Wednesday, October 4, 2023
BusinessPolicy bank to design mandatory bonds for interest-free banks

Policy bank to design mandatory bonds for interest-free banks

The Development Bank of Ethiopia (DBE) began to design bonds for interest free banks, which have joined the financial sector since last year. It is expected to replace the one percent mandatory bond introduced by the National Bank of Ethiopia (NBE) this year.

Interest free banks were raising their concerns over the new rule, citing it goes against the principles of Sharia. While their proposal received a positive nod from the central bank (NBE), the policy bank (DBE) has already started to identify options to start interest-free bonds.

Yohannes Ayalew (PhD), President of the DBE, confirmed to The Reporter that preparations to design the bond have already started.

“We are aware of the issue and we are preparing the bond; we are even looking at many alternatives, including interest free products like Sukuk,” said Yohannes.

According to Yohannes, a team of experts at the DBE have already started to conduct studies to propose a new model on how interest free banks can invest in the banks mandatory bond without paying interest.

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Zamzam is the first interest-free bank to join the financial industry. It started operations last year with a paid-up capital of 850 million birr.

It was followed by Hijra, which went operational in the same period with a paid-up capital of 700 million birr with an additional half a billion birr in unsubscribed capital.

Ramis Bank is also on the verge of joining the industry with its shareholders investing 724 million birr.

Kedir Abas, Strategic Director of Zamzam Bank, is among those who have been calling for the introduction of interest-free bonds soon after the mandatory rule compelling commercial banks to invest one percent of their outstanding credit to buy bonds from the DBE was introduced.

“Contrary to the practice in a conventional banking system, we cannot invest on interest-paying products. It is thus imperative to introduce a product like Mudrabah that allows us to invest on Sharia-compliant businesses and share the profit later,” he remarked.

Interest-free banks are not the only financial institutions that have raised their concerns over the new mandatory rule. Commercial banks, through their associations, contested the rule as it demands to allocate one percent of their outstanding credit, instead of the annual aggregate, to buy the bond.

Dubbed as the DBE Bond, it bears an interest of two percentage points higher than the minimum interest rate at the period of issuance with a three year maturity date.

The outstanding credit in the banking system reached 1.3 trillion birr during last year. Out of the aggregate amount, the share of private banks is around 46 percent.

Banks will be required to invest an estimated 14 billion birr during the first phase of implementation of the mandatory rule.

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