Ethiopia adopts Islamic banking; two banks in the making

Much revered for his courageous reconciliation with Eritrea and for engaging Ethiopia on the path to democracy, Prime Minister and Nobel Peace Prize winner Abiy Ahmed is also instrumental in the transformation of his country’s financial system, having accommodated the fully-fledged Islamic banking model to achieve greater financial inclusion. MARC ROUSSOT has more.

Addressing thousands of Ethiopian Muslims gathered in Addis Ababa during Iftar in May 2019, Abiy Ahmed promised to fully support the establishment of an Islamic bank in the country. Raising their phones, they captured the moment with videos and photos. Four months later, two fully-fledged Islamic banks are in the making: Hijra Bank and ZamZam Bank.

Hijra Bank is planning to start operations at the end of January 2020 following a five-month long capital-raising campaign expected to end in early November. About 40% of the bank’s ETB1 billion (US$33.76 million) subscribed capital has already been sold in Ethiopia and to the diaspora through a network of 12 Ethiopian banks.

“Our shares are mainly being sold to people living in rural areas and small cities in the Oromia state, Somali state, Afar state and Wollo region from Amhara state. Most of them are farmers and small business owners. This will make Hijra Bank a community bank and will determine the future of the bank in terms of number of clients and deposits,” says Ahbabu Abdallah, the chairman of Hijra Bank’s funding committee.

Because of the profile of its shareholders, the retail and SME markets will be the main targets of Hijra Bank, which plans to reach out to the unbanked communities leveraging mainly agent and digital banking, while also developing a small network of branches in the largest cities of Ethiopia.

Murabahah will be the first product rolled out to place the bank in a good position to compete with its conventional counterparts running Islamic windows. Later on, Musharakah and diminishing Musharakah will be introduced followed by Ijarah and Mudarabah.

Political shift
Islamic banking has long been requested by Muslims which represent about 34% of the population. ZamZam Bank was on the brink of becoming Ethiopia’s first Shariah compliant financial institution back in 2010.

The bank had even met the National Bank of Ethiopia’s minimum capital requirement, having successfully raised ETB330 million (US$10.95 million) against a proposed capital of ETB250 million (US$8.3 million).

Nevertheless, the project was nipped in the bud due to strong opposition and only the window model was accommodated. To date, at least eight licenses have been delivered by the National Bank of Ethiopia including the first one to Oromia International Bank in 2013.

Many analysts have blamed the polarization caused by Ethiopia’s ethnic-based federalism and a strong political grip from the Tigrayans, which are mainly Christian, for this delay in authorizing Islamic banking.

The election of Abiy as prime minister in 2018 dramatically changed the status quo. Born in Oromia state, a home to Muslims, Orthodox and Protestant Christians, this son of a Muslim father and a Christian mother agreed to further accommodate Islamic finance.

ZamZam Bank was revived and the bank successfully raised over ETB600 million (US$20.06 million) in paid-up capital and registered subscriptions worth ETB1.4 billion (US$46.81 million) for its ordinary shares, after a less-than-four-month capital-raising campaign that ended in October 2019.

“We are making history here, as it is the first time that such a capital is raised in Ethiopia,” Nassir Dino, the chairman of ZamZam Bank, told IFN.

The shift introduced by Abiy is mainly motivated by his wish to use Islamic banking as a tool to achieve greater financial inclusion targeted to reach 60% by 2020 from 35% today.

“Accommodating the fully-fledged Islamic banking model is a way for the government to onboard the unbanked population, which is composed of 70–80% of Muslims,” explains Ahbabu.

This article first appeared in IFN Volume 16 Issue 43 on the 29th of October 2019


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