individual responsibility to a more organized, state-administered duty. This was akin to the transformation from a scattering of stars into a constellation, each point of light connected to create a system that was more structured and far-reaching.

The Zakat Administration

Imagine a medieval treasury where the collected Zakat funds were as carefully recorded and managed as a librarian tends to books. This period saw the establishment of dedicated Zakat offices, with officials appointed to collect, record, and distribute Zakat. This institutional approach expanded the scope of Zakat, enabling large-scale projects like the construction of public works, hospitals, and schools—benefits that flowed back into the community, nurturing a garden from the seeds of charity.

The Tapestry of Modern Zakat Practices

Fast forward to the present, and the essence of Zakat remains unchanged, though its practice has adapted to the complexities of modern life. Today, Zakat practices are a rich tapestry, reflecting the diversity of the global Muslim community.

Zakat in the Digital Age

In an era where technology bridges continents, Zakat has embraced the digital revolution. Online calculators simplify the task of determining what is due, while charities and organizations use the internet to collect and distribute Zakat funds worldwide. This digital transformation is like the wind carrying seeds far and wide, allowing the spirit of Zakat to reach every corner of the earth, nourishing souls and communities in its wake.

The Global Zakat Movement

The modern Zakat movement is a vibrant community of believers, scholars, and humanitarian organizations working together to address the challenges of poverty, inequality, and disaster relief. Through international cooperation, Zakat funds now provide not just for basic needs, but also for sustainable development projects, education, and healthcare initiatives, painting a picture of a future where faith and action go hand in hand to create a better world for all.

The Historical Evolution of Zakat Practices

The historical evolution of Zakat practices is a story of adaptation and resilience, a journey from the simple act of giving to a sophisticated system of social welfare that spans the globe. Each era has added its own colors and patterns to the tapestry of Zakat, enriching it with new dimensions of meaning and impact.

As we continue to weave this tapestry, let us draw inspiration from the past, embracing the spirit of Zakat with innovation and compassion. For in every moment of giving, in every penny dropped into the Zakat jar, lies the potential to transform a life, uplift a community, and carry forward the timeless legacy of generosity that is the heart of Zakat.

In the grand narrative of Islamic history, the evolution of Zakat practices stands as a testament to the enduring power of faith, community, and the human spirit to overcome challenges and create a more just and compassionate world. Let’s cherish and continue this legacy, for in the act of giving, we find our greatest strength and our most profound connection to one another.

Spread the love