Interest-free finance is growing at a galloping pace in more than 56 countries of the world including Ethiopia. Many financial institutions are working well and contributing in the form of providing interest free banking service along with other formal financial services across the world. This article focuses on appraising the interest free banking service provision experience in Ethiopia. According to the Association of Ethiopian Microfinance Institutions (AEMFI) the commencement of interest-free financial products in Ethiopia is a very recent phenomenon counting back to the year 2011. Till now, eight banks obtained license from the NBE to provide interest-free banking products through their windows.
The contribution of interest-free products is found at its early stage attributing to the fact that only three banks have currently started the delivery of interest-free products and the scheme is also new. It was on September 2013 that the National Bank of Ethiopia (NBE) granted the first interest-free banking service license to Oromia International Bank using a separate window along with other banking services.
This was later followed by the Commercial Bank of Ethiopia and the United Bank on May 2014. Finance and Investment Consultant Eliyas Luha told The Ethiopian Herald that interestfree banking mainly targets individual and institutional customers that do not want interest on their deposits for religious or other reasons. Islamic finance has grown dramatically in our regional and around the world in the last decade. As a fully Shari’ah-compliant institution, the East Africa Bank (EAB) is part of this global phenomenon.
EAB has operated eight branches in East African countries, and recently inaugurated its headquarter in Djibouti. EAB’s CEO Ibrahim Rashid Jaffar says over the past few years, Dahabshiil Group Holdings, together with our partners and agents, has succeeded in building a modern regional bank, East Africa Bank (EAB), to provide a wide range of financial services to our customers in the Horn of Africa. According to him, EAB has demonstrated strong capabilities in serving an increasingly demanding customer base consisting of individuals, businesses and international organizations operating in the region.
Backed by the strength of the Dahabshiil Group, EAB thrive on playing a key role in the development process engaged in helping businesses, rebranding new technologies, attracting major corporate financing, and expanding support to SMEs, the CEO explained. “Since licensed in 2010 by the central bank of Djibouti, the Bank has been offering a broad range of supports to businesses in Djibouti trading in Ethiopia.
The Bank eyes Ethiopia’s growing market niche for both cooperative and individual services.” He said, “We are now embarking on the next generation of banking in the region, providing quality service and innovative products. We recognize our customers’ business requirements are becoming increasingly complex and the range of options available are constantly widening.”
In this regard, Mawerdi Abdurahman, working in the Association of Ethiopian Microfinance Institutions, noted that lack of awareness in the society and unavailability of skilled human resources that has the expertise on interest-free products are the major challenges so far observed in the interest-free banking sector of Ethiopia. According to Mawerdi, the other challenge faced by the sector not only in Ethiopia but also worldwide is lack of a suitable financial performance measure that has inhibited banks from identifying their financial position, detecting problems and to settle concerns about the safety and soundness of investments.
“Other factors that contribute to low outreach of interest-free microfinance products in Ethiopia as well as globally are shortage of Islamic-finance providers including funders and donors, underdeveloped Islamic microfinance industry and lack of understanding of the generic Shari’ah models by clients and policy makers.”
As to Mawerdi, the AEMFI is attempting to promote interest-free microfinance in Ethiopia with the intention of creating awareness and further promoting the development of the products. In this regard, it is true to say the contribution of EAB to the growth of the banking and financial sector in Ethiopia as well as in East Africa will be advantageous of providing innovative and dynamic services to its customers.
Abdirashid Duale, CEO of the Dahabshiil Group, revealed that EAB has regional presence providing shari’ah based services for a decade in Uganda, Kenya, Rwanda, Djibouti, and Somalia. As the EAB was previously named as Dahabshiil International Bank, it has also global presence in increasing financial access to the banking communities whether through remittance, supporting finance for SMEs, and providing mobile payment services across the world.
According to Abdirashid, EAB has grown from strength to strength for the last few years, and is grateful for the opportunity to serve its customers in a manner that contributes effectively to their personal and corporate goals. As outlined in the Ethiopian Microfinance Review, the composition of interest-free finance products or models takes into consideration fair distribution of wealth by encouraging business in accordance with the Shari’ah principles.
As the Shari’ah principles, any predetermined payment above the actual amount of principal is prohibited. In addition, making money from money is not acceptable in Islam. The most common types of interest-free finance models operated by East Africa Bank includes Murabaha, Istisnaa, Ijara, Islamic covered drawings and other Shari’ah compliant products. Above all, Shari’ah urges the borrower to be generous when he repays.
The borrower is encouraged to return more than the original amount borrowed as a gift and is permissible as long as it is not demanded by the lender. Once the penalty is collected, it must be donated to charity and cannot form part of the income of the lender. A country with a good share of Muslim population having an interest-free financial system in addition to the conventional one has a positive impact for the financial sector development, Elias Lula also agreed on.
Since the interest-free financing scheme is based on a business deal amid the client and the finance provider, it encourages business and contributes for economic progress. The financial institution supports the client in undertaking a certain business activity and in acquiring the commodities that need financing. The interest-free financing scheme minimizes risk since it is mostly shared between the finance provider and the client.
The system does not lead to loss of livelihood of the poor since both the financier and the client would share the loss when the project fails in a situation that is beyond the control of the client. As to Eliyas, the presence of EAB in Ethiopia will have significant importance to facilitate the business and trade relations between Ethiopia and Djibouti interlinked through the port of Djibouti. In fact, the Bank has been offering remittance services to the household economy and the food security of many Somalis in Ethiopia.
He said adding that Dahabshiil has the experience in playing the role in innovation and technologically advancement especially in the field of remittances and telecommunications in Kenya and other East African countries. In general, the system encourages business activities to take place and changes the lives of individuals since the products offer flexible options for those who do not have sufficient finance.
The Ethiopian Herald April 28/2019
BY ZELALEM GIRMA
