Potential challenges, Issues that could hamper the establishment and operationalization of Islamic Banking System-: ‘A aase of Ghana’- Policy recommendations

By Dr Richmond Akwasi ATUAHENE

Corporate Governance/Banking Consultant

 Abstract

Islamic banking in Ghana is still at its drawing and preparatory stage and surrounded by a lot of potential challenges and set backs. It is important to note that despite the averagely small number of Muslims population in the country, little progress has been made in ensuring its full take off and operationalization. The paper explores the potential challenges Islamic banking could be faced with in Ghana.

Through review of past studies, the paper identified factors like; constitutional and other legal challenge; religious and cultural differences; Shari’ah related issues; double taxation; inadequate human resources; disparity in accounting standards and others could be the major challenges of Islamic banking in Ghana.

The study has made various recommendations to address the potential challenges and issues to make Islamic banking system viable option to the conventional banking. Furthermore, the paper recommends that Islamic banking and finance in Ghana offers a huge investment opportunity for both domestic and foreign investors what is most needed to achieve this, is for all stakeholders to collaborate in a way that a structured, functional and sustainable Islamic banking model will be formulated and communicated widely so as to gain general acceptability.

1.0 Introduction/ Background

Over the past decades, Islamic banking has emerged as a viable alternative to conventional banking, gaining recognition in both Muslim-majority and non-Muslim countries. A system of financial activities that complies with Islamic law (Shariah). It avoids elements such as interest (riba), excessive uncertainty (gharar), and speculative behaviour, instead emphasizing profit and loss sharing, asset-backed financing, and ethical investment. A subset of Islamic finance, Islamic banking refers to banking activities that adhere strictly to Shariah principles.

It operates by offering products and services structured around risk-sharing, asset-based financing, and the prohibition of interest. Islamic banks provide alternatives to conventional banking by using contracts like mudarabah and musharaka. Non-interest banking (NIB), also referred to as interest-free banking and sometimes used synonymously with Islamic banking, is increasingly becoming an integral part of the global financial system. Since its development in the 1960s,

it has continued to cater for the specific needs of not only the Muslim community but also non-Muslims who want to pursue their economic activities devoid of interest. Recently, the stronger resilience shown by Islamic financial institutions (IFIs) during the 2007-2008 financial crisis compared to their conventional counterparts caused policymakers and academics in many parts of the world to renew their quest for allowing alternatives to conventional financial arrangements in search for a new financial architecture.

Conceptually, lslamic banking has been defined as banking in consonance with the ethics and value system of lslam and governed, in addition to the conventional good governance and risk management rules, by the principles laid down by lslamic Shariah (The State Bank of Pakistan, 2009). lslamic banking has become a global phenomenon giving Muslim and non-Muslim nations deep thought of either adopting it in full fledge, partially or rather discard it completely.

For decades now, lslamic banking has been growing and spreading from the predominantly Muslim countries of the Far East (Saudi Arabia, Jordan, Syria, Kuwait, Qatar, Malaysia, Pakistan, Singapore, lndonesia, etc) to countries of Africa (Sudan, Nigeria, Libya, Morocco, Tunisia, etc) and the European countries as the United Kingdom, the United State of America, Denmark, Luxembourg, etc).

The Ghanaian non-interest Islamic banking engenders varieties of debate, simply because the system could be built based on Islamic principles. Islamic banking is market determinants with the moral principles and teaching of Islamic shariah, also an arrangement of saving money so as to steady by means of the standards of Islamic rule (Shari’ah) as well as practices through the improvement of Islamic economies.

The proposed Islamic banking by Government and Bank of Ghana does not merely imply the interest-free banking system; rather, it is the banking in consonance with the ethos and value system of Islam and governed by the principles and rules laid down by Islamic Shariah. The challenges facing emerging markets of Islamic finance in Ghana are multi-faceted.

They include; constitutional and other legal challenges, liquidity management for IF institutions, reputation and operational risk related challenges, distorted perception of the IF products and services by the consumers among others. The adoption of Islamic brand of non-interest banking in Ghana suggests the need to address challenges and issues to the newly embraced banking model with a view to proffering recommendations for the accelerated growth and development of Islamic banking in the country.

Islamic banking in Ghana is still at its drawing stage and surrounded by a lot of challenges and issues. According to the latest 2021 census data, Christians make up 71.3% of Ghana’s population. This includes various denominations, with Pentecostal/Charismatics forming the largest segment at 28.3% of the total population, followed by Protestants at 18.4% and Catholics at 13.1% and Islam at 17.6%. It is important to note that despite the 17.6% Muslims population of the entire population in the country, little progress has been made in ensuring its full take off and operationalization.

The drawing stage and operationalization of Islamic banking and finance in Ghana could be hindered by a lot of issues and challenges ranging from religious diversity of the country and inability of the stakeholders to collectively face the problem and the lacked of comprehensive nation-wide research and literature on Islamic banking operations in Ghana.

The Ghanaian non-interest Islamic banking has been engendered varieties of debate, simply because the system is build based on Islamic principles. Islamic banking is market determinants with the moral principles and teaching of Islamic shariah, also an arrangement of saving money so as to steady by means of the standards of Islamic rule (Shari’ah) as well as practices through the improvement of Islamic economies.

Even though to some extent that the government has appointed special adviser at Bank of Ghana to facilitate its full take off, most Ghanaians lack the knowledge of Islamic banking and finance while other religions followers in the country completely oppose to the idea. Challenges for Ghanaian non-interest Islamic banking include potential religious and cultural differences, inadequate financial innovation, lack of public awareness and skilled personnel, and insufficient regulatory frameworks. Furthermore, challenges for Ghanaian Islamic banking could include double taxation, accounting issues, a shortage of qualified personnel, inadequate financial innovations, regulatory issues and low customer patronage & awareness stemming from its unique Shari’ah-based foundation. The Government and Bank of Ghana must develop comprehensive road map, and regulatory framework for non-interest banking and finance under Islamic banking requires to address legal, institutional and operational challenges. The full take off and operationalization of Islamic banking and finance in Ghana has could be hampered by a lot of potential issues and challenges ranging from religious diversity of the country and inability of the stakeholders to collectively face the problems.

2.0. Principles of Islamic Banking

Method or procedure of operations in interest free bank is various also has a space for further advancement in their methods of their activities gave they are in accordance with muamalat standards. Underneath anyway, confine to principals:

1. a) Qard Hasan loans: It is a considerate credit agreed to a well- deserved customer by interest free banks to reduce paucity. Also, recipient is necessary by Shari’ah to give just only principle to the Islamic bank. Notwithstanding, the customer may pay an expansion to prove gratefulness to the interest free bank however this goal ought not be unveiled to bank by the client toward the commencement of business (2018).
2. b) Mudaraba: A Mudaraba Agreement is a money related exchange whereby two parties in the agreement. One party will give the required resources (Rabb-ul-Maal) while the other party will do dealing as business person (Mudarib). Means interest free bank be as resources contributor (Rabb-ul-Maal). In this sort of budgetary agreement, benefits are shared among bank and the business person (customer) in light of predetermined proportion. In any case, in case of misfortune the bank (or contributors) tolerate the misfortune also the business person mis-lay his or her exertion gave it was not thus of his or her carelessness. Mudaraba agreement is of two sections in Islamic keeping money framework. One a player in the agreement is flanked by the Islamic bank and contributors, while other party is between the bank and the business person (Saidu.2018).
3. c) Murabaha: This kind of agreement is for the most part employing in obtainment of equipments. It is a trade agreement involving non-interest bank and its customer at a repaired benefit name mark-up. In this agreement, the customer will give every one of the details specification of the item and the Islamic bank will go out on a limb of buying it for the customer at a cost in addition to increase which the customer can pay instalmental basis or whole at a time or at an expressed time (Saidu.2018)..
4. d) Ijarah (Lease): Ijarah is identical to renting agreement in traditional conventional banking. It is an agreement that Islamic bank purchased an assets as well as rents it away to its customer on the understanding that the customer will paying a specific amount on regular intervals it can be usually monthly, quarterly or annually for a predefined timeframe to the Islamic bank. It might likewise incorporate the alternative of the customer buying the advantage toward the finish of the agreement from the bank (Saidu.2018).
5. e) Musharaqa (Equity Partnership): Musharaqa is an agreement that at least two people contribute resources for the organizing of specific business enterprise in a manner that each accomplice has appropriate to include in the organization of the business or not. Therefore, a partner has a right to choose to participate or dormant partner in the business. Moreover, in this kind of business in Islamic the profit used to share among the partners based on agreed ration which need to be same with the amount contributed. Along these lines, Islamic bank will go about as an accomplice for this situation to give the resources arrangement also sharing revenue and loss (Saidu.2018).
6. g) Salam (Forward Trade Contract): Salam means feature delivery contract, is an agreement by which interest free bank agrees to bring a commodity to the customer (its customer) at specific agreed date by the two parties that explain in swap of an advanced full spot disbursement to the bank. Meaning the customer pays the complete sum but the deliverance of the product will be in the specific date open agreed by the parties (Saidu.2018).

3.0 Literature Review on the Islamic Banking System.

Various research on problems of non-interest Islamic banking have been carried out in various country globally for the propose of organizing Islamic banking and it is procedures. More so some of this research are conducted in a single country understanding (Jabr, 2003;) whereas others are carried out in various country globally system (Iqbal et al, 1998). One nation research is based on a specific country understanding whereas the multi countries system is findings based on the universal method of Islamic finance

Islamic banking (also refer to as non-interest banking) is gradually taking path into the global financial system. The modern Islamic banking has its roots to the Egyptian experiment of a variant of a saving bank based on profit-sharing in the town of Mit Ghamr in 1963, which was spear headed by economist Ahmad ElNaggar. Subsequently, the Nasir Social Bank in Egypt was declared as an interest-free commercial bank in 1971, although its charter made no reference to Islam or Islamic law (Shari’ah) (Ariff, 1988). The guiding principle of Islamic banking and finance is to provide banking and financial services which are compliant with Shari’ah. The primary source of Sharia’h is the Divine Islamic Law as revealed in the Holy Quran. The banking system is very significant in the development process of every economy. The orthodoxy of commercial banking is predicated on intermediation and generation of net interest income through two core operations: the collection of deposits on which banks pay interest and the issuing of loans for which banks receive interest income. This translates into the basis of measuring net interest margin – a difference between lending and deposit rates. In short, conventional banking system is interest-based or credit-based. The development of banking has opened new frontiers for commercial banks to expand beyond their traditional role and sources of income to activities that generate non-interest income (such as fee-based activities, licensing, insurance, etc). As the name implies, non-interest income is income that does not originate as interest on loaned funds, and non-interest income typically requires minimal risk for the bank and minimal capital. “An increase of the non-interest income improves the banking profitability and reduces the risk of the lending operations by more diversification of banking activity (Hakimi, Hamdi and DJelassi, 2012)”. The non-interest income is predicated on the pillar for generating banking (bank and creditor) income primarily from fees. Examples of non-interest income include deposit and transaction fees, insufficient funds fees, annual fees, monthly account service charges, inactivity fees, and cheque and deposit slip fees. Under the non-interest banking frameworks, institutions charge fees that provide non-interest income as a way of generating revenue and ensuring liquidity in the event of increased default rates

Interest is prohibited by the major religions – Islam, Judaism and Christianity. They had condemned taking “interest” in all its ramifications. The Holy Qur’an explicitly and emphatically forbids taking or giving of interest on transactions. In the Qur’an, in Surah Al-Imran (3:130), Allah says: “O you who believe! Do not devour Riba (usury) multiplying it over and keep your duty to Allah that you may prosper”. Same kind of prohibition regarding fixed interest is also stated in Al-Baqarah (2:275-281), Al-Nisa (4:160-161) and Surah Al-Rum (30:39) of the Qur’an. There are numerous Hadiths which explain the prohibition of interest (Riba) and risk or uncertainty (Gharar). Both Riba and Gharar are illegal under Islamic law: Riba refers to fixed rate of interest and Gharar refers to speculation or uncertainty. Also, there is complete unanimity among all schools of thought in Islam that the term “Riba” stands for “interest” in all types and forms (Ariff, 1988)’

In the Bible, too, the taking of “interest” is categorically forbidden. Exodus (22:25) says: “If you lend money to any of my people who are poor among you, you shall not be like a moneylender to him; you shall not charge him interest.” Leviticus (25:35-37) states: “If one of your brethren becomes poor, and falls into poverty among you, then you shall help him, like a stranger or a sojourner that he may live with you. Take no usury or interest from him, but fear God, that your brother may live with you. You shall not lend him your money for usury, nor lend him your food at a profit.” The Hebrew Bible also regulates interest taking as in Deuteronomy (23:19) says: “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury.” The term Usury is used in the same sense of any amount claimed by creditor over and above the principal advanced by him to debtor

Islamic banking is a system of banking or banking activity that is consistent with Islamic law (Shari’ah) principles and guided by Islamic economics. It is a banking system that provides financing and attracts savings on the basis of profit- and loss-sharing (PLS) rather than lending and interest. Therefore, an important part of the system is the prohibition on collecting interest. Another part is on ethical investments by prohibitions on business such as alcoholism, gambling, armaments, pig farming and pornography. Islamic banking system emerged as the major alternative to conventional banking system. Islamic financial products now comprise a broad range of financial services, where for almost all conventional financial products there is nearly always an analogous Islamic finance product (Gait and Worthington, 2007). The importance and potential of Islamic banking prompted the International Monetary Fund (IMF) to facilitate the establishment of the Islamic Financial Services Board (IFSB) in 2002. The IFSB serves as the Islamic equivalent of IMF towards addressing the need for a suitable regulatory framework, new financial instruments and institutional arrangements for Islamic finance operations (Khan and Bashar, 2008).The basic difference between Islamic banking from conventional banking is primarily that the investor in a conventional bank is assured of a predetermined rate of interest while Islamic banks promote risk sharing between provider of capital (investor) and the user of funds (customer). Whereas the rate of interest applied by conventional banks is known as Base Lending Rate (BLR) which fluctuates according to the interest rate, the Islamic banks determine the price upfront, thus clients are free from interest rates risk. The basic elements of Islamic finance or banking are primarily four: Risk sharing, Materiality, No exploitation, and No financing for sinful activities.

• Risk sharing means that Risk is shared among investor, bank and fund user; hence profit and loss sharing ratio is pre-determined in Islamic finance transactions. The risk of loss rests exclusively with the capital and no other factor of production is expected to incur it.
• Materiality means a real transaction must exist; it is an asset-backed financing in which each financial transaction must be tied to a tangible, identifiable underlying asset, and thus a financial transaction needs to have a ‘material finality’, that is a direct or indirect link to a real economic transaction. This is because money is not considered as asset. So the idea is to convert all assets into gold standard or its equivalents whose value do not deteriorate over time.
• No exploitation means contractual parties should not be exploited; financing and benefit arrangements are clearly spelt out in Islamic finance contracts.
• No financing for sinful activities means transaction which is forbidden by Islamic law should not be financed. These include liquor, pork-based products, gambling, pornography, uncertainty and speculation.

The literature review on Islamic banking and finance system in the emerging economies including Nigeria identified a lot challenges. Some of these challenges include, constitutional and other legal challenge, religious and cultural differences, lack of knowledge of accounting and auditing standards pertinent to Islamic financial institutions, inadequate legal and regulatory environment, problem of competition with dominant conventional banks, double taxation, Lack of Sharia?compliant liquidity management instruments, absence of Islamic insurance to protect Islamic banks, and lack of public awareness on the importance of Islamic banking and finance.

Saidu (2018) found out challenges for Nigerian non-interest Islamic banking include low public awareness, a shortage of qualified professionals, inadequate financial innovation, a lack of Shari’ah-compliant financial instruments and infrastructure, and religious and cultural misconceptions about the banking system. Similarly, Otu and Nabiebu (2019) assessed the challenges of non-interest (Islamic) banking in Nigeria which reveals that it includes Islamophobia, lack of distinct and comprehensive legal framework, ethno-religious factors, disparity in accounting standards, awareness, in adequate human resources. Islamic banking is believed to be an alternative type of financial intermediation that is centered on the profit and loss sharing motive.

It is seen as market focused based on a moral dimension which is in accordance to Islamic values, norms, principles and teachings (Abdul-Rahman Latif, Muda, & Abdullah 2014). It is not the only type of profit and loss sharing banking grounded on non?interest doctrines, but it is the most advanced form that has global acceptance and appeal (Sanusi 2011). Similarly, Garba (2012) asserted that Islamic banking has the same tenacity as the conventional banking except for that it operates in line with the doctrine of sharia’s known as Fiqh al-muamalat (Islamic rules of transaction). The rudimentary principle of Islamic banking is the distribution of profit and loss and the prohibition of riba (interest). Among the common Islamic concepts used in Islamic banking are profit sharing (mudarabah), safe keeping (waqf), joint venture (musharaka), cost plus (murabaha), and leasing (ijara). Conversely, Lawal (2012) opined that Islamic Banking is not identical with interest free banking. It functions on Islamic code of ethics which is founded on the Quran. Its entire finances are asset sponsored which makes its complete funds open for investment in the production of goods and services. Islamic banking rejects deal in all economic activities that has a social or moral issue to the society and it works on profit and loss sharing motive.

Furthermore, Sanusi (2011) stated that deficiency of knowledge, expertise and technical aptitude to standardize, and administer Islamic banks as well as absence of Islamic cover (Takaful) to safeguard investments of Islamic banks against unexpected dangers and facilitate the growth of the industry respectively are some major factors affecting the growth of Islamic banking in Nigeria. Lack of knowledge of accounting and auditing standards pertinent to Islamic financial institutions. One of the major issues facing Islamic finance and banking system in Nigeria is the challenge of have a well knowledgeable expertise to handle the system effectively most is especially with regard to the structure Islamic books of account (Venardos, 2012).

The balance?sheet structure of Islamic banks is unique, and even though the work of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) on accounting and auditing standards for Islamic banking products is available, there is the need to train conventional accountants and auditors in the application of the standards (Lewis, 2001). Inadequate legal and regulatory environment is a key challenge in the Islamic banking from emerging economies. Malami (2014) observed that the existing banking laws in many so- called secular countries like Nigeria which are mainly applicable to the interest based conventional banks constitute the most serious challenge to the operation of interest free banking. He opined that Islamic banking operations in Nigeria will largely be inhibited by a number of banking laws and regulatory directives such as companies Act, Banking Act, and Central Bank ordinances. Similarly, Adebayo (2010) observed that the 2004 CBN bank consolidation policy which increased the capitalization of commercial banks from 2 billion to 25 billion constituted a potential bottleneck in the take-off of full- fledged interest free (Islamic) bank like JAIZ bank as well as the smooth running of Islamic windows in conventional bank. Double taxation that would be levied on Islamic banks as a result of stamp duties and capital gains tax that are subtracted upon asset transfer. Islamic banks face a tremendous challenge in this respect because their financial intermediation is asset? based (Vasigh, Fleming & Humphreys, 2014). In home financing for example, the Islamic banks take possession of the asset either through sale or construction contract, and they pay stamp duty for that. When they resell the asset to a customer through a mark?up sale or a lease ending with ownership contract, another stamp duty is charged for the asset transfer. Other jurisdictions, including the UK and Luxembourg have modified their tax laws to exempt Islamic banks from double taxation on assets they acquire for financing purposes. Another challenge in the area of taxation is that profits generated from the financial instruments offered by Islamic banks are not given the tax relief enjoyed by debt instruments in conventional finance. Debt instruments issued in Nigeria are currently exempted from taxes including income tax and VAT. Similarly interest payments on loans advanced are given the same relief. The same status should be granted to receivables in a Murabahah or Ijarah?based financing (Zainab, 2017). Inadequate public awareness on the importance of Islamic banking and finance had been another issue in the developing economies. There is apparently low awareness of the Islamic banking concept in Nigeria. Hence, for interest free banking system to work efficiently in Nigeria, there is a great need for sensitization of all the stake holders (government/public, government and individuals) by Islamic professional scholars and Muslim economists. This is borne out of the fact that Nigeria is a secular state. Hence, government should not be seen as trying to Islamize the country’s financial/banking system. This means that the tendency of the non-Muslims to misconstrue the ideology because of its religious coloration calls for nation-wide awareness (Okeke & Ojukwo , 2012). Therefore, this study has identified the challenges and major issues that is hindering the establishment of Islamic Banking in emerging economies.

Once Islamic banking is established, several operational challenges emerge. In Kenya, despite efforts to integrate Islamic banking into the conventional financial system, the shortage of trained professionals and the absence of standardized regulatory structures continue to impede progress (Mwangi, 2017). South Africa faces similar issues where the dominance of conventional financial institutions and the limited availability of Sharia-compliant products restrict consumer adoption (Jeeva, S. 2020). In Asia, even countries with well-developed regulatory frameworks such as Malaysia and Indonesia confront operational challenges. Malaysia’s robust system contends with fierce competition from conventional banks and the ongoing need to innovate Sharia- compliant products (Rosly, 2010). In Indonesia, low awareness and the overwhelming presence of conventional financial institutions limit the expansion of Islamic banking services (Ascarya, 2017). Pakistan also struggles with regulatory inconsistencies and a lack of standardization among. GAB (2025) opined that potential challenges such as low public awareness, regulatory barriers, misconceptions regarding Islamic principles, potential competition from the conventional banking sector, and a lack of professional capacity must be addressed in order to realize the full benefit of Islamic banking.

The research by Shaukat et al. (2011), as the available search results do not directly mention a 2011 research paper by “Shaukat et al.” focusing on deficient good governance in the non-interest financial industry, though related themes are discussed in other works on Islamic financial institutions and general corporate governance. The search results point to a paper by Shaukat & Kausar (2009) titled “Corporate Governance and Its Impact on Financial Performance of Islamic Banks” that may be the intended reference, discussing a framework to address common corporate governance issues found in Islamic financial institutions. Also, the research of Shaukat et al. (2011) are in view of the deficient of good governance that will regulate the non-interest financial industry, lack of experience and well- equipped personnel in both non-interest and conventional banking, short of standard shariah advisory committee, lack of short-term asset investment all those are constitutes the obstacles drawing non-interest banking back. Moreover, he also states that non-interest banks are very low in innovation and developments, low standard services, transparency and answerability is very minimal, etc this are the obstacles facing non-interest banking.

4.0 Research Methodology

The methodology used in the preparation of this paper is to study the library with the document content analysis method. Additional information is obtained from various documents and references to the official website of the relevant agencies. The study also uses content analysis method to data obtained from the literature scholar, newspaper and website in question. The information obtained is used to view the potential challenges and issues of Ghanaian Non-interest Islamic banking. After basic examination of the devastating effects of the challenges, the author considered proffering answers for a workable recommendation for the establishment and operationalization of Islamic banking in Ghana.

5.0. Discussions on potential constitutional and legal, operational and institutional challenges for the proposed Islamic Banking Systems in Ghana

The literature review conducted through content analysis highlighted the potential challenges and critical issues in the establishment and operationalization of Islamic banking in Ghana. Before Islamic banking could be implemented in Ghana, several foundational issues must be addressed. In Ghana, the absence of specialized Islamic banking laws and comprehensive policies has significantly constrained the development of Sharia-compliant products (Ibrahim & Yatoo, 2021; Mbawuni & Gyasi, 2019).  In the process of the research, the challenges and issues have identified for the proposed Ghanaian non-interest Islamic banking. The potential challenges confronting every Islamic banking system in Ghana could be categorized into constitutional and legal, institutional challenges and operational challenges based on the reviewed studies. Constitutional and legal, institutional challenges are those challenges that are unique to Islamic banking institutions while the operational challenges are those challenges confronting the operations of Islamic banking. In the case of Ghana, the challenges that it may likely face are also categorized in constitutional and legal, institutional and operational challenges. In Ghana, the non-interest Islamic banking system could face several challenges despite its potential benefits for financial inclusion and economic development. Key challenges include

1. Constitutional and other legal challenge

First, there is a genuine concern among stakeholders that Islamic banking as presently modeled within the Ghanaian financial sector still suffers inadequate legal framework. The absence of a comprehensive and robust legal framework to regulate the Islamic banking sector creates uncertainty and hinder its establishment and operationalization. This is so, apparently because the bulk of the existing legal and regulatory frameworks are delegated legislations made in form of guidelines. Such legislations, in the Ghanaian legal jurisprudence, remain persuasive authority by which the courts are usually not bound.

In fact, the continued reliance of the Bank of Ghana on its own perceived interpretation of relevant sections of the law granting it exercisable powers may be interpreted differently by the courts. After all the interpretative and adjudicatory functions of the courts are part and parcel of the judicial powers vested in the courts. Lack of a robust and comprehensive legal framework, especially at the level of adjudication of conflicts involving Islamic finance contracts products or entities. A significant challenge is the lack of an adequate legal and regulatory framework to govern non-interest banking, creating legal conundrums and uncertainty. The current legal framework is inadequate to support the establishment of Islamic banking system in Ghana. The existing legal framework is considered inadequate and a major impediment to the proper regulation of the non-interest banking sector.

The Ghanaian Parliament will be required to amend the existing BSDIs, Bank of Ghana Act 2002 (612) Amendment Act 2016 Act 918; NBFI Act 2008 Act 774 are critical for Islamic banking operations or enact new laws for the propose Islamic banking system. The exiting legal framework in Ghana is also a major setback to Islamic banking due to the fact that it is design to suit the conventional settings. Islamic banking cannot adequately operate if there is no special legal framework for its institutions. This can be understood from the fact that as Islamic banking operates on Shari’ah basis, the enforcement of such operations in the court of law is another problem without implementing Islamic laws in Ghanaian legal system. The only way out is for the introduction of special laws for the operation of Islamic banking in Ghana.  Amendment to Banking Laws- BSDI Act 930 Act 2016 and Bank of Ghana (Amendment Act 2016 Act 918) and NBFI Act 778 Act 2008).   The establishment and practice of lslamic banking in Ghana will have to be provided for both the Bank of Ghana (Amendment Act 2016 Act 918)   by extension the 1992 Ghanaian constitution Section 185 (1c) But the: ‘regulatory and supervisory’ frameworks and Banks and Specialized Deposits Taking Act 930 Act 2016

ii…Religious and Cultural Differences

Second, one of the main problems of Ghanaian non interest banking could be religion and cultural barriers in the country. Ghanaian is a country mixed with different beliefs norms and culture. This religious and cultural issue is a serious issue that needs efficient solution for Ghanaian non interest banking to continue moving forward.  This is because others beliefs that are not Muslims have the perception that if they participate in Islamic banking like they become Muslims or they are helping Islamic religions, this misperception causes major seatback of non-interest banking in Ghana. Divergent beliefs and norms in Ghana can pose major challenges to the adoption of Islamic finance. Some religious and cultural differences, as well as concerns about secularism, could hinder the full acceptance and integration of Islamic banking in Ghana’s pluralistic society. Most negative effects associated with Ghanaian Islamic finance could come from divergent beliefs, norms and culture that lead to major challenges in the system.

There is a lot of mis-perception about Islamic banking in Ghana and with the ethno-religious diversity in Ghana it makes it imperative to create mass awareness and acceptance. One major of the operational challenge could be religious and cultural differences in the Islamic banking system in the country. Some aspects of the Islamic banking system can be perceived as controversial, leading to potential religious and cultural resistance. One of the major challenges of Islamic banking in Ghana has to do with the country’s multiple cultural and religious belief. This issue is a serious one that needs to be effectively and efficiently resolved if Islamic banking in Ghana must prosper. This is because of the fact that others with different cultural and religious belief will have a misperception of the institutions that may lead to not accepting the institution by the general public.

According to the latest 2021 census data, Christians make up 71.3% of Ghana’s population. This includes various denominations, with Pentecostal/Charismatics forming the largest segment at 28.3% of the total population, followed by Protestants at 18.4% and Catholics at 13.1% and Islam at 17.6%. Considering the fact that Ghana is a Christian dominated country, effective public education would help clear the misconception about Islamic banking. Increased advocacy efforts should also target financial institutions, regulators, policymakers, and the public to dispel misconceptions and emphasize its economic and ethical benefits (Abdul-Wahab & Abdul Razak, 2020). This particular challenge of Islamic banking can be addressed only through the help of Central Bank of Ghana, religious bodies like Christian Council. Pentecostal Council, Chief Imam and Islamic banking institutions by creating adequate awareness about the needs, objectives and the advantages of the institutions. This is necessary if Islamic banking in Ghana must survive and achieve its objectives as prescribe by Shari’ah.

iii.. Inadequate of Financial Innovations

Third, as financial markets are changing with time, there is the need to design financial products that will meet the needs and tastes of the users with regards to risk involve in the maturity of the instruments and return from such instruments in any financial institutions which Islamic banking is not an exception.Islamic banks could face challenges in creating new, Shari’ah-compliant products and services, as these often require creative solutions that can sometimes be delayed by strict religious requirement. However, there is inadequate financial innovations or delay in implementing innovated products in Islamic banking due to Shari;ah guidelines requirement. This makes Islamic banking to be relatively rigid to innovations. In order to exploit the fast changing market environment and face increasing competition squarely, financial innovations in Islamic Finance are vital and should be encouraged in advance

iv). Conflicts between Conventional and Islamic in the Ghanaian Banking System

Fourth, the Ghanaian’s financial industry – money and capital markets, is wholly conventional and secularism reigning for over a century in the country, all the financial institutions are based on the principle of taking and offering of interest. However, the position of Islamic banks on the issue of interest is very clear as enunciated in the above Qur’anic and Prophetic traditions. Moreover, their position is more precarious when they are required to discriminate in their deposit taking function and investment operations – only monies and investments that are halal or shari’ah compliant are considered. Those averse to the system, therefore, wonder how could such banking system cope under these predicaments? In Islamic banking, the term “NIFI” stands for Non-Interest Financial Institution, a type of bank that operates under the principles of Sharia law by prohibiting interest (riba) and promoting risk and profit sharing between the financial institution and its customers, rather than traditional interest-based lending. NIFIs provide an alternative financial system focused on real-world asset-backed transactions and investments, connecting finance to tangible economic activities and ensuring Sharia compliance in all operations

The non-interest financial institution, for instance, does not accept deposit from casinos, alcholic industries, proceeds from prostitution, sale of swine, etc. Furthermore, at the level of money market operations, it cannot engage in interbank transactions with other conventional banks, neither floats its excess liquidity in the treasury market, nor expects any return from safe keeping with the apex bank. No doubt, the challenges are enormous, but the the nature of Islamic banking transactions are completely unique and sufficient enough to more than compensate the forgone earnings from these sources. Islam prohibits that money begets money without creating something tangible, or better still, without engaging other factors of production such as labor in the process. The arrangement which Islamic banks seek to promote, therefore, is usually one which encourages mutual and profitable cooperation between capital and labor

iv…Lack of profit -sharing finance

Fifth, Islamic banking in Ghana may likely be hindered by lack of profit- sharing financial instruments. Islamic banking transactions are divided into fixed charge and profit sharing. The proponents of Islamic banking built up Islamic banking in the hope that it will operate on profit sharing basis. However in practice, profit sharing finance has remained relatively small in the operation of Islamic banking. This is a serious challenge to Islamic banking in the sense that one of the major reason for Islamic banking is to operate on profit sharing basis.  Bank of Ghana should encourage Islamic banking in Ghana to provide more profit sharing finance.

v…Shari’ah Related Issues

Sixth, there is a deficiency of Shari’ah experts needed to advise on and oversee the compliance of Islamic banking operations. Challenges include the lack of specialized institutions, insufficient accounting standards, and a deficit of Shari’ah-compliant experts to manage and operate Islamic financial institutions. Dearth of Shari’ah scholars knowledgeable in conventional economics, law, accounting, banking and finance place severe constraints on the regulatory Shari’ah compliance mechanism. Due to the fact that Islamic banking has religious dimension, financial innovations in this institution needs to meet Shari’ah requirements. That is, any new financial products in Islamic banking cannot be adopted until it is approve by the Shari’ah advisory board and also followed by post Shari’ah auditing. However, this act delays Islamic banking ability to take advantage of changing financial environment due to the fact that time has to be wasted before it is finally approve by the Shari’ah board. This act is very vital for Islamic banking in order to protect their clients’ confidence in the institution. So Islamic banking should have varieties of financial instruments as well as products that have been approved in advance by the Shari’ah board in order to overcome any delay that changes brought about in the financial environment may cause in its adopting new products and instruments in the future.

vi…Inadequate Human Resources

Sixth, lack of adequate knowledge of the Islamic banking will hamper its growth in Ghana. There is a deficiency in the number of highly qualified staff and specialists in Islamic finance operations, which is necessary for the sector’s development. The low awareness about the Islamic banking system and products in the general public affects the efforts at developing the system in the country. Both investors and users of Islamic banks have remained very apprehensive on the success of the Islamic banking in Ghana. Some people still have a wrong understanding or perception of Islamic banking. These include serious concerns that: Islamic banking is only for Muslims, Islamic banking is not profitable because no interest is charged, or Islamic banking is only offered in Islamic states. Therefore, greater education and knowledge on Islamic banking should be delivered to the public so as to create better awareness among the citizenry that Islamic banking is not only an alternative financial approach but also in some aspects provides better value propositions to the consumers.

The responsibility of public awareness on the Islamic banking system no doubt is saddled on licensed providers of Islamic banking services and the financial regulators (e.g. Bank of Ghana and Securities Exchange Commission) that have significant roles to play in promoting the non-interest banking model. This can be achieved by launching a massive education and training program for bankers and their clients and an effective campaign through media for the general public to create awareness about the Islamic financial system, including specialized courses and organized seminars as in the case of conventional banking.

The survival of Islamic banking in Ghana highly depends on adequately qualified human resources in teaching, training and research in Islamic Finance with knowledge in both Islamic and conventional finance as well as economics. In the case of teaching and research, only a handful of universities at present can be said to have been teaching as well as conducting research in both Islamic Finance and the conventional settings. The output of such research findings and human capital development in the both settings need to be improved if the institution must survive in Ghana. This is because using indigenous labour will be cost effective compare to importing labour service from outside the country. However, in the case of training in Islamic banking, little or no effort has been made in this aspect. And this is very detrimental to the survival of Islamic banking in Ghana.

The step forward for Islamic banking in Ghana with respect to human resources problems is to adequately fund institutions teaching and conducting research in both settings and establish more institutions in Ghana. In addition, Bank of Ghana should organize training on Islamic Finance for students in tertiary institutions, bankers, researchers etc. The BoG can as well send them outside for further training that will have multiple effects in the institution.

• Lack of skilled and trained human resource

Seventh, there is lack of skilled and trained human resource in Islamic banking. Indeed, it is obvious that even the conventional banking that operated for more than a century in the country still faced the problem of shortage of skilled and trained banking personnel. Lack of adequate personnels who are experts in Islamic finance is a major challenge to the Islamic financial system. This is because the survival and development of Islamic banking is dependent on the adequacy of trained personnels who are knowledgeable in how Islamic banking operates. The above problem is further be compounded because only very few universities are offering Islamic finance in Ghana. Consequently, there is acute shortage of experts in this field of banking, hence detrimental to the operators of the above banking system because it is not cost effective for them to employ experts from outside the country. Furthermore, the lack of knowledge of accounting and auditing standards applicable to Islamic financial institutions is another impediment in the development of Islamic banking in Ghana.

The balance?sheet structure of Islamic banks is unique. Although the work of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) on accounting and auditing standards for Islamic banking products is available, accountants and auditors would have to be trained in the application of such standards.

The shortage of skilled and trained human resources for Islamic banking in Ghana can be addressed by collaboration among regulatory institutions, Islamic finance institutions and the academic institutions, as well as the professional bodies for continuous training of bankers and researchers. The Financial Reporting Council of Ghana (FRC) and the relevant professional bodies such the Chartered Institute of Accountants of Ghana (ICA. Ghana), Chartered Institute of Taxation of Ghana, and Chartered Institute of Bankers of Ghana (CIB Ghana) need to train accountants and auditors in financial reporting and standards for Islamic banking, finance and insurance.

viii) Inadequate public awareness

Eighth, Islamic banking in Ghana will be challenged by lack of information about the objectives, principles, and advantages of Islamic banking in the country. There is a dearth of information about Islamic banking in Ghana even among Muslims. Majority Muslims only know that Islamic banking is based on non-interest basis, while the majority of the followers of other faiths have little or no knowledge about it at all.

This is a serious setback to Islamic banking in Ghana thereby leading to unnecessary oppositions and lack of public acceptance.  Bank of Ghana has not been really doing great in this aspect but still needs to carry it to the grass root level, and any potential Islamic banking in Ghana should also assist in creating awareness to enhance public acceptance of the institution.

1. ix) Inappropriate institutional framework

Ninth, the institutional challenges that may likely hinder the successful establishment and management of Islamic banking in Ghana are as follows. The nascent Islamic banking in Ghana could be hindered by the current institutional framework that supports conventional banking. This is because the current institutional framework is structure in the line of conventional financial system which is against Islamic banking. The step forward is for Bank of Ghana to either modify the exiting framework or introduce special framework for Islamic banking in order to provide adequate support for the establishment and operation of Islamic banking in Ghana.

x). Lack of Equity Institution.

Tenth, it is generally accepted that the need for long term finance cannot be overestimated in any financial institution. This is another challenge that Islamic banking in Ghana may need to address in order to enhance its operations. This is because the existing institutions that provide such facilities operate on interest basis which is against Islamic banking principle. For Ghanaian Islamic banking to operate effectively, there should be institutions that will provide long term finance such as bonds and equity on Shari’ah principles.

1. xi) Current Regulatory and Supervisory Framework of BSDIs.

Eleventh, with the existing weak regulatory and supervisory framework of the BSDIs adding the Islamic banking could pose a bigger threat the country financial stability. Islamic banking in Ghana could face the challenge of ineffective supervisory framework from the Bank of Ghana as well as the Shari’ah advisory board. This is as a result of the fact that the two bodies may end up contradicting issues instead of complementing each other, and the shortage of Shari;ah scholars as well as Bank of Ghana’s supervisors with the require knowledge. In order to overcome this, the role of the BoG and that of the Shari’ah board should be structured in such a way that it adequately regulate and supervise Islamic banking activities as well as protects public interest in Islamic banking in Ghana with qualified persons in such areas

xii.) Disparity in Accounting Standards

Twelfth, lack of standardized accounting and auditing practices for Islamic banks poses a challenge. Islamic banking in Ghana may be challenged by the disparity in their accounting standard as experienced all over the world. In general, the framework of Islamic finance is the same framework used by the conventional finance practices. These frameworks are, inter alia, legal and regulatory framework, taxation framework, and accounting and auditing standards, though Islamic Financial Institutions are expected to be guided by AAOIFI rather than the IFRS or other accounting and auditing standards. The raison d’être of Islamic finance is that all transactions must be Shari’ah-compliant. It is the objective of the Bank of Ghana urgently need to develop the non-interest (Islamic) banking system parallel to the conventional system in Ghana.

The Bank of Ghana must introduce a concept of ‘Islamic window’ which allows the existing conventional banks to introduce Islamic banking products of customers. The creation of legal infrastructure conducive for working of Islamic financial system is very obvious. Therefore, the Islamic banking should be supported by the legal, accounting and taxation systems. There should be an exclusive regulatory framework for Islamic banks and financial institutions, which will provide for regulatory treatment for various Islamic products, also for capital adequacy ratio purposes. The Financial Reporting Council (FRC) of Ghana should also embrace the fundamentals of International Accounting and Auditing system as issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in reporting of financial statements of non-interest (Islamic) banking institutions in the country

xiii) Lack of Short-Term Financial Instruments and Institutions

Thirteenth, the lack of inter-bank transactions among Islamic banking due to their fewness leads to inadequate short term financial institutions and instruments. Islamic banking is however, in high need of short term institutions and instrument for effectively and efficient operations. For Ghanaian Islamic banking to effective flourish, there should be more participants in Islamic banking in Ghana in order to enhance inter-bank transactions based on Shari’ah principles. Non-interest banking in Ghana could face operational challenges, including liquidity constraints, high exposure to government debt, and exchange rate volatility, which can affect its stability

xiv) Absence of Secondary Financial Market

Fourteenth, lack of secondary financial markets is another challenge that Islamic banking in Ghana may likely face. This is because the existing secondary financial markets operate on interest basis which is against Islamic ethics. For Islamic banking in Ghana to operate adequately, there should be secondary financial markets that operate on Shari’ah basis.

1. xv) Lack of Sharia-Compliant Liquidity Management Instruments

Fifteenth, Islamic banks cannot invest their excess liquidity in interest?based instruments, which are the liquidity management instruments in the market, which places them at a competitive disadvantage with respect to their conventional counterparts. Also the current interbank market and the instruments used by the Central Bank for monetary policy operations are all interest?based with no equivalent government securities or other money market instruments that are Sharia?compliant, all of which are essential to avoid a liquidity bottleneck for Islamic banks when they come into operation.

The challenges and issues surrounding the establishment of Islamic banking system in Ghana are, however, unique with the concerted efforts on the part of Government, Bank of Ghana, religious bodies, like Catholic Bishop Conference, Christian Council, Pentecostal and Charismatic Church Councils, the Chief Imam and Muslim Communities on public awareness of the establishment and operationalization of Islamic banking system could be reality.

xvii) Double taxation issue in Islamic finance

Sixteenth, the tax statutes would require amendments to consider the non-interest (Islamic) banking services; otherwise there is a portent danger for double taxation that would be levied on Islamic banks as a result of stamp duties and capital gains tax, which are deductible upon asset transfer. Islamic banks face a tremendous challenge in this respect because their financial intermediation is asset based. Double taxation that would be levied on Islamic banks as a result of stamp duties and capital gains tax that is deductible upon assets transfer.

Islamic banks could face a tremendous challenge in this respect their financial intermediation is asset based. Another challenge in the area of taxation is that profits generated from the financial instruments offered by Islamic banks are not given the tax relief enjoyed by debt instruments in conventional finance. Debt instruments issued in Ghana are currently exempted from taxes including income tax and VAT. Similarly interest payments on loans advanced are given the same relief. The same status should be granted to receivables in a Murbahah of Ijarah based financing.

xviii). Weak infrastructure

Seventeenth, Infrastructure has become very complex in the contemporary commercial transaction especially with the use of technology in the banking sector. There are now e-platforms for conducting transactions between the bank and customers and between customers among themselves. The sophistication of technological infrastructure and the accompanying user- friendly feature has made deployment of such infrastructure a necessity for Islamic financial institutions. The challenge however lies in the huge cost required to develop a well-designed infrastructure such as widespread Automated Teller Machines (ATMs) points for customers? easy accessibility, firewall (to prevent from unauthorized access and hackers), Server (to maintain the operation and its availability), Webpage (to promote Islamic e-products and services), mobile application (for easy access regardless of location)

xix). Corporate Governance Failures

Lastly, concerns over good corporate governance became very dominant over the last decade borne out of rampant and high- profile cases of Ghanaian bank failures in 2018 and abuses of power due to poor compliance to governance standards and moral decadence at top management level. Some antagonist of the NIFI, therefore, express fear that such cases could also obtain even in the management of the NIFIs. The cases of recent failures of seven banking institutions in Ghana is still fresh in our memories. Similar occurrences of breakdown of governance standards leading to collapse of some non-banking financial institutions in Ghana with long years of survival no longer make heart-breaking headlines in the local and international media.

It is a known fact that corporate executives of Ghanaian banks live an expensive lifestyle on fat and gluttonous bonuses and unrealistic allowances while proactively perpetuating themselves in their positions. Contrarily, it is pertinent to note that, ethical issues – honesty, transparency and compliance to corporate governance standards are not only echoed and adored in Islam, but are part and parcel of its essential feature. Islamic sharia’ah principles under whose purview the NIFI’s operate is very clear and unequivocal on the matter of upholding trust of office and on the matter of justice and fairness in ones’ own dealings.

6.0 Conclusion

This study concludes that Islamic banking and finance in Ghana could offers a huge investment opportunity for both domestic and foreign investors what is most needed to achieve this, is for all stakeholders to collaborate in a way that a structured, functional and sustainable Islamic banking model will be formulated and communicated widely so as to gain general acceptability (Vasigh, Fleming & Humphreys, 2014).

The study has also identified potential challenges to non-interest banking in Ghana, including inadequate legal frameworks, lack of public awareness, insufficient regulatory capacity, cultural and religious differences, and disparities in accounting standards. The study recommends that a more robust legal framework, increased public sensitization through various media, and a strengthened regulatory structure are necessary to support the growth of Islamic banking in Ghana.

Islamic banking is relatively a new concept in Ghana but has greatly advanced in the Middle East and some other parts of the world like the United Kingdom, United States of America, Denmark, Switzerland and Luxembourg; as well as in African countries of Egypt, Nigeria, Sudan, Morocco, South Africa, Libya, Tunisia, etc. So far literatures have shown that Islamic banking has been recording tremendous growth where it is being practice. With the 2008/2009 global economic crisis, most nations of the world have turned to consider the practice of Islamic banking as a viable option to getting out of the crisis. Ghana has been making some efforts towards operationalization of Islamic banking practice in Ghana without necessarily affecting the operations of the conventional banks. For Ghana to succeed it must conduct a comprehensive nation-wide research to address the intended legal and regulatory, operational and institutional challenges and issues as it was done before and during the introduction of rural and community banking framework in 1976 to address the lack of access to formal financial services in those areas. Solutions involve government and Bank of Ghana’s efforts to raise awareness through media campaigns, comprehensive legal reforms, banks investing in staff training and creating innovative Shariah-compliant products, and organizing public lectures and seminars on the principles of Islamic finance. Ghana can successfully adopt Islamic banking by taking gradual, well-planned steps that minimize risk and build stakeholder confidence. A phased approach should begin with pilot programs, such as introducing Islamic banking windows within existing conventional banks, before progressing to fully standalone Islamic banks. This strategy can be supported by targeted regulatory reforms, capacity-building initiatives within the financial sector, and extensive public sensitization efforts

7.0. Policy Recommendations

First, the Government and Bank of Ghana must come out with credible road map like what the Nigerian when developed the concept of Islamic banking in 1991 but operationalized in 1995 and licensed the first Islamic bank Habib Bank PLC in 1996. The evolution of Nigerian Islamic banking dated back to 1991 with the enactment of the banks and other financial institutions decree, which recognized banks based on profit and loss sharing. Nigeria investors started applying license to operate Islamic banking between 1993- 1996. The Government and Bank of Ghana must adopt the Nigerian Islamic banking approach.

Ghana must develop roadmap for Islamic banking  focusing on building a robust legal and regulatory framework, developing Shari’ah-compliant products and instruments, promoting public awareness and capacity building for professionals, fostering financial inclusion for the unbanked, and strategically positioning Ghana as a continental hub for Islamic finance through initiatives like sukuk and partnerships with international Islamic financial institution. In essence, Ghana’s roadmap should involve a concerted effort from the government, Bank of Ghana and Securities Exchange Commission, and the private sector to establish a comprehensive and thriving Islamic financial ecosystem within the country. In addition to the above, Bank of Ghana must develop five-year development framework and strategies for the Islamic banking system.

The document will discuss the proposed measures to address the gaps or challenges in meeting the objectives of the five-year framework and strategies. The roles of the public and private sectors, and other stakeholders carrying out the key recommendations, were also highlighted, taking into account the state of development of the Ghanaian Islamic financial services industry.

Second, the Ghana Parliament must enact a more comprehensive legal framework to provide a clear regulation and the growth of the Islamic banking system in Ghana or amend the existing banking laws to make them more relevant and suitable to the Islamic banking system.

The Ghanaian Parliament and Bank of Ghana (BoG) should work together to create and implement a comprehensive legal framework for non-interest banking. Enacting a comprehensive legal framework and distinct regulatory acts is crucial for proper oversight and governance. The Parliament should amend the existing BSDIs Act 2016 Act 930, Bank of Ghana Act 2002 (612) Amendment Act 2016 Act 918; NBFI Act 2008 Act 774 which are critical for Islamic banking system in Ghana.  A robust and comprehensive legal framework is needed to fully regulate and support the non-interest banking sector. The government should work to establish and refine a legal and regulatory structure tailored to the unique Read Full Story