The National Bank of Ethiopia is working to use Islamic banking to bring financial services to Ethiopians who didn’t have access to any financial services at all.
The principles of Islamic finances state that: you cannot make money out of money. Interest cannot be charged, nor paid, and you cannot invest in items banned in Islam like alcohol or gambling. The question is now how will a religion with 1.5 billion followers find services for banking and finances? Rarely is making services Islamic compliant at the top of the agenda.
In recent years, Islamic appropriate banking has gained more traction and support. In 2008, a proclamation by Ethiopia’s financial regulator introduced interest-free banking in the country. Formal directives on Islamic compliant finance were also issued in 2011.
With support from USAid, Mercy Crops launched the Somali Microfinance Institution; the first provider of Islamic compliant finance and banking services within the country. The institution has 16 branches and a growing client base. Still, rural Ethiopia has a 125000:1 person to bank ratio. Somali Microfinance Institution is working very hard to bridge this gap through expansion, and looking into other methods as well.
Ethiopia is set to lead the way as a model to work towards getting the policymakers on board. In October 2014, Mercy Corps hosted both Ethiopian regulators and commercial banks from the UK to show how UK institutions can integrate Islamic compliant finance services into their offerings. Having the mixed group together produced a forward-thinking and productive conversation between the Ethiopians and UK bankers.
The challenge now lies with the National Bank of Ethiopia to develop legal framework to build up the financial sector. It will be a work in progress to provide financial services to those who have not had access. This will involve further development and understanding of interest-free finances.