Why Ethiopia wants to develop Islamic finance

Ethiopia’s central bank aims to develop Islamic finance to help expand financial access and inclusion, part of wider government efforts to mobilize domestic resources to diversify its economy, a central bank official said.

The landlocked country has one of the highest economic growth rates in Africa, but relies heavily on an agricultural sector that employs three-quarters of the workforce and contributes to around 80 percent of exports.

The government wants to industrialize its economy but this requires sustaining investment rates of almost 40 percent of GDP over the next five years, said Getahun Nana, Vice Governor of the National Bank of Ethiopia.

“This can only be achieved if the financial sector, particularly the banking industry, can play significant role in mobilizing desperately needed savings from domestic sources.”

Islamic finance could help in this endeavor, so the central bank is conducting a study to determine the demand for sharia compliant financial products in a country where around a third of the population of 100 million is Muslim.

The study would help determine what proportion of Muslims are excluded from the financial sector, Nana said in a speech during an Islamic finance conference held this week in neighboring Djibouti.

“If this is identified to be a barrier, a specific and enabling regulatory framework will be developed so as no one is excluded from obtaining financial services because of religious reasons.”

Islamic finance is still new in Ethiopia, despite the government allowing financial institutions to offer such products back in 2008.

Currently eight out of 18 financial institutions offer sharia compliant products via Islamic windows but they have so far mobilized less than 1 percent of total deposits, Nana said.

“Sharia compliant financing facilities that these banks provided to their customers are even very much insignificant.”

 

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