In parallel with the expansion of window service in conventional banks, permitting the existence of full-fledged Islamic banks has brought about significant outcomes in ensuring financial inclusion and sustaining economic growth, experts in the filed say, calling for suitable legal and regulatory frameworks for the new service.

Though 11 conventional banks have been registering success to collect 38 billion Birr during the past six years from interest-free window service, only 15 percent of the stated amount is meant to Islamic products. Considering the Muslim community’s long-quest and the sector’s huge economic potential, Prime Minister Dr. Abiy Ahmed promised to allow the operation of full-fledged Islamic banks last May.

Speaking to The Ethiopian Herald, Business Lecturer at Addis Ababa University Mukemil Bedru says that the establishment of Islamic banks is instrumental in paving ways for Muslim-owned businesses access to loan, foreign exchange and other

banking services. The Premier’s pledge would also have a role to curb the Muslim community’s economic deprivation due to the absence of non-interest banks and the limited availability of the window service.

The expert notes that the establishment of non- interest banks would ensure financial inclusion and banked the unbaked society and channel the huge and idle money to productive business and investment projects. The more money interest-free banks obtained from the public, the better they finance the participation of the community in the economic building.

Noting the limited availability of interest-free window service and awareness related setback, he says that the emergence of Islamic banks could serve as an instrument to the public desire to alternate banking and nurture entrepreneurial culture.


Sharing the above rationale, Chairman of ZamZam Bank (under formation), Dr. Nassir Dino states that the mushrooming of non- interest banks in Ethiopia’s financial industry is crucial to change the existing limited involvement of Middle East companies in the country’s wider trade and investment opportunities and supplement the export performance.

Noting the banks’ intermediary role is their utmost contribution in the economy, the Chairman says that interest-free banks would have a big contribution for the realization of a fair and proportional economic growth through allocating substantial finance for viable business plans and projects.

“The demand to Islamic finance is not limited to Muslims,” he says, adding that the non-Muslim community has also been showing a growing desire to non- interest service due to the rigorous collateral requirements of conventional banks. “Clients could secure the desired finance as long as they come up with feasible business plans and we don’t require physical collaterals to permit the loan.”

Dr. Nassir points out that apart from rendering all services that conventional banks offer to customers, Islamic banks have distinctive schemes and provide profits instead of interest and they are operating in cost and profit-sharing principles.

Musharakah (a joint enterprise in which all the partners share the profit or loss of the joint venture), Mudarabah (a partnership or trust financing contract where the banks give money to working partner for investing in a commercial enterprise), Murabaha (a sales contract where the buyer and seller agree on the profit or cost-plus price for the items being sold), Wadiah (arrangement the bank charges a fee for the safe custody of the depositor’s funds) and Ijara (leasing) are among the most common services of Islamic banks.

As to Mukemil, the government’s commitment to ensure financial inclusion and boost public saving and investment as well as the success witnessed in window service put the establishment of interest-free banks in fertile ground.

Mentioning the vital role non-interest banks could have in bringing tangible benefits to the financial industry, he argues that the absence of suitable legal and institutional frameworks could lead to the potential clash between the banks’ activities with the existing monetary policy and the National Bank’s regulatory and control systems.

The expert points out that a shortage of skilled labor force with specialized knowledge and experience in Islamic banking, limited institutional capacity, absence of manuals and awareness related gaps are also among the sector’s primary challenges.


By the same token, Dr. Nassir says that non- interest banks could be challenged by a shortage of viable business plans and may not utilize investment deposit and encounter the problem of excess liquidity whilst limited project evaluation capacity could also cause a similar problem. “On the other hand, many projects and business ideas could flood the banks and may challenge their financial and institutional capacity.”

He says that interest-free banks should prepare manuals to enable customers, regulatory bodies and other stakeholders to have a clear picture of their operation and ensure customers’ convenience. Establishing sister companies would have equal importance to avert excess liquidity during the absence of workable projects and business ideas.

Both scholars highlight that the banks should give prime attention to capacity building programs and they are expected to send employees to the Islamic finance center of excellence for education and training in a view to providing world-class services.

Through addressing policy and institutional gaps, formulating new legal and regulatory frameworks as well as adjusting practices to fit with non-interest banking, the government will ensure financial inclusion and boost public savings thereby eradicating poverty and maintaining the economic growth, they remark. Source: The Ethiopian Herald