The National Bank of Ethiopia (NBE) has issued the long-awaited directive on the formation of full-fledged interest-free banking (IFB).

Issued on June 18, 2019, the directive was signed by Yinager Dessie (PhD), governor of the central bank, resurrecting a proclamation legislated 11 years ago allowing interest-free banking.

Even though the Banking Business Proclamation was initially enacted in 2008 authorising the establishment of interest-free banking, the directive had restricted operations to a window service alongside other conventional banking.

After the legislation of the proclamation, promoters of ZemZem Bank filed a request with the central bank to form a bank dedicated to Islamic banking. Previously, the issuance of a directive for IFB that restricted it to window service had aborted their initial attempt to establish the bank.

A speech delivered by Prime Minister Abiy Ahmed (PhD) at the end of May this year during an Iftar programme his office hosted at Millennium Hall, showed a ray of hope for those who aspire to form IFBs. In his speech, the Prime Minister expressed his administration’s commitment to allow the formation of Islamic banking.

Within a month after the Prime Minister's promise, the central bank issued the directive that now enables banks to offer exclusive interest-free banking services.

"Interest-free banking has to be promoted for greater financial inclusion," reads the directive.

So far, four share companies have passed the pre-application stage and received permissions from the central bank to open bank accounts and start selling shares. While Zad, Zemzem, Hijira and Nejashi are in the process of formation, two others, Kush and Huda, have initiated a process to organise an interest-free bank.

The opening of financial institutions fully dedicated to Islamic banking in the country will have a significant impact in reaching a segment of the population that remains outside the banking system, according to Munir Hussien, project manager of the under formation Zad Bank S.C, the latest company to receive the under formation status. Started about two and a half months ago with seven promoters, Zad secured a pre-registration license from the central bank last week.

Zad Bank has already identified seven banks to sell shares for public subscription, according to Munir.

"We'll start selling shares beginning this week," he told Fortune.

Zemzem Bank, a pioneer in interest-free banking in the country, has also begun selling shares.

Even though no banks offer full-fledged Islamic banking currently, over half of the commercial banks have been providing it as a side business alongside their conventional banking services. Among the 17 privately and state-owned banks, 11 have secured a license to operate IFBs, and 10 of them have already commenced the service.

Two banks started IFB services as window services in 2013, and most of the banks offer it in three deposit categories: Wadi'a, Qard and Mudarabah.