The Start and growth of Interest Free (Islamic) Banking Service in Ethiopia: Does the sector going well?

Islamic-compliant financial products can take several forms and business models. Yet, the principles of Islamic finance are universal: you cannot make money off money. No one can charge or pay interest, or invest in items that Islam forbids such as alcohol and gambling. IFB service is an option similar to conventional banking systems except differing on the concepts of interest rates and exclusion of businesses engaged in gambling, sales or production of pork and alcohol. It encourages a person who does not want interest on his deposits, but the service must strictly adhere to the law set for IFB. For this to happen The Bank should set a Sharia’h Advisory Board that comprises of at least five scholars to closely follow the implementation of IFB.

Generally, access to finance in Ethiopia is very low. Nationally, only 14 % of the adult population has access to formal credit and savings products.  Until recently, there were no financial institutions catering to the large population i.e., around 40 % of the Ethiopians, denied Islamic-compliant products for a long time. In the past, this was due to the lack of development in the country and consequently very few financial institutions. But, however, in recent years before non-inclusion of the Muslim population of Ethiopia from the financial services were unjustifiable and undermine not only the Muslims but also the National Development. This is because wherever you live, whatever your needs are, financial services must be tailored to your needs or at least. For example, in the agricultural sector, farmers want to repay a loan with small payments until harvest when a balloon payment is made. That’s why the so-called the ‘policymakers’ should have been realized these facts and made appropriate policy.

The history of interest-free banking services in Ethiopia dates back to 2010, during the initiation of the unrealized bank, Zemzem. Since then, the idea of creating an infrastructure to support Islamic banking in Ethiopia has gained support, and in 2008, a proclamation by the National Bank of Ethiopia (NBE), Ethiopia’s financial regulator, introduced interest-free banking in Ethiopia, and then in 2011, issued formal directives on Islamic-compliant finance.

Interest Free Banking Growth in Ethiopia

Oromia International Bank (OIB) is the first private financial institution to implement interest-free banking [Islamic banking] in Ethiopia in Sept. 2013, three years after the issuance of the Directive. This was later followed by interest-free banking (IFB) solutions from the Commercial Bank of Ethiopia and the United Bank. The Services are offered on separate windows basis along with the Conventional Banking Services. The services of the Bank under IFB are four: Amanah- keeping money safe on trust, Qerd- a current account that allows transactions with cheques, Mudaraba- an investment account, and Mudaraba Time Deposit Account- where the customer saves money for a fixed period and withdrawal is done on notice, not on demand. The study showed that, regardless of the limited IFB products and services, the amount of deposit mobilized and the number of account holders in the IFB scheme has been increasing during the past four years. This shows the existence of large demand for the IFB products and services.

However, what’s most challenging about working in this area is that interest-free banking in Ethiopia is not progressing at the same pace as market demand. This has many factors and the followings are the major ones:

• Lack of knowledge about regulations. Banks are unclear how to solve legal disputes that arise from interest-free finance, and there is a still a gap in knowledge about how to design appropriate products. This major challenge arose Due to that the National Bank of Ethiopia unable to develop a comprehensive and transparent legal framework. This also will negatively affect the growth of confidence in the sector.

• Lack of awareness of the bankers/employees and the customers about the IFB services.  The employees did not have sufficient knowledge to answer customers’ queries on IFB services. It is apparent that the Muslim uses Interest Free Banking because their religion did not allow them to give or accept interest. This is the simple logic behind IFB. However, banks integrate different features to banking products and services that comply with Shari’ah law. Since this Shari’ah compliance banking products and services concepts are new to both the employees and the customers, it needs broad and aggressive awareness-raising activities.

So, what the Ethiopian Muslims are Eager to see about developments of IFB?

we can see this in two ways. In the long run, the Muslim wants the following developments in the area on IFB in Ethiopia.

• A fully-fledged Islamic bank that offers the Muslim both complete service and ownership of the bank: It is obvious that the Muslims deposit their money in an interest-free account and they won't get the full Islamic banking service, like Islamic consumer/mortgage loan that way too. That is, it is the majority of Muslims intention to have separate fully fledged interest-free banking that owned and operated by Muslims. These intentions come with many factors. The following are the major ones.

• Majority of the Muslim customers are not comfortable with the current separate window services. This is because the windows are not fully functional, that is, in some branch windows are not even available; in other branches, and there are service interruptions due to either shortage of employees or inappropriate allocation. Generally, the services provisions are incomplete and inconsistent, mixing of conventional and IFB services, inappropriate customer handling behaviors by some employees,

• Sharia Compliance: Majority of the Customers are suspicious that the IFB services offered to comply with the Sharia principles. They provide logical reasoning like the banks are completely owned and operated by non muslims and they priorly concerned with their profit, not the principles the customers relied on.

In the short run, they need to see improvements in the following areas:

• should adopt comprehensive and regular training on the IFB products and services for those staffs who are engaged in providing this service.

• Provide continuous and intense workshops, seminars and promotion to raise the awareness of the customers on the features and characteristics of the IFB services and products.

• Avail adequate services and products that equally benefit the customers, like availing consumer loan to the customers based on the Shari’ah principles.

• Promote the service using religious leaders and influential persons on different public gathering and events.

• Expand the services of IFB across all branches, this is because no customer needs to be told unavailability of the service while conventional one provided

• Promote the IFB service on different public gatherings using religious leaders and influential persons around branches.

• Expand the IFB service across areas where there is a large number of potential customer for the product.

• Work in collaboration with the stakeholders in different aspects of IFB products and services.

 • Maintain service excellence

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• Major Islamic Banking Products and Services Currently Available in Ethiopia