A directive issued by the National Bank of Ethiopia (NBE) has delivered a serious blow to banks seeking to operate full-fledged non-interest bearing banking services in accordance with Islamic financing principles and modes of operation, while giving conventional banks the green light to run Islamic windows  . According to the directive, which will be effective starting October 1, full-fledged banking on the basis of non-interest bearing principle is not going to be accepted by NBE. The supervisory body came to the decision following years of deliberation on the subject .

After a proposal on Islamic banking was submitted to the Prime Minister’s Office, during which time the the banking  proclamation of 2008 was in the works, NBE incorporated the first clause that refers to non-interest bearing banking business in the country’s history. Since the promulgation of the proclamation, which bestowed on the bank the power to write a workable directive, though, it took over two years to compile a draft. Finally, NBE  prepared a draft and  circulated the document in the industry for a while. However, the draft document did not appear to contemplate a bank operating just an Islamic window .

Meanwhile, Zemzem Bank, the first bank in Ethiopia that longed to operate on the basis of this Islamic banking principle, was well into the process of organizing the new bank. Members of the organizing committee at the bank, who also were close to the matter from the very beginning, unsuspectingly mobilized funds and fulfilled the threshold capital to become the first Islamic bank in the country. Furthermore, a while back the bank had assembled shareholders to name the first board members of the bank only to learn over the weekend that all has fallen apart. According to sources at NBE, the Bank’s decision is based on the rationale that the country’s banking sector follows the conventional banking practice. But, in due consideration of the demand for the banking product (non-Interest bearing) it was allowed to be practiced on the basis of a window. “Anybody wanting to give the service should do it in conjunction with interest bearing banking,” sources explain.

However, the window service as well should fulfill some requirements, according to the directive. The first requirement is a risk management mechanism, which is important in the delivery of Islamic banking product. Hence, NBE strictly requires banks wanting to give the service to make account of the detail risk management mechanism.

On the other hand, a mechanism to effectively separate the Islamic banking operation from conventional banking is also another requirement that the directive give s emphasis to.

The directive also obliges banks seeking to provide the service to  furnish to NBE information on their financial capacity, accounting policy to be followed and the relative proportion of the Islamic banking to the conventional and other relevant documents.