Friday April 5, 2019
by Elias Gebreselassie
Sharia-compliant finance boosts financial inclusion in Ethiopia, but a fully-fledged Islamic bank has yet to take root.
Hukun Aden Mohammed prepares snacks at her shop located in the Bole Michael neighbourhood of Addis Ababa [Michael Tewelde/Al Jazeera]
Addis Ababa, Ethiopia - It's afternoon in Addis Ababa's bustling Bole Michael district, and businesswoman Hukun Aden Mohammed is doing a brisk trade.
The 45-year-old, single mother of seven opened her modest cosmetics
and snack shop in the heavily ethnic Somali neighbourhood two years ago.
Business is so good, she's planning to grow and diversify.
"I plan to expand my business by opening up a shoe
store," Mohammed told Al Jazeera. "Inshallah (God willing) I also plan
to open businesses in my home city, Jijiga in Somali regional state and
across other parts of Ethiopia."
Ten years ago, Mohammad, an observant Muslim, would have struggled to find funding that aligned with her religious beliefs.
measured embrace of Islamic banking is offering her and other
entrepreneurial-minded Muslims a gateway to financial inclusion.
She started her business with a loan from the Somali Microfinance
Institution (SMFI), Ethiopia's first provider of sharia-compliant
"I first received around 7,000 Ethiopian bir
($246) loan from SMFI and with my business successfully expanding, I
have recently received a loan of around 75,000 Ethiopian Birr ($2,645),"
Unlike conventional finance, sharia-compliant
financial institutions do not charge interest on loans. Instead, they
share in any potential profits or losses of the businesses they
Ubah Hassan prepares to give 75,000 Birr ($2,645) in loans Hukum Aden Mohammed [Michael Tewelde/Al Jazeera]
They also refrain from lending to businesses that
engage in or promote activities prohibited under Islamic law, such as
gambling, or selling pork or alcohol, or selling services that promote
The vast majority of SMFI's loans are structured
as resale agreements known as Murabaha, where the bank purchases goods
for its client and then sells the goods back to them at a slightly
higher price than the original cost. The customer can then repay the
loan in instalments.
For Mohammad, Islamic banking services have transformed her financial life.
"The loans from Somali Microfinance Institution
have already allowed me to support the needs of my children, pay for my
accommodation and business rent," she said. "With future loans from
SMFI, I plan to buy house or land to expand my business and build a
stable home for me and my family."
Boosting financial inclusion
While financial inclusion has improved in Ethiopia, it still lags behind the rest of sub-Saharan Africa.
The percentage of adults in Ethiopia with a bank account increased from 22 percent in 2014, to 35 percent in 2017, according to the World Bank Global Findex database.
In Kenya, by contrast, 82 percent of adults had a bank account in 2017.
Part of that gap can be attributed to mobile money uptake, which is far greater in Kenya than Ethiopia.
While the drivers of that difference are not fully understood,
Islamic banking is helping to boost financial inclusion in Ethiopia by
reaching communities which formerly felt excluded from the country's
Though roughly a third of Ethiopia's estimated 105
million citizens are believed to be Muslim, formal directives on
Islamic law-compliant finance were only issued by the National Bank of
Ethiopia (NBE) in 2011 - the same year SMFI opened its doors.
SMFI has since served around 30,000 customers,
mostly in rural communities in Ethiopia's eastern Somali region. Islamic
law-compliant microfinance institutions have also sprung up in
Ethiopia's Afar region.
Inching towards a fully-fledged Islamic bank
SMFI hopes to evolve from a microfinance
institution into a fully-fledged Islamic bank - a hurdle no Ethiopian
financial institution has cleared yet.
"Regardless of whether we become a fully-fledged
sharia-compliant bank in the future, we plan to expand our services to
other parts of Ethiopia serving interested customers, Muslims and
non-Muslims alike," Ubah Hassan, senior saving and credit officer at SMI, told Al Jazeera.
While most big banks in the country have a window
where customers can access Islamic financial services, a dearth of
expertise in Islamic law-compliant banking has hampered past attempts to
form an Islamic bank.
The proposed Islamic bank Zamzam stalled in 2012
when it failed to satisfy NBE directives on interest-free banking issued
the year before.
"We didn't have experienced personnel in Ethiopia
on sharia-based banking services and products in Ethiopia previously,"
Solomon Desta of NBE told Al Jazeera. "That's why we initially opted to
start with interest-free window banking services."
A typical day in the Bole Michael neighbourhood of Addis Ababa [Michael Tewelde/Al Jazeera]
Abdillahi Farah, financial inclusion adviser at Mercy Corps Ethiopia which helped launch SMFI, said Islamic law-compliant windows in big banks do not go far enough for some customers.
"Sharia-compliant MFIs have attracted customers
who have felt banks don't represent them even though they have
window-based interest banking system as some suspect it's a compromised
banking practice," he told Al Jazeera.
But Ethiopia may be inching closer to green-lighting an Islamic bank.
Efforts to create a more hospitable climate for
Islamic banks have been renewed since Prime Minister Abiy Ahmed, a
Christian whose father is Muslim, came to power in April 2018.
And many see greenlighting Islamic banks as part
of a greater liberalisation drive to attract more foreign investment,
including the NBE, which is preparing a study to assess the impact of
allowing fully Islamic law-compliant financial institutions.
"Ethiopia is looking on how to comprehensively
liberalise the financial sector," said Desta. "Ethiopia is
geographically close to Middle Eastern countries that have lots of money
which can be easily mobilised to invest in the country."