J. Atsu Amegashie
September 1, 2026
Sharia law or Islamic law prohibits charging interest (riba) on loans. In a document titled “Guideline for the Regulation and Supervision of Non-Interest Banking in Ghana”, and dated January 13, 2026, the Bank of Ghana (BoG) developed guidelines to meet “…. the growing interest from individuals, banks, and financial institutions for the introduction of Non-Interest Banking (NIB) products and services.” (https://www.bog.gov.gh/news/guideline-for-the-regulation-and-supervision-of-non-interest-banking-in-ghana/).
In a predominantly Christian country like Ghana, there is considerable apprehension about the introduction of Islamic banking. At an engagement with the Ecumenical Society on Non-Interest Banking and Finance on September 1, 2026, the Governor of Bank of Ghana, Dr Johnson Asiamah, assured the public that non-interest banking will complement Ghana’s conventional banking system and will not replace existing banking models. He said that:
“Some have asked whether the Bank of Ghana is introducing a religion into Ghana’s banking system or supporting one faith over another. These are important questions, and the public is entitled to clarity. The Bank is not a regulator of religion, nor is it introducing a new religious category.” (https://www.citinewsroom.com/2026/09/non-interest-banking-will-complement-conventional-banking-bog-governor/)
If Islamic banks do not charge interest, how do they make money? There are various financing systems under Islamic banking. An example is “Murabaha” which, as defined in the aforementioned BoG document, is “… a sale contract whereby the institution sells to a customer a specified asset, whereby the selling price is the sum of the cost price and an agreed profit margin.” Murabaha is based on cost-plus financing, in which ownership of an asset is transferred by a bank to a customer after a series of payments that include a profit markup.
Here is a concrete example. Suppose Kojo wants to buy a house that is priced at $200,000. Under Murabaha, his bank will buy the house and then sell it to Kojo at, for example, $300,000 (i.e., a mark-up of $100,000). If the sale is amortized over 25 years (i.e., 300 months), then Kojo will make monthly payments of $300,000/300 = $1000 to the bank for 25 years.
Strictly speaking, this arrangement has an implicit interest rate. To see this, consider a conventional mortgage. Let’s pose the following question: “Given a mortgage of $200,000, a monthly payment of $1000, and an amortization period of 25 years, what is the annual interest rate?” The answer is 3.49% (compounded monthly). Thus, there is an implicit interest rate in the Murabaha financing scheme of Islamic banking. In fact, Islamic financial institutions commonly benchmark their pricing (profit margins) against prevailing market interest rates. Thus, the economic return can be very similar to the pricing of a conventional mortgage even though the contractual form is different.
Another financing scheme in Islamic banking is “Mudarabah”. In the BoG’s document, this is defined as “… a partnership where one partner provides capital (rabbul maal) to another partner (mudarib) for investing in a commercial enterprise. Profits are shared according to a pre-agreed sharing ratio, while losses are borne by the fund/capital provider, except in cases of proven negligence, misconduct or breach of contract by the manager.” The partner who does not provide capital provides labor, management, and expertise (Mudarib). The mudarib provides the labor, management, and expertise and receives the pre-agreed share of profits. Thus, instead of charging interest on the capital provided to the business, Mudarabah is a financing arrangement under which Islamic banks take, in effect, an equity stake in the businesses with which they enter into partnerships.
Again, there is an equivalence between Mudarabah and conventional banking. Suppose an Islamic bank enters into a partnership with Kojo and invests $1000. The duration of the contract is a year, and the bank will take 30% of any profit that the business makes. Kojo is the manager. For now, suppose the business will definitely make a profit of $4000. The Islamic bank gets 30% of $4000 = $1200. Thus, its profit is $1200 minus $1000 = $200.
In this example, what is the implied interest rate of this 30% of profit? Consider an interest rate of r and a loan of $1000. Then a traditional bank’s profit may be written as (1 + r) times 1000 minus 1000 = r times 1000. If r = 20%, then the traditional bank, like the Islamic bank, made a profit of $200. Thus, in this example, an interest rate of 20% gives the bank the same payoff as a 30% share of profit.
We did not consider risk in our example. The main difference between Mudarabah and traditional banking lies in how risks are shared. Under Mudarabah, the non-bank partner does not make any payment to the bank when the business or partnership makes a loss or breaks even. The bank bears all the downside risk because 100% of the financial loss on the contributed capital is borne by the fund/capital provider, while the mudarib generally bears the opportunity cost of his labor. This is not the case in traditional banking. In traditional banking, the borrower may still have a financial obligation to the bank in the event of a loss, possibly via bankruptcy proceedings. I wrote “may” because traditional banks write off loans. In fact, they are expected to write off some loans.
In effect, when a business gets money (raises capital) from an Islamic bank, it is as though it issues equity (shares). In contrast, when the business gets money from a traditional bank, it issues debt (an IOU). From the standpoint of a business that wants to raise capital, there is a whole literature on whether it is better to raise money by issuing debt or by issuing equity. Each has its pros and cons. The famous Modigliani-Miller (MM) theorem in economics (corporate finance) says that, under certain conditions, the value of a firm is independent of its capital structure (the composition of its capital in terms of debt and equity, the debt-equity ratio). Taking into account the risk (probability) of business failure and given suitably restrictive assumptions about pricing, risk, bankruptcy, taxes, and information, one can construct an MM-like result in which the expected value of the firm is independent of whether it is financed through Mudarabah or conventional debt. However, the distribution or variance of the payoffs to the parties can differ substantially. The proof is beyond the scope of this short essay.
There is also Musharakah, which is different from Mudarabah. In Musharakah, the partners contribute capital, and losses are generally shared according to capital contributions. Mudarabah is different because the mudarib (Kojo in our example) contributes labor and management rather than capital. Islamic banks using Mudarabah have a particularly strong need to monitor the underlying business because their remuneration depends directly on the profits generated by the financed venture.
Non-interest banking in Ghana is not Sharia law in Ghana. Relax.
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