After the National Bank of Ethiopia gave a green light for the establishment of Islamic banks, more than five Islamic banks are now in the process of being established. Interest free banking has been given as one service in 10 banks including the state owned Commercial Bank of Ethiopia. Munir Hussein project manager and founding member of Zad Bank Share Company catches up with Capitals’s Tesfaye Getnet to talk about what interest free banking is and to address some of the concern raised by the public regarding with this service. Excerpts;
Capital: What are the main characteristics of interest free banking and why is it significant?
Munir Hussein: Interest free banking is like any banking service. In the banking industry, which plays an intermediary role, people or other entities deposit money and lend it to others who need it to do some work. When you see conventional banks they are fully based on interest for both the depositors and the borrowers. But interest is forbidden in Sharia law, like it is not allowed in Christianity, Judaism and in many religions of the world. And when you see Sharia, earning money by lending money is strictly forbidden without taking any risk or investment. And in the interest system lenders don’t care if the borrowers have earned a profit or not. They must pay the principal and the interest. People who do not want interest in the bank need a bank system who serves them according to their religion. So there are three main concepts in interest free banking: no receiving and paying interest at all. The second one is sharing risks, for example if you borrow money for investment the bank will share both the loss and the profit of the investment and also if the bank deposits your money and invests it. The third one is that such interest free banks are asset plus risk service providers. When you look at conventional ones the biggest commodity is money. Amongst the common Islamic concepts used in Islamic banking are: Profit sharing (mudarabah): Islamic Banks offer savings and time deposits in the form of investment accounts under the system of mudarabah. The depositors of such accounts share profits and/or losses of the institutions under an agreed-upon formula. The depositors in mudarabah accounts are the suppliers of capital, rabb al-mal, who entrust their funds to the bank, mudarib, in the tradition of Western style investment banking, subject to dealings with only noninterest bearing instruments. The mudarib, acting as money manager or agent, invests the money and then distributes the profits and/or losses on the basis of the agreed-upon contract. The following conditions must be met. The other one musharakah is a form of equity financing through joint ventures. Unlike the case of mudarabah, here the bank not only participates in the supply of capital to the venture, but also in its management. The other instrument used by the Islamic Banks is ijarah or leasing. Two types of leases are used. In one, the lessee pays the lessor instalment payments that go towards ultimate purchase of the equipment by the lessee. This type of lease/purchase agreement is known as ijarah, Wa-iqtina. The second type of lease maintains the ownership of the lessor as per the lease contract. There is also another instrument called murabahah (or more specifically, baimujal murabah -cost plus financing), used by the Islamic Banks consisting of transactions where the institution buys a product (e.g., a car or a machine) on a client’s behalf and then resells this with a mark-up to a client, the borrower. And it’s all services are good in controlling because in inflation. Because in here assets are the main transaction not only money.
Capital: Interest free banking is available in Ethiopia in both private and government banks, why is a specific Islamic bank is needed here?
Munir Hussein: We can see the reason we want to have a specific Islamic bank in many directions. Much of our banking system relies on interest free banking through windows. They have had this in both private and government banks to provide non interest free banking services since 2011. Though we appreciate this window service it is not enough to serve the community who needs the non interest free banking system. When we see the total deposit of 2017/18 deposits of the conventional banks it is around 730 billion birr from which non interest free banking holds only 40 billion birr and from the total 360 billion birr finance the again the interest free bank holds 6 billion birr. So in total the interest free banks hold 2 percent finance and 5 percent deposit shares so it is so small compared to the great potential it has and opening an exclusive interest free banking is very essential to get better result. The other point is some people don’t have trust in conventional interest free banking services because they doubt that the money they put in it may be go to in the investment their religion doesn’t allow it though the National Bank has a strict regulation on the segregation of funds of the conventional and non interest accounts. So the coming of Islamic banks will give us to get more product varieties in the bank service, more deposit and investment. And we will hope we start our work on next year 20 January.
Capital: Zad is one of the emerging Islamic banks to be established here, what are you doing now? When will you open the bank?
Munir Hussien: There are three phases in the National Bank process when we talk about establishing a bank. These are: pre application, application and commencement of application. We have done the pre application which requires the proposal of the bank, the opening of the blocked account and the selling of the shares. After we complete selling the shares of one billion birr which we are floating now and securing the 500 million birr paid up capital, we will go to getting the license. Beside this we have established IT, sales, finance and admin teams and the technical team is recruiting staff for future work and those who have more knowledge in interest free banking will get more opportunities to join us regardless of their religion. We will train the staff both in here and aboard and we have started some work regarding on this.
Capital: Do you think we have enough human resources to start non interest banking?
Munir Hussien: We firmly believe that we don’t have enough trained people to fully serve these banks but we can train them and we are doing it now starting from fresh graduates to bank experienced workers we will give training in technology, work procedure and attitudes.
Capital: Critics of non-interest banking seem to look more at it from the religious angle than from its various benefits. What is your take on this?
Munir Hussien: Interest free banking is a bank, it is not a religious worshiping place or an institution or NGOs. Like any bank it mobilizes deposit, facilitates finance and promotes investment and plays role in the import and export of the country. Don’t forget that we are the least banked society and the coming of interest free banking service will definitely widen our access to finance. And we will give more answer to the people who don’t need interest because as a citizen it is their right to get this service. What I would like to tell is that Interest free banking is not established to serve the Muslim community only it is also for those who need it regardless of their religion. They can buy a share, deposit money and work as a staff of the bank. The number of Muslims in Kenya is much lower than in South Africa but they have full-fledged non interest banks, if you look at Malaysia among the beneficiary of interest free bank 40 percent of them are non-Muslim and if you look at UK more people are investing their money in this bank.
Capital: What role will Islamic finance play in supporting sustainable and long-term investment decisions?
Munir Hussien: It will give benefits like some foreign investors don’t want to borrow money with interest and the coming of interest free banking is important for them. The other thing is government can borrow money from this bank and return profit from the investment. It can buy a bond form this bank when it issues foreclosure. The proceeds from the issuance will be used for investment activities in the form of purchasing rights to the benefits of state property to be leased to the government and the procurement of projects to be leased to the government. Rewards come from the profits from the investment activities. This financing is not centred only around credit worthiness of the client but rather on the worthiness and profitability of the project to be financed. This profit sharing concept helps to foster economic development by encouraging equal income distribution, which results in greater benefits for social justice and sustainable growth.
Capital: Do you think the existing commercial law is compatible to provide a full-fledged Islamic bank service in here? What kind of law revision do you need?
Munir Hussien: Honestly speaking the National Bank of Ethiopia is collaborating with us to start our job and we would like to thank them for that but we need some revision like on the mudarabah deposit and NBE has some restriction on this finance and we need it to be more relaxed. The other thing we need is a clear regulatory and circular framework in this sector like it has for conventional banks.
Capital: Nigeria works with interest free banking and it has not seen big results in the sector. Do you think this sector will be profitable in a short period of time?
Munir Hussien: Nigeria and other African countries started the service in recent times and it is foolish to compare it with conventional banks. When we come to us to do a better job we have to be good in quality service in expanding branches, in raising capital, in innovation, in bringing a variety of products and if we are good at it we will reach to the line that satisfies us.