The banking sector plays a vital role in
growth-supporting factor for economic growth in the developing countries’
economies like Ethiopia. Recently, Interest free banking has become an
increasingly popular method for alleviating poverty, financial inclusion and
economic development around the world. Its importance is highly needed in
developing countries such as Ethiopia.The
Banking industry in Ethiopia has been operating in the country for over a
century but interest-free banking had never been practiced even though around a third of Ethiopians
identify as Muslim. They had been excluded themselves from dealing with conventional
banking activities due to its acceptability of interest.The idea of creating
an infrastructure to support Islamic banking in Ethiopia has gained more
support in recent years though, and in 2008, a proclamation and in
2011,directives, by theNational Bank of Ethiopia (NBE);there is now flexibility for conventional banks to
establish Islamic banking windows and launch Islamic financial products. Recently, many conventional banks likeAbay Bank, Commercial bank of Ethiopia,
Cooperative Bank of Oromia, Enat Bank, Nib International Bank, Oromia  international bank, United Bank and Wegagen
Bankhave started using Interest free
banking transactions, tools and techniques in their banking operations.All
these are really encouraging and motivating for the Banking industry as a
whole, particularly interest free banking since about 78% ofadult population
does not have access to formal banking because of either unavailability of
formal banking framework or paying or receiving
interest prohibited in the religious or other social ethos. However, the
Interest free banks and Interest free banking system, like any other system,
has to be seen as an evolving reality and it is facing a lot of issues and
challenges in its steady journey towards the lofty goal of capturing the lion?s
share of the banking services industry.


Islamic windows
allowed conventional banks to offer Islamic services directly from their
existing network; bypassing the cost and overhead associated with setup of
separate Islamic operations. However, they are facing some criticism with a sense of suspicion among the Islamic
scholars and the Islamic banking clients on the authenticity, clearance of monitory system, etc.Some
scholarsargue thatconventional banks should not be permissible to open Islamic windows,
as their sources for fund is unlawful.
Hence they are not complying with Shariah at first place exploiting the Muslim
investors and unfairly competing with Islamic institutions.
On the other hand, there is a group of
contemporary scholars who permit this type of banking service as long as the
sharia conditions laid down for them are satisfied and fulfill certain required
conditions such as: complete segregation of funds; the existence of a Sharia
supervisory board; management committed to Islamic financial concepts; safeguarding
Muslim investors’ funds from negligence, trespass, and fraud; and compliance
with the standards of the Accounting and Auditing Organization for   Islamic Financial Institutions (AAOIFI).Besides, Islamic banking is a system but not a religious
institute, so it can provide banking services to the non-Muslim clients (Zainul
et al., 2008).Many Islamic bankingclientsalsobelieve that conventional banks
are involved in immoral – from an Islamic Sharia point of view. Hence,there is
still a sense of suspicion and mistrust amongst the majority of Islamic banking
clients with regards to these “Islamic windows” and their Islamic products.This
explains the reluctance from numerous Islamic banking clients to deal with
Islamic windows and their financial products.

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The most essential element of
an Islamic window is that all of its operations are in strict compliance with
Shariah. Proper Shariah compliance is a matter of great concern in the windows.
So that,it is very important for the management of Islamic banking to ensure that
all the transactions and products of Islamic banking are accordance to the
principles of Shari’ahat all times
and at all cost. This is due to the fact that Shari’ahrequirements are the backbone of Islamic banking which is
to adhere to. Moreover,according to experts, the formation of Islamic banking under
the bank is like forming a new bank, because the service provided is quite
separate from the conventional banking system. It is not like launching one
service under the bank. It means forming an additional independent financial
institution under the bank; therefore, it needs more preparation and a
different and separate office that operates the interest-free banking. So that,conventional
banks established separate divisions within, namely Islamic Banking Divisions
under which Islamic windows were opened. These divisions are independent and
appointed religious bodies (Sharia Supervisory Committees) supervise their
operations and authorise and inspect their financial products. They also
have their own principles, tools and
techniques of operation. Therefore, the funds of Islamic banking windows are
kept separate from those funds, which have not been mobilised by following
Sharia provisions. The funds mobilised through Islamic windows are not
commingled with the funds of the deposits mobilised through conventional
branches. This is done through maintaining separate accounts, books, and
records and this compliance is disclosed to the customers through annual
reports, prospectuses, websites and other promotional materials. Conforming to
these standards will help Islamic windows avoid confusion, misunderstanding and
ambiguity and ensure clarity and sound Islamic banking practices.

A significant amount of theoretical and empirical research on
Islamic banks has been undertaken throughout the world.It
is the conclusion of many studies ( Sanusi, 2011; Iqbal et al. 1998; Dusuki and
Aboizaid, 2007;Malik et al. 2011; Ariss and Sarieddine, 2007; Njamike, 2010;
and Iqbal, 2001) that the establishment of Islamic banking in any country be it
Muslim or non-Muslim faces a number of challenges. These challenges
could be institutional or operational, but they are not without remedies.
Institutional challenges are those challenges that are unique to Islamic
banking institutions such asinappropriate
institutional framework, inadequate legal framework, lack of equity
institutions, poor supervisory framework, disparity in accounting
standard, lack of secondary financialmarkets and lack of short-term financial
instruments andwhile the operational challenges are those challenges
confronting the operations of Islamic banking.Which is in the form of religiousand cultural differences, lack of
innovations in financial products, lack of profit sharing finance, Sharia’h
related issues, inadequate manpower with the requisite knowledge, lack of
awareness and competition. Moreover, studies in literature
highlighted many challenges and barriers to a successful CB conversion into and
Islamic bank model. Majority of studies (e.g., Alani, 2012; Al-
Oqool, 2011; Al-Atyat, 2007; Mustafa, 2006; Al-Martan, 1999) evidenced that
human resources, regulations and legislation, shari’ah compliance and Islamic
banking products are the major barriers that affect the CBs conversion to
Islamic banks. Added to this, factors that determine successful conversion
include resistance to conversion and leadership rule.


The challenges is compounded by the
fact that the environment in Ethiopia differs from that of other Middle Eastern
and GCC countries, even some African countries such as Kenya….in that Ethiopia
does not have ample experienced in dealing with IFB. In other words, the IFB is
a new event in Ethiopia as Evidenced by only conventional banks offering
interest free banking products and services along with conventional products in
the past seven years. Therefore, the practices and operations of IFB is a process
riddled with obstacles and challenges that are distinct from other countries
that have been pioneers in applying Islamic banking system for the past five
decades or more. In the context of Ethiopia, the information on the practices
and challenges of interest free banking and findings on different issues of
interest free banking have been made available through limited research
activities only in recent years. For example,

Debebe(2015) in his
study entitled as Factors Affecting Customers? to Use Interest Free Banking in
Ethiopia showed that perceived
relative advantage, perceived compatibility, customers’ level of awareness and
subjective norm have a significant positive impact on the attitude towards
interest free banking in commercial bank of Ethiopia. Also, Teferi(2015),in
his study entitled asContribution
of IFB to economic development and its prospects in Ethiopia. IFB plays a vital
role inidle monetary resource mobilization and allocation, inviting to use
banking system, creating employment opportunity, supporting GDP growth and
assisting in stabilizing crisis and arresting inflation. Moreover,IFB is deemed
to play an integral role in Ethiopia in catalyzing the economic development
subject to adequate awareness creation about its governing principles,
compliance with prohibitions, familiarity with operating philosophies,
expertise capacity building of operators-bankers, experience sharing from
Islamic banking-pioneering countries, and devising enabling regulatory

Moreover, studies on Challenges of
Interest free banking in Ethiopia. Majority of studies (e.g., Mohamed, 2012;
Kerima, 2016; Akmel, 2015; Mercy
C., 2014) evidenced that lack
of bench mark and frame work for IFB products, lack of sharia Supervisory
board,  inadequate public awareness, and
inadequate human resource are the major challenges of banks which has been
taken as the case study.Since the concept of Islamic windows by
conventional banking is new, there is deficiency in literature especially in
the context of Ethiopia. Identifying existing and possible challenges and
issues will be beneficiary for the development of the service as an industry
and lesson for banks currently offering the service and those banks intended to
offer the service in the future.


To the best of my knowledge, this
study provides the first empirical analysis of the practices and challenges of
interest free banking in Ethiopia, particular reference to interest freewindows
of the commercial banks, Unlike previous studies, which either focuses on the
challenges and prospect of establishing full-fledged Islamic banking or
challenges of customer using IBF or case study on the challenges of IFB
particular conventional bank. This studywills an attempt to know the issues,
challenges, and role of Islamic windows managed by conventional banks in Ethiopia
and to evaluate them critically.