The National Bank of Ethiopia is looking for alternatives to traditional treasury bills to accommodate financial institutions that only offer interest-free banking services in accordance with Islamic principles.
Since last year, all banks have been required to allocate 20% of the loans they disburse to purchase treasury bills, with the exception of fully-fledged Islamic banks. However, providers of interest-free banking have been unable to acquire the bills as collecting or paying interest contravenes Sharia principles.
Discussions regarding possible alternatives have occurred since these requirements were established, though industry players say further preparations are needed to propose Sharia-compliant solutions.
“Talks have begun between Hijra Bank and the National Bank to explore the feasibility of introducing alternatives like Sukuk bonds to replace conventional treasury bills,” said Hassen Mohammed, Vice President and Information Sector Director of Hijra Bank.
A senior Zamzam Bank official, who spoke on condition of anonymity, expressed concerns about implementing such systems given Ethiopia’s current economic environment. The lack of an established capital market was cited as a potential hurdle to effectively integrating Islamic financial services into the treasury bill market.
The official stressed the need for investments to align with Sharia law and suggested the government develop a suitable framework.
National Bank Governor Fikadu Degife confirmed the central bank’s awareness of the issue and commitment to finding the optimal approach. Studies of international practices aim to provide guidance on Sharia-compliant treasury bill implementation, he explained.
“We are under preparation to propose alternatives,” the vice governor added, though no timeline was given.
Currently, Zamzam, Hijra and Ramis are the interest-free banking institutions operating in Ethiopia.
The Ethiopian Securities Exchange (ETSE) said last month that it intends to introduce various Sharia-compliant financial instruments to integrate Islamic banking principles into the capital markets.
In the previous fiscal year, of the 117 billion birr deposited in Ethiopia’s Sharia-compliant, interest-free banking system, around 35.5 percent or 41.5 billion birr had been allocated to business financing. The remaining funds not allocated—representing approximately 75.5 billion birr—indicate the potential that exists within the country’s Islamic finance sector.