Ghana’s financial sector has undergone significant transformation over the past two decades, driven by regulatory reforms aimed at promoting stability, inclusivity, and innovation. The Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) stands as a cornerstone of this regulatory framework, providing a comprehensive basis for the licensing, regulation, and supervision of banks and other deposit-taking institutions. As interest in non-interest (Islamic) banking grows—both globally and with the recent pronouncements from the President of the Republic—there is a need to examine whether Act 930 is equipped to facilitate the introduction and growth of non-interest banking and finance. This article discusses the Act’s provisions, strengths, limitations, and the steps needed to ensure Ghana’s readiness for a robust non-interest banking sector.
Background: The Rise of Non-Interest Banking
Non-interest banking, often referred to as Islamic banking, operates on principles that prohibit the charging or payment of interest (riba) and emphasise risk-sharing, asset-backed lending, and ethical investments. Instead of traditional lending, non-interest banks use contracts such as Mudarabah (profit-sharing), Murabaha (cost-plus financing), and Ijarah (leasing). These models will appeal to most people in Ghana, whether Muslim or non-Muslim, who seek ethical and alternative financial products. The global Islamic finance industry has surpassed $3 trillion in assets, signalling its potential for financial inclusion and economic development. Ghana needs to position itself to participate in this growing market.
Overview of Act 930: Structure and Purpose
The Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) was enacted to consolidate and modernise Ghana’s banking laws, replacing the Banking Act, 2004 (Act 673). Its primary objectives include:
Ensuring the soundness and stability of the financial system
Protecting depositors’ interests
Promoting effective governance and risk management
Providing a framework for the licensing and regulation of a wide range of deposit-taking institutions
Act 930 covers universal banks, rural and community banks, savings and loans companies, finance houses, and other Specialised Deposit-taking Institutions (SDIs). The Act empowers the Bank of Ghana (BoG) as the principal regulator, granting it broad discretion to issue directives, set prudential standards, and enforce compliance with these standards.
Regulatory Flexibility for Specialised Institutions
One of the Act’s most notable features is its flexible approach to licensing and regulating SDIs. Under Section 4, the BoG may grant licenses to institutions with specialised mandates, provided they meet prescribed criteria. This flexibility is crucial for introducing non-interest banking models, which often require unique operational structures and compliance frameworks.
Key strengths in this regard include:
Broad Permissible Activities: The Act generalises permissible activities for SDIs, allowing for a wide range of financial services, including those based on profit-sharing and asset-backing. This opens the door for non-interest banks to offer Sharia-compliant products, subject to approval by the Bank of Ghana (BoG).
Customizable Licensing Conditions: BoG is empowered to impose specific licensing conditions, including requirements for Sharia governance, product approval, and risk management tailored to non-interest banking.
Prohibition of Speculative Activities: The Act indirectly prohibits gambling and other speculative ventures, aligning with Islamic finance principles that discourage excessive uncertainty (gharar) and speculation (maysir).
Capital, Governance, and Prudential Requirements
Sound governance and financial integrity are central to both conventional and non-interest banking. Act 930 establishes robust standards in these areas:
Fit-and-Proper Test: Directors and key management personnel must meet fit-and-proper criteria, ensuring they conduct themselves ethically and possess the necessary competence. This is especially relevant for non-interest banks, where Sharia compliance and ethical oversight are of paramount importance.
Capital Adequacy: The Act sets minimum capital requirements and mandates the maintenance of adequate liquidity and solvency ratios. These prudential standards are compatible with the asset-backed nature of Islamic finance, which typically avoids excessive leverage.
Risk Exposure Limits: The Act limits significant exposures (e.g., a maximum of 25% of net own funds to a single counterparty), reducing systemic risk and encouraging diversification—principles consistent with Islamic finance’s emphasis on risk-sharing.
Supervisory Powers and Regulatory Discretion
The Act grants the BoG extensive supervisory powers, including the authority to:
Issue binding directives and guidelines
Approve or reject new products and services
Conduct on-site and off-site inspections
Enforce remedial actions and sanctions for non-compliance
This regulatory discretion is critical for effectively supervising non-interest banks, which may require specialised oversight mechanisms, such as Sharia compliance audits and product certification.
Gaps and Challenges for Non-Interest Banking
Despite its strengths, Act 930 does not explicitly address the unique requirements of non-interest banking. Key gaps include:
1. Absence of Sharia Governance Framework
Non-interest banks typically require a Sharia Supervisory Board (SSB) to ensure their products and operations comply with Islamic law. Act 930 does not mandate the establishment of such boards or provide for the recognition or regulation of SSBs. Without explicit legal backing, the legitimacy and effectiveness of Sharia governance could be undermined.
Recommendation: The BoG should issue supplementary regulations or guidelines under Section 92 (Directives) to require non-interest banks to establish SSBs, define their roles, and set standards for independence and expertise.
2. Lack of Product-Specific Legal Recognition
Islamic finance relies on contracts such as Mudarabah, Murabaha, and Ijarah, which differ from conventional loan agreements in their structure and terms. Act 930’s definition of permissible activities is broad; however, the law does not explicitly recognise these contracts. This could create uncertainty regarding their enforceability in Ghanaian courts.
Recommendation: Amendments to the Act or its schedules could explicitly recognise standard Islamic finance contracts, providing legal certainty and facilitating product innovation.
3. Liquidity Management Tools
Non-interest banks cannot participate in conventional interbank markets or use interest-based liquidity instruments. Act 930 does not provide for the development or approval of Sharia-compliant liquidity management tools, such as Sukuk (Islamic bonds) or commodity Murabaha.
Recommendation: The BoG, utilising its regulatory powers, should develop and approve Sharia-compliant liquidity instruments and establish an Islamic interbank market to support the liquidity needs of non-interest banks.
Tax and Accounting Treatment
Islamic finance transactions often involve multiple contracts and asset transfers, resulting in higher tax and accounting burdens than conventional loans. Act 930 does not address these issues, potentially disadvantaging non-interest banks.
Recommendation: Collaboration between the BoG, Ghana Revenue Authority, and the Institute of Chartered Accountants, Ghana, should produce harmonised tax and accounting guidelines for Islamic finance transactions.
Cleansing or purifying income and investments from any elements that are not compliant with the fundamental principles of Non-Interest Finance, such as: Interest (riba) Income from gambling, alcohol, or other prohibited industries.
Recommendation: Regulations should include a provision outlining the treatment of impure funds in line with international best practices.
International Comparisons and Best Practices
Countries such as Malaysia, the United Kingdom, and Nigeria have successfully integrated non-interest banking by enacting enabling legislation, issuing detailed regulatory guidelines, and fostering collaboration between regulators, industry, and Sharia scholars. Key lessons include:
Legal Clarity: Explicit recognition of Islamic finance contracts and Sharia governance structures in primary legislation.
Regulatory Support: Central banks are active in product approval, capacity building, and market development.
Market Infrastructure: Development of Islamic interbank markets, liquidity management tools, and deposit insurance schemes tailored to non-interest banks.
Ghana can draw on these experiences to enhance its legal and regulatory frameworks. These legal systems adhere to the common law framework, ensuring a level playing field for all financial institutions.
Opportunities and Implications for Ghana
The introduction of non-interest banking offers several potential benefits for Ghana:
Financial Inclusion: Non-interest banking can attract unbanked populations
Diversification: A more diverse financial sector can enhance stability and resilience.
Ethical Finance: Non-interest banking’s emphasis on social responsibility and ethical investment aligns with Ghana’s development goals.
However, realising these benefits requires a supportive legal and regulatory environment, adequate supervision, and stakeholder engagement.
Conclusion: Pathways to Readiness
The Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) provides a solid foundation for regulating Ghana’s financial sector, with sufficient flexibility to accommodate non-interest banking models. Its broad licensing framework, prudential standards, and regulatory discretion empower the BoG to facilitate the entry and growth of non-interest banks. However, targeted reforms are necessary to address gaps in Sharia governance, product recognition, liquidity management, and tax treatment.
By amending the Act and issuing supplementary regulations, Ghana can lead in inclusive and Innovative finance, unlocking new opportunities for economic development and social progress. The readiness for non-interest banking is within reach if policymakers, regulators, and industry stakeholders work collaboratively to create a robust and enabling environment for all.
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The author, Yusif Geoffrey, a chartered accountant and a fellow at the Islamic Finance Research Institute of Ghana (IFRIG), has advocated the introduction of non-interest banking and finance in Ghana. Yusif Geoffrey holds ACCA, ICAG, CIFE, MSc) can be contacted via email at Papayusif@gmail.com
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