Islamic Finance Gaining Momentum

By Felix Dela Klutse

The Islamic world is increasingly seeing Ghana and other African countries as a destination for foreign investment, both on the institutional and corporate fronts.

One sign of such interest was the recent forum on investments in Africa, held in Marrakech and organised by the Organisation of Islamic Cooperation (OIC), which groups 57 countries and has been very active on the continent on the humanitarian and diplomatic fronts since its creation in 1969.

More recently, the organisation's financial arm, the Islamic Development Bank (IDB) - whose main shareholders are Saudi Arabia (23.6%), Libya (9.5%), Iran (8.3%), Nigeria (7.7%) and the United Arab Emirates (7.5%) - has become a major player in development finance in Africa.

The Director of Islamic Development Bank, Sidi Mohamed Taleb, told Business Day in an interview that "Ghana is one of the countries that has so many business opportunities," disclosing that Ghana had greatly benefitted from the $122 billion invested in 2015 by his outfit into sub-Saharan Africa.

The Islamic Development Bank is now focusing on removing obstacles to Africa's development, among them are poor infrastructure and agricultural productivity. The strategy, which has been largely designed by the 22 African member states of Organisation of Islamic Cooperation, according to Mr Taleb, will invest mainly in Africa's energy, telecoms, and transport and agriculture sectors.

How Islamic Banking works

Islamic banking, which implies the avoidance of interest, has become a substantial industry during the last four decades. The industry, which exists in more than 50 countries, is estimated to be worth $5 trillion in the next three years, according to international credit ratings agency, Moody's.

As an increasing number of people are dissatisfied or skeptical about the banking services they receive, and see them as exploitative or even unethical, many view the emergence of Islamic banking as a curiosity, and perhaps even a business opportunity, and one that lends itself to dialogue between Westerners and Muslims.

Spread across the Middle East and other parts of the world, a slew of Islamic financial institutions have been offering interest-free services that advocates say can provide a more sustainable alternative to conventional banking practices.

Charging and paying interest is not allowed in Islamic finance because it is prohibited under Sharia law. Instead, if a bank is providing finance for an infrastructure project, for example, the bank and customer agree to share the risk of investment and divide any earnings.

Ms. Hajara Adeola, Managing Director of Lotus Capital, one of the groups helping to pave the way for Islamic finance in Nigeria told Business Day: "One of the most well-known principles is the lack of interest, so you can't own a return simply for having money. You would have to somehow employ that money into productive use and then you can earn a return on that money."

Islamic banks are also not allowed to trade in financial risk areas or deal in mortgage-backed securities or credit-default swaps. Investing in Islamically unacceptable businesses such as alcohol and cigarette makers, casinos and adult-entertainment companies is also forbidden.

According the International Monetary Fund (IMF), Islamic finance assets grew at double-digit rates during the past decade, from about $200 billion in 2003 to an estimated $1.8 trillion at the end of 2013.

A new IMF study compares the performance of Islamic banks and conventional banks during the recent financial crisis, and finds that Islamic banks, on average, showed stronger resilience during the global financial crisis.

Ernst & Young, a consultancy and accounting firm, estimates that Islamic banking assets grew at an annual rate of 17.6% between 2009 and 2013, and will grow by an average of 19.7% a year to 2018.

Setting up Islamic Bank in Ghana

In Ghana, 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 banking practice in the country particularly with regards to the changing of high interest charges by the conventional banks.

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 60-year history of the country.

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.

The Head of Banking supervision of the Bank of Ghana, Franklyn Belnye, sometime ago 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."

In 2015, an Islamic Investment Fund has been launched in Kumasi with the objective of reviving economic activities within Muslim communities. The Shari'a complaint financial system aimed to mobilize funds from the Muslim Ummah for development, whilst creating jobs for the teeming youth in need of jobs.

The Fund is initiated by the Ahlussunna WalJama'a Ashanti Regional Imam (ASWAJ) to offer "ethical investment" tools to investors seeking to invest in profitable "halal" business ventures which have minimal risk but good potential for growth.

A GHC 100,000 was raised in the initial public offering of 200 shares at a share value of Gh500 per share. The Fund seeks a combination of capital appreciation and current income for shareholders.

The investment plan is established along three minimum risk areas: short term businesses - Cattle Rearing, Washing Bay and Cash-Crop Farming; medium term - Transportation and Commodity Trading; and long term - Real Estate Development, Islamic Microfinance, Project financing and Venture capital.

Islamic finance in other African Countries

Islamic finance is gaining momentum in sub-Saharan Africa, where about 30% of the population is Muslim, according to the Pew Research Center, a think tank in Washington D.C. Gulf African Bank, which offers sharia-compliant products, now has 14 branches in Kenya, with a rising portfolio of small and medium enterprises. Apart from Nigeria, Islamic bank has gain grounds in some African countries such as Tunisia, Algeria, Egypt and Morocco.

Morocco's banks, insurance and agribusiness are expanding fast in Africa, helping to boost Moroccan exporters. The Attijawariwafa Bank now has subsidiaries and branches in 14 African countries, mostly in West Africa. The world leader in fertilisers, the Office Chérifien des Phosphates (OCP), a Moroccan company, is aggressively promoting its products south of the Sahara.

In the Sahel region the bank is financing the flagship Dakar-Port Sudan railway and key energy projects in Mali, Mauritania, Guinea and Côte d'Ivoire, in some cases with the strategic aim of stabilising the region.

The bank has a $400m portfolio in Mali, where it is building a new international airport. It is also financing a road between Algeria and Kidal, the capital of northern Mali, which fell to the extremist group Al Qaida in the Islamic Maghreb, in 2013.

Companies from several Islamic countries have also developed commercial and private investment ties with Africa. According to a 2015 report by the Economist Intelligence Unit (EIU), East Africa is attracting most of the Gulf's non-commodity investment, with manufacturing in Ethiopia; leisure, retail and tourism in Mozambique and Kenya; and education in Uganda of particular interest. Retail and hypermarkets, automotives, commercial banking and tourism are key sectors.

Meanwhile, Turkish Airlines is expanding its presence on the continent, with 44 African destinations; Royal Air Maroc has 22 and Emirates Airlines 19. Turkey is becoming increasingly involved in FDI to Africa.

Turkish trade with Africa has risen nearly fourfold from $5.4bn in 2003 to $20bn in 2014, according to a 2015 research paper by Chatham House, the UK's Royal Institute of International Affairs. Turkey has signed investment treaties with 12 countries in sub-Saharan Africa and aims to sign a free trade agreement with the East African Community by 2019. For example, Turkish exports into Ghana increased from US$3million in 2002 to US$179million in 2013.

Regulator's concerns

Money transfers from Islamic countries or charities to Africa have also faced regulators' concerns that networks could be used for criminal financing. Kenya suspended the operations of 13 firms in the first half of 2015 over concerns that funds were flowing to al-Shabab militants. In May 2013, Barclays has threatened to close the bank accounts of 250 money transfer companies as part of a drive to meet stricter money laundering rules.

IMF's position on Islamic Banking

A February 2016 study by the IMF concludes that there is no evidence that Islamic finance faces different risks from those of conventional finance as regards terrorism and crime. However, it concludes that an in-depth analysis of the intrinsic characteristics and arrangements used in Islamic finance is still required, and that Islamic financial institutions need to build more experience with regard to the risks they face in dealing with money laundering and terrorism financing. If so, this would apply also to the Islamic world's investments in Africa.

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