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Sukuk: The golden key to unlock infrastructure financing in Ghana

 As Ghana grapples with significant infrastructure deficits and loss of access to the Eurobond market, several calls have been made for innovative financing solutions to bridge the financing gap, especially for the country’s infrastructure. Among these inno­vative financing solutions is Sukuk, an Islamic financial instrument similar to conventional bonds; this instrument has been used as an avenue for unlocking much-needed funds for infrastructure projects by both developed and developing economies across the globe. Ghana can address its pressing infrastruc­ture needs by leveraging Sukuk while adhering to ethical financing principles.

Understanding Sukuk

Sukuk refers to a legal instru­ment, deed, or check, among other things. The current form of Sukuk can be traced back to a decision made by Malaysia’s Islamic Jurisprudence Council (IJC) in Feb­ruary 1988. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) defines Sukuk as “certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity. Sukuk can be defined as a financial instrument that serves as an asset-backed trust certificate.

It signifies ownership in a tan­gible asset or its usufruct, which refers to the rights to the earnings or benefits derived from that asset. Essentially, sukuk represents a form of investment that combines the principles of Islamic finance with the tangible qualities of un­derlying assets. It allows investors to share in the returns generated by the asset while ensuring compli­ance with Islamic Jurisprudence.

Unlike traditional bonds that incur interest, sukuk involves as­set-backed financing, where inves­tors receive returns based on the performance of underlying assets. This structure aligns with ethical finance principles and provides a unique opportunity for govern­ments and businesses to diversify their funding sources.

The infrastructure challenge in Ghana

Ghana’s infrastructure deficit is a critical barrier to economic growth, affecting transportation, energy, and healthcare sectors. There is a huge infrastructure gap in several sectors of the economy, including energy, education, affordable hous­ing, health, transport, and recre­ation. The World Bank estimated that Ghana would require $2.3 billion annually for infrastructure financing.

The critical question is how Ghana can sustainably finance this necessary expenditure with­out worsening its debt burden. Sukuk, known as Islamic Bonds, is the golden Key to Ghana’s infrastructure financing needs. Its asset-backed feature ensures that the financial arrangement does not create an additional debt burden for the country.

Global Sukuk market

The global Sukuk market has made notable strides over the past decade, showcasing its strength and resilience despite various global financial challenges, such as the COVID-19 pandemic. As high­lighted in the Islamic Financial Ser­vices Board (IFSB) Stability Report 2023, the Islamic finance industry is projected to reach a remarkable USD 3.38 trillion this year. This growth underlines the significance of sukuk as a vital capital market instrument within the Islamic Capi­tal Market.

The recent International Islamic Financial Market (IIFM) Sukuk report reveals that global Sukuk issuances increased by around 16 per cent p.a., or USD 212 billion, in 2023 compared to USD 182.7 billion in 2022. Such figures reflect the increasing recognition and adoption of sukuk as an innova­tive financing tool that has gained prominence in financing Infra­structure projects across the globe.

Benefits of Sukuk for Ghana

1. Alternative Funding Source: Sukuk can provide Ghana access to a broader pool of inves­tors, including those interested in Sharia-compliant investments. This diversification will enhance finan­cial resilience and reduce reliance on traditional debt instruments such as the Euro and other domes­tic bonds. The absence of interest in the structuring of Sukuk makes it unique and attractive to investors from the Islamic Finance market, which is expected to reach $5.96 trillion by 2026

2. Economic Growth: By fi­nancing key infrastructure projects through Sukuk, the government can stimulate economic activity, create jobs, and improve public services. Infrastructure develop­ment is closely linked to GDP growth and overall national devel­opment. Ghana can follow African Countries like Nigeria, South Africa and the United Kingdom that have issued Sukuk to finance various infrastructure projects

3. Financial Inclusion: Issuing Sukuk can foster financial inclusion by engaging a broader population segment in investment opportunities. This approach can empower individuals and busi­nesses that prefer ethical financial products. In 2024, the Ministry of Finance reported in the National Financial Inclusion and Develop­ment Strategy that about 60 per cent of Ghanaians are excluded from the formal financial system.

4. Public-Private Partner­ships (PPP): Sukuk can facilitate PPPs by providing a structured financing mechanism that aligns the interests of both public entities and private investors. This collab­oration can lead to more efficient project execution and risk-sharing. For example, the Islamic Devel­opment Bank financed a Hydro Agricultural Development Project in Cote d’Ivoire and Maternal and neonatal healthcare services in Mauritania using Islamic Finan­cial Instruments. This is mainly because Islamic Finance is with partnership financing models

Way forward

Despite its potential, several challenges may hinder the success­ful implementation of Sukuk in Ghana:

• Awareness and Understanding: To facilitate its adoption, policy­makers, investors, and the general public need to be more aware and understand Sukuk. IFRIG, a research institute specialising in Islamic finance, has engaged in substantial advocacy in this regard; nevertheless, there remains consid­erable scope for enhancement.

• Regulatory Framework: A robust regulatory framework supporting Sukuk issuance is vital. The Banks and Specialised Depos­it-taking Act 930 Institutions ACT, 2016, Securities Industry 2016 (ACT 929), and other related laws must be reviewed to create an envi­ronment that will attract investors to enter this financial market.

• Joining IOC and IsDB: Apply for membership in the Organization of Islamic Countries (OIC), the mother Institution of the Islamic Development Bank (IsDB). These are multilateral financial institutions like the World Bank and the International Moni­toring Fund.

• Ghana will not become an Islamic country if it joins the IsDB. Still, it can access a large pool of non-interest-bearing financing tools to finance the much-needed infrastructure to fill the deficit.

Conclusion

Sukuk presents a gold key for unlocking infrastructure financing in Ghana, offering an ethical and sustainable alternative to con­ventional debt instruments. By embracing this innovative finan­cial model, Ghana can address its infrastructure challenges while promoting economic growth and financial inclusion. As the nation looks towards the future, leveraging Sukuk could be pivotal in building the resilient infrastructure neces­sary for sustainable development.

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. Through its tireless efforts, IFRIG continues highlighting the benefits of a more equitable and sustainable financial system that shares risk and rewards and promotes financial inclusion. As Ghana takes steps to introduce the Non-Interest Banking and Finance industry & products, IFRIG’s research and advo­cacy will play a crucial role in shaping the country’s finan­cial future. IFRIG is poised to impact Ghana’s economy and contribute to a more prosperous and financially stable future for all.

Papayusif@gmail.com

BY YUSIF GEOFFREY

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