The time is right to open the window to alternate sources of funding through ethical finance, especially Islamic finance, Dean-University of Cape Coast (UCC) Business School, Professor John Gartchie Gatsi, has advocated.
Given that growth in the banking industry is expected to moderate in the medium-term on account of the impending Domestic Debt Exchange Programme (DDEP) and consequently impact cost and access to lending, Prof. Gatsi who says Islamic finance – forecasted to have a total global asset value of US$4.94trillion by 2025 – could be the ideal vehicle for lending to businesses and households at much lower rates than the current average of 36 percent.
Also known as Islamic banking, it is pivoted on banks and their clients making profits and losses together, with the academic and economist believing that such a system could drive infrastructure-focused public-private partnerships (PPPs) as its underlying principles support socially inclusive and development-promoting activities.
“Islamic finance provides practically all the products that traditional finance offers, but places a higher emphasis on partnerships and joint ventures while striving to promote financial inclusion,” he told the B&FT, adding that the introduction of ethical finance products will serve to deepen the local financial ecosystem.
The economist reiterated recent calls for reforms to the Banks and Specialised Deposit-taking Institutions Act, 2016 (Act 930) to include ethical banking and achieve financial inclusion in the country.
Prof. Gatsi argued that failure to amend the law for Islamic finance will see the nation lose out on the benefits it brings. as well as the increased choices for financial products.
He stated that the Act was enacted for conventional banks and needs to have legal flexibility for the governance structures, including Islamic banking.
“In other jurisdictions, where there is a hybrid model the existing frameworks allowed conventional banks to create ethical finance windows – and this has allowed them to benefit from the best of both worlds… We need our legislation to be adjusted or we will fail to reap the overwhelming benefits that ethical finance provides,” he explained.
He added that the growth of Islamic finance in non-Muslim countries shows that the benefits transcend the issue of ethical finance; and hence should be viewed from a financial inclusion perspective, not from a religious viewpoint.
“The focus is development and not necessarily religion, and that is what we should see it as; it is an opportunity for diversity in the funding mix,” he said.
The Islamic Finance Development Report 2021 projected growth in size of the Islamic finance industry from US$3.374trillion across 135 countries in 2020 to US$4.94trillion by 2025, at an average growth rate of 8 percent.
The report also highlights expenditure on corporate social responsibility, which reached US$1.28billion.
Furthermore, the report notes continued strong demand for sovereign Sukuk bonds – low-risk investments – as evidenced by their oversubscription rates. To meet this demand, several jumbo issuances were carried out in 2020 and the first half of 2021. Uganda, Nigeria and Egypt are among the notable issuers of sharia-compliant bonds on the continent.