I chanced on an article by Bright Simons on Bank of Ghana’s Exposure Draft on Non-Interest Banking which was published by citinewsroom.com and I felt some few comments would be in order. Let me first commend him for the great insights. I share in his concerns relative to issues about commingling of funds (although with some reservations), insurance (deposits and other assets), liquidity management mechanisms, capital adequacy ratio issues, and tax harmonization and amendments.
Much as I share in these concerns, we must also be fair to the Bank of Ghana. I say so because many of the issues raised relative to insurance, liquidity management mechanisms, and the need for amendments of aspects of the current tax regime to align with the non-interest banking principles may not necessarily be candidates for inclusion in a guideline document of this nature. Indeed, many of such issues would require separate engagements with relevant stakeholders.
Although it would be ideal to have all the regulatory frameworks and mechanisms in place before the non-interest banking concept is rolled out, the experience of even advanced financial systems shows that not all the planks must necessarily be in place before non-interest banking can take off. In the United Kingdom, for instance, Islamic finance had been in existence since 1970s, but it was in 2015 (after several decades of operations) that the Bank of England initiated steps to have a dedicated liquidity management mechanism for Islamic Banks.
There are also the examples of Turkey, Malaysia, and Indonesia relative to instruments for liquidity management which were developed years after Islamic banks had started operations. An important question is, who said Bank of Ghana is oblivious of these important ingredients?
Bright makes the point that the rebranding of Islamic Banking as Non-Interest Banking creates unnecessary technical confusion. Reading through the commentary, I don’t see any such confusion. The idea that the Bank of Ghana is trying so hard to hide the identity of these banks is overstretched. Attempts by central banks to brand Islamic banking with different nomenclature is not new, particularly in countries where secular laws are used. In Turkey, Islamic banks are called participation banks due to the secular laws in that country. In Morocco, Islamic banks are called participatory banks.
The central bank does not have to necessarily label the concept as Islamic banking to make the operations shariah-compliant. This is also why I have a problem when Bright makes the argument that the pious unbanked look for signifiers like “Islamic” or “Shariah” to trust that the products are Islamic.
The argument that stripping religion from the nomenclature and symbols of non-interest banks and requiring strict adherence to standards set by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) at the same time amounts to market identity crisis is more of form than substance.
The non-interest banking institutions do not have to take on the name “Islamic” to make the use of standards set by AAOIFI possible or reasonable. Given that the conventional accounting and auditing standards may not align with the peculiar needs of the non-interest banking institutions, it makes a lot of sense to adhere to existing international standards which align with their peculiar situation.
AAOIFI has institutional membership categorized into regulatory members, founding members, and common members. Some of the members in the common membership category are from secular countries such as South Africa, Kenya, Canada, UK, USA, Sri Lanka, Russia, Australia, Turkey, and Switzerland. These common members can attend general assembly meetings, although without a vote.
The point is that whiles AAOIFI sets standards which align with the principles of non-interest banking, its deliberations and standards thereof are not meant for only institutions with “Islamic” attached to their names. AAOIFI does not also make it mandatory that for a bank to use its standards, it must necessarily have “Islamic” in its name.
It is true that the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) was enacted with conventional banking in mind, but it is problematic to argue that the stripping of the term “Islamic” for non-interest banking institutions constitute an attempt to secularize the new model. Indeed, central banks in secular countries do not have to change banking laws to accommodate non-interest banking.
The United Kingdom is one of the Islamic finance hubs in the world. As of 2023, according to Fitch Ratings (2024), the assets of Islamic banks in the UK stood at US$ 8.2 billion. Yet, these Islamic banks in the UK are regulated by the English law. The Bank of England did not have to change the banking laws.
Moreover, the point that the definitions of the non-interest banking products take their root from the Islamic jurisprudence but not rooted in the English law or the Common law is equally problematic. Naturally, these terms would have to take their roots from the Islamic jurisprudence because that is where they come from. The UK still makes use of these terms without changing the English law, and the country has not appointed new judges in Islamic jurisprudence because they allowed Islamic finance.
Different sectors of every country have peculiar terminologies which may feature in specific contracts between parties in those sectors but not necessarily captured in the constitutions or other enactments. Yet, judges, relying on expertise of individuals in the various fields, continue to determine issues brought before them. It is not clear why the case of non-interest banking is special to the extent that judges are helpless because the terms used are not rooted in the Common law or English law.
The argument about tax deductibility relative to interest must be put in a proper context. It is true that interest is tax deductible in general terms. However, the nature of conventional banks means the treatment is different. Interest expense of banks (mostly on deposits) is a key expenditure item which cannot be treated as usual finance cost for the purposes of tax deductibility.
As conventional banks dwell substantially on deposit to on-lend, the chunk of their interest expense comes from what they pay on deposits and not the debt component of their capital structure. Indeed, the financing cost on the debt component of their capital structure which qualifies for tax deductibility is relatively small. To then make the point that products and services of non-interest banking institutions would be 25 to 30% more expensive than products of their conventional counterparts is to overstate the realities.
It is true that riba is broader than interest. However, to argue that a bank can package a product which has elements of riba but not necessarily interest in the conventional sense is to overstretch the issue and underestimate the ability of the pious unbanked to distinguish between what is permitted under the very tenets the bank is supposed to operate. The so-called pious unbanked can discern and see through a product which has elements of riba but not necessarily interest in the conventional sense and the bank runs the risk of losing the trust of such patrons.
It is a risk too high for a bank to take, and the bank will be minded by what it churns out as products. Businesses as they are, the banks would not be focused only on meeting the interest criteria alone set by the Bank of Ghana. After all, the banks develop products to meet the needs of their clients and not just the regulator. Developing a product to suit the needs of clients would naturally involve understanding the clients.
Relative to the point that because the non-interest banking institutions must remunerate their Non-Interest Banking Advisory Committee (NIBAC) members, the NIBAC members may approve products on the borderline, I think the argument is overstretched. The good thing is that a screening of a product and subsequent recommendation by the NIBAC does not bring finality.
As stated in the guidelines, such products must have the written approval of the Bank of Ghana which has Non-Interest Financial Advisory Council (NIFAC) to back it. Moreover, the appointment of members of the NIBAC of the banks is subject to approval by the Bank of Ghana through its NIFAC. These are clear safeguards which would necessarily instill sanity in the product screening process.
Moreover, the point that the Exposure Draft has created a bizarre judicial role for the NIBAC is problematic. While it is true that NIBAC is supposed to resolve disputes at the first instance when there is one, the Exposure Draft did not say that resolutions by the NIBAC are conclusive. In fact, it is only the first step, just as we have internal dispute resolution mechanisms in conventional banks or even non-financial institutions. Although the Exposure Draft provided mechanisms for unsatisfied parties to escalate the issue to the NIFAC which sits with the Bank of Ghana, and another window to even escalate it further if the parties are still not satisfied, I find it interesting that Bright would selectively dwell on the first line of approach in dispute resolution for non-interest banking institutions.
For the question on why the Bank of Ghana, through its NIFAC, can deny license on the basis of non-compliance with the tenets of non-interest banking in a secular environment, I struggle to understand why a prospective non-interest banking institution would hide behind secular laws to challenge the Bank of Ghana for refusal of license on the grounds of non-compliance with the very tenets of the sector it seeks to operate in.
Regarding the issue raised about human resource, there are quite a number of people with qualifications in Islamic banking and finance, although very few may have practiced that knowledge outside Ghana. Personally, I hold a postgraduate diploma in Islamic banking and insurance from the UK, in addition to my secular qualifications, and I know many Ghanaians who have similar qualifications. Let the system be piloted and you would be amazed by the pool of knowledge in this country relative to non-interest banking.
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Author: Prof. Abdul-Aziz Iddrisu
(Associate Professor in Finance)
Kumasi Technical University
[email protected]
