Interest-Free Banking (IFB) refers to a system of banking or banking activity that is consistent with Sharia (Islamic law) principles and guided by Islamic economics which prohibits the collection and or payment of interest as well as engaging in areas forbidden by Sharia.
Since 2013, the Commercial Bank of Ethiopia (CBE) has begun this alternative banking service. It aswell has pioneered the establishment of a fully-fledged IFB branch across the country.
Nuri Hussein is CBE’s
Vice President for Interest-Free Banking and recently sat down with The Ethiopian Herald.
The VP stated that the Bank come to the understanding that the IFB business
could be operated independently of the conventional wing to satisfy the growing
demand and maintain the business’ growth. Excerpts:
How do you come up with the decision of establishing IFB?
Ethiopia is a nation of diverse socio-economic and religious backgrounds, and the banking industry should be designed to serve the interest of all segments of society. Before the launching of the IFB, Ethiopia was at the bottom list of different financial rankings. Hence, with the implementation of GTP I, the financial sector was expected to undertake product diversification.
Another case in point might be, although the business is not immune from crisis, there is consensus among economists that IFB business is risk resilient. Besides, CBE, as a state bank with a wide branch network across the country, had the opportunity to closely monitor the dynamics when it comes to the demands of its customers.
Hence, by the time NBE had introduced the directive, authorizing interest-free banking business, we immediately conducted a feasibility study. And the result indicated that IFB business is viable as a separate engagement. Besides, product diversification is one of the mechanisms a bank could deploy to manage its business risks. Moreover, there was the necessary population (customer) threshold and economic landscape to introduce IFB.
Was there an enabling legislative ground to launch the business?
IFB business has been supported by Banking Business Proclamation: 592/2008, Art. 22/2 and NBE have issued directive SBB/51/2011 which authorizes the business.
Further, IFB in Ethiopia was officially recognized as an alternative and separate business with the introduction of the National Bank of Ethiopia (NBE) directive SBB/51/2011 which allows existing conventional banks to provide the service. Before then, CBE used to avail non-interest bearing savings products, but we had not The
any credit product immune from interest payment. The CBE is one of the first banks to secure a license from the NBE to engage in IFB.
Can you tell us more about the services?
The IFB service was started with a window model. The number of branches offering the service reached 145 within just one year, the number has kept on multiplying for the subsequent years and currently, our 1,468 branches across the country have been providing the service through 1,623 windows.
It is well known that the role of the bank is to collect funds from the excess and allocate it in areas of deficit, and the same applies to the IFB.
We managed to diversify the types of deposit and financing products with continuous improvement and customer feedback. We can see the CBE’s IFB products based on four categories-deposits, financings, service-based banking and other services.
Can you tell us the amount of fund collection so far?
The CBE was a champion in mobilizing deposits through IFB windows. The growth rate was as high as 70 percent per year and total deposits mobilized from the private sector through all available products reached over 25.8 billion Birr in October 2019. The success story in deposit mobilization is attributed mainly to branch network expansion, customer awareness creation, and relentless effort of employees of the Bank.
So far, the CBE has been disbursing over 1.1 billion Birr loan for halal businesses and the Bank would consolidate its engagement in financing businesses that have been running per Sharia law.
How could you make profits from non-interest loans?
Generally, banks operating in economies and regulatory environments like ours engage in IFB based financing using three approaches; buy and sell of tangibles, leasing as well as investment participation.
The first one is that when customers encounter a shortage of input for the production of goods and/or services; a bank may procure and handover the needed kinds of stuff to customers and makes some profit as a result.
In this case, the bank is not acting as a financier, in the context of conventional banks, but as a trader that sells on credit. The bank may act as the buyer from the customer or seller to customers depending on the nature of the financing request and type of business.
The second, for businesses where massive investment is required, a bank may purchase machinery, business premises, equipment or any other necessity for the business and lease it to customers. But most of the time such arrangements end-up with transferring the ownership to the lessee. Under this arrangement, the bank assumes the full risk of the property during its lease period.
There are circumstances where a bank may participate in business as an investor, not as a financier, which takes us to the third point. By so doing, it shares the profit and losses arising from the normal operation of the business. There are different varieties of this approach (Mudharabah and Musharakah or their derivatives) depending on the bank’s involvement in the decision-making process of the business.
Currently, we are financing all term type requests for anything that can be bought which is Halal (which the Sharia permits) either from local or abroad to resell through Murabaha and Export via Qard (interest-free loan) contract. Other financing services have legal constraints to practice it easily.
Why the CBE opts for establishing fully-fledged IFB branches?
We have three major reasons to commence fully-fledged IFB branches such as ensuring customer service satisfaction; attracting more customers, and responding to Sharia Advisory Committee’s requests following policy changes made by the government on Banking Business.
These CBE has managed to achieve remarkable successes in customer base expansion and deposit mobilization through the IFB business, and currently, it has close to 2.2 million customer bases in the scheme whilst the total deposit hits over 25.8 billion Birr. The annual year-to-year increase in deposits and customer base of IFB business is more than the growth of its conventional counterpart.
Banks use different structures to render IFB services: IFB products and services within a conventional bank branch, window model, branch model, and fully interest-free bank model. For various reasons and emanating from regulatory requirements, the CBE introduced IFB services using the window model where a dedicated window within a branch will be arranged to solely serve IFB customers.
However, during the preparation of the annual plan for the 2019/20 budget year and following the financial reform of the Ethiopian Government, Bank Management come to the understanding that the business is capable of being operated independently of the conventional wing. Besides, customer sessions conducted during the last Ethiopian fiscal year informed the Bank that there is a strong demand for an independent and dedicated IFB branch. As a result, a dedicated branch opening during the current fiscal year become part of the initiative to address customer requests and run the business independently.
Ethiopian Herald Friday 3 January 2020
BY BILAL DERSO
