This article was contributed by Dr Nasir Dino in his capacity as chairman of Board of Directors of ZamZam bank. The readers are necessarily bound to take a view in favour of the role of fully-fledged interest-free banks in the development of interest-free banking in Ethiopia. For a more comprehensive account of interest-free banking in Ethiopia, readers are directed to pages 34-43.
Historical Background
Among Africa’s 10 largest economies, Ethiopia was one of the first ones to have a bank in 1905/06. Banking then, obviously, had to be in the public sector. Since then, there has been a gradual improvement in the scope and depth of the banking sector, which naturally transformed into a better version with every passing generation. This included an allowance for the private sector to play a role in banking and finance.
In 1963, a new Monetary and Banking Law was announced, separating commercial and central banking functions, thereby creating the National Bank of Ethiopia (the central bank of Ethiopia) and the Commercial Bank of Ethiopia (a high street commercial bank). During the Dege communist regime (1974-91), private businesses were nationalized, including banks and other financial firms. During this period, Ethiopia had only three state-owned banks.
Since the change in regime in 1991, the communist ideology has receded and a gradual process of liberalization of economy has been put in place. In 1994, two new proclamations were enacted, namely Monetary and Banking proclamation (1983E.C./1994G.C.) and the 1984/94 Licensing and Supervision of Banking Business proclamation (1984/94). This was the start of opening up of the financial sector, which has continued till today.
Despite all of this, Ethiopia’s financial sector remained rudimentary until a comprehensive plan for privatization of the state-owned corporations was introduced by the current government. Today, the Ethiopian financial sector comprises banks, insurance companies, microfinance players, and prospects for a vibrant FinTech sector.
PROCLAMATION NO. 592/2008, ALLOWING INTEREST-FREE FUND MOBILIZATION AND FINANCING, WAS A PARADIGM SHIFT IN THE FINANCIAL SECTOR OF ETHIOPIA
Apart from conventional banks, there are now fully-fledged interest-free banks operating along with the mainstream conventional banks many of which also offer interest-free banking in the form of what is commonly known as a Window Model. After an initial hiccup in 2011, ZamZam Bank became the first fully-fledged interest-free bank operating in the country. This paved way for some other players to apply for interest-free banking licenses and a couple of them have, since then, started their operations as such, or are waiting for the regulatory nod.
Muslims in Ethiopia have for long required establishment of interest-free banks, because a significant proportion of them do not feel comfortable in dealing with interest, as per their faith. Following the change in regulations in 2008, conventional banks started offering such services. With the establishment of fully-fledged interest-free banks, choices for Muslims have certainly increased. The advocates of interest-free banking in Ethiopia present a number of arguments as a rationale. The perceived benefits include: Effect on equity and wealth distribution, economic stability, allocation of resources, inflation control and socio-political harmonization and integration. Perceived benefits include: Effect on equity and wealth distribution, economic stability, allocation of resources, inflation control and socio-political harmonization and integration.
Journey of Interest-Free Banking in Ethiopia
A group of committed individuals – Dr Nassir Dino, Dr Ahmed Hussein, Jemal Muzeyin and Dr Endris Mohammed – initiated the idea of forming a full-fledged interest-free bank in Ethiopia by the name of ZamZam Bank. They were motivated by the emerging economic policy in Ethiopia, which encourages participation of private stakeholders in the financial sector. Their main aim was to play their part in mitigating the limitations of the existing banking services by way of offering a choice to those who didn’t feel comfortable with interest-based financial services. This was with an explicit intention to serve the Muslim community that has not been fully served by the existing banks.
At the time of their application to the National Bank of Ethiopia (NBE), there was no adequate provision for the establishment of a fully-fledged interest-free bank. The application, however, served as a stimulus to initiate policy debate on faith-based financial exclusion. Moreover, the country’s policymakers were for the first time, exposed to the global Islamic financial services, which was growing significantly in different parts of the world.
As mentioned earlier, there are two major legislations in connection with money and banking in Ethiopia, namely, Monetary and Banking proclamation (1983E.C./1994G.C.) and the 1984/94 Licensing and Supervision of Banking Business proclamation (1984/94). As these were delineated in view of the conventional interest-based banking system, lack of provision for an alternative interest-free banking was quite natural. Consequently, NBE had to turn down requests of certain existing conventional banks to offer interest-free financial products. Some of these banks, however, took it upon themselves to structure and offer a special demand deposit account (an interest-free saving account) to respond to the needs of the clients uncomfortable with dealing in interest. This was indeed a compromised solution that needed to be improved to offer comprehensive interest-free financial services on both the liabilities and assets side.
IT MUST BE ACKNOWLEDGED THAT THE JOURNEY WOULD HAVE BEEN LONGER, INFLICTING MORE PAIN IN THE PROCESS, HAD IT NOT BEEN SUPPORTED BY THE ALL-INCLUSIVE APPROACH OF THE INCUMBENT GOVERNMENT UNDER THE LEADERSHIP OF THE PRIME MINISTER DR ABIY AHMED ALI
The good news is that the Ethiopian government formulated economic and monetary policies that envisage equal opportunities for everyone in the country irrespective of religion, ethnicity, location, region, culture, and an outlook to improve the economic conditions and promote the principle of equitable distribution of wealth and income. The demand of a segment of the society to set up fully-fledged interest-free banks is consistent with this approach of the government, which is a growing trend from the developed countries like the UK to the far-flung countries like Suriname.
Fully-fledged interest-free financial institutions take several forms, including commercial banks, investment and holding companies, equity funds, insurance/takaful companies as well as development banks. An interest-free window is simply a business segment within a conventional bank through which customers can conduct business by utilizing only interest-free instruments. The approach taken by the stakeholders of ZamZam Bank favours fully-fledged interest-free banks.
Irrespective of the organisational form of the interest-free banking, the banking regulator must provide a level-playing field to all players. Human resource development and capacity building in this respect is imperative.
ANY PERCEPTION OF INTEREST-FREE BANKING AS A RELIGIOUS PHENOMENON MUST BE DISPELLED URGENTLY
ZamZam Bank has played an instrumental role in creating awareness on issues facing interest-free banking in the country. This was achieved by lobbying with various personalities, including civil servants, business tycoons, diasporas, religious scholars, social groups, and professionals. An extensive campaign in the print and social media took several years. It was a daunting task to convince the politicians, mainly members of the then-ruling party (EPRDF), including parliamentarians, ministers and government officials for the establishment of interest-free banking in Ethiopia.
After an extensive conversation with EPRDF People’s Representative Office and the ministers’ cabinet, an amendment to the 1994 banking business proclamation was announced in June 2008.
Proclamation No. 592/2008 was officially published in Negarit Newspaper on June 28, 2008. Article 22(2) of this proclamation indicates that interest-free fund mobilization and financing is allowed. The regulatory assignment was delegated to NBE to work out the mode of delivery and other details. This was a paradigm shift in the financial sector of Ethiopia. As soon as this proclamation was released, the founding members of ZamZam Bank officially submitted the revised documents and began preparation for launching share subscriptions, sales, and other preparations to establish the bank.
Accordingly, the draft directives (three successive drafts that took almost three years) distributed by NBE to obtain feedback from banks (including those under formation like ZamZam) allowed the opening of fully-fledged interest-free banks, along with conversion of conventional banks, and windows under conventional banks. During the month of June in 2009, NBE announced the first draft directive allowing interest-free banking to be carried out by its stakeholders as stated above.
On October 8, 2010, NBE released a second draft of the directives for interest-free banking in Ethiopia. On October 18th of the same year, all banks including banks under formation were called for discussion.
ZamZam Bank’s founding members were active participants in every panel discussion.
In parallel, considering the public’s pressing demand to launch the bank and the encouraging draft directives and the political willingness ignited the ZamZam Bank’s stakeholders to call a public meeting at the Addis Ababa Theatre & Cultural Hall on December 4, 2010. That was a marvelous and inspiring meeting of potential stakeholders whereby the shareholders’ prospectus for ZamZam Bank (under formation), submitted to NBE, was one on the agenda. This officially marked the beginning of ZamZam’s capital collection process.
At the time, a record-breaking 137,000,000 birr from 6,300 shareholders was raised. The minimum capital requirement for establishing a bank then was 75,000,000 birr. On April 16, 2011, ZamZam held a general assembly of founding shareholders subscription assembly meeting at Millennium Hall to go into business. After approving the bank’s Articles of Association and Memorandum of Association, a board of directors consisting of nine members was endorsed fully. However, NBE finally issued a directive in September 2011 (SBB/51/2011) that only allowed providing interest-free banking services through windows in a conventional bank. As a result, the formation process of ZamZam, which was the initiator in bringing this form of service to the Ethiopian market, could not further proceed.
The founding members did not give up, and continued to appeal to high-level government officials hoping that one day their dream will be realized. On September 13, 2011, the founding members of ZamZam along with other interest-free banks under formation were called for a meeting by the NBE officials to announce its decision to permit only an interest-free window within a conventional bank. The direction taken by NBE clearly diverged from the thinking that had developed by then.
Though ZamZam could not provide the service itself due to regulatory restrictions, it partly fulfilled its objective of opening the door for the public to get interest-free banking services within conventional banks. This was a proud moment for the stakeholders of ZamZam, who conceived the idea in 2007.
The story did not stop there!
On December 6, 2011, a letter was written by ZamZam stakeholders invoking the late Prime Minister, Meles Zenawi. There was no success. Another testing time came when the founding members of ZamZam received a letter from the Banking Supervision Department at NBE, stating that they were required to grow their capital to 500 million birrs to establish a conventional bank with an interest-free window or return the previously accumulated capital to the shareholders. When Prime Minister Hailemariam Desalegn came into power, ZamZam organisers submitted a letter of appeal. Once again, there was no response. After a long and tedious process, the 137 million birr paid-up capital was returned to the founding shareholders.
The challenges faced, and the treatment of the organisers in the process is beyond the scope of this brief article. It was indeed a harmful and drastic decision taken by the EPRDF government to deny the public’s demand. Paradoxically, it was the EPRDF government itself, which had been the very cause of bringing the concept of interest-free banking to Ethiopia.
On June 25, 2018, a letter from the founders appealing the reinstatement of ZamZam Bank, and resurrection of fully-fledged interest-free banking, was presented to the new Prime Minister Dr Abiy Ahmed Ali. This initiated a months-long discussion of experts on the issue. On the other hand, on May 20, 2019, a letter was sent to the newly appointed Governor of NBE, Dr Yinager Dessie, from the founding group of ZamZam, requesting his help in the re-establishment of the bank. This bore fruits, as the ball started rolling in the right direction. Eventually, the Prime Minister Dr Abiy Ahmed Ali declared the long-awaited, wonderful news to the nation personally.
Finally, in June of 2019, according to the reinstatement application sent in May of the same year, NBE ordered opening of escrow accounts for share sales of the bank to raise the required 500 million birr. On October 11, 2019, according to the organisers’ initial prospectus schedule, ZamZam Bank under formation managed to raise 630 million birr in capital surpassing NBE’s minimum of 500 million. This success must be attributed to the endless endurance of its founding organisers and the continuous concerted support of people since the idea’s conception and of support of new organisers who joined in the reinstatement phase. The bank finally held a historical founding shareholders’ general assembly meeting at Millennium Hall on November 16, 2019. Article of Association, Memorandum of Association, and eleven members of the board of directors were once again approved. The BOD also elected Dr Nassir Dino as its chairman and appointed Mrs Melika Bedri – a veteran banker – as its CEO, who started working for the bank in this capacity on September 29, 2019. This was a new dawn! And certainly, a paradigm shift.
The persistent effort has brought about an important milestone in the banking history of the country. Though it has been forced to pass on a rough path struggling hard for over a decade to see the fruits of its labour. It must be acknowledged that the journey would have been longer, inflicting more pain in the process, had it not been supported by the all-inclusive approach of the incumbent government under the leadership of the Prime Minister Dr Abiy Ahmed Ali.
The new FDRE government that took power in 2018, proved to be a turning point. The Prime Minister Dr Abiy Ahmed Ali’s government amended the Banking Business Proclamation No. 592/2008 by 1159/2019. It was also due to the sympathetic yet neutral assessment of the situation by the new Governor of NBE, Dr Yinager Dessie, who amended the directive SBB/51/2011 by SBB/72/19, which allows the long-anticipated opening of fully-fledged interest-free banks in Ethiopia.
ZamZam Bank, thus, became the first interest-free bank that received the banking business license from Governor Dr Yinager Dessie on October 13, 2019. The occasion was celebrated in a colourful event held at Skylight Hotel. The Bank started its operation on June 3, 2020. The guest of honour, Finance Minister Ahmed Shide, inaugurated the main and the first branch of the bank in Ethiopia, which was named Alif Branch (located in Addis Ababa) along with the federal and regional presidents and vice presidents of the Islamic Supreme Council of Ethiopia. As of today, there are two fully-fledged interest-free banks in operation in Ethiopia, and two more in the pipeline.
Challenges and Recommendations
There are significant differences between conventional and interest-free banks. This must be recognised by the regulator. Capacity building, education and training should be organised at a national level with all stakeholders including policymakers, tax agents, the financial industry, academia, and so forth.
A legal forum for dispute settlement while delivering interest-free banking services should be planned. Interest-free banking transactions should be protected by law and should abide by Shari’a principles.
The lack of awareness surrounding interest-free banking and its benefits is a major hindrance to its development. There should be an effort to prevent this problem from being overlooked in the business community, among bank staff and religious scholars. This lack of awareness directly leads to uninformed perceptions of the interest-free banking service. Any perception of interest-free banking as a religious phenomenon must be dispelled urgently. It is a business model and must be presented, developed and promoted as such.
Given the youth of this venture in Ethiopia, a platform dedicated to the training and informing of practitioners and religious leaders of its potential impact should be established. A National Shari’a Advisory Council, capable of taking decisions compatible with the globally accepted standards, is a must. Also, there is a need to expose local scholars and practitioners to the practices of interest-free banking in other countries.
Interest-free banking should also have clear guidelines and policies in place in the annual NBE report and the financial inclusion strategy of the country. Failing to develop a comprehensive regulatory framework for interest-free banking may harm the industry in the long run.
From the governance perspective, a lot of tasks need attention for the success of the interest-free banking be it revising the directives that hinder investment by the banks, profit and loss sharing scheme, mechanism of the NBE as a lender of last resort to the banks, and much more.
Conclusion
Establishing fully-fledged interest-free banking in Ethiopia is a history spanning 13 years (2007- 2020). From the idea’s conception and initial lobbying in 2007 to the grand opening of the first branch of ZamZam Bank in 2020, it has been an adventure. The first attempt at establishing the bank spanned about four years. ZamZam’s founders persevered, after multiple discussions and adjustments to NBE’s policy drafts regarding its formation. Despite the heartbreak of the community owing to the final directive sent to the founders on September 11, 2011, they were not discouraged.
Therefore, they proceeded with their struggle through political lobbying. After continuously appealing for years, with no or limited success, they could only persist through their passion for serving the public and contributing to the growth of their country.
This endurance finally came to fruition in June of 2018, when they once more sent a letter of reconsideration to the newly elected Prime Minister Dr Abiy Ahmed Ali. The positive response to the appeal in 2018 vindicated the founders and the public into accelerating the establishment of the now first fully-fledged Islamic Bank in Ethiopia.
