ODA BISIL COLLEGE AMBO CAMPUS

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

OPPORTUNITIES AND CHALLENGES OF INTEREST FREE

BANKING: IN CASE OF COMMERCIAL BANK OF ETHIOPIA
(KETERO BRANCH)

A RESEARCH PAPER SUBMMITED TO THE DEPARTMENT OF

ACCOUNTING AND FINANCE IN A PARTIAL FULFILMENT OF BA
DEGREE IN ACCOUNTING AND FINANCE.

Prepared By.
Name of Students IDNO
1. CHALA GELANA.....................................................................................092/13
2. BEDASA EJERSA....................................................................................089/13
3. BIQILTU FUFA.........................................................................................291/13
4. BONTU GETACHO..................................................................................090/13
5. BUZUNSH ETHICHA..............................................................................091/13
6. MULU NADASA.......................................................................................107/13
7. IDOSA ASAFA.........................................................................................323/13
8. KUME DIRIRSA .......................................................................................103/13
9. FOYERA MULATA............................................................

ADVISOR: GAROMA BEKELE(MSc)

MAY, 2024
Ambo, Ethiopia

Declaration statement
i
We, the undersigned, declare that this research is our original work and that all source of
materials used for the study have been dully acknowledged
Declared by: signature Date

1, Chala Gelana ___________ _________

2, Badhasa Ejersa ____________ _________
3, Biqiltu fufa ____________ _________
4, Bontu Getacho ____________ _________
5, Idosa Asafa ____________ _________

ii
 ACKNOWLEDGEMENT
First of all we would like to thanks the Almighty of God for giving the
aptitude, determination, and endurance throughout our daily lives.
Without his support nothing can be accomplished. And we would like
to express our gratitude and appreciation to our advisor Mr.Garoma
Bekele whose dedication and support have made possible to the
completion of the activities of the study, we would like to say thanks
to employees, interest free banks in case of Commercial bank of
Ethiopia in Ketero Branch for providing the relevant data.
Finally, Thank you very much to those who have been helping us in
various ways and standing by us.

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Table of Contents page number
ACKNOWLEDGEMENT ..........................................................................................................................................................................iii
List of Tables.........................................................................................................................................iv
ACRONYMES......................................................................................................................................v
ABSTRACT...........................................................................................................................................vi
CHAPTER ONE....................................................................................................................................1
1. INTRODUCTION.........................................................................................................................1
1.1 Background of the Study.......................................................................................................1
1.2 Statement of the Problem.......................................................................................................2
1.3 Research questions.................................................................................................................2
1.4 Objective of the Study...........................................................................................................3
1.4.1 General Objectives.........................................................................................................3
1.4.2 Specific objectives.........................................................................................................3
1.5 Significance of the study........................................................................................................3
1.6 Scope of the study..................................................................................................................4
1.7 Limitation of the study...........................................................................................................4
1.8 Organization of the paper.......................................................................................................4
CHAPTER TWO...................................................................................................................................5
2. LITERATURE REVIEW..............................................................................................................5
2.1. Introduction to Islamic Banking.............................................................................................5
2.2. Principles of Islamic banking.................................................................................................6
2.3. Prohibition of Interest............................................................................................................6
2.4. Fundamental of Islamic banking............................................................................................7
2.5. Compatibility of Islamic banking with conventional banking................................................8
2.6. Status of Islamic banking in Ethiopia....................................................................................9
2.7. Challenges of Islamic banking...............................................................................................9
CHAPTER THREE.............................................................................................................................11
3. RESEARCH METHODOLGY...................................................................................................11
3.1. Research design...................................................................................................................11
3.2. Source of data......................................................................................................................11
3.3. Methods of data collection...................................................................................................11
3.3.1. Types of data................................................................................................................11
3.3.2. Procedure for data collection.......................................................................................11
3.4. Sampling size and Sampling technique................................................................................12
CHAPTER FOUR...............................................................................................................................13

iv
4. DATA PRESENTATION AND ANALYSIS..................................................................................13
4.1. Respondents Demographic Variables...........................................................................................13
4.2. Awareness, Misconceptions and General Understanding about Interest Free Banking...............16
4.2.1. Employees Data Presentation and Analysis...........................................................................16
4.2.2. Customers Data Presentation and Analysis...........................................................................19
4.3. Opportunities of Interest-Free Banking in Ethiopia......................................................................22
4.3.1. Employee Data Presentation and Analysis.............................................................................23
4.3.2. Customers Data Presentation and Analysis...........................................................................24
4.4. Challenges Facing Interest Free Banking in Ethiopia.....................................................................26
4.4.1. Employees Data Presentation and Analysis...........................................................................26
4.4.2. Customers Data Presentation and Analysis...........................................................................30
CHAPTER FIVE......................................................................................................................................31
5. CONCLUSIONS AND RECOMMENDATIONS......................................................................................31
5.1 Conclusions....................................................................................................................................31
5.1.1. Conclusions on Awareness Findings......................................................................................31
5.1.1.1. Employees Awareness Findings...........................................................................................31
5.1.2. Opportunities of Interest Free Banking..........................................................................32
5.1.3. Challenges Facing Interest Free Banking in Ethiopia.....................................................33
5.2 Recommendations.........................................................................................................................33
5.2.1 Recommendations Depending on Employees Data........................................................33
Recommendation Depending on Customers Data...................................................................34
References...........................................................................................................................................35

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List of Tables
Table 1: ......................................................................................................................................12
Table 2:.......................................................................................................................................13
Table 3: ......................................................................................................................................15
Table 4: ......................................................................................................................................15
Table 5: .....................................................................................................................................16
Table 6:.......................................................................................................................................17
Table 7:.......................................................................................................................................17
Table 8: ......................................................................................................................................18
Table 9: .....................................................................................................................................18
Table 10: ..............................................................................................................................19
Table 11: ....................................................................................................................................20
Table 12: ...................................................................................................................................20
Table 13: ...................................................................................................................................21
Table 14: ....................................................................................................................................22
Table 15: ....................................................................................................................................22
Table 16: ....................................................................................................................................23
Table 17: ....................................................................................................................................23
Table 18: ....................................................................................................................................23
Table 19: ....................................................................................................................................25
Table 20… ..............................................................................................................................26
Table 21......................................................................................................................................26
Table 22:.....................................................................................................................................27
Table 23: ....................................................................................................................................28
Table 24: ....................................................................................................................................28
Table 25:.....................................................................................................................................29

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 ACRONYMES
CBE- COMMERCIALBANKOFETHIOPIA

IFB- INTEREST FREE BANKING

PLS- PROFIT AND LOSS SHARING

OIC- ORGANISATION OF ISLAMIC CONFRANCE

DC- DEBIT CARD

CD-CREDIT CARD

MFI-MICRO FINANCE INSTIUTION

vii
 ABSTRACT
There is doubt that commercial banking has become an essential sector of the modern
economy. Commercial banks act as the center of any financial intermediary’s universe.
Ethiopia is one of the fast growing countries in Africa and its financial sector is also one of
the fastest developing sectors in the country with the establishment of new commercial banks
and other financial institution. Nevertheless, there is only one type of banking systems,
conventional banking, since 1906. One of the goals of these banks is to supporting the
countries long term development plans. However, the gap between poor and rich is still wide
as in the other developing countries.

On the other hand, there has come a swift transition in the financial services in the world. A
new mode of banking i.e. Islamic banking has been introduced and accepted widely in many
countries of the world including Muslims as well as non-Muslims dominated countries.
Islamic banks have succeeded in mobilizing large amount of funds. It is growing at an annual
rate of 41% worldwide with asset of Islamic financial institution amounting to a staggering
$700 billion. Such type of sound, deep and efficient financial sectors are vital to have high,
sustained, private sector led growth in Ethiopia.

This paper entitled “opportunities and challenges of IFB in case CBE goes around the key
issues of opportunities and challenges of IFB in CBE. It has also assessed the impact and
rational behind the prohibition of interest by taking CBE cases.

The data needed and applied in this study were gathered from various primary and
secondary sources. Sources of primary data were employees and customers of IFB. The tools
used to collect primary data were questionnaires. The finding shows that there is high
demand for IFB in Muslims and non-Muslims society. It has also found that there are
potential challenges and obstacles that can hinder the operation of IFB.

viii
 CHAPTER ONE
1. INTRODUCTION

1.1 Background of the Study

Banks are the backbone of the economy of any country. It is the determinant factor to bring the
development of the country; it serves as a bridge in between savings and investment. They are
key financial intermediaries or institutions that serve as “middleman” in the transfer of funds
from savers to those who invest in real asset as house, equipment and factories. In performing
these function financial intermediaries improves the well beings of both saver and investor by
improving economic efficiency they raise living standards of the society. The banking sector is
considered to be an important source of financing for most business. Commercial banks are the
backbone of the economy of the country. In Ethiopia the finance sector is one of the fastest
developing sectors in the country with the establishment of new commercial banks and micro-
finance institutions. Nevertheless, this development and growth is not horizontally (variety)
rather it is vertically (in number with the same type of service).

The finance sector of the country is also coping VISA Debit Card and Credit Card in recent
years prove this fact. Commercial banks are still the dominant participant and contributor in the
finance sector of the country, though their insurance companies and micro-finance institutions.
However, in Ethiopia, the gap between rich and poor is still wide as in the other
underdeveloped countries. It will be due to injustice interest-based activities of these
conventional banks (Mohsen & Muhammad, 1987).

On the other hand, Islamic banking is in a rapidly growing stage as a feasible alternative to
conventional banking in world. Although innovative solution for some issues are still lacking,
it would be unfair to compare its progress to that of establishing conventional finance. But
Islamic banking puts a possible solution for the problem of interest-based banking (Siddiqi &
Mohammed, 1969). Islamic banking is based on two main financial principles. Firstly,
investment is to be made in the private sector through interest-free finance. Secondly, the
development of financing instrument is to be done in the basis of profit and loss sharing (PLS)
as well as sharing of risks. One major difference between Islamic banks and conventional
banks is the prohibition of interest on loans, given the fact that Islam does not allow unjustified
capital increases, and also it emphasizes on driving on capital increase through investment and
going through full economic cycle (www.islamicbanking.com). One of the unique and salient

1
character of Islamic banks is that the integration of ethical and moral values with its banking
operation. Furthermore, Islamic banks eliminate the barrier between those who save and those
who invest and bring them closer to the real market. The nature of the finance intermediation
of the Islamic banks significantly differ from conventional banks and it is in harmony with real
market and developmental change in it (Abdul Ghafoor, 2010). Since October 28, 2013
commercial bank of Ethiopia is operating Interest Free Banking (IFB) by leaving window units
within the conventional banks in selected 23 branches (www.combanketh.et). This study aimed
to find out the opportunities and challenges face in CBE to implement interest free banking.

1.2 Statement of the Problem

For the growing of investment and development of economy, finance sectors especially banks,
plays a significant role. Interest free banks are among these finance sectors. Interest free
banking seems to be of very recent origin. Now Islamic banking is growing at an annual rate of
41 percent worldwide with asset of Islamic finance institutions amounting to a staggering $
700 billion last years (Abdul Ghafour, 2010). Many international as well as local institutions
have stepped into this Multi-billion dollars booming industry. Interestingly Muslim and non-
Muslim counties such as U.K, USA, Japan, China, Sweden, Denmark and other European
countries have been accepted and implemented the Islamic banking system.

Unlike the above-mentioned countries, Ethiopia has only the conventional banking system.
Conventional banks intermediate funds from the depositors to entrepreneurs on the basis of
interest. Only these banks have dominated the Ethiopian finance sector almost for centuries.
Interest free banking on the other hand, is in a rapidly growing stage as a feasible alternative to
conventional banking in many countries. Nevertheless, the opportunities and viability of
interest-free banking is proven in other countries yet have not started in Ethiopia. There might
be various reasons for this. There will be potential challenge and obstacles that curb the
successful establishment and operation of Non-interest banking in Ethiopia. Thus this paper is,
conducted to assess the rationales behind the prohibition of interest and signify possible
opportunity of Interest free banking in Ethiopia. It also assesses the potential challenges and
obstacles that hold back the establishment and operation of Interest free banking in cases of
CBE.

1.3 Research questions

The study attempts to answer the following research questions.

1. Can interest have negative impact on Ethiopia economy and social relation of the society?

2
2. Does Interest Free Banking have opportunity in Ethiopia if established and starting to
work?
3. Is there any challenge and obstacle that can obstruct the establishment and operation of
interest free banking in Ethiopia?
4. Does interest free banking supplement the investment opportunity in Ethiopia?
5. Is commercial Bank of Ethiopia Full-informative to its Non-interest Users or customers?

1.4 Objective of the Study

1.4.1 General Objectives

The general objective of this study is to show the possible opportunities of Interest free
banking in CBE and to assess and find out the probable potential challenges and obstacles that
hinder the successful establishment and operation of Non-interest banking in cases of CBE.

1.4.2 Specific objectives

The specific objective of this paper is,

1. To show how non-interest banking is operating.
2. To determine if Interest free banking supplement investment opportunities in Ethiopia.
3. To assess if there is any challenge that affect the growth and development of Interest free
banking in Ethiopia.
4. Assess if commercial bank of Ethiopia is full informative to its Interest free banking
customers.
5. To find out potential obstacle/challenges for Interest free banking upon establishment and
operation in Ethiopia.

1.5 Significance of the study

The establishment of Interest free banking will have too advantage for Ethiopia. To establish
and obtain the maximum benefit from the new banking system it is important to make the
environment clear from obstacles and challenges. So that this study has taken into account the
following benefit and beneficiaries. Firstly, to bankers and finance institution it provides
another window to expand their profit and service. Secondly, it will show benefit and
opportunity of interest free banking to individual and institutional investors of Ethiopia who
wants to invest in this sector; finally, it gives highlights to the government office who has
related to banking activities. In general, the research paper would play a significant role for the

3
development of and betterment of the finance sectors as well as to avoid misconception from
Interest free banking system.

1.6 Scope of the study

The study will be conducted only based on the processes and methodologies used. The
researchers will assessing the rationales behind the prohibition of interest, the need for Interest
free banking, and some of many opportunity of interest free banking in Ethiopia. It also
addressed the probable potential operational challenges of this bank in cases of CBE only.

1.7 Limitation of the study

Obviously, there is no research activity which is perfect or undertaken without any limitation.
Likewise, in the study the researcher had faced obstacles and problems that have limited of the
study. Among others, lack of sufficient time and information were the core ones. In addition,
the following problem had taken as limitation for this study. The majority of respondents lack
of knowledge about Interest free banking, Unavailability of compiled secondary data, and
unavailability of well-organized research center relating to these studies. These and other micro
and macro problems are taken as a limitation.

1.8 Organization of the paper

This paper will be prepared into five chapters. The first chapter deals about the introduction of
the study which is background, statement of the problem, objective, significance, and research
questions. The second chapter discusses the literatures about Interest free banking.

The third chapter deals about research methodology. The data presentation, analysis and
interpretation will be presented in the fourth chapter. Finally, the fifth chapter deals with
conclusion and recommendation.

4
 CHAPTER TWO
2. LITERATURE REVIEW

This literature review illustrates the concept, scope and principles of Interest free banking

2.1. Introduction to Islamic Banking

Islamic banking appeared on world as a prominent player was in the early 1970’s. But rules
and regulations governing Islamic banking system has been present in the world for many
centuries (www.islacmicbanking.com). Islamic financial system is existed in Muslim
community in different shapes according to situation of time. Actually Islamic financialsystem
has a capability to fulfill the society requirements in respectable way (wassem Ahmad, 2008).
Islamic finance has become a global system spreading as far as Asia the Middle East, and the
western world. Islamic banking is not limited only to the Muslim nation in the Middle East but
also exists in the developed economies such as USA, Europe, and the Far East.

5
Islamic banking (interest free banking) is a growing sector with its diversity in different
segments and spectrum. It caters to religious Muslims in Muslim’s societies as well as in
countries where Muslims are in minority. In addition, it is a broad standard non-Muslim
individual and communities that seek ethical financial solutions have also been attracted to
Islamic banking. It is clear from banking practice that Islamic banking is equally popular in all
communities (www.hsbcamanah.com).

It is clear from above statements that Islamic banking is not only specific to Muslims but
actually it is a system which provides financial services which includes the non-Muslim society
with more options other than the conventional banking services.

The organization of Islamic conference (OIC) defined an Islamic banking as “a financial

institution whose statutes, rules and procedures expressly state its commitment to the principles
of Islamic and to the banning of the receipt and payment of interest on any of its operations”
(Siddiqi& Mohammed, 1969). According to this statement it is clear that interest is fully
prohibited in Islamic law.

Islamic financial system is not a new practice. Its roots belong to the early days of Islam and in
the age of Hazart Umar it was available in a disciplined form, all financial matters of state
solved through Islamic financial law. Islamic financial system is gradually improved and now
days it is recommended and exercises by many Muslim countries as well some non-Muslim
countries especially UKs, USA and Australia (Wassem Ahmad, 2008).

Although interest free banking is very famous in Muslim and non-Muslim communities and it
is a system which has a complete financial and economic solution but still Islamic financial and
banking system is not well organized in non-Muslim countries. Islamic banking is facing the
challenges of lack of fund management and lack of proper institutional set up to run infant
system. Comparatively the conventional banking system has strong financial and institutional
network in all Muslim and non-Muslim countries (Wassem Ahmad, 2008).

2.2. Principles of Islamic banking

The principles of Islamic banking are based on Islamic law, known as sharia, which mean:
interest cannot pay or received on transactions in any case where money is exchange for money
because the money is not actually any value accordance to Islam if it’s not employed in
business, transactions must avoid uncertainty (Ghrar) speculation (Maysir) or anything that
could lead to the unjust enrichment or unfair exploitation of one of the parties to a contract. In
case of speculation the big investors and industrialists turn the economic financial system

6
toward their own and personal benefits. Transaction cannot be made that involve prohibited
products or activities such as alcohol illicit drugs and tobacco because Islam wants to develop
an ethical and friendly environment in the society (Siddiqi & Muhammad, 1969).

2.3. Prohibition of Interest

Although the fact of prohibition against interest in Islamic banking is axiomatic, a variety of
arguments have been provided by Islamic scholars to explain and justify its application. One
argument which has not received any attention in the literature on Islamic banking, and which
goes a long way in justifying the prohibition, is based on Islam’s position on property rights
and obligations and its conception of economic justice (Mohsen & Muhammed,1987).

Money represents the monetized claim of its owner to property rights created by assets that
were obtained through work or transfer. Lending money, in effect, is a transfer of this right,
and all that can be claimed in return is its equivalent and no more. Thus, interest on money is
regarded as representing unjustified creation of instantaneous property rights: unjustified,
because interest is a property rights claimed outside the legitimate framework of recognized
property rights; instantaneous, because as soon as the contract for lending upon interest is
concluded, a right to the borrower’s property is created for the lender. On the other hand, when
the financial capital of the lender is used in partnership with the human capital and labor of the
entrepreneur, the lender’s rights to his property is no transferred and he shares, as co-owner,
the final product his money has helped to create. He will be remunerated in proportion to his
financial investment in the ensuring incremental wealth. This emphasis on profit sharing
provides the basis for the development of an Islamic financial system (Mohsen & Mohammed,
1987).

In broad terms, the transformation of banking from an interest based system to one that relies
on profit and loss sharing makes an Islamic banking system essentially an equity based system.
In such a system depositors are treated as if they were the shareholder of the bank, and
consequently are not guaranteed nominal values, or a pre-determined rate of return, on their
deposits. If the bank makes a profit, the shareholder (depositor) is entitled to reactive a certain
share of it; on the other hand, if the bank incurs a loss, the depositor is expected to share in it
and thus receive a negative rate of return. From the depositor’s perspective, then, an Islamic
bank is in most respects identical to a mutual fund or an investment trust. Furthermore, to
remain consistent with religious strictures, banks cannot charge interest on their lending
operations, but have to use special modes of investment and financing that are also based on
profit and loss sharing (Mohsen & Mohammed, 1987).

7
 2.4. Fundamental of Islamic banking

Islamic banking has the same purpose as convention banking to make money for the banking
institute up lending out capital. But that is not the sole purpose either. Adherence to Islamic
law and ensuring fair play is also at the core of Islamic banking. Because Islam forbids simply
lending out money at interest, Islamic rules on transactions (known as Fqgh al-Muamalt) have
been created to prevent it. The basic principle of Islamic banking is based on risk-sharing
which is a component of trade rather than risk-transfer which is seen in conventional banking.
Islamic banking introduces concepts such as profit sharing (Mudarabah), safe keeping
(Wadiah), joint venture or partnership finance (Musharakah), cost plus
(Murabehah/Murababha) and leasing (Ijar) (en.wikipedia.org).

According to Ahmed, 2008 study classification the fundamentals of Islamic principles are as
follow.

1. Musharakah (partnership finance)

Masharakah is a contract in which the bank and the industrialist contribute jointly to the capital
of a company or project to make a profit, profit and losses are shared between the parties on
agreed term and condition of the contract.

2. Mudarabah (Trust financing)

Mudarabah is a contract. In this contract the responsibility of bank provides all the capital
while the partner contributes commercial efforts, professional skills and experiences. Finally,
the bank receives a pre-determined proportion of the profits. In the case of aloes, the bank
bears all the financial loss whilst the manufacturer goes unrewarded. It is concluded that this
system encourages the individual to participate in financial activity and prove himself as an
active part of society.

3. The third principles and the free charges among the principles within the fixed charges
category are:
i. Murabaha (cost-put financing)

The murabaha is a contract in which the bank informs the industrialist about the acquisition
cost a good and negotiates with him the profit margin. It is one of the most popular modes used
in Islamic banking system in different countries to promote interest-free transactions.

ii. Bai-mua’jjal (deferred payment sale)

The Bai-mua’jja is a deferred payment sale contract which is traded without additional costs.

8
 iii. Ijara (leasing)

The Ijara is a rent contract by which the owner of the good rents it another party beading it.
After that the latter can purchase it and rent is reduced until the good become the possession of
the client. Nowadays the Home finance and Islamic mortgage and based on the concept of Ijara
and it is very successful tool in Islamic financial system.

iv. Quard Hassan

In Islamic financial system the customers who are facing financial crises or unpredicted
expenditure banks provide welfare loan without paying any fees or interest.

2.5. Compatibility of Islamic banking with conventional banking

Islamic banking has same purposes and practice and conventional banking except that Islamic
banks operate in accordance with Sharia laws. The basic principles of Islamic banking are the
sharing of profit and loss between contracted parties and as well very strongly prohibit the Riba
(interest) (Wassem Ahmed, 2008).

Islamic and traditional banking actually are not different they both banking system has same
objective and practices the only difference of implementation of interest because interest is
totally prohibited in Islam. Islamic banking falls into the realms of conventional banking;
Islamic banking try to ensure that all their financial natters according to Islamic financial law
as well as the rules and regulations of a particular state like the financial services authority
(FSA) in the United Kingdom Islamic banking almost provides some service as conventional
banking such as current accounts, serving, accounts, insurances, mortgages and investment
opportunities in the society (Wassem Ahmed 2008).

It is resulted from these statements the functions of Islamic banking are matched with
traditional banking system such as conventional banking charge interest against Islamic
banking provides these services with charging of services fees and mortgages rate are most
likely same in both banking system but only difference that Islamic banking follow the Ijarah
rules in which the installment is calculated on the basis of monthly rent plus services fees of
the banking institution (wassem, Ahmed, 2008).

2.6. Status of Islamic banking in Ethiopia

According to (Mohamed, 2012) Islamic banking is at an incipient stage. The existing legal
framework does not permit full-fledged Islamic Banking a lot of amendments need to be

9
carried out in the prevalent legal set up while appropriate models need to be selected and
implemented to suit society’s diverse financial needs.

As Mohammed’ study paper in 2012, to accommodate Muslims, who are by sharia’s Islamic
low prohibited from taking, or giving interest (Riba), commercial banks were offering zero
interest (special demand deposit). However fully fledged establishment of Islamic banks,
which offers the owners of capital to share the profits made by the entrepreneur who comes up
with investment project, is an untapped concept of the local finance sector.

Islamic banking launched in Ethiopia first by commercial bank of Ethiopia then other banks
like Oromiya bank follow opening window units.

2.7. Challenges of Islamic banking

Islamic banking is doing well in the world economy but some of the potential opportunities and
challenges should be taken up to make Islamic banking more user friendly in every segment of
economy and society. There is needed to make a clear and transparent system of general.
Islamic banking which concerned to all sectors of society and economy in order to address the
challenges and threats of the future needs of the financial sector (Wassem, Ahmed 2008).

Despite the growth of Islamic banking over the last 30 years one of the main challenges facing
Islamic banking is the poor understanding about its operating in the Muslim and non-Muslim
world (Mohamed 2012).

Islamic banking is at an early stage of learning and experience, lacking the flexibility to choose
arrangements which best suits their need in reacting to structural shifts in the economic setting
as well as challenges in consumer preference. For example, Islamic banks, without have and
interest free money and capital market will not have adequate instruments to meet the pre-
condition for liquidity management and effective maturity transformation (Mohammed, 2012).

Whatever the goal and functions are, Islamic banks come into existence in an environment
where the laws, institutions training and attitude are set to serve and economy based on the
principles of interest. In non-Muslim countries (i.e. countries with less than 50% Muslim
population), central banks are very stringent in granting licenses for Islamic banks additional
requirements if mother government and non-government authorities. So, apart from legal
constraints, there are economic measures that result operations of Islamic banks in non-Muslim
world difficult (Mohammed, 2012).

Many Islamic banks lack liquidity instruments such as treasury bills and other marketable
securities which could be utilized either to cover liquidity shortages or to manage excess

10
liquidity. This problem is aggravated since many Islamic banks work under operational
procedures different from those of the central banks; the resulting non-compatibility prevents
the central banks from controlling or giving support to Islamic banks if a liquidity gap should
occur (Mohammed, 2012).

Despite there are high demand opportunities that make to launch and precede Islamic banking
there are a lot of challenges that could hinder the growth and development of the system which
I have come to understand.

11
 CHAPTER THREE
3. RESEARCH METHODOLGY

3.1. Research design

In order to achieve the stated objectives of this study will employee descriptive research design
to gather as much information as possible to show the opportunities and challenges of interest
free banking service of commercial bank of Ethiopia.

3.2. Source of data

To conduct this research both primary and secondary data will be used. The sources of primary
data will be collected from employees and selected customer of the bank. The Secondary data
will be collected and used to describe and elaborate the conceptual aspects of interest free
banking. In addition to this different websites and books written by various authors were used
as data collection instruments.

3.3. Methods of data collection

3.3.1. Types of data

For accomplishing this research work and research objectives both primary and secondary data
was collected.

The primary data was collected from those employees and selected customers of the bank.
Thus, in order to obtain the reliable and sufficient information, partially self-administered
questionnaires were used as data collecting instruments.

In an effort to make the research more valid, credible and applicable secondary data were used
for the issues rise on the research. For this purpose, published sources, i.e. different books and
Webpages were investigated.

3.3.2. Procedure for data collection

In order to collect sufficient data that can answer this research questions, the researchers will
designed questionnaires to bank employees and selective customers who have related to their
day to day activities. Data from both primary and secondary sources will be collected and
organized in the form of tables.

12
 3.4. Sampling size and Sampling technique

From total population of thirty-five employees of commercial bank of Ethiopia six employees
will be selected as a sample size by using purposive sampling techniques, because these six
employees were especially engaged in the area of interest free banking services. The
researchers also used purposive sampling techniques to select 10 customers of commercial
bank of Ethiopia from total populations.

13
 CHAPTER FOUR
4. DATA PRESENTATION AND ANALYSIS
In this chapter, the results of data gathered on opportunities and challenges of Interest free
banking in case of CBE will be presented and analyzed. we distributed partially self-
administered questionnaires to Muslim and Non-Muslim customers (users) and employees of
commercial bank of Ethiopia director of interest free banking which are primarily involved and
responsible to the system.

4.1. Respondents Demographic Variables

Table 1: Employees of commercial bank of Ethiopia director of interest-free banking
respondent’s demographic variables

Variable Category Frequency Percentage

Sex Male 4 67%

Female 2 33%

Total 6 100%

Age 21-30 years 5 83%

31-40 years 1 17%

41-50 years 0 0%

51 and above 0 0%

Total 6 100%

Education level Diploma 0 0%

BA degree 6 100%

MA Degree and 0 0%
above

Total 6 100%

14
 Marital status Single 4 67%

Married 2 33%

Divorced 0 0%

Widowed 0 0%

Total 6 100%

Religion Muslim 5 83%

Non-Muslim 1 17%

Total 6 100%

As table (1) shows, from the total sample of 6 employees 4(67%) were male and 2(33%) are
female. This table indicates the age characteristics of employee respondents. According to the
data shown in the table (1), 5(83%) of them fall in the age category between 21-30 years,
1(17%) of them are in the age category between 31-40 years.

With regard to the educational background of the respondents, 6(100%) among them have BA
Degree. This would help to the bank to have enough qualified employees and efficient to
compete with other banks.

The above table has also depicted some data regarding the marital status of the respondents. As
indicated 4(67%) of the respondents were single, 2(33%) were married.

Finally, 5(83%) of the participants were Muslims and 1(17%) of those included in the study are
Non-Muslim community.

Table 2: customers of commercial bank of Ethiopia respondent’s demographic variables

Variable Frequency Percentage

Sex Male 7 70%

Female 3 30%

Total 10 100%

Age 18-30 years 3 30%

15
 31-40 years 4 40%

41-50 years 2 20%

50 and above years 1 10%

Total 10 100%

Illiterate 1 10%
Educational status
Primary education 2 20%

High school 4 40%

education

Diploma 1 10%

BA degree 1 10%

MA degree and 1 10%

above

Total 10 100%

As table (2) indicates, from the total sample of 10 respondents, 7(70%) of the respondents were
male and 3(30%) of them were female, table (2) also shows the age characteristics of the
respondents of customers. According to the data shown in the table 3(30%) of the respondents
fall in the age category between 18-30 years, 4(40%) of them are in the age category between
31-40 years, 2(20%) of them are between 41-50 years, 1(10%) is 51 or above.

The educational background of the customer respondents, 1(10%) of them do not have any
formal education, 1(10%) of the respondents have some primary education level, 5(50%) of the
respondents have high school education while 3(30%) of 50%) of the respondents were
married, 1(10%) divorced and 1(10%) of those were widowed.

16
4.2. Awareness, Misconceptions and General Understanding about
Interest Free Banking
Awareness and general understanding of the system is crucial if Interest-free banking is to
develop and grow in Ethiopia. One of the research questions was “Is commercial bank of
Ethiopia full informative to its Interest free banking customers?”

4.2.1. Employees Data Presentation and Analysis

Table 3:

Item Frequency percentage

Interest free banking Strongly agree 2 33.3%

customers has
Agree 4 66.7%
enough
understanding about Neither 0 0%
non interest banking
Disagree 0 0%

Strongly disagree 0 0%

Total 6 100%

Most of the respondents 4(66.7%) of the respondents are agree that customers are
understanding the system so that this might be good if interest free banking are developed in
the country and also demanding of customers can increase. 0(0%) of the employees kept from
voting their opinion. The rest 2(33.3%) strongly agree about customer’s awareness of the
system.

The above table suggests that there is a need to work on understanding how the banking system
is, so that it could get more acceptance than before.

Table 4:

Item Frequency percentage

Interest is prohibited Strongly agree 3 50%

in Islam
Agree 1 16.7%

Neither 2 33.3%

17
 Disagree 0 0%

Strongly disagree 0 0%

Total 6 100%

As the researcher understand from the above table 3(50%) of the respondents strongly believe
that interest is prohibited in Islam and the rest 1(16.7%) of those respondent agree with the
statement and the rest 2(33.3%) are neither.

With this condition Interest free banking might have highly potential demand among the
important number of Muslim communities around.

Table 5:

Item Frequency percentage

Interest free banking Strongly agree 0 0%

is 0nly for Muslims
Agree 1 16.7%

Neither 0 0%

Disagree 4 66.6%

Strongly disagree 1 16.7%

Total 6 100%

From the above table 1(16.7%) of the respondent are agree and believe Interest free banking
could serve only Muslim communities other than non-Muslim. 1(16.7%) of the employees
strongly protest the idea that Islamic banking is only for Muslims. and 4(66.6%) of the
participants argue Interest free banking is not only for Muslims.

Interest free banking has also potential opportunity among non-Muslim community and most
of the employees and the bank is aware of Interest free banking is not only for Muslims.

18
Table 6:

Item Frequency percentage

Interest free banking Strongly agree 4 66.6%

is equally beneficial
Agree 1 16.7%
to other communities
Neither 1 16.7%

Disagree 0 0%

Strongly disagree 0 0%

Total 6 100%

As depicted in the above table 4(66.6%) of the employees strongly argue. It is equally
beneficial to other communities. 1(16.7%) of the participants agree other communities could be
equally benefited, if they use the system 1(16.7%) employees in the direct of interest free
banking of commercials bank of Ethiopia have no clue weather it is equally beneficial or they
are kept from concluding the degree to which the system benefits non-Muslim communities.

As in the literatures every one Muslims as well as non-Muslims could be equally benefited
from the system. Since it is designed for every citizen with opportunity to Muslims the above
table (6) suggests there is a gap of awareness among the employees.

Table 7:

Item Frequency Percentage

Interest free banking Strongly agree 2 33.3%

products (saving and loan
Agree 2 33.3%
services) of commercial
bank of Ethiopia are Neither 1 16.7%
improving investment
opportunities Disagree 0 0%

Strongly disagree 1 16.7%

19
 Total 6 100%

Except 1(16.7%) of respondents believe Interest free banking products of commercial bank of
Ethiopia are improving investment opportunities. This important benefit of interest free
banking to the citizens could also benefit the system to grow and develop.

Most of the employees are able to understand that interest-free banking system could improve
investment and not only the conventional which is shown by table (7).

Table (8):

Item Frequency Percentage

Commercial bank of Ethiopia is Strongly agree 1 16.7%

engaged in interest free banking
Agree 3 50%
products (saving and loan
services)that address the Muslim Neither 1 16.7%
and non-Muslim community need
Disagree 1 16.7%

Strongly disagree 0 0%

Total 6 100%

Most of the responder 3 (50%) of participant’s response among the employees leads us to the
opinion commercials bank of Ethiopia is engaged. According to the Muslim and non-Muslim
community need. 1. Employee is neutral to the statement 1(16.7%) disagree that commercial
bank of Ethiopia is addressing the Muslim and non-Muslim community need. This
disagreement shows there is a gap among the employees or commercials bank of Ethiopia is
not addressing the Muslim and non-Muslim community need. CBE must work either in the
awareness or addressing the need.

4.2.2. Customers Data Presentation and Analysis

Table 9:

Item Frequency Percentage

Interest is prohibited in Islam Strongly agree 5 50%

Agree 2 20%

20
 Neither 1 10%

Disagree 2 20%

Strongly disagree 0 0%

Total 10 100%

Most of them agree with the statement and 5(50%) of those respondents strongly believe
interest is prohibited in Islam.

The above table (9) lead as to conclude not only interest is prohibited in Islam but also strongly
prohibited. The table shows Islam is a good opportunity for the system.

Table 10:

Item Frequency Percentage

Interest factor under Strongly agree 1 10%

conventional banking and
Agree 1 10%
profit/loss factor under
interest free banking are Neither 7 70%
different concepts
Disagree 0 0%

Strongly disagree 1 10%

Total 10 100%

10(70%) amazingly most of respondents have no idea about the difference or the profit/loss
factor under Interest free banking. This may lead to misunderstanding of the system in the
business section 1(10%) of those asked argue the factors are different concepts and 1(10%)
percent of the participants agreed that interest factor under conventional banking and
profit/loss factor under Interest free banking are different. Among the 1(10%) of the
participants come with disagree,which suggests to work on awareness of customers or change
their opinion according to the business procedures.

21
Table 11:

Item Frequency Percentage

Interest free banking Strongly agree 0 0%

is only for Muslims
Agree 0 0%

Neither 2 20%

Disagree 2 20%

Strongly disagree 6 60%

Total 10 100%

The tables (11) show most of the respondents,6(60%) are aware of the system is designed not
only for Muslims 2 (20%) of respondents’ kept from giving opinion or they can’t decide it
might be also awareness problem.

Commercial bank of Ethiopia should work on the awareness of customers that it is designed for
all citizens so that it would have large number of customers and this leads to the growth and
development of the system.

Table 12:

Item Frequency Percentage

Interest free banking is equal Strongly agree 3 30%

beneficial to other
Agree 4 40%
communities
Neither 1 10%

Disagree 2 20%

Strongly disagree 0 0%

Total 10 100%

22
The table depicts 4(40%) of participant customers in the study believe Interest free banking is
equally beneficial to non-Muslim customers. 1(10%) are neutral and 2(20%) of the respondents
disagree that Interest free banking could be equally beneficial to non-Muslim communities.

As in the literatures non-Muslims could also equally benefited from the system but there is
misconception among customers. This responsibility must be for banks using the system to
serve their customers. Unless a lot of effort is put on to solve this problem this is hindering idle
opportunity.

Table 13:

Item Frequency Percentage

There is financial institution in Strongly agree 1 10%

Ethiopia that are currently provides Agree 2 20%
financial products that are in
Neither 6 60%
accordance with interest free
banking Disagree 1 10%

Strongly disagree 0 0%

Total 10 100%

2(20%) of the respondents know and/or believe there is financial institution in Ethiopia that
currently providing financial products that are in accordance with Interest free banking. and
1(10%)of those disagree.

Since 6(60%) of the respondents are not in the side of agreement. I would decide most of
customers are not accepting the commercial Bank of Ethiopia interest free banking are working
with accordance to other financial institution.

CBE should exert a lot of effort on awareness of customers before any other measures it took.

4.3. Opportunities of Interest-Free Banking in Ethiopia

Opportunities should be there if this banking system is to develop and grow in the future in
Ethiopia. One of the research questions was: Does Interest free banking supplements
investment opportunities in Ethiopia?

23
4.3.1. Employee Data Presentation and Analysis
Table 14;

Item Frequency Percentage

Interest free banking system Strongly agree 1 16.7%

suggests strong alternative
Agree 3 50%
systems which are profitable and
well controlled institutions Neither 1 16.7%

Disagree 1 16.%7

Strongly disagree 0 0%

Total 6 100%

As suggested in the literature review that Interest free banking system gives alternatives
systems additional to the conventional banking system which are more profitable because of
they are well controlled by the banks since the loan given to customers and/or saving deposits
are owned by both parties until fully transferred the ownership title to one side (Bank or
customer). System is suggesting strong alternative systems with the opinion of most of
respondents 3(50%) agreed to the statement. 1(16.7%) of the employees do not know. The rest
1(16.7%) need awareness efforts by the bank or other responsible party.

Table 15:

Item Frequency Percentage

Many Muslim and non-Muslim Strongly agree 3 50%

were no using banking products
Agree 1 16.7%
(saving and loan services)was due
to saving and loan services Neither 1 16.7%
involve interest
Disagree 1 16.7%

Strongly disagree 0 0%

Total 6 100%

24
3(50%) of the employees argue there are potential customers with the need of interest free
banking. 1(16.7%) of them are neutral to the statement. But 1(16.7%) of the employees
disagree.

Even though 1(16.7%) of customers are not in the need to the banking system, the table (15)
show as there was demand by 1(16.7%) of responses. And this is opportunity for the system.

4.3.2. Customers Data Presentation and Analysis

Table 16:

Item Frequency Percentage

You have cancelled (or you Strongly agree 2 20%

would cancel a plan for business
Agree 4 40%
expansion and/or new investment
opportunity to be financed by Neither 2 20%
bank loan due to lack of interest
free banking before commercial Disagree 1 10%

bank of Ethiopia launch non

Strongly disagree 1 10%
interest banking

Total 10 100%

6(60%) of participants in the study have canceled or would cancel a plan for business
expansion and/or new investment opportunity to be financed by bank loan due to lack of
interest free banking system. 2(20%) of them are neutral and 1(10%) of them doesn’t cancel
their plan.

Since 2(20%) of respondents would not accept interest. I have come with large percentage of
demand for Interest free banking. And this is important opportunity for non interest banking.

Table 17:

Item Frequency Percentage

Commercial bank of Ethiopia is Strongly agree 1 10%

engaged in interest free banking
Agree 2 20%
products (saving and loan
services) that address the Muslim Neither 4 40%

25
 Disagree 2 20%

Strongly disagree 1 10%

and non-Muslim community need
Total 10 100%

3(30%) of the respondents believe commercial bank of Ethiopia is engaged in Interest free
banking products (saving and loan services) that address the Muslim and non-Muslim
community need. 4(40%) of them doesn’t give opinion and 3(30%) of the respondents
disagree. There is a gap between agreed and disagreed one so

Commercial bank of Ethiopia should be transparent and advertise its products to its customers
with any media it could use to get acceptance among the need.

Table 18:

Item Frequency Percentage

Interest free banking system Strongly agree 3 30%

suggests strong alternative
Agree 3 30%
systems which are profitable and
well controlled institutions Neither 3 30%

Disagree 1 10%

Strongly disagree 0 0%

Total 10 100%

6(60%) of the respondents believe Interest free banking suggests strong alternative systems
which are profitable and well controlled intuitions. 3(30%) of them doesn’t know. 1(10%)
disagree with the statement.

As 6(60%) of respondents suggests if it is a strong alternative system which come with the idea
of profitable and well controlled in situation there should be more acceptance among the
government as well as the citizens so that the system could develop with developing the
country economy.

26
Table 19:

Item Frequency Percentage

Many Muslim and non-Muslim Strongly agree 3 30%

were not using banking products
Agree 3 30%
(saving and loan services)was due
to saving and loan services Neither 2 20%
involve interest
Disagree 1 10%

Strongly disagree 1 10%

Total 10 100%

6(60%) of the respondents believe many Muslims and non-Muslim were not using banking
products was due to saving and loan services involve interest. 2(20%) have no idea and 2(20%)
of those customers respondents believe many Muslims and non-Muslims were not using
banking products is not due to saving and loan services involve interest.

Since large percentage of respondent customers agreed with the statement there was high
demand for the system.

4.4. Challenges Facing Interest Free Banking in Ethiopia

Challenges must be Discovered and Solved, if the system is smoothly and freely practicing
through the developing and to grow up the system. The two research questions under this item
are “is there any challenge that affects growth and development of Interest free banking?” and
“Is Interest free banking is in a position to satisfy its customers in Ethiopia?”

4.4.1. Employees Data Presentation and Analysis

Table 20: Weather they believe the Muslim and non-Muslim Community have Awareness
about IFB System

Item Frequency Percentage

The Muslim and non-Muslim Strongly agree 1 16.7%

27
 community is aware of interest Agree 2 33.3%
free banking system
Neither 1 16.7%

Disagree 2 33.3%

Strongly disagree 0 0%

Total 6 100%

3(50%) of the employee’s response is that the Muslim and non-Muslim community is aware of
Interest free banking system. 1(16.7%) responses show that the Muslim and non-Muslim
community doesn’t know how the system works. The rest 2(33.3%) of the respondents doesn’t
agree that the Muslim and non-Muslim community are aware of the system.

This table shows there is the need to work on awareness of customers that the users become
friendlies.

Table (21)

Item Frequency Percentage

There is gap in qualified human Strongly agree 1 16.7%

resource for interest free banking
Agree 1 16.7%

Neither 1 16.7%

Disagree 2 33.3%

Strongly disagree 1 16.7%

Total 6 100%%

2(33.3%) of the employees respond there is a gap in qualification to the system. 1(16.7%) of
them are kept from opinion and the rest 3(50%) employees said the current workers are enough
qualified.

28
Since most of participants are in the side with the presence of the gap, responsible and
designed authorities and institutions should give consideration. Otherwise this gap could be
hindrance for growth and development of the system.

Table 22:

Item Frequency Percentage

Commercial bank of Ethiopia Strongly agree 1 16.7%

have enough qualified scholars in
Agree 3 50%
interest free banking to insure
that interest free banking services Neither 1 16.7%
are fully comply with sharia law
Disagree 1 16.7%

Strongly disagree 0 0%

Total 6 100%

4(66.6%) of the employees agreed that commercial bank of Ethiopia have enough qualified
scholars in Interest free banking to ensure that Interest free banking services are fully comply
with sharia law. 1(16.7%) of them kept from giving opinion and 1(16.7%) of the participants
argue that there are no enough qualified scholars to make Interest free banking fully comply
with sharia law.

The table (22) above show there is problem of acceptance that the system is accordance with
sharia law among the employees. If we project this percentage to the whole employees of
commercial bank of Ethiopia it might be large no of employees are not accepting the system.

Commercial bank of Ethiopia director of interest free banking must be responsible for this to
work on what it supposed to do.

Table 23:

Item Frequency Percentage

29
 The current customers are fully Strongly agree 1 16.7%
satisfied with the range of services
Agree 1 16.7%
that interest free banking of
commercial bank of Ethiopia
Neither 1 16.7%
provides
Disagree 2 33.3%

Strongly disagree 1 16.7%

Total 6 100%

2(33.3%) of respondent employees agreed, 1(16.7%) does not give opinion and 3(50%)
disagree.

Item Frequency Percentage

Commercial bank of Ethiopia Strongly agree 1 10%

have enough qualified scholars in
Agree 2 20%
interest free banking to insure that
interest free banking services are Neither 2 20%
fully comply with sharia law
Disagree 4 40%

Strongly disagree 1 10%

Total 10 100%

This important number of disagreement as well as neutral opinion suggests even though there
is demand for the system and commercial bank of Ethiopia is serving it is not satisfactory
enough to address the whole idle demand. CBE should consider customer’s satisfaction if it
wants to develop and growth system.

4.4.2. Customers Data Presentation and Analysis

Table 24:

3(30) of the respondents believe that commercial bank of Ethiopia has enough qualified
scholars. 2(20%) of them doesn’t know and 5(50%) of them disagree that commercial bank of

30
Ethiopia have enough qualified scholars in Interest free banking to ensure that Interest free
banking services are fully comply with sharia law.

Since 5(50%) of the respondents disagree there is unacceptability of the scholars engaged to
the system as enough qualified or there is a gap in qualified scholars that ensure Interest free
banking serves fully comply with sharia law.

Commercial bank of Ethiopia must train its employees to have enough qualified scholars or
aware its customers it has sharia compliance service giving qualified scholars.

Table 25:

Item Frequency Percentage

You are satisfied with the range Strongly agree 1 10%

of services that interest free
Agree 3 30%
banking of commercials bank of
Ethiopia provides Neither 1 10%

Disagree 4 40%

Strongly disagree 1 10%

Total 10 100%

4(40%) are satisfied users, 1(10%) neither and 5(50%) are not satisfied with the range of
services that Interest free banking of commercial bank of Ethiopia provides.

Most of its customers are not satisfied as 5(50%) of respondents depicts in the table.
Commercial bank of Ethiopia director of Interest-free banking is facing a gap even though the
system is at its infant stage in Ethiopia. Commercial bank of Ethiopia should work on
customer’s satisfaction.

31
 CHAPTER FIVE
5. CONCLUSIONS AND RECOMMENDATIONS

Up to this point the study has summarized, analyzed and interpreted different related literatures
and survey results in relation to the rationales behind the prohibition of interest/riba as well as
opportunities and challenges of interest free banking in case of commercial bank of Ethiopia
from different angles and point of view. In this part of the paper the conclusion and
recommendation made based on the empirical, analytical, and findings have presented.

5.1 Conclusions
In Ethiopia, most of the developments of Islamic finance have taken place since 2008 E.C and
they were limited products (Mohammed, 2008). But since Oct. 28, 2013 Islamic (Interest-Free)
banking is established and engaged in serving the need which makes is to establish.

5.1.1. Conclusions on Awareness Findings

5.1.1.1. Employees Awareness Findings

As we can conclude from table (3) there is a problem of understanding how the system works
when it is implemented in the business area. Table (4) suggests Muslims are the main target to
improve and develop the system. We can conclude from table (5) that non interest banking
have also potential opportunity among non-Muslim community and most of the employees and

32
the bank is fully aware of Interest free banking is not only for Muslims. But as in the literatures
every one Muslims as well as non-Muslims could be equally benefited from the system, it is
designed for every citizen with opportunity to Muslims and table (6) depicts there is a gap
awareness in this section among the employees. Most of the employees are able to understand
that interest-free banking system could improve investment and not only the conventional bank
is shown in the table (7) on the table (8) the disagreement with that commercial bank of
Ethiopia is engaged in Interest free banking products which address the Muslim and non-
Muslims community need shows there is a gap but commercial bank of Ethiopia is addressing
most of its employees.

5.1.1.2. Customers Awareness Findings

When we conclude from the analysis of customer’s data we start from table (9) table (9) lead as
to conclude not only interest is prohibited in Islam but also strongly prohibited. From table (10)
we decide that important number of customers need the awareness about the difference
between the conventional and Interest free banking systems, table (11) show as there is
Misconception among customers because Interest free banking is not only for Muslims. Table
(12) there is also misconception among customers as the literatures suggest non-Muslims could
also equally have benefited from the system. table (13) are not in the side of agreement I would
conclude that most of customers are not accepting the commercial bank of Ethiopia’s interest-
free banking as it is with accordance with Islamic law.

5.1.2. Opportunities of Interest Free Banking

5.1.2.1. Conclusion from Employees Data

The data gathered in table (14) lead as to conclude interest-free banking system is suggesting
strong alternative systems with the opinion of most of respondent agreed to the statement. As
suggested in the literatures that Islamic banking system gives alternative systems additional to
conventional banking in non-Muslim majority population countries which are more profitable.
Because of they are well controlled by the banks since the loan given to customers and/or
saving deposits are owned by both parties until fully transferred the ownerships title to one side
(bank or customer).

The table (15) make as to conclude there was demand but not strong as in the literatures.

33
5.1.2.2. Conclusion from Customers Data
Table (16) would not accept interest. I have come with large percentage of demand for Islamic
banking among Muslim customers. And this is important opportunity for Interest free banking.
Table (17) shows there is acceptance gap among large percentage of its customers with its
mission commercial bank of Ethiopia is engaging to serve the need among Muslim community.
Table (18) suggests it is a strong alternative system which comes with the idea of profitable
and well controlled institution. This is opportunity come with the system to be accepted among
the government, so that the system could develop with developing the country economy. Table
(19) lead as to conclude there was high demand for Interest free banking in Ethiopia.

5.1.3. Challenges Facing Interest Free Banking in Ethiopia

5.1.3.1. Conclusion from Employees Data

Table (20) led us to conclude awareness among customers is a big challenge to Interest free
banking for cooperation and working smoothly as well as to get acceptance. Table (21) show
as there is a qualified human resource for Interest free banking. Table (22) led us to conclude
there is problem of acceptance that the system is in accordance with sharia law among the
employees.

Table (23) led us to conclude commercial bank of Ethiopia is not satisfying its Interest free
banking customers enough to address the whole demand.

5.1.3.2. Conclusion from Customers Data

As table (24) depicts there is unacceptability of the scholars engaged to the system as enough
qualified or there is a gap in qualified scholars that ensure Interest free banking services fully
comply with sharia law. I concluded that most of commercial bank of Ethiopia’s customers
isn’t satisfied depending on table (25).

5.2 Recommendations
The Ethiopian banking sector has established interest free banking to develop and grow the
system is a next step.

5.2.1 Recommendations Depending on Employees Data

There is a need to work on understanding how the Interest free banking system is so that it
could get more customers (users) than before.

The current interest-free banks should exploit the highly potential demand in to develop and
grow faster.

34
The commercial bank of Ethiopia should make the awareness among the non-Muslim as well
as Muslim communities so that it could get large customers.

The study shows there is the need to work on how commercial bank of Ethiopia is
implementing the system to get more acceptances and to become friendlier with its customers.
The authorities and institutions responsible for Interest free banking should consider the gap in
the qualified human resource for Interest free banking. And also commercial bank of Ethiopia
director of interest free banking must be responsible for qualification of human resource which
makes the system (service) compliance with sharia law.

Commercial bank of Ethiopia should consider customers satisfaction if it wants to develop and
grow the system.

Recommendation Depending on Customers Data

The responsible parties for interest-free banking should work on awareness of customers which
makes their opinion according to the business.

Commercial bank of Ethiopia as well as other responsible parties should work on the
awareness of customers so that it would have large number of customers and this leads to the
growth and development of the system.

Commercial bank of Ethiopia should be transparent and advertise its products to its customers
with every media it could use to get acceptance among the Interest free banking demand.

There should be more acceptance and demand among the government as well as the citizens
because of its idea of profitable and well controlled, So that the system could develop with
developing the country economy.

Commercial bank of Ethiopia must train its employees to have enough qualified scholars or
aware its customers that it has sharia compliance services giving qualified scholars.
Commercial bank of Ethiopia should work on customer satisfaction.

35
References
- Mohsen, S.K., Abbas, M., (1987). Theoretical studies in Islamic banking and Finance.
USA: Institute for Research and Islamic studies.
- Siddiqi, Muhammad, N., (1969). Banking without interest. Saudi: Ghairsudi bank Kari.
- Mohammed, M.O., (2012). Islamic banking. Addis Ababa, Ethiopia: Islamic Research
& Cultural Center.
- Wassem, A., (2008). Islamic banking in United Kingdom. London: Kingston
University.
- Wikipedia (May 2014). History of commercial bank of Ethiopia. Retrieved from
http://en.wikipedia.org/wiki/Islamic-banking
- Abdul Gafoor,M, 1995.Interest free commercial banking
- www.combanketh.et
- www.islamicbanking.com
- www.hsbcamanah.com

36
 APPENDIX “1”

ODA BISIL COLLEGE

DEPARTMENT OF ACCOUNTING AND FINANCE

Questionnaire to be filled by Customers of Interest free banking in Commercial

bank of Ethiopia

Dear Respondents

This questionnaire is designed to collect information on the state of Interest free banking. The
information gathered is to be used in a study under the topic. Challenges and opportunities of
Interest free banking: The case of commercial Bank of Ethiopia. Any information gathered will
be only for academic purpose. Therefore, you are kindly requested to give an accurate and
honest response so that I can produce quality paper which enables me to acquire BA degree in
accounting and finance.

Thank you in advance for your cooperation

Note: 1. there is no need to write your name

2. I kindly request you to make (√) the answer of your choice.

Background of Respondents

1. Sex: A, Male B, Female

2. Age. A. 18-30 years
B. 31-40 years
C. 41-50 years
D. 51 and above years
3. Educational Status: A. Illiterate
B. Primary education
C. High school education
D. Diploma

37
 E. BA Degree
F. MA degree and above
4. Marital Status:
A. Single B. Married C. Divorced D. Widowed

Please indicate your agreement or disagreement with the following statements about Islamic
(interest-free) banking by making (√) one of the boxes for each statement.

1 2 3 4 5

No Awareness Items Strongly Agree Neither Disagree Strongly

agree (Neutral) disagree

5 Interest is prohibited in Islam.

6 Interest factor under conventional banking and

profit/loss factor under Islamic banking are
different concepts.

7 Interest free banking is only for Muslims.

8 Interest free banking is equally beneficial to

other communities.

9 There is financial Institution in Ethiopia that

currently provides financial products (Saving
and loan services) that are in accordance with
non interest banking

Opportunity related items

10 You have cancelled or you would cancel a plan

for business expansion and/or new investment
opportunity to be financed by bank loan due to
lack of interest free banking system before
Islamic banking launching in Ethiopia.

11 Commercial bank of Ethiopia is engaged in

Interest free banking products (Saving and

38
 Loan services that address the Muslim and non-
Muslim Community need.

12 Interest free banking system suggests strong

alternative systems which are profitable and
well controlled institutions.

13 Many Muslims and non-Muslims were not

using banking products (Saving and Loan
Services) was due to saving and loan services
involve interest.

Challenges related items

14 Commercial bank of Ethiopia has enough

qualified scholars in Interest free banking to
ensure that Interest free banking services are
fully comply with Sharia Law.

15 You are satisfied with the range of services that

interest free banking of commercial bank of
Ethiopia provides.

Thank you for completing this questionnaire

39
 APPENDIX “2”

ODA BISIL COLLEGE

DEPARTMENT OF ACCOUNTING AND FINANCE

Questionnaire to be filled by Employees of Commercial bank of Ethiopia director

of Interest-Free banking

Dear Respondents

This questionnaire is designed to collect information on the state of Interest free banking. The
information gathered is to be used in a study under the topic. Challenges and opportunities of
Interest free banking: The case of commercial Bank of Ethiopia. Any information gathered will
be only for academic purpose. Therefore, you are kindly requested to give an accurate and
honest response so that I can produce quality paper which enables me to acquire BA degree in
accounting and finance.

Thank you in advance for your cooperation.

Note: 1. there is no need to write your name

2. I kindly request you to make (√) the answer of your choice.

Background of Respondents

1. Sex: A, Male B, Female

2. Age: A. 21-30 years
B. 31-40 years

C. 41-50 years

D. 51 and above

3. Educational Status: A. Diploma

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 B. BA Degree
C. MA Degree and above
4. Marital Status:
A. Single B. Married C. Divorced D. Widowed
5. Religion
1. Muslim B. Non-Muslim

Please indicate your agreement or disagreement with the following statements about Islamic
(Interest-Free) banking by making (√) one of the boxes for each statement.

1 2 3 4 5

No Awareness Items Strongly Agree Neither Disagree Strongly

agree (Neutral) disagree

6 Interest free banking customers have enough

understanding about non interest banking.

7 Interest is prohibited in Islam.

8 Interest free banking is only for Muslims.

9 Interest free banking is equally beneficial to

other communities.

10 Interest free banking products (Saving and

Loan services) of commercial bank of
Ethiopia are improving investment
opportunities.

11 Commercial bank of Ethiopia is engaged in

Interest free banking products (Saving and
Loan Services) that address the Muslim and
non-Muslim community need.

Opportunity related items

12 Interest free banking system suggests strong

alternative systems which are profitable and

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 well controlled institutions.

13 Many Muslims were not using banking

services due to savings and loan services
involve interest.

Challenges related items

14 The Muslim and non-Muslim Community is

aware of Interest free banking system.

15 There is a gap in qualified human resource

for Interest free banking.

16 Commercial bank of Ethiopia has enough

qualified scholars in Interest free banking to
ensure that Islamic banking services are fully
comply with sharia law.

17 The current customers are fully satisfied with

the range of services that Interest free
banking of commercial bank of Ethiopia
provides.

Thank you for completing this questionnaire

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