By Dr. Abdul-Jalil IBRAHIM
As per Fitch Ratings (2024), the Islamic finance sector has expanded to a value of $4.5 trillion, backed by both nations with significant Muslim populations and non-religious states due to its ability to enhance financial access, especially for those not adequately served by traditional banking systems.
The IMF (2021) also highlights that Islamic finance contributes to financial security through fostering shared risks, deterring excessive speculation, and supporting transactions secured by tangible assets.
With the Bank of Ghana progressing in developing a regulatory structure for Islamic banking, increasing hope is being felt by those involved that Ghana may soon become part of the group of nations featuring a two-tiered banking system that supports both traditional and Islamic financial practices.
This initiative presents significant potential for expanding financial access, promoting responsible investing, and attracting funds from underutilized parts of society, as well as narrowing the divide between finance and the actual economy. Despite these advancements, one issue continues to require focused consideration: managing liquidity risks.
In contrast to traditional banks that utilize interest-bearing products like Treasury notes, bonds, and interbank deposits for managing cash flow, Islamic banks face restrictions because every financial product needs to adhere to Sharia law — particularly the ban on interest (riba), high risk (gharar), and betting (maysir). Although these guidelines maintain the moral standards of Islamic banking, they greatly reduce the range of available and acceptable methods for handling liquidity.
The issue of holding excess liquidity
The problem with surplus cash reserves
Managing unutilized financial resources
The dilemma of maintaining unused funds
Handling excessive monetary balances
The complication of keeping idle capital
Dealing with underused financial assets
The difficulty of managing non-earning money
The concern of having surplus liquid assets
The burden of possessing untapped cash flow
Owing to multiple limitations, Islamic financial institutions across different regions frequently encounter significant difficulties in handling liquidity risks as part of their daily activities (IFSB, 2023). Such obstacles arise at all levels—organizational, inter-bank, and central banking—within the structure of liquidity risk management for Islamic banks. These restrictions comprise:
- Shortage of Shari’ah-compliant cash assets
- Insufficient shariah-compliant money market operations, or a vibrant shariah-compliant trading or repurchase (“repo”) marketplace
- Lack of adequate Shariah-compliant methods to manage liquidity risk; inadequate instruments available for regulatory bodies to provide liquidity assistance to Islamic banks during both routine and challenging market situations.
- Lack of adequate attention to the requirements of IIFS in open market operations for achieving monetary policy goals
- There is no type of Shariah-compliant lender-of-last-resort (SLOLR) mechanism in place in most regions to ensure the resilience and steadiness of Islamic Financial Institutions during severe liquidity crises.
Without suitable short-term Shariah-compliant tools, Islamic banks frequently have little option but to keep large quantities of cash or liquid assets to fulfill regulatory liquidity standards and handle client withdrawal requests. Although this cautious strategy is reasonable, it leads to wasted resources and reduced earnings.
The money that might instead be used to boost the actual economy—via trade finance, project funding, or asset-backed deals—is left unused. This not only harms the bank’s financial results but also reduces its development influence.
Why Ghana Needs to Act Promptly
Ghana holds a special opportunity. As a nation set to officially incorporate Islamic banking into its monetary framework, it has the chance to establish a strong, supportive ecosystem right from the beginning. By drawing lessons from nations such as Malaysia, Bahrain, the United Arab Emirates, and the United Kingdom—countries with advanced Islamic liquidity management systems—institutional structures, Ghana can sidestep the initial challenges encountered by numerous Islamic banks functioning within regulatory settings primarily created for traditional finance.
Key policy recommendations
In order to bridge the shortfall in liquidity management, the subsequent actions ought to be taken into account:
-
Salam Sukuk backed by cocoa (tenor of 3-6 months):
An instrument adhering to Sharia law wherein Islamic banks offer initial funding to cocoa growers/purchasers (through the Ghana Cocoa Board and Ministry of Finance) in return for a predetermined amount of upcoming cocoa shipments, which are subsequently sold for gain. Such an arrangement could draw financial resources from international Islamic banks into Ghana. -
Evolution of Islamic financial tools:
The Ghanaian Ministry of Finance, working together with the Bank of Ghana, may introduce temporary Sukuk (Islamic financial securities) using models like Murabaha, Ijara, or Wakalah. These tools can act as replacements for Treasury bills within Islamic banking institutions. -
Creation of an Islamic banking market that adheres to Shariah principles:
Establishing a system allowing Islamic financial institutions to lend and receive money mutually in accordance with Sharia law could improve the movement of liquid assets across the industry. -
Central bank liquidity facilities:
The Bank of Ghana has the capability to set up a Shariah-compliant funding mechanism—akin to those offered by the Central Bank of Malaysia or the Islamic Liquidity Management Corporation—which would serve as a final source of support for Islamic financial institutions. -
Developing capabilities and Islamic law oversight:
An adequately resourced National Shariah Advisory Committee must collaborate intensively with the central bank to guarantee that every monetary tool and structures comply with both regulatory benchmarks and Islamic law specifications.
Conclusion
Managing liquidity risks goes beyond being merely a technical issue; it plays a crucial role in ensuring the prosperity and long-term viability of Islamic banking within Ghana. Failing to tackle these challenges at an early stage may hinder the development of the sector, reduce investor trust, and make Islamic financial institutions less competitive. Nevertheless, through appropriate regulatory planning and cooperation among all relevant parties, Ghana has the potential to build a strong base for a robust and adaptable Islamic finance framework—one that works alongside traditional systems without compromising its moral principles.
Professor Ibrahim teaches at the University of Professional Studies, Accra.
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