Financial Inclusion Through Taxation – Unlocking the Potential of Islamic Finance in Ghana

Financial Inclusion Through Taxation – Unlocking the Potential of Islamic Finance in Ghana

In Ghana’s pursuit of financial inclusion and sustainable economic growth, Islamic finance offers a powerful yet underutilized tool. Guided by fundamental principles of risk-sharing, asset-backed transactions, prohibition of interest, and ethical investment, Islamic finance has emerged as a compelling alternative to conventional finance. It fosters inclusive economic development, aligning financial services with moral and social responsibility. However, Ghana’s current tax framework fails to adequately accommodate this fast-growing sector, creating unintended disadvantages for businesses and individuals eager to engage in Shariah-compliant finance.

Shariah-compliant finance encompasses a range of contractual structures such as Murabaha (cost-plus financing), Ijara (leasing), Mudarabah (profit-sharing), Musharakah (joint ventures), and Sukuk (Islamic bonds). These instruments require specific recognition and clarity in tax legislation to avoid inefficiencies like double taxation, misclassification, and regulatory ambiguity. In Murabaha and similar contracts, for instance, the institution purchases an asset, then resells or leases it, potentially triggering VAT or stamp duty twice. This contrasts sharply with conventional loan structures that are typically taxed only once, and such discrepancies diminish the competitiveness of Islamic finance in Ghana.

Furthermore, instruments like Sukuk are often misclassified under current tax laws, at times treated as equity instead of debt-like securities, impacting their appropriate tax treatment. Islamic finance returns, including lease payments, profit shares, and asset markups, are not deductible under current laws, unlike conventional interest payments, leading to inequity in tax treatment. Compounding these issues is the absence of clear administrative guidance from the Ghana Revenue Authority (GRA). With limited technical expertise and no standardized accounting or reporting rules for Shariah-compliant products, tax officers face difficulties in consistent implementation, while institutions operate under uncertainty.

Addressing these structural challenges demands a comprehensive reform agenda that begins with legislative action. The Income Tax Act (Act 896), Value Added Tax Act (Act 870), Stamp Duty Act (Act 689), Capital Gains Tax Act, Banking Act (Act 673), Companies Act (Act 992), and Securities Industry Act (Act 929) must be amended to define and incorporate Islamic finance instruments. Ghana can draw from international examples: the United Kingdom modified its Finance Act 2005 to achieve tax neutrality for products like Murabaha and Sukuk, Malaysia has established generous tax incentives for Islamic finance institutions, and Nigeria has also made legislative adjustments to accommodate Islamic bonds. Introducing such reforms would ensure that Shariah-compliant transactions receive equal tax treatment and avoid distortions caused by double taxation and improperly classified instruments.

The Banking Act 2016 already permits non-interest banking, but without complementary tax provisions, this alone cannot unlock full potential. Therefore, tax laws must be amended to recognize equivalent deductions for returns structured as markups, profit shares, or lease rentals, reflecting the spirit of interest deduction in conventional finance. Provisions should also ensure that the process of issuing Sukuk, critical for mobilizing infrastructure finance, is tax-attractive rather than burdensome.

Alongside legislative changes, Ghana needs robust administrative support. The GRA must develop and issue interpretive circulars and practice notes, clarifying tax treatment for each Islamic contract type, from Murabaha and Ijara to Mudarabah, Musharakah, and Sukuk. These practice guides will offer clarity and consistency, reducing tax disputes and fostering investor confidence.

Moreover, charitable obligations such as Zakat, an obligatory alms payment in Islam, should be recognized for tax purposes. Because Ghana’s tax code allows deductions for donations approved by the state, Zakat payments by Islamic financial institutions could qualify as deductible expenses, placing them on the same footing as conventional CSR contributions.

Capacity building is essential to drive these reforms. Ghana should partner with local and international institutions, like the Islamic Finance Research Institute of Ghana (IFRIG), Islamic Finance Professionals Institute (IFPI), and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), to train GRA officials, regulators, auditors, and financial institutions in the mechanics and principles of Shariah-compliant finance. Public awareness initiatives will further educate businesses and consumers on the tax neutrality and benefits of Islamic finance.

To catalyze growth beyond neutrality, incentives must also be offered. Under Section 134(3) of the Income Tax Act and the Sixth Schedule, temporary concessions are granted to selected sectors. Inclusion of Islamic finance, including Sukuk issuance, within these incentives can fund major infrastructure projects. Reduced corporate tax rates and tax holidays for startups and SMEs embracing Islamic models would stimulate innovation and market entry. Providing tax breaks for Sukuk-based financing would complement efforts to boost infrastructure and investment.

A strong regulatory governance framework is essential. Establishing a National Shariah Advisory Board will ensure fidelity to Shariah principles across tax and financial regulations. The Ministry of Finance should empower the Bank of Ghana and Securities and Exchange Commission to develop licensing, oversight, and supervision mechanisms for Islamic banks, Islamic windows, and Takaful (Islamic insurance), reinforcing integrity and public trust.

International benchmarks, such as Malaysia, the UK, and Nigeria, offer valuable frameworks that Ghana can emulate to create a coherent, inclusive, and globally competitive Islamic finance ecosystem. A clearly defined, tax-neutral regulatory environment could position Ghana as West Africa’s Islamic finance hub, promoting new financial products and attracting a broader investor base and consumer segment. Additionally, it would deepen capital markets, diversify financing sources, and promote a long-term savings culture aligned with ethical values.

The implementation requires coordinated stakeholder engagement. Partnerships among the Ministry of Finance, Bank of Ghana, GRA, Islamic finance professionals, financial institutions, and academia will be vital for legal reform, product innovation, and policy development. Public-private collaborations should focus on designing new Islamic financial instruments and establishing legal and tax frameworks to support their growth.

Ultimately, without reform, Ghana’s tax system will continue to create unnecessary friction for Islamic finance, undermining its inclusive potential. If the government remains committed to broadening financial access and attracting diverse capital sources, establishing tax neutrality for Islamic finance is imperative. It enables Ghana to tap into a global movement toward ethical, asset-backed, and socially responsible financial services, and in doing so, accelerate progress toward inclusive and sustainable growth.

Let the time for action begin today.