On the back of impressive global growth, the opening of the Islamic financial services (IFS) sector in Ghana is expected to create new financing and lending opportunities in the coming years, with sharia-compliant banking offering particular potential in the retail and small and medium-sized enterprise segments.
As is the case in many West African markets, interest rates for commercial loans can be relatively high – with an average of more than 25% for all but blue-chip companies – which means Islamic finance could provide a competitive alternative for potential borrowers.
Sharia-compliant institutions avoid levying interest, instead relying on other mechanisms to extend financing to clients and secure revenues in return. They also abstain from investments in businesses involved in religiously proscribed activities, such as alcohol and gambling.
While IFS has already become popular in predominantly Muslim countries, particularly in the Gulf and South-east Asia, it has also slowly gained traction in Africa, with governments in Senegal, Nigeria and South Africa issuing sharia-compliant debt, known as sukuk.
IFS has quickly become a formidable segment of the global economy. With average asset expansion of around 16% per year since 2006, the sector’s global balance sheet now reaches close to $2trn, according to a working paper published by the IMF last year.
In Ghana there is currently just one sharia-compliant financial institution – Ghana Islamic Microfinance, which began as an NGO – though there is significant scope for growth.
Part of this is due to the country’s demographic make-up. Although Muslims are far from the only potential client base for IFS, as evidenced by the rollout of Islamic financing instruments in countries like the UK and Japan, sharia-compliant products could prove attractive for the roughly 17.6% of Ghana’s population that identifies as Muslim, according to the 2010 census.
That proportion rises in the Northern Region, where financial inclusion rates are lower and Muslims account for some 60% of the population.
The limited size of IFS in Ghana is largely on par with the region, according to the IMF. A 2014 report found that Islamic finance had yet to develop a significant presence in sub-Saharan Africa. Only a handful of countries have issued sukuk, for example, and IFS institutions are generally few and far between.
However, according to local press reports in August, the Bank of Ghana (BoG) may be preparing to issue the country’s first licence for a sharia-compliant bank in late 2015 or early 2016, with an accompanying reform to the regulatory framework also expected to be implemented.
The rollout of new financing products that would result from the arrival of a larger IFS lender could prove helpful in improving access to credit in Ghana.
Speaking to the local press, Nana Otuo Acheampong, the executive head of the Osei Tutu II Centre for Executive Education, a financial services training institution, said that while Ghana’s substantial Muslim population would likely prefer sharia-compliant products, the lending terms of such services could also be attractive to non-Muslims customers.
Part of this stems from the country’s elevated interest rates. The BoG’s current base rate is 25%, which has doubled in the last four years according to BoG figures, as the bank took steps protect the cedi, which has fallen due to concerns over the country's macroeconomic position and a broader pull-back from emerging-market currencies.
With an expanding population, a solid longer-term economic outlook and a growing middle class eager for greater financial access, fundamentals suggest there is room for both conventional and Islamic products in the market. The ratio of bank assets to GDP in Ghana remains relatively modest by global standards, at around 36%, according to data from the BoG and the World Bank.
In the meantime, the IMF paper suggested that the growth of Islamic finance could be catalysed by sukuk, as international sukuk issues do not require a domestic Islamic finance market.
Sukuk could help make Ghanaian sovereign debt a more attractive proposition to a wider array of international investors against the backdrop of a less certain conventional bond market, with the US Federal Reserve expected to raise interest rates and investors increasingly shying away from emerging market exposure.
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