Practices and Challenges of Interest Free Banking Windows of Commercial Banks in Ethiopia

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Addis Ababa University


This research work attempts to provide empirical evidence on Practices and challenges of interest free banking in Ethiopia with particular reference to Commercial banks currently offering interest free banking service. The study has employed descriptive research based on survey and the data are of cross sectional type. The study has used structured and semi structured questionnaire and interview. A total of 560 sample respondents were taken through multistage sampling. Of the total sample interest free banking customers and staffs of the bank constitutes 384 and 176 respectively. The data was analyzed using descriptive statistics of mean, frequency and percentage using SPSS version 20 Software. The findings showed that Interest free banking services have been benefiting banks, not only in terms of increasing customers and mobilizing deposits, but also they enjoyed greater profitability and FCY generation. The findings also show that currently knowledge of bankers and customers on Interest free banking and IFB products is low. Moreover a of customers’ sampled show they are skeptic about Interest free banking window of commercial banks’ ability manage their fund and Shari’ah compliance these windows. Furthermore, the compliance of theses windows merely depends on maintaining separate records and accounts which lacks shariah advisor and management commitment to ensure fully compliance with requirements for adopting interest free banking within the bank. In addition the result indicates lack of supervision by NBE, lack of confidence and trust of clients, lack of legal support from government, lack of qualified human resource, lack of cooperation among Islamic windows, lack of infrastructure suitable for Interest free banking operation, and doubt of clients identified by the practitioners as major challenges in the process of offering interest free banking services in Ethiopia. Accordingly, the study recommends that there should be vigorous public enlightenment programmes to create more awareness and to remove misconception and doubt among Muslim and non-Muslim; Shareholders, board of directors and the management of the bank should accept the concept and be cooperative with interest free banking window of the banking and establish a working Shari’ah supervisory board (SSB) for interest free banking operation and strictly comply with its guidance; The government of Ethiopia should take more proactive efforts to promote Interest free banking services with certain amendments laws and regulations and NBE should also establish a separate department for handling all issues relating to Interest-Free Banking and closely monitor and supervise the operation of interest banking windows of conventional banks.


A research project paper submitted to Addis Ababa University Department of Business Administration in partial fulfillment of the requirements for the Degree of Masters of Business Administration in Finance


Interest free banking, Interest free banking window, Shariah compliance