Interest Free Banking in Ethiopia: Prospects and Challenges

Abstract

Ethiopia has a substantial number of Muslims estimated more than 38 million. Ethiopia accommodated Islamic finance in its financial system through interest-free banking window in 2011 and Full-fledged interest-free banking by the end of 2019. This study aims to investigate the prospects and challenges of the newly adopted full-fledged interest-free banking system. For these purposes, several secondary data collected and analyzed descriptively. The result indicates that Islamic finance has a notable opportunity in Ethiopia. Unbanked huge customers, lofty demand, the profitability of IFB windows and the ability of under formation full-fledged interest-free banks to collect the minimum paid-up capital easily indicate the prospects. While negative perception toward Islamic finance, legal framework challenges like the exclusiveness of banking business activity, limitation on investment of banks, tax system and unavailability of controlling mechanism last but not least lack of experts and skilled resource are identified as the main impediments of the sector. Therefore, it is recommended to the government of Ethiopia to make accommodative adjustments on the legal frameworks to resolve the shortcomings and for educational institutions to provide programs, seminars, and training in the area of Islamic finance in order to produce experts that serve the sector.