The Global Islamic Finance Report says that the Islamic financial services industry stood at 2.293 trillion dollars at the end of December 2016. This figure shows how IFB has been expanding across the world. Contrary to the universal situation, IFB service is generally in its infancy in Ethiopia, and the misconception that interest free banking is only used by followers of Islam and those that adhere to Sharia laws have contributed to its slow growth, reports BERHANE HAILEMARIAM, FORTUNE STAFF WRITER.
Musefa Mussa, in his late 30s, is the founder and manager of Wejiz Engineering Plc, a company that deals with export-and-import, real estate, building construction and consulting.
It opened in 2013, the year that Oromia International Bank began interest-free banking (IFB) services.
A user of the conventional banking system previously, which both paid and charged interest, he boasts of being one of the first clients of the bank’s new service.
“The long process of getting loans and the burden of interest payments had been a great obstacle for the growth of my business at that time,” he says.
IFB was initially introduced by Zemzem Bank in 2008, which never got off the ground. The bank was able to collect 137 million Br in paid-up capital from 6,800 people, but the National Bank of Ethiopia was unable to roll out a directive for IFB at the time.
This changed in October 2011, when the central bank issued a directive authorising IFB. Oromia Bank and Commercial Bank of Ethiopia were the first to begin providing the service.
Currently, 10 out of the 17 commercial banks operating in the country offer IFB products and services. The last to join was Dashen Bank, which rolled out its services in March 2018.
Most of the IFB services offered by the banks currently fall under three deposit categories: Wadi’a, Qard and Mudarabah; and two financing and investment services: Qard al Hassan and Murabahah.
Wadi’a resembles a regular savings account, without any interest payments made to the depositor. Qard is similar to a current account and is mostly used by traders. Mudarabah is similar to a fixed-time deposit account, which can be restricted or unrestricted. None of the three offer clients interest payments.
In an unrestricted Mudarabah case, the bank can only invest the money in a business that does not not violate Sharia law, while in the restricted account the bank invests in businesses where the client permits. The bank and the customer share the profit, according to their agreement.
When it comes to financing and investment services such Qard al Hassan, the bank undertakes export financing arrangements that the bank is not allowed to profit from but gets hard currency from the transaction.
Murabahah financing, on the other hand, generates profit for the bank through service provisions. The bank processes the transactions and provides what the customer imports, in return getting paid for the cost and profit.
“Murabahah financing covers 80pc of the IFB financing portfolio in the world,” says Abie Sano, president of Oromia Bank.
Given his business interests in import-export, Musefa frequently uses Qerd al Hassan and Murabahah for export and import, respectively.
“With both services, I benefited much,” he said, “Most of my worries are handled by the bank.”
There are also services such as Musharaka and Istisnah. The former is a joint venture based on a partnership where the bank provides the money. By facilitating this, the bank gets to share the profit as well as the risk in case of business failure.
Istisnah is a service that gives customers the opportunity to buy or build a home. The bank monitors the construction and delivers according to the agreement, taking a profit margin. Nonetheless, these services are not offered by banks currently even though the central bank allows it.
Users of IFB services like Jaffar Hussein, a plastic factory owner, states that the services have a lot of facilities that accelerate business transactions.
“If the government improves some laws on land use and mortgages, services like Musharaka and Istisnah will help people benefit economically,” he adds.
After the Commercial Bank and Oromia Bank launched the service in 2013, other banks noticed the profitability of the services and have been quick to join. United Bank started in 2014; Cooperative Bank of Oromia, Wegagen and Nib banks in 2015; Awash and Abay banks in 2016; and Abyssinia in 2017.
The last entrant into the market is Dashen Bank, which attracted 12,249 clients and 275 million Br in deposits from its 375 branches within the last five months.
Oromia Bank leads with 249,000 IFB clients, 3.2 billion Br in deposits and has issued financing valued at 1.6 billion Br and more than 451 clients. The bank earned 188 million Br in profits from IFB in the last fiscal year.
Compared with the overall financial statement of the bank, the share of IFB comprises 16pc in terms of overall deposits, 22pc in number of clients, 14pc in financing, 16pc in hard currency gains and 25pc from profit earnings.
The principle of IFB services is to comply with Sharia laws, the Islamic religious law. To ensure adherence, a third-party monitoring body consisting of Sharia scholars with social acceptance and knowledge of the religion, law and business is established.
This body, the Sharia Supervisory Board, is independent and acts as a consultative advisory body which approves all products and services, gives legal opinions and approves financial statements, according to the Global Islamic Finance Report 2014.
“The banks should at least have a Sharia advisory body that consists of three persons,” says Mesfin Bezu, director of the IFB Department at Dashen.
Oromia Bank and Dashen have a five-member advisory body whose members have backgrounds in philosophy, international law and Sharia law.
Ibrahim Dawd, who has been in the banking business for 12 years and is educated in Sharia law, has been a Sharia advisor for United and Abay banks since 2014.
The Sharia advisory committee or board acts as an intermediary between the bank and the client and watches the compliance of the operation to ensure the bank’s adherence to Sharia, according to Ibrahim.
“It is just to give confidence and assurance to the clients and the bank,” he said. “The advisor should at least have knowledge of the Sharia rules and know-how of the banking business.”
The advisory committee does not interfere in every transaction but oversees that the process of the service, procedures, formats and contracts are Sharia-compliant.
“It checks the financial reports are up to the standards of Sharia and the finances are not mixed up with conventional transactions,” he says. “Sometimes we do surprise audits.”
Ibrahim believes that the awareness of the public has a long way to go and that the banks and the advisors have to work hard on changing the sentiment that IFB works for followers of the religion of Islam only.
A banking expert with over a decade of experience in the industry lauds the start of IFB in the country but points out that the awareness gap among people in addition to inconvenient laws and regulations of the country hampers the growth of IFB.
“The dilemma is that the non-Muslim community thinks IFB is only for Muslims only, while the Muslim community does not fully utilise the service,” Habib Mohammed says. “It would also have been better if IFB services were translated from Arabic to indigenous languages for more people to understand them.”
About 75pc of the world’s Muslim population is estimated to be under-banked or lacks access to financial institutions.