Ensuring Equal Access to Financial and Banking Services: A Critical Review of the Incorporation of Interest-Free Banking Principles in Ethiopian Law

Kassim Kuffa Jarra

 

Abstract: The conventional interest-based banking system in Ethiopia does not align with Islamic religious rule that prohibit any interest-based businesses including banking. While Ethiopian law introduced interest-free banking in 2008, there is no explicit constitutional recognition of the applicability of religious rules to banking and financial matters. This raises questions about whether Ethiopian business laws adequately incorporate interest-free banking principles, such as trade intermediation and profit-loss sharing, to accommodate financially sensitive stakeholders, including Muslims who do not accept interest-based banking. Using doctrinal research, the analysis in this article of secondary sources and publicly available primary data in Ethiopia reveals that the current laws were designed to suit interest-centred conventional banking principles and do not fully incorporate interest-free banking theories. The analysis also reveals non-removal of legal barriers for stringent separation of banking and non-banking business from Shari’ah compliant intermediation model which requires incorporation of non-interest banking theories. This lack of incorporation poses the risk of excluding Muslims from ownership in banking and limits their access to financial and credit services. To address these concerns, this article recommends amending banking, commercial, civil, and investment rules in Ethiopia to sufficiently incorporate the principles of interest-free banking. Lessons can be drawn from other jurisdictions that have adopted a universalist banking approach to reform current stringent separation of banking and non-banking businesses that poses significant barrier to the workability of interest-free banking business in Ethiopian dual banking settings. This would strengthen banking pluralism and ensure adequate inclusion and protection of religious investors and financial consumers.