Islamic Banking in Ethiopia and its Legislative Challenges

Mohammed Ibrahim Ahmed

 

Abstract: Islamic banking refers to banking business in which mobilising or advancing funds is undertaken in a manner consistent with Islamic law. Evidence shows the rapid growth of Islamic banking as an alternative to the conventional banking. Ethiopia is a multi-religious and a multi-ethnic society. However, until recently no Islamic banking product exited to serve the Muslim community. This fact isolated Ethiopian Muslims from holding shares in the banking sector because participation in interest bearing financial transactions is against Sharia principles. In Ethiopia, interest free banking was first allowed in 2011 as a part of the existing conventional banking system. Full-fledged and independent interest free banking business was allowed in 2019. However, the adoption of Islamic banking in Ethiopia has been accompanied by some legislative challenges. The article analyses the legislatives challenges that impinge on the successful operation of Islamic banking in Ethiopia and argues that the adopted model of Islamic banking cannot effectively serve the purposes for which it is set up. This is primarily because both the Islamic banking and conventional banking are governed by the same legal framework, which undermines the proper functioning of Islamic banking. The article proposes that in order for Islamic banking to function properly, some existing laws of the country need to be amended to accommodate and facilitate the special nature of Islamic banking.