In the name of God, the compassionate the merciful
Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. It is typically measured as an annual percentage increase. When inflation occurs, each unit of currency buys fewer goods and services than it did before. In other words, too much money chasing fewer goods in an economy. This can have various economic impacts, such as affecting interest rates, investment decisions, and consumer spending patterns.
From the Ghana Statistical Service, Ghana’s annual inflation rate edged up to 23.5% in January 2024, from 23.2% in the prior month, staying well above the central bank’s target band of 6% to 10%. This comes after five consecutive months of decreases, amid a weakening currency. Non-food price growth accelerated to 20.5% in January compared with December’s 18.7%, while food inflation eased to 27.1% from 28.7% in December. This has had negative effects on the Ghanaian population and businesses in the country. There were considerable job losses, business closures, and a sharp reduction in household incomes due to Ghana’s high inflation trend.
Some major negative effects of inflation on the economy
Some of the effects of inflation can be devastating to both individuals and businesses. For example, inflation decreases the value of money, leading to a decrease in the purchasing power of consumers. This makes it difficult for people to afford goods and services, leading to a decrease in overall consumer spending. Inflation can also lead to uncertainty in the market, which can discourage investment and economic growth. Businesses may be hesitant to make long-term investments in a high-inflation environment, leading to decreased productivity and economic output.
Inflation can also lead to wage and income disparities, as rising prices may not be met with corresponding increases in wages as we have witnessed in Ghana. This can lead to a decrease in the standard of living for many individuals and exacerbate income inequality. Inflation erodes the value of savings and investment returns, as the real value of money decreases over time. This can discourage individuals from saving and investing, which can have long-term negative effects on the economy. High inflation can create uncertainty and instability in the economy, as businesses and consumers may struggle to predict future prices and make informed decisions. This can lead to a decrease in economic activity and overall economic growth.
However, Islamic finance presents several mechanisms that could help control inflation in Ghana. Simple as that, you apply the Islamic finance principles, you achieve the results. Here are a few ways in which Islamic finance can contribute to managing inflation:
Profit-and-loss sharing: Islamic finance emphasizes profit-and-loss sharing arrangements, which means that returns to capital are tied to the actual performance of projects. This can help to allocate resources more efficiently and reduce speculative behaviour that may contribute to inflation:
Asset-backed financing: Islamic finance promotes asset-backed financing, ensuring that financial transactions are backed by tangible assets. This can help reduce the likelihood of excessive money creation and credit expansion, which are often linked to inflationary pressures.
Ethical investment principles: Islamic finance adheres to ethical and social principles, which can help direct capital toward productive and socially beneficial activities. Promoting responsible and sustainable investment can contribute to a more stable economic environment, potentially mitigating inflationary tendencies
Prohibition of speculative transactions: Islamic finance prohibits certain speculative transactions, such as gambling and excessive uncertainty (gharar). By avoiding speculative practices, it may help stabilize prices and prevent asset bubbles.
It is important to note that while Islamic finance offers these potential benefits, its impact on controlling inflation would depend on various factors such as the overall economic context, regulatory environment, and the specific implementation of Islamic financial practices in a given country. And Allah truly knows best! “Praise be to Allah in whose favour good deeds are accomplished” (ibn Majah 3803)
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana and beyond.
Email: yahaya0246873726@gmail.com
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