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RESEARCH PROPOSAL

Challenges of Interest Free Banking in Ethiopia: In

case of Dashen Bank S.C.

STUDENT NAME: Feysel Abdu Mohammed

ID NUMBER: GSE/0867/11
DEPARTMENT: Masters in Business Leadership
COMPUS: Commerce Campus, AAU
COURSE CODE: MMGT 501

SUBMITTED TO: Dr. Konjit H.

February 2019
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Contents

1 Back ground of the study .............................................................................................................................. 3

2 Literature Review .......................................................................................................................................... 4
2.1.1 What is Interest free Banking?...................................................................................................... 4
2.1.2 The perspective in brief ................................................................................................................ 5
2.1.3 Contribution of Jews ..................................................................................................................... 5
2.1.4 Contribution of Christians ............................................................................................................. 5
2.2 Statement of the problem .................................................................................................................... 5
2.3 Research questions ............................................................................................................................... 5
2.4 Objectives of the research .................................................................................................................... 6
2.5 Definition of Terms ............................................................................................................................... 6
2.6 Significance of the study ....................................................................................................................... 6
2.7 Delimitation/scope of the study ........................................................................................................... 6
3 Research Methodology ................................................................................................................................. 7
3.1 Research Approach ............................................................................................................................... 7
3.2 Data Collection ...................................................................................................................................... 7
3.2.1 Primary data collection ................................................................................................................. 7
3.2.2 Secondary data collection ............................................................................................................. 7
3.2.3 Sampling Plan ................................................................................................................................ 7
3.2.4 Population ..................................................................................................................................... 7
3.2.5 Sampling Method .......................................................................................................................... 8
3.2.6 Data Acquisition Method .............................................................................................................. 8
3.2.7 Validity and reliability ................................................................................................................... 8
4 Ethical Considerations................................................................................................................................... 8
5 Organization of study report......................................................................................................................... 9
5.1 Chapter one .......................................................................................................................................... 9
5.2 Chapter Two .......................................................................................................................................... 9
5.3 Chapter Three ....................................................................................................................................... 9
5.4 Chapter four .......................................................................................................................................... 9
6 Time schedule ............................................................................................................................................. 10
6.1 Action Plan .......................................................................................................................................... 10
6.2 Budget Schedule ................................................................................................................................. 11
7 References .................................................................................................................................................. 11
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1 Back ground of the study

Interest Free banking business also known with different names in different countries as
alternative banking, participatory banking, non interest banking, community banking, social
banking, ethical banking, Islamic banking, and with other names. The business targeted
those customers who do not want to transact bank interest rate for religious or other reason.

Interest free banking experienced an exponential growth duo to the growth of Islamic
finance after the aftermath of 2007/2008 financial crises. Islamic finance has experienced a
remarkable growth in the last few decades and has been considered, especially after the
global financial growth, as a possible alternative to the conventional system. Global Islamic
finance report (2012).

Its growth in Africa is very encouraging. Since 2014, Islamic finance is expanding rapidly
across Africa with $2.3 billion African sukuk, or Islamic bond, issuance, providing new
funding sources for sovereigns and financial institutions …According to the report, despite
the growth, African sukuk make up just 0.5 percent of global sukuk. APA News (2018)

The African countries are leveraged their economic growth and benefited from the field.
Ever since the inauguration of Islamic financing in Kenya in 2008 or thereabouts, Islamic
banking has seen a speedy intensification in a comparatively small period of time. Abdulaziz
(2013).

In 2007, the total assets of the banking industry were KES951 billion (US$10.78 billion).
Today, the total assets are KES2.3 trillion (US$26.08 billion) which indicates an increase of
241%, according to the Central Bank of Kenya (CBK). This demonstrates that the banking
industry is playing a major role in the economy of Kenya. Abdulaziz (2013).

The business introduced to our country with the issuance of National Bank of Ethiopia
Directive number 592/2008. Some African Countries started the business with same period.
But the growth demonstrated in Ethiopia is as not good. From the preliminary data collected
from Product Development and research Department of Dashen Bank s.c depicted that the
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total amount of all banks in Ethiopia mobilized a total of Birr 728.9 billion as of June 30,
2018. The IFB deposit contribution is only Birr 19.5 billion, which is only 2.67 %.

Even though there are a number of concerted efforts conducted to exploit the industry
globally, comprehensive effort has not yet been done to tackle the challenges of interest free
banking resides in Ethiopia. Dr. Seid Abdela on his speech held on the first Interest Free
Banking Summit held here in Ethiopia on October 28, 2018, stresses that the subject is not
explored more. Abdela (2018). The major initiative stimulus for the researcher is his speech
on this summit.

Therefore, this study will try to fill the gap by exploring the major problems confronted
interest free banking in Ethiopia.

2 Literature Review
2.1.1 What is Interest free Banking?

Interest Free Banking is defined as a banking business in which mobilizing or advancing of

funds is undertaken in a manner consistent with Islamic finance principles and mode of
operations that avoids receiving or paying interest, as per the National Bank of Ethiopia’s
Directive authorizing the business of Interest Free Banking.

It is a deposit taking banking institution whose scope of activities includes all currently
known banking activities, excluding depositing, borrowing and lending on the basis of
interest. On the liabilities side, it mobilizes funds on the basis of agent contract. It can also
accept demand deposits which are treated as interest free loans from the clients to the bank
and which are guaranteed. On the asset side, it advances funds on a profit and loss sharing
or a debt creating basis, in accordance with Sharia principles.

It also plays the role of an investment manager for owners of time deposits, usually called
investment deposits. In addition, equity holding as well as commodity and asset trading
constitute an integral part of Islamic banking operations. An interest free banking shares its
net earnings with depositors in a way that depends on the size and date to maturity of each
deposit. Depositors must be informed beforehand of the formula used for sharing the net
earnings with the bank. mabid and munawar (2001).
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2.1.2 The perspective in brief

The struggle of man to liberate him from the depredation of interest is as old as history itself,
and predates even the mining of money. Homer (1977). Hammurabi, who ruled Babylonia
from 2123 to 2081 B.C., has left us the oldest book in the world in the shape of his code,
which not only prescribes maximum rates of interest for various varieties of loans but also
suggests the method of profit and loss sharing to avoid interest Jewish Encyclopaedia
(1905). This is besides occasion on which no interest can be claimed. Encyclopaedia of
Religion and Ethics (1921).

All great religions have opposed interest; from philosophers like Aristotle to poets like Dante,
we repeatedly meet with repulsion for this institution. As Keynes puts it; “for several
millenniums, enlightened opinion held for certain and obvious... the doctrine that the rate of
interest is not self adjusting at a level best suited to the social advantage...”Keynes (1936).

2.1.3 Contribution of Jews

The first interest free bank, by the name of Agibi Bank, was started by the Jews in Babylonia
in 700 B.C. Baron (1958). The basis adopted was mortgage of some productive asset like a
house, a piece of land, a horse or slave etc., which the borrower parted with and the bank
hired out in exchange of a loan without interest.

2.1.4 Contribution of Christians

Under the patronage of Christian church, the concept first loans were given following the
precedent of Babylonian and Greek temples. Homer(2005).

2.2 Statement of the problem

To explore and analyze the major challenges and issues confronted by Interest Free
Banking services across Ethiopia.

2.3 Research questions

3.1. What are the major hurdles faced by Interest free banking with respect of
institutional, operational and customer aspects?
3.2. What are the success contributions factors for neighboring peer countries
interest free banking industry?
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3.3. What are the major stakeholders responsible to take action for the progress of
interest free banking service?

2.4 Objectives of the research

3.4. To find out what are the major challenges faced by the Interest Free Banking
3.5. To assess and compare the performance of Interest Free banking operation in
Ethiopia and its neighboring countries.
3.6. To recommend the best solution to alleviate on issues holds up for progress.

2.5 Definition of Terms

“Interest” any premium charged on money borrowed is tantamount to interest irrespective

of the amount paid. Hence, it is prohibited because it concentrates wealth and nurture
inequality through exploitation.

“Shari’a” has the meaning assigned to it by Islamic law and jurisprudence as expounded by

authoritative sources; in the context of this policy, it is construed by reference to pertinent

Qur’anic ordinances and applicable rules in Islamic jurisprudence or business transactions;

“sukuk” is an Islamic financial certificate, similar to a bond in Western finance, that

complies with Sharia.

2.6 Significance of the study

After this study examines all of the aforementioned key elements to Interest free banking
success, it will offer a larger picture of the external and internal obstacles that hinder the
industry not to flourish as expected as compared with the neighboring county’s peers.
Contributing literature describing interest free banking hurdles along with methods to
improve the efficiency of the industry will be believed to lead the desired state. And finally it
is believed that the study can be used as an input to inform various stakeholders for further
study.

2.7 Delimitation/scope of the study

It will be more reliable to make wide study in all Ethiopian commercial bank that provide
interest free banking window along with their conventional banking services ( there are ten
interest free banking windows over all in Ethiopia). However because of lack of sufficient
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time, financial constraints and limited human resource, the researcher has limited the study
to explore the challenges of Interest free banking only on Dashen Bank S.C. the study
incorporate 450 IFB employees.

3 Research Methodology

3.1 Research Approach

The technique is used for this research is mixed research. The mixed research approach
includes both qualitative and quantitative research.

3.2 Data Collection

There are two types of data collection

3.2.1 Primary data collection

For the primary data collection methods, the researcher will use comprehensive interviews
with deputy chief officer and managers, surveys with the customers and questionnaire with
the employees of Dashen Bank s.c.

3.2.2 Secondary data collection

A vast majority of the information gathered for this proposed study will consist of secondary
research primarily from literatures, books, journals, internet, newspaper articles and any
available related reports.

Gathering information regarding the challenges of IFB operation will also consist of global
research into secondary sources that will serve to illustrate mechanisms that can aid to
frame a parameter for the study.

3.2.3 Sampling Plan

Surveys geared toward appropriate challenges will be distributed. To gain enhancement for
support to the study, secondary research information also will be into consideration.

3.2.4 Population

None of the primary research involving sampling data analysis will be outside of the Addis
Ababa Region.
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3.2.5 Sampling Method

In order to receive adequate responses from potential respondents, a proposed amount of

participants would fall into the category of no fewer than 100 people with proposed
objectives of approximately 450.

3.2.6 Data Acquisition Method

The researcher will distribute self-administered surveys that will be distributed to similar
groups of people (at the researcher's discretion) to gauge their reactions to challenges of
interest free banking. In conjunction, a rank-order scale questionnaire will be distributed to
potential respondents in which different challenges will be presented where subjects will
rank each item in the questionnaire in terms of the level of importance to each subject.

3.2.7 Validity and reliability

After carefully examining the compiled primary research gathered through surveys and rank-
order scales, all of the information can be quantified and statistically charted and graphed to
show any potential challenges. Whatever the response indicates, the first-hand analyses will
serve to identify to all stakeholders the major hurdles faced the business sector. This
approach to analyzing data expected to be the most effective because it can be formatted
into easily ascertained information that acts as indicators to potential hurdles.

4 Ethical Considerations

 Individual respondents will never be identified in reporting survey findings; completely

anonymous summaries, for example, in terms of tables and charts should be given.
Respondents must be asked for their consent to participate in a survey, and their
privacy and rights will be observed.
 The researcher exerts utmost effort for the respondents to know what the study is
involved, how long it will take, and what will be done with the data.
 The conclusions and recommendations of the study will be disclosed in accordance
with the findings observed.
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5 Organization of study report

After completion of the research, the report is expected to be organized in the following
manner:

5.1 Chapter one

Introduction:-This chapter expected to contain background of the study,
statement of the problem, basic research questions, objectives of the study,
definition of terms, significance of the study, and delimitation/scope of the
study.

5.2 Chapter Two

Literature review: - The actual research in this chapter is expected to deal
with the literature relevant to the study under the topic “what Interest free
Banking is”, “the perspective in brief”, “contribution of major religion to interest
free Banking”, and the major international challenges of interest free Banking
business and the best solutions to the challenges.

5.3 Chapter Three

3.7. Research Methodology: - The final study under the proposed title in chapter
three focuses on specific procedures or techniques used to identify, select,
process, and analysis of information will be discussed. It is believed that the
research methodology section will allow the reader to critically evaluate
a study's overall validity and reliability.

5.4 Chapter four

Results and discussion/Data presentation, analysis &interpretation: - in

this chapter results and findings summary of the study will be dealt with,
interpretation of the findings will be discussed.

3.8. Chapter Five:-Summary, Conclusion, recommendation:-This chapter will

comprise four sections, which include summary of findings, conclusions,
limitations of the study and recommendations.
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6 Time schedule

6.1 Action Plan

S.N Activities Measure of Duratio Duration In months (M)
Success n
M M M M M M M M M M
1 2 3 4 5 6 7 8 9 1
0
1 Develop research proposal Approved research 2M
with advisor consultation proposal
2 Go through in search of literature review 3M
related literature review endorsed by the
advisor
3 Work to finalize the Research Agreed research 2M
Methodology methodology, like
sample size....
4 Development of the research Prepared interview 2M
instrument questions and
questioners
5 Gather Data collection Finalized collection 2M
of data
6 Research Report Writing
6.1 Submit first draft 1M
report
6.2 Submit final 1M
research report
7 Face to face presentation Conclude defence 1M
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6.2 Budget Schedule

The total cost of the research is expected to be self sponsor. The detail estimated costs are
depicted by the following schedule.

S.N Activities Unit of Unit /rate Quantity Total cost

Measure (Birr)

1 Secretarial, stationary and package overall 5,000.00

printing
2 Transportation overall 1,000.00
3 Telephone overall 700.00
4 miscellaneous overall 1,000.00
Total 7,700.00

7 References

1. Abdela, S (Dr.). (2018) The 1st Interest Free banking summit, 28 October, ECA,
Ethiopia
2. Abdulazi, B. Islamic Finance in Keny (2013). REDmoney Group: Dubai
3. APA News. (2018) promising Growth Prospects for Islamic Finance in 18 African
Countries-Report. Journal du cameroun.com: Cameroun.
4. Baron, S.W. (1958) a Social and religion History of the Jews. New York: Columbia
University Press.
5. Global Islamic Finance Report (2012). London: Edbiz consulting Limited
6. Hastings, J. (1921).Encyclopaedia of Religion and Ethics. Edinburgh:T & T Clark.
7. Homer, S. (1977) a history of Interest rates. New Brunswick Rutgers: University
press.
8. J.M. Keynes (1936). General Theory of employment interest and money. UK:
Palgrave Macmillan.
9. MA al-jarhi and M iqbal. (2001). answers to some frequently asked questions. Islamic
Development Bank: IRTI.
10. The Jewish Encyclopaedia (1905). New York: Ktav publishing House Inc.
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