Directors and senior managers of the state-owned Commercial Bank of Ethiopia (CBE) mull over the dilemma of forming a subsidiary bank for Sharia banking, people knowledgeable of the bank's transformation strategy disclosed to Fortune.

The Bank has been under reform as part of a transformation and strategic plan launched two years ago following the Board's restructuring, which brought on board Eyob Tesfaye (PhD), now working for the United Nations, and Mamo Mihretu, a senior government official in charge of the Ethiopian Investment Holdings.

Chaired by Teklewold Atnafu, who governed the central bank for nearly two decades, the Board has identified major gaps and recommended that CBE be reformed. The Board established a project office, which floated an international tender. McKinsey & Company was hired to develop a strategic design for 1.7 million dollars, completed in seven months.

The Board has considered establishing a full-fledged Islamic bank, said a person familiar with the subject. However, the consultant recommended keeping the current business model, improving the product base and training staff. The source disclosed that the consultant examined the experiences of countries categorised under highly conservative, hybrid, and liberal interest-free banking (IFB), urging the CBE to follow the hybrid model.

The Bank has formed a Sharia Advisory Committee (SAC), under the chairmanship of Jeylan Khadir (PhD), comprising members of five known Muslim scholars. Jeylan also serves as a chairperson of the Ethiopian Sharia Scholars Council and the African Sharia Scholars League.

Shariah banking was raised to the division level. A Vice President and three directors were assigned, and the organizational structure of the Bank's interest-free banking was redesigned into two directors, 13 managers, and two team leader positions were introduced. The main trigger for CBE reform was the unmatched surge of operational expenses.

"It was on the brink of crisis," said Emebet Melese (PhD), vice president of the project office.

The transformation and strategy plan has transformation, strategic, and implementation phases, each with a project office.

Led by Eyob, the transformation project was concluded last year, and implementation was launched earlier this year. It aims to prepare the Bank for the upcoming changes in the financial sector and make it competitive, financially stable and digitally upgraded. The regulators at the National Bank of Ethiopia (NBE) have been pulling a bill that allows the financial industry to open for foreign banks.

Left to the CBE's management, the implementation has met a snag, according to individuals familiar with the progress.

McKinsey has identified a dozen pillars to make reviews of CBE's operations. Redefining its mandate to domestic and international banking approaches, and from credit and resource structure to risk management are among the pillars. It has provided a five-year strategic map to the Bank.

McKinsey identified five core operational problems the CBE faced in its interest-free banking services: creating well-assessed service models, value propositions, sufficient service products, and technology adoption.

A proposed change to overhaul the interest-free banking division is to provide credit services to clients through the Murahaba financing model, an Islamic financing structure where customers offer the materials they want to buy, and the bank covers the costs. The loan would be repaid within the contract's time, allowing Muslim customers to get credit services.

Amin Abdela (PhD), an economist, has conducted a market analysis on interest-free banking and its economic impact. He sees the absence of a well-designed project model as a gap in the industry. Interest-free banks do not have several options enabling them to generate funds to cover expenses; the industry is unstable. It is highly dependent on the profit and loss sharing scheme, where banks use the deposits for investment and customers share both the profit and loss.