The Performance of Islamic Window in Ethiopian Conventional Banks that Operate an Interest Free Banking Service


Bachelor Thesis, 2022

29 Pages


Excerpt

TABLE OF CONTENTS

ABSTRACT

ACKNOWLEDGEMENT

LIST OF ACRONYMS

LIST OF TABLES

CHAPTER ONE
1. INTRODUCTION
1.1. Background of the study
1.2. Background of the commercial bank of Ethiopia
1.3. Background of Cooperative Bank of Oromia
1.4. Background of Awash Bank
1.5. Background of Bank of Abyssinia
1.6. Statement of problem
1.7. Research questions
1.8. Objectives
1.9. Significance
1.10. Limitation

CHAPTER TWO
2. Literature review

CHAPTER THREE
3. Methodology
3.1. Analysis

CHAPTER FOUR
4. FINDINGS
4.1. Financing Activities
4.2. INVESTMENT ACTIVITIES
4.3. NUMBER OF ACCOUNT HOLDERS

CHAPTER FIVE
5. CONCLUSION
5.1. Suggestion

BIBLIOGRAPHY

ABSTRACT

This study aims to examine the performance of the Islamic window in Four Ethiopian conventional banks, the banks is chosen base on their financial statements which ranked this four higher than others with an Islamic Window in terms of their net profit. The four include Commercial Bank of Ethiopia, Cooperative Bank of Oromia, Bank of Abyssinia and Awash Bank. The government of Ethiopia permitted the interest free banking service in 2013 and fully fledged Islamic Banks in 2019. Between 2013 to 2019 ten commercial banks open Islamic window and operate side by side with other conventional services. The study of this paper, therefore asses the growth of this Islamic window and performance based on deposits attracted, financing operated and investment over taken. The study would aim to use descriptive analysis based on mainly report of the four banks chosen and also other relevant gathered sources.

Keywords: Islamic window, conventional banks of Ethiopia, performance of interest free banking service, commercial bank of Ethiopia, cooperative bank of Oromia, Awash Bank, bank of Abyssinia

ACKNOWLEDGEMENT

I praise and thank Almighty Allah who gave me courage, determination and hope of bringing meaningful change to me, to my family and to the Ummah as I embark on a journey of seeking beneficial knowledge aiming at improving the Islamic Economics, Banking and Finance field which is in its infant stages, at this stage the field require more knowledgeable human resource to move it to a next level which with the help of Almighty Allah I am striving to be part of those who will take the field to the next level.

I thank International Open University for their support in giving me the scholarship to study at absolutely no cost, especially Brother Hamisi (Kenya IOU representative) who through him I secure this great opportunity. I also send my gratitude and appreciation to Dr. Bilal Phillips who made this scholarship available to us through his program of providing 1 million scholarships to African needy students as well as in other developing nations. I thank also Brother Nissar Ahmad, my research supervisor for his advice and guidance during research period. Lastly I appreciate the efforts of my family for their support throughout my study period and also during my research writing. May Allah (Subahanahu wa taala) reward in a special way deem fit for His majesty and dominions who in one way or the other helps in my journey of seeking authentic Islamic knowledge.

LIST OF ACRONYMS

Abbildung in dieser Leseprobe nicht enthalten

LIST OF TABLES

TABLE 1: IFB deposits and year on year percentage change

TABLE 2: IFB INVESTMENTS

TABLE 2.1: CBO IFB INVESTMENT BY SECTORS (BILLIONS)

TABLE 2.2: AWASH IFB INVESTMENT IN VARIOUS SECTORS 2019-20

TABLE 2.3: AWASH IFB PRODUCTS AND INVESTED AMOUNT 2020-21

TABLE 2.4: AWASH IFB INVESTMENTS IN VARIOUS SECTORS 2020-2

TABLE 2.5: BOA IFB INVESTMENTS 2020-2021

CHAPTER ONE

1. INTRODUCTION

This chapter is organized in ten parts providing background information of the research which is to evaluate the performance of Islamic window in Ethiopian conventional banks that operate interest free banking service. The first part is to provide us with a background of the study and part two to five is the background of the Ethiopian conventional banks that to be assessed in this research. Statement of problem, Research question, Objectives, Significance and limitation would be addressed in part six, seven, eight, nine and ten respectively.

1.1. Background of the study

Interest free banking service operate in compliance with Islamic principle, The Islamic Shariah prohibit interest on loans which was the foundation of conventional banking operation. Allah (Subhanahu Wa Taala) explicitly prohibit interest in Quran and warn the faithful of war with Him and His messenger, He said, “O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are indeed believers. If ye do it not, take notice of war from Allah and His Apostle: but if ye turn back, ye shall have your capital sums: deal not unjustly, and ye shall not be dealt with unjustly. If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew. And fear the Day when ye shall be brought back to Allah. Then shall every soul be paid what it earned, and none shall be dealt with unjustly (Quran 2:278-281).

Similarly, prophets Muhamad was reported to have cursed people who engage themselves in Riba, “Jabir said that Allah's Messenger (may peace be upon him) cursed the accepter of interest and its payer, and one who records it, and the two witnesses, and he said: They are all equal.” (Sahih Muslim, Book 010, Number 3881). Muslims therefore require a financial service that is free from this prohibition.

Though the foundation of governing Islamic banks was laid by the prophet (SAW) where all the Islamic bank models today are based on all the economic transaction he either directed or approve, it took over 1300 years for the first Islamic bank to be established, Mit Ghamr was the first Islamic Banks which was instituted in 1963 in Egypt. This does not mean that Muslims were excluded from economic activities before Mit Ghamr, Many Muslims were traders and the need for safe keeping didn’t arise in Islam because of the norms, laws and values of protecting private property in Shariah.

But during the time of Abbasid Era around 913 AD, the Islamic government instituted what is known as diwan al-jahabidhah literally a financial clerk conducting almost all modern banking functions, this helps the Islamic empire flourish during the triangular trade between Africa, Europe and Asia up until 12th century where the empire slowly fall due to constant attack from Crusaders, Mongols and Tartars, internal rivalry, erosion of Islamic culture and prolonged Turco-Persians war. From here the development of Islamic banks enters the period of stagnancy as many Islamic states fall under colonization. Later, after colonization an attempt to revive it was undertaken in Pakistan which didn’t last for a long time due to grievances of the depositors against the services fee charged by the bank, then After, Mit Ghamr was founded till it stops its operation around 1967 due to rivalry with conventional counter parts which dominated the country for a longtime, they politically instigated the authority against it and operation was halted.

Around 1963 same time with Mit Ghamr, the Tabung Haji( Pilgrims fund corporation) established in Malaysia to help Muslims to save for pilgrimage, In the year 1971, another Islamic Bank Nasser Social Bank instituted in Egypt for financial inclusions of poor, in 1975 Islamic governments from different Islamic countries form Islamic Development Bank in Jeddah, Saudi Arabia to serve the growth of the Muslim nations, followed by Dubai Islamic Bank in Dubai, UAE which was the first Islamic commercial banks. Since then the concept of Islamic banks expanded throughout different countries, In Pakistan all conventional banks were directed to have Islamic window beside their conventional operation in 1977 aiming to face out interest slowly.

Muslim population in Ethiopia accounted for a third of Ethiopian population according 2007 census, with a country of over eighty million then, this is a huge population that was excluded from the financial services that was in line with their faith. Since the first bank was established in Ethiopia in 1905 (Harvey p. 2) up to the year 2013 when the operation of Islamic window was permitted, Some Muslims were forced to use conventional model of financing, saving and investment, whereas others were totally excluded from the financial services for a century. This exclusion was evident as many customers open an account when the window was established by the commercial bank of Ethiopia. Within a few years, the total number of account holders of the Islamic window of Commercial bank of Ethiopia grows from 105,453 in 2015 to 893,661in 2018 with an average growth rate of 126% per year. (Abebe, 2019).

1.2. Background of the commercial bank of Ethiopia

CBE is state run commercial bank which was founded by the Ethiopian government, during it is inception in 1942 the bank double it is role as central banks till 1963 where it was divided. The then named Stated Bank of Ethiopia split up into CBE and Central Bank of Ethiopia.

With 20 million Ethiopian birr, CBE was first operationalized in the year 1964 and was merge with Addis Ababa Bank in 1974. The bank was the first in the country to install the Automated Teller Machine, it had 1444 branches countrywide in the year 2019 with a capital of 712.9 billion birr which is approximately ≤14.258 billion US dollars and have over 37000 employees. The bank just recently inaugurated it is new headquarter building which is the tallest building in the whole of Horn of Africa. The building is 209 meters high with a 53 floors constructed on 165,476m² of area.

1.3. Background of Cooperative Bank of Oromia

CBO was established to fill the gaps between the have and have not, it was meant to bridge the rifts that excluded rural populations especially farmers and micro enterprises owners from accessing the financial service. The rural populations and micro enterprises owners opt to use traditional ways of saving and loaning each other through a rotational basis method, where they form groups and each member contribute a particular amount weekly or monthly and is given to one of their own. This informal ways of financing themselves was inadequate and they are a greater need that led to the formation of cooperative unions, to finance it, is what led to the birth of Cooperative Bank of Oromia owned by the cooperative unions members themselves, individuals and organizations.

The begetter of the bank Haile Gebre Lube came up with an idea of establishing cooperative banks in 2002 believing that the only way to fight penury was through collaboration, it was licensed in 2004 and operationalize in 2005, As of the year 2022 the bank has a total asset of 100 billion Ethiopian birr which is approximately ≤2 billion US dollars, over 567 branches, 8.8 million account holders and over 11500 workers.

1.4. Background of Awash Bank

13th of Feb 1995 the efforts of 486 individuals who contributed together 24.2 million Ethiopian birr with an intention of creating a financial entity bore a fruit, the bank which they name Awash Bank started it is operation officially as all this founding members listed as shareholders.

The bank was able to attract more capital since then and the numbers of shareholders grew to 5400 and owner’s capital accumulated to 10 billion Ethiopian birr which is approximately to ≤200 million US dollars. The bank possessed an asset of 150 billion birr which is approximately ≤3 billion US dollars, with a 660 branches countrywide, the bank is among the leading private banks in Ethiopia and not only that, but also first private banks to surpass a billion returns in the history of Ethiopia in the year 2019.

1.5. Background of Bank of Abyssinia

BOA was created in the year 1996 where the founders vision was to established unified all in one commercial model of the service. The name Abyssinia reflect the moral and bravery which is the prime attributes of the bank under which it is founded. The bank vision of tirelessly working to achieve their vision is in line with their long term plan of becoming the leading bank in East Africa by the year 2030.

The bank integrated in it values the most important business success model; customer satisfaction, the value was highly embodied in the business culture of the bank which was prioritize as the first one. Beside this, integrity, team work and collaboration was also part of the bank values in which the bank is striving to integrate into its daily operation.

1.6. Statement of problem

Since its inception in the year 2013, the Islamic window in Ethiopian conventional banks shows significant growth, from number of customers, amount of deposit to customer financing (Abebe 2019), besides the number of conventional banks offering Interest free banking service increase over the years and reach more than half of all banks in the country (Aman 2019). They also huge potential to reach out to unbanked Islamic customers (Hailu) with a possible further growth of Interest free banking service in Ethiopia.

Interest free banking service have a continued growth, they are need to identify the nature of this growth, it is performance and also if it is shariah compliant. With almost all the Bank offering Islamic window having shariah board (Bank financial statement) with well-known scholars in the country, they are no doubt it wins the trust of customers and therefore having a potential growth.

1.7. Research questions

What is the performance of Islamic Window in Ethiopian conventional banks with focus on Commercial bank of Ethiopia, Cooperative Bank of Oromia, Bank of Abbyssinia and Awash bank chosen as a sample?

1.8. Objectives

To identify the performance and growth of the interest free banking over the last few years with four banks chosen as a sample. Annual reports of all four banks were to be analyzed of the last three years with focus on number of customers, deposit accumulated, investment and financing over taken.

1.9. Significance

The study will contribute towards the body of the existing knowledge of the interest free banking service in Ethiopia and can also be used but not limited to students and researchers for further research in this field. It will also help the chosen banks to overcome their weakness and improve further their strength.

1.10. Limitation

The limitation of this research is that it was conducted for academic purpose. Many factors might not be considered that is necessary for expert’s suggestions, government regulations and follow up recommendations. that is why future research on comprehensive banks that offers Islamic window in Ethiopia might be necessary and useful.

CHAPTER TWO

2. Literature review

Abebe (2019) studied performance assessment of Interest free banking of commercial bank of Ethiopia, he found out that from 2015 to 2018 the number of CBE branches offering Islamic window increase from 340 in 2015 to 952 in 2018 with a percentage growth rate of 48.08%, the number of customers of Interest free Banking service of Commercial bank of Ethiopia grows from 105,453 in 2015 to 893,661 in 2018 with an average growth rate of 126% per year, the number of deposits increase from 1.2 billion birr in 2015 to 9.8 billion birr in 2018 with an average growth rate of 108.2%, Investment financing increase from 38.4 million birr in 2015 to 295.5 million birr in 2017 and decline to 185.5 million birr in 2018 and the bank made profit of 1.3 million birr in 2016, 15.1 million birr in 2017 and 11.3 million birr in 2018 with a loss of 2.9 million incurred in the year 2015. The study concluded that that the performance of Interest free banking service of CBE shows growth including the profitability performance.

Aman (2019) analyze Interest-free window banking and finance in Ethiopia, this study aims to study the expansion of the window model and the its performance. The study find out that the number of banks offering Islamic window increase continuously between 2013 to 2018 in Ethiopia, out 19 commercial banks, 10 opened interest free banking services within the said five years, the deposits service dominate the IFB service that made the sectors heavily relying on it making billions birr idle, the financing service of the IFB is inadequately indulge in by the banks but generally study conclude that Interest free banking service has a bright future in the country with all parts of it show tremendous growth.

Hailu (2020) studied prospects and challenges of interest free banking in Ethiopia, the study analyzes descriptively their sources and indicated that Islamic finance has huge potential in Ethiopia to explore unbanked Islamic customers, high level needs and profitability of the window itself. The study conducted also the deposit collected and income generated by the three banks which is commercial bank of Ethiopia, cooperative bank of Oromia and Oromia International bank (Now named Oromia Bank) for the year 2018-2019 showing significant growth in the amount of deposits collected and income generated.

CHAPTER THREE

3. Methodology

The study would use mainly quantitative research method with focus on descriptive analysis of the annual reports of the four chosen bank, three years’ performance data were to be analyzed of all four chosen banks with focus on number of branches offering Islamic window, number of customers do window have, amount of deposit, amount of bank financing and investment, income generated from the financing and investment and profit or loss incurred.

The results of this analyses are to tabulated for all four banks, description of it is growth or decline are to be outlined in order to conveniently convey the finding of this research.

3.1. Analysis

I have done a general comprehensive study of financial analysis of the four chosen banks, I did financial statement analysis and its expounded notes; the emphasis was given to solvency, capital structure, liquidity, forecasting, profitability, operating performance, asset utilization, return on invested capital and cash analysis. Tabulation and graphs is inserted in all places really necessary to do so.

[...]

Excerpt out of 29 pages

Details

Title
The Performance of Islamic Window in Ethiopian Conventional Banks that Operate an Interest Free Banking Service
Course
Islamic Economics Banking and Finance
Author
Year
2022
Pages
29
Catalog Number
V1254203
ISBN (Book)
9783346693624
Language
English
Keywords
performance, islamic, window, ethiopian, conventional, banks, operate, interest, free, banking, service
Quote paper
Guyo Golicha Huqa (Author), 2022, The Performance of Islamic Window in Ethiopian Conventional Banks that Operate an Interest Free Banking Service, Munich, GRIN Verlag, https://www.grin.com/document/1254203

Comments

  • No comments yet.
Read the ebook
Title: The Performance of Islamic Window in Ethiopian Conventional Banks that Operate an Interest Free Banking Service



Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free