In the name of God, the compassionate the merciful
Islamic finance is a global market that operates through the conventional financial system. Over the years, the industry has grown at a bullet-train speed. In 2021, the total assets value of global Islamic finance markets amounted to about 3.95 trillion U.S. dollars. It is expected to amount to 5.9 trillion U.S. dollars by 2026. The industry has several advantages for the Ghanaian economy. The following are the six major advantages that can serve as a booster to Ghana’s current economic challenges;
Asset and services-backed financial transactions
Money cannot earn money but be used to create assets and services. The foundation of Islamic finance is that the quantity of money in circulation must be matched by assets and services of that value of money. Islamic finance agrees with conventional finance theorists that money has global and principal functions: medium of exchange, store of value, unit of account, and means of liquidity. But Islamic finance disagrees that money in itself is a service or asset. The bases for asset and services backing for all financial contracts is to strengthen the foundation of an economy so that, that economic system itself will fight against inflation (more money chasing fewer goods) which erodes the income of individuals and businesses.
It helps by assisting with financial inclusion
The World Bank defines financial inclusion as “Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs: transactions, payments, savings, credit, and insurance delivered in a responsible and sustainable way.” (Worldbank.org, 2017).
The conventional banking system is based on interest payment at a rate pre-set on the deposits of money. Payment and receipt of interest are prohibited in Shariah Law, and Muslims abstain from banking. However, through Islamic banking, financial inclusion can be promoted and well used to bring a larger pool of savings into the local and global economy.
Reducing the impact of harmful products and practices
Shariah principles forbid any transactions that support industries or activities which are forbidden in Islam. For example, usury, speculation, and gambling whether these are legal or not in the place of transaction.
Principle of financial justice
Financial justice is a basic requirement that helps Islamic finance products function in a Shariah-compliant way. The Western financial system looks at making a profit through interest payments and makes the beneficiary liable for any risk. On the other hand, Islamic finance paves the way for the sharing of profit/loss and risk involved in a proportional manner between the lender and the beneficiary. Therefore, if a financier is expecting a claim on the profits of a project, it is necessary that he/she should also carry a proportional share of the loss and risk (Al Ghunm bil Ghurm) of that project.
Encouraging stability in investments
In Islamic finance, investments are approached with a slower, insightful decision-making process (due diligence) when compared to conventional finance. Companies whose financial practices and operations are too risky are usually kept away by Islamic financing companies. By performing intensive audits and analyses, Islamic finance promotes the reduction of risk and creates the space for greater investment stability. This is the reason why when conventional banks were collapsing during the 2008-9 economic downturn, their Islamic banks counterparts were buoyantly standing.
Catalyzes economic development
Islamic finance companies certainly have profit creation and growth as their objectives. For which, they choose to invest in businesses based on their potential for growth and success. Thus, in the Islamic banking industry, each bank will invest in promising business ventures and attempt to out-perform its competitors, in order to attract more funds from its depositors. This will eventually result in a high return on investments both for the bank and the depositors, in the long run. This is unlikely in a conventional bank, where depositors redeem returns on their deposits based on a pre-determined interest rate.
All these benefits are potential tools that can be used by our leaders to easily and simply uplift the Ghanaian economy from its current debt and inflation-redden status. And Allah knows best!
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email: yahaya0246873726@gmail.com
Facebook account: facebook.om/Yahaya.iliasu.94
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