Feisel Abdi Guhad, a Kenyan businessman originally from Kebri Dehar in the Ethiopia Somali region, has returned back to his birthplace to invest in a slaughter house.
As co-founder and general manager of the Jijiga Export Slaughter House Plc, in Jijiga, he is eyeing up the opportunity to supply the Middle Eastern market with goat and sheep meat.
The veterinarian-turned-businessman is finalising the construction of the slaughter house, which will have the capacity to process 2,000 sheep and goats in an eight-hour period. Eighty percent of the 122 million Br project has been completed; the remaining 20pc involves the acquisition and installation of machinery, for which Feisel has been seeking a loan.
But Feisel is not looking for an ordinary loan, rather one that follows Islamic values. He deposits his money in an interest-free account and he wants his loan that way, too. Now he has Interest Free Banking (IFB) to resort to, although prior to that he had been considering selling shares to raise the finances.
Now, he is finding solutions with the Murabha service at the Commercial Bank of Ethiopia’s (CBE) recently opened IFB service window. The service offers a method to meet Feisel’s requirement of a 35 million Br interest-free loan.
“The bank will buy the machinery for us and we will pay it to the bank in the future, with a mark up as a profit for the bank,” Feisel said.
The CBE is one of the three banks currently providing IFB, along with the United Bank and Oromia International Bank. The National Bank of Ethiopia’s (NBE) directive that allows banks to offer interest-free banking services alongside their conventional operations came into play in October 2011, but IFB in Ethiopia only started in September 2013, when the Oromia International Bank (OIB) launched the service. The CBE joined the market at the end of October, followed by United, which began providing the service on May 1, 2014.
Interest-free banking mainly targets individual and institutional customers that do not want interest on their deposits, for religious or other reasons. The directive defines the service as the mobilisation or advancing of funds undertaken in a manner consistent with Islamic finance, avoiding the receiving and paying of interest.
The service, which will be offered at separate windows, can be used by individuals, government institutions and non-governmental organisations (NGOs). Services offered under interest-free banking include – deposits, foreign exchange and money transferring services, and are commonly available for customers who engage in trade partnerships, agricultural forwards contracts, construction, manufacturing and import-export trade.
Around three and a half years ago, ZemZem, a prospective new bank, asked to join the banking industry as a full-fledged interest-free bank, but was unable to start operations as the NBE’s directive requires that interest-free banking be given alongside conventional banking services. ZemZem Bank was floating shares with the sole intention of operating interest-free banking, since December 2010. It was able to raise 137 million Br in paid-up capital and 337 million Br in subscribed capital from 6,800 shareholders.
The licensing and supervision of banking business directives to authorise interest free banking also orders banks not to go past the maximum share of interest-free banking business in their consolidated balance sheet without prior approval from the Central Bank. A violation of this could lead to the closure of an interest-free banking window. Establishing a Sharia advisory board and separate financial reports, keeping all data and ensuring the segregation of activities from conventional banking are also some of the requirements set by the directive to launch the program.
The three banks that started giving IFB services are offering savings (Wadia) and current (Amanah) account services, as well as equity financing (Mudrabah), based on principles drawn from Islam. These principles include avoiding interest, gambling and uncertainty. All business should also be conducted in writing, and profits will be shared as agreed, but loss according to capital.
The CBE started providing IFB services across 23 branches and the number has now grown to 43 and is expected to reach 200 in a year’s time, according to Ephrem Mekuria, communications manager of the bank, who says “the customers are increasing in number, but a lack of awareness from potential customers” has created a challenge for the rapid growth of the sector. This service will take time for the public to embrace, as even mobile and internet banking are still struggling to gain total traction and mass usage, Taye Dibekulu, president of United Bank, explains. To mitigate this, banks are conducting customer sessions. The absence of a highly qualified workforce is also another challenge in the sector, but it has taken 10 to 15 years to mature even in Saudi Arabia, which is now among the leading providers of the service, say bankers.
The CBE is targeting the unbanked society that is avoiding banks for religious reasons and those who want choice. But experts in the industry say the competition to mobilise resources and raise deposits is pushing banks to join the IFB market, which Ephrem challenges.
“It is not to raise savings; in fact you cannot use the deposit you raised through the IFB at conventional windows,” he argues. “Rather, it is part of our drive to be a world class bank, in addition to providing options for our customers.”
United Bank has a similar argument, adding that the service is not only related to religious matters, but has some of the characters and elements of investment banking that can be utilised by investors also using conventional banking.
United is currently providing a deposit service and not yet financing. This is because it is collecting deposits to finance projects in the same segment of its business. There have been no loans requested or processed to date, according to the president of the bank.
There are also some contentious issues, like double-taxation and calculations of taxes on the investments and the bank. These are, however, expected to become clear over time, according to Andualem Hailu, planning and research manager at Awash International Bank.
United plans to start financing projects engaged in international trade with easily liquidable products, as they will be easy to manage and have better transparency. But, in the future, the bank plans to include other sectors, too. United, founded 17 years ago, now has a capital of one billion Birr, with 2,300 employees and 86 branches. The level of deposits at the bank has reached nine billion Birr, whilst it has outstanding loans of five billion Birr.
International experiences show that banks in different countries give these services in independent banks, or in a separate branch or separate window in a conventional bank.
With a separate book of accounts and balance sheets, it is like establishing a bank within a bank, experts agree.
The CBE, which was established in 1942, has been able to disburse total loans and bonds of 57.3 billion Br in the first nine months of the current fiscal year. The bank also collected total bonds and loans of 26.4 billion Br during the same period. The bank also managed to collect 4.5 billion dollars from its 808 branches, which are staffed by 18,000 employees.
The bank has attained 6,000 customers for its IFB service, with 100 million Br in savings from IFB clients by the first week of May. When it comes to disbursement, the bank is yet to finance projects through the IFB window. It has, however, approved some projects for financing, including the Jijiga Export Slaughter House Plc project, according to bank officials.
Banks providing the service in the country have similar products. In the deposit segment, for example, the CBE gives Amanah, safekeeping with no interest, and Qard services of current and cheque accounts. There is also a scheme whereby the depositor shares the loss and profits of investments made using his money and the Mudarabah savings and time deposit with no interest to be accrued.
What is common in the financing segment of the service is sales contracts-based financing. Murabha, a cost plus mark-up scheme that is asset-backed, is the main product for IFB. Additionally, there is Hijara, done by leasing the machinery or equipment under consideration, with the investor gradually owning it after instalment payments. There is also Selama, which is most commonly used by farmers to purchase inputs for their farm, and Istisna – work-in-progress financing. There are also other financing schemes called Mudarabah, where only the bank bares the risk and Musharaka, where both the bank and the investor share the risk.
Nejat Hussein, 22, is a store manager at Nofel Bajaj – an importer of rickshaws around Gojjam Berenda in the Addis Ketema District. It has been three months since she opened a Qard cheque account at the IFB window of the Abacoran branch of the CBE in the same district. Before this, she used the conventional window.
Ahmed Kemal, 25, is the IFB officer at the service of Nejat and other similar clients at the IFB window. He trained for three weeks at the training facility of the bank around Saris in the Nifas Silk Lafto District. In the beginning, around six months ago, he used to serve three or four clients a day. But now he handles 10 transactions, such as deposit and money transfers, and serves around five people who open new accounts daily.
“Our customers can deposit anywhere, but they can only withdraw from the designated branches,” Ahmed told Fortune. “This absence of networking between all branches is creating problems to the customers, but their number is definitely growing.”
Ahmed was, at that moment, serving a customer who was moving his account back to conventional banking because the Keranio branch of the CBE, which is the closest to him, was not offering IFB services.
The sector also creates more space for fraudulent activities than the conventional window, according to experts. As the global transaction is moving towards a cashless economy, the challenge of identifying and keeping finances from the two streams apart will become more difficult. Experts believe that the main elements influencing customer retention in the sector are still service quality, delivery time and accessibility.
But, with other banks lining up to join the sector, the bankers that Fortune spoke to are sure that there will be a significant amount of customers using the service in a couple of years, and Feisel, who returned back to his country of origin in November 2011, believes he will be a loyal customer of IFB, which he hopes will enable his company to start production in 2014/15.
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