Major Islamic Banking Products and Services Currently Available in Ethiopia

Following the issuance of the Interest Free Banking Directives (SBB/51/2011) by the National Bank of Ethiopia, the Commercial Banks in Ethiopia were conceived of the potential of this market, and thus interested in launching interest-free banking window service that operates in line with the National Bank of Ethiopia Directives. Today most of Ethiopia’s big commercial banks offer a narrow range of Islamic financial products, but to few customers. Islamic finance in Ethiopia was stillborn. The narrow range of Islamic financial products currently available in major commercial banks of Ethiopia are presented as follows

I) Saving and Current Account Deposits/ Interest Free Deposit Account Services

Generally, the services under this category can be summarized as follows.

1.1. Saving Al Wadiah /Wadiah Amanah (saving with guarantee)

This type of account is opened for unspecified length of time by customers who own the funds in the Bank for safekeeping. Depositors give their consent to the Bank to deal with the whole or any part of their monies in the manner that it deems fit, so long as it is not against sharia. The Bank will guarantee repayment of the whole sum or any outstanding part in the depositor account without any interest when demanded.

1.2. Current Al Wadiah /Amanah (current account)/ Wadiah special Accounts

This is interest-free current account opened for unspecified length of time and managed through checks until the depositor demands payment and is paid promptly/right away. It is an account which is regarded as trusts or safekeeping and offers the depositors’ safety of their money against the bank’s guarantee to return their funds on demand and is a non-interest bearing account.

1.3. Mudharabah (profit sharing saving account)/ Mudharabah Unrestricted Investment Account

This is a type of investment partnership where a customer deposits money for unspecified length of time and the Bank shares both the profit and loss with her/him. The customer may withdraw his/her deposit at any time, but the Bank may impose some restrictions on the amount to be taken out as this arrangement is both profit and loss sharing partnership. It is a fund that will be placed in the Bank general pool of Shariah compliant banking activities. In return, the account holder will be entitled to an agreed percentage share of investment income or proportionally bears the loss of capital.

1.4. Mudharabah (fixed-time deposit)

Mudharabah is a profit sharing fixed time deposit. To benefit from this service the depositor (customer) should not withdraw the deposited amount before the agreed date in the contract. If the customer, however, demands the money deposited before the stated date, the Bank may not share the profit.

1.5. Mudharabah Restricted Investment Account

is a fund that will be specifically utilized to a particular project of the account holder choice. In return, the account holder will be entitled to an agreed percentage share of the investments income or proportionally bears the loss of capital.

1.6. Labbaik Saving Account

is a safekeeping account to be deposited regularly for Hajj and Umrah. The purpose of traveling to Meca Medina, the deposited amount to be available on demand.

II) Financing

2.1. Murabah

This service involves a request from a customer to the Bank or by the initiative of the Bank to purchase and then on sell to the customer certain goods and/or assets not banned by sharia. The sale by the Bank to the customer is at cost plus on an agreed margin. Payment by the customer is in one or more predetermined installments at agreed points in time. Ownership of the goods passes to the customer upon delivery by the Bank. Such a sale contract is valid on condition that the price, other cost and the profit margins of the seller are stated at the time of the agreement of sale. The asset/good remains as a mortgage with the Bank until the default is settled. The Bank may ask for collateral, if necessary, for this financial service. Among the services included in Murabaha are the following:

• Murabaha fixed-time financing ---- For production inputs, purchase of machinery or short-term project;
• Murabaha revolving financing --- For purchase of production inputs;
• Murabaha LC financing --- For purchase of production inputs from abroad or for buying machinery;
• Murabaha pre-shipment and Murabaha post-shipment financing for purchase of goods to be exported.
• A contract of promise to sell and to buy commodity, machinery, vehicle etc on agreed profit added to the cost (mark-up).

2.2 Salam

This is a financing service that would be made available in cash for operating costs to customers engaged in agriculture as per the agreement to be reached between the Bank and the customer. It is an arrangement whereby the customer delivers the type of product s/he produces in accordance with the type, quality, quantity, price and time agreed upon with the Bank or to the agent/body the Bank has entered salam finance agreement. The Bank may ask for collateral, if necessary. It is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. Salam is used to finance agricultural like goods.

2.3 Istisna

Istisna is a contract of sales and purchase of assets by specification or order where the price is paid in advance but the assets are manufactured or produced and delivered at a later date. In line with this, the Bank will deliver industrially produced goods or assembled and constructed items as per the orders/specifications of the customers when they are finalized by the producers. Sales transaction concluded before the commodity came into existence. the bank shall act as a manufacturer or constructor to undertake house construction, plant, power station, roads projects etc as per specification.

2.4 The Bank, based on the job order/specifications of the customer and making a separate agreement with the builders/producers, may make payments to the institutions at once or in installments by assessing the progress of the work. The Bank may ask for guarantee from the customer and producer/builder.

2.5 Ijara

This is a leasing agreement where the Bank buys agricultural vehicles or industrial machinery for lease/rent in its own initiative or by the order of a customer/client and then leases it back over to him/her/it for a fixed period. Depending on the promise given earlier, the Bank can sell the asset or transfer it freely to the lessee customer on or before the last day of the lease agreement. The Bank may ask guarantee to provide this service. It is a form of financing applicable to financing and operating leases of properties. By making use of these a customer can obtain money for:

• Running costs;
• Purchase of goods/assets;
• Export and import trade;
• Project finance;
• Lease; and
• Operating cost for agricultural works/activities.

2.6 Mudarabah,

Mudarabah is a contractual relationship executed between two parties, one supplying the capital (rabbulmal) and the other supplying the labor and skill as agent or manager (mudarib), for investing in a pre-determined activity, which grants each party a share of the earnings as determined at the time of the investment. This practice existed in the pre-Islamic period and Muslim jurists of all the major legal schools are agreed on the legitimacy of Mudarabah transactions. Mudarabah business can be of two types: restricted, if the capital-provider specifies any particular business in which the capital is to be invested, and un-restricted if the capital-provider authorizes the mudarib to invest the funds in any business he deems fit.

2.7 Musharakah

Musharakah is a joint enterprise or partnership structure in Islamic finance in which partners share in the profits and losses of an enterprise. Since Islamic law (or Sharia) does not permit the concept of interest in lending, musharakah allows for the financier of a project or company to achieve a return in the form of a portion of the actual profits earned according to a predetermined ratio. However, unlike a traditional creditor, the financier will also share in any losses should they occur, also on a pro rata basis. Musharakah is a type of Shirkah al-Amwal (or partnership), which in Arabic means "sharing."

2.8 Free - Cost Loans/ Qard Al - Hasan

Therefore, al-qard al-hasan is a gratuitous loan extended to needy people for a specified period of time. At the end of that period, the face value of the loan (asl al-qard) is to be paid off. In other words, shari’a prohibits the stipulation of an excess for the lender, as it amounts to riba, whether the excess is expressed in terms of quality or quantity, or whether it is a tangible item or a benefit. However, it is permitted that the repayment of qardh (loan extinguishing) is made with an excess (tangible item, benefit, service, etc), provided that such an excess is neither expressly stipulated nor implicitly pre-arranged (through collusion or tawatu’) in the contract of loan. Islamic shari’a doesn’t recognize any types of loan other than al-qard al-hasan.

III) International Trade Support Financing/Import and Export

The service is provided for customers engaged in export and import trade, and it is an arrangement where customers delegate the Bank or collaborate with it. This service is similar to the international trade support service given regularly interest free. These include:

3.1 Wakalah Letter of Credit 

Written undertaking by a bank given to the seller at a request and/ or the instructions of the buyer under wakala contract, to make payment or to accept and pay bills of exchange (Draft) drawn by the seller up to a stated sum of money within a prescribed time limit and against stipulated documents provided that the terms and conditions of the credit are complied with.

3.2 Murabaha Import Letter of Credit

Is a contract whereby the bank buys goods for the customer (applicant) and the customer agrees to later buy the goods from the the bank through a resale at a mark-up price.

3.3 Musharaka Letter of Credit

Is a contract whereby the value of the letter of credit issued by the bank and the profits of the partnership transaction are shared between the bank and the customer based on an agreed ratio.

3.4 Wakala Export Letter of Credit

Is a condition where the exporter appoints the bank as his/her agent to collect receivables on his/her behalf.

3.4 Wakala Documentary Collection (Wakala Cash Against Document - CAD)

It is type of transaction by which importer and exporter conclude a contract, accordingly the exporter deliver documents to the importer through his/her bank to buyer bank through which, the title for purchased goods is released to the buyer after the total sale price is collected in full.

3.5 Wakala Advance Payment

A transaction in which an importer makes payment for items to be imported prior to the shipment of goods. The importer must trust that the supplier will ship the product on time and that the goods will be as their agreement because it creates a lot of risk factors for the importers.

3.6 Wakala Consignment Basis Payment (for Export) 

It is a transaction method in which the local exporter (a consignor) exports the goods to the foreign importer (a trustee) who pays (remit) the exporter only as and when the goods are sold.

IV) Letter of Guarantee Facility/ Kafala

The Bank makes available guarantees such as advance payment guarantee, bid bond and performance bond; and it may request collateral for the services. A written promises by the bank as compensation to the beneficiary in the event that the obligatory fails to honor his/her/its obligations, in accordance with the terms and conditions of the guarantee/agreement/contract. Types of Letters of Guarantee rendered by major commercial banks in the country include:

4.1 Kafala 

Is a written promise by the bank to compensate (pay sum of money) to the beneficiary (local or foreign) in the event that the obligor fails to honour his/her/its obligations in accordance with the terms and conditions of the guarantee/agreement/contract. Types of Kafala/Letters of Guarantee offered by most of the commercial banks include:

• Bid Bond
• Performance Bond
• Advance Payment Guarantee
• Retention Payment Guarantee
• Letters of Indemnity for Missing Documents
• Customs Duty Guarantee

V) Investment

5.1 Mudharaba Investment

A partnership between the bank and eligible customer (entrepreneur), profit and loss shared as per the agreed profit sharing ratio.

5.2 Musharaka Investment

It is a joint ownership of property or equipment or commercial enterprise. Partner shall share profit as per the agreed ratio while losses are shared in proportion to capital contribution of partner.

5.3 Diminishing Musharakah

Is a form of co-ownership in which two or more persons (i.e., the bank and the client) share the ownership of a tangible asset in an agreed proportion and one of the co-owners/client undertakes to buy in periodic installments the proportionate share of the other co-owner/bank until the title to such tangible asset is completely transferred to the purchasing co-owner/client.

VI) Others

Foreign Exchange Service.

6.1 Hawallah

Local beneficiaries of hawallah can collect money sent to them through branches of the Bank from any part of the country from the closest branch that has interest free banking window and could similarly send money using this service. Besides, customers can similarly utilize the service to receive money sent to them from any corner of the world.

6.2 Foreign Exchange

Customers of international trade support service can trade/exchange foreign currencies according to the spot rate of the day.

List of references

Interest Free Banking products and services 2018, accessed 7 March 2018, < www.combanketh.et>.

Interest Free Banking Services /IFB/ 2018, accessed 7 March 2018, < www.unitedbank.com.et

Interest Free Banking Services 2018, accessed 7 March 2018, < www.orointbank.com

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