National Bank of Ethiopia (NBE) has directed all financial institutions to collaborate on a study aimed at establishing a national Sharia-compliant board to oversee the emerging interest-free banking sector. Tasked with leading this effort Ethiopian Bankers Association has instructed banks, microfinance institutions, and insurance companies to designate personnel responsible for interest-free banking and to participate in the collaborative study with a deadline for reporting progress set for March 26.

According to Demsew Kassa, secretary of the Association, a quick study drawing lessons from Malaysia and the Middle East would be considered in this process. It is expected to be completed by mid-May and sent to the central bank. Demsew said establishing the board will bring consistency to the fragmented service currently governed by independent committees.

Central bank laid the groundwork for an interest-free financial system with a directive in 2019, mandating separate financial reporting, account segregation, and the formation of Sharia-compliant committees within banks wishing to participate. ZamZam Bank, licensed by the NBE four years ago, was the pioneer to commence operations with Shabelle, Hijra and Rammis, following suit. Yet the sector lacked a standardised framework.

During recent meetings between Prime Minister Abiy Ahmed (PhD) and members of the Islamic community, the question of advisory board was raised by participants.

Ahmedin Jebel, a board member of Hijra Bank, said establishing an interest-free directorate should become a priority in the nascent stage of interest-free banking in Ethiopia. He expressed concerns about potential exclusion from financial assistance by the central bank during liquidity crises.

"It needs a vice governor," he told Fortune.

He enquired about the 10pc investment cap imposed by the central bank on non-banking businesses, citing it as a significant constraint hindering the growth of the interest-free sector.

The PM responded with plans to conduct a series of discussions with officials at the central bank.

Frezer Ayalew, head of Banking Supervision at the NBE, expressed expectations that the study would contribute to the establishment of a nationwide supervisory capacity, potentially unifying the powers of interest-free supervision committees across financial institutions. He said the study would assess the necessity of a board and the role of Ethiopia's emerging capital markets in providing markets for Sharia-compliant financial products and services.

"A board will have a role in creating national consistency across IFB services," he said.

For the past 13 years, banks have been offering interest-free banking services through separate windows, with Oromia Bank leading the way followed by the state-owned Commercial Bank of Ethiopia (CBE) and Hibret Bank. Five insurance companies—Awash, Nyala, Global, Oromia, and Nile—are currently providing Sharia compliant services.

Dawit Keno, president of Hijra Bank, supports the establishment of a separate division and an overseeing vice governor to foster the growth of Sharia-compliant banking, noting that this move would contribute to expanding financial inclusion. He said the importance of regulators determining whether the pending Board will have a supervisory or advisory role.

Dawit observes the fundamental difference between interest-free banking and conventional practices lies particularly in avoiding interest rates, and acknowledges various challenges that need to be addressed. The lack of clear regulatory frameworks for asset-backed financing is a major one that can lead to potential double taxation scenarios in the interest-free landscape.

"This'll expand financial inclusion," he told Fortune.

His peer Khedir Ahmed, president of Shebelle Bank, has observed diverse interpretations by various scholars. He said the importance of a board in determining what constitutes Sharia compliance, accenting the need to address divergent interpretations resulting from separate committees operating without a national framework.

While some stakeholders emphasise the importance of a national board to ensure consistent Sharia compliance, others raise concerns about potential overlap with existing structures.

Insurance companies appoint a team of experts to supervise their Sharia-compliant Takaful operations, which entail a risk-sharing arrangement facilitated by pooled funds.

Yared Molla, President of the Ethiopian Insurers Association, advocates for a more distinct division of powers to regulate the insurance sector, given its unique products compared to the banking sector. Yared stated that they have already designated interest-free officers who will participate in the study organised by the bankers' association.

"Risk sharing and asset-based financing are entirely distinct," he told Fortune.

This perspective aligns with the financial expert Abdulmenan Mohammed's (PhD) view of the establishment of a board to oversee Sharia-compliant financial services as crucial for fostering the growth of a robust interest-free space. Abdulmenan believes that a national board will play a vital role in ensuring adherence to Sharia principles, promoting research and education in interest-free financial products, and facilitating the introduction of new products.

"It's currently underdeveloped and dominated by a few actors," he told Fortune.

PUBLISHED ON Mar 30,2024 [ VOL 24 , NO 1248]

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