Business News of 2014-03-25

BoG reviews banking act to include Islamic banking

The Banking Act is being reviewed to incorporate the concept and governance of Islamic Banking and Finance in the country.

This is to pave the way for the establishment of such banks in the country by the end of the year to end the perennnial complaints of high interest charges by the conventional bank by creditors.

Presently, two applications for the establishment of Islamic banks in Ghana are pending before the Central Bank awaiting approval to kick start what will see a different dimension of banking and finance in the 57-year history of the country.

Relieve to industry

The move, according to Bank of Ghana sources, is to provide funding options to businesses and creditors who are reeling under high interest rates by the conventional banks.

Much as lending from the bank may be discriminatory, it is expected to feel a gap as far as lending from the various banks in the country is concerned.

Head of Banking supervision of the Bank of Ghana, Mr Franklyn Belnye, said the banking act, 2004, (Act 673) was being revised to establish a framework for undertaking consolidated supervision of banks, including the yet to be approved Islamic banking and finance.

He added that the revision of the act would re-classify non-banking institutions and finance houses as Special Deposit-Taking Institutions with comprehensive provision for their regulation.

Speaking at a seminar on Islamic banking in Accra on February 20, a Deputy Governor of the Bank of Ghana, Dr Abdul-Nashiru Issahaku, was upbeat about the success of the concept of Islamic banking when introduced in Ghana.

The seminar, which was sponsored by the Bank of Ghana in collaboration with the Global Institute of Islamic Banking, Insurance and Consultancy (GIIBIC), was to examine the opportunities and challenges for the establishment of an Islamic Bank in Ghana.

“Islamic Finance has to be compliant with the basic tenets of Shari’ah (the legal code of Islam), which is based on the principles of justice, fair dealings and harmony through equitable distribution of wealth,” the deputy governor said.

“Islam is opposed to exploitation of an individual or institution by others for self-aggrandisement,” he added.

But the challenge, according to the deputy governor, is that Islamic banks, like other commercial banks, are required by law to keep some of their deposits with the Central Bank, which usually attracts interest that Islamic banks forbid.

“An alternative is needed to ensure that Islamic banks get a fair return on their deposits with the Central Bank,” he said.

Head of the Sharia compliance at the Al Salam Bank in Bahrain, Dr Mohammed Burhan Arbouna, who was the resource person at the seminar, said Islamic banks that were Sharia-compliant did not charge or pay interest.

Again, the Islamic banks do not finance projects that are considered not to comply with the principles of Sharia - such as investments in gambling, alcohol production and so on.

According to him, the business model of Islamic finance is based on partnership and not on "riba", usurious interest taking, which is forbidden in the Koran.

“However, even though they don't charge interest, Islamic banks are generally not charity organisations,” he said.

Dr Burhan explained that the customer and the Islamic bank shared the risk of any investment on agreed terms, and divided any profits between them.

No Interest

More and more conventional international banks, such as Citibank, HSBC and UBS, are converting some of their services to interest-free Islamic finance models.

As Islamic banks cannot charge interest, they will commonly buy real items and lease them back to customers.

The payments from the customers will include a charge which will enable the bank to make money.

For example, if a customer wants to buy a computer, the bank will buy the machine, and then sell it on to the customer at a fixed price - leasing it to them or charging a rental fee until the item is fully paid for.

Industry players have argued that Islamic banking has the potential of solving the high interest rates challenges for the private sector.

Islamic banking is emerging as one of the fastest growing sectors in global finance. Estimates of the value of Islamic banking internationally range from US$200bn to US$500bn.

British banks have recently started offering products tailored for Muslims, but they are all non-Islamic banks.

For example, HSBC already offers an Islamic law (Sharia) compliant pension, home loan scheme and stockbroking service.

But some financial analysts are concerned that the increase in Islamic banking opens western financial institutions to influence informed by a conservative Islamic agenda.

However, many bankers at the World Economic Forum were upbeat about a growing success story of banking services which they argue are a fairer and more ethical way to handle financial affairs.