WOLLO UNIVERSITY

SHOOL OF LAW

LLM PROGRAM ON BUSINNESS LAW

COURSE: - ADVANCED LEGAL RESEARCH

RESEARCH PROPOSAL ASSIGNMENT ON ATITLE:

THE PRACTICE OF INTEREST FREE MICRO FINANCE INSTITUTION
IN AFAR:
CHALLENGES AND PROSPECTS

BY: REDWAN ALI AHMED

ID.NO. SGSS/1004/2011

SUBMITTED TO: ZELALEM ESHETU (PROFESOR OF LAWS)

SEPTEMBER, 2019 G.C

DESSIE, ETHIOPIA
 1. BACK GROUND OF THE STUDY

Financial deepening and broadening is one of the crucial factors for financial development.
Financial development is the major determinant of fostering economic growth1. One of the
methods to access financial sector to the poor is through establishing micro finance institutions.
The role of micro finance institution is very important in poverty alleviation for low income
segment of the society and who have unable to access other modes of financial sectors 2. In
Ethiopia the essence of formal micro finance institution come into exists after the issuance of
proclamation number 40/1996 based on which National bank of Ethiopia have been licensed
micro finance business since 1997.3

In Ethiopia micro finance more prevalently found in three regions of the country namely
Amhara, Tigray and Oromiya which they take the lion share 4.The pastoralist areas of Ethiopia
has been marginalized for micro finance access where problems have been aggravated by the
recurrent and complex natural calamities such as drought, flood, disease and so forth. More than
any other pastoral groups in Ethiopia, Afar pastoralists have been neglected in terms of
development programs5 particularly in accessing micro finance institution considering the life
style of the society. According to central statistics agency (2007) the indigenous people of Afar
is 100% Muslim and when it is compared dwellers of Afar region about 98% of the people is
Muslim. Therefore, it is indispensible that the poor in Afar observant to Islam requires interest
free micro finance other than conventional financial system including micro finance. Due to
unidentified reasons accessing micro finance which coincides with the lifestyle of the poor in the
region had not been introduced until 20186.

1
Thorsten Beck, Samuel Munzele Maimbo, Issa Faye, Thouraya Triki ,Financing Africa : Through the crisis and
Beyond, The International Bank for Reconstruction and Development / The World Bank, 2011 p.9
2
Santosh Kumar Karn Challenges and Opportunities of Microfinance in Nepal, University Department of
Commerce and Business Administration, T.M. Bhagalpur University, Bhagalpur, India,
www.ijssm.org/&http://nepjol.info/index.php/IJSSM/issue/archive
3
Yigrem Kassa, Regulation & Supervision of Microfinance Business in Ethiopia: Achievements, Challenges &
Prospect (To be presented at International Conference on Microfinance Regulation, March 15-17, 2010,Bangladesh,
Dhaka) p. 29
4
Ms. Rahma Hersi,in association with HESPI Staff,the prospects and challeges of Islamic micro finance in the
IGAD Region,may 2018 p.16
5
Yayneshet Tesfay and Kelemework Tafere, Indigenous Rangeland resources and Conflict Management
by the North Afar Pastoral Groups in Ethiopia, A Pastoral Forum Organized by the Dry lands
Coordination Group (DCG) in Ethiopia, Mekelle, Ethiopia, 2004 p.5
6
Ibrahim Ramadan, Afar micro finance legal expert

1
In Ethiopia interest free banking which is one widow service in the commercial bank has been
introduced after the issuance of National Bank of Ethiopia directive no SSB 51/2011the
directives to authorize the business of interest free banking. Following this though, the
government of Ethiopia or National Bank of Ethiopia has not yet regulated specific legal frame
work and regulatory system that govern the issue of interest free micro finance 7, in Afar such
type of micro finance institution has started to perform8.To promote this interest free micro
finance institution and to make it instrumental to serve the marginalized and religiously
observant Islamic poor, it requires to provide sound legal and regulatory framework. Specific
legal frame work to such type of micro finance institution help to be transparent, build
confidence to the client, suitable to regulate and supervise, and may help to perform its activity
within the legal frame work to maximize profit. The present study paper tries to investigate and
explore the practice of the Afar micro finance institution (interest free) and legal frame work and
regulatory system. Furthermore, the paper will assess how regulation and supervision of this
financial system performed practically and its sufficiency.

2. STATEMENT OF THE PROBLEM

Interest free micro finance is the sharia based profit losing and sharing mechanism which adheres
the principles of Islamic economy with balanced growth through poverty alleviation. Its goal in
many ways is similar to Islamic banking. The products and services of Islamic micro finance are
based on the sharia principles like micro credit (Qard), trustee financing (mudaraba), partnership
(musharaka), leasing (Ijarah) and cost plus sale (mudarabah). The products and services have
provided interest free unlike conventional financial system.9

The emerging of interest free micro finance in Ethiopia requires policy and legal frame work. In
the country though, interest free micro finance practically has performed in two regions in recent
times (Afar 2018 and Somali 2011)10, there is no or at least sufficient legal framework which

7
Ms. Rahma Hersi,in association with HESPI Staff,the prospects and challeges of Islamic micro finance in the
IGAD Region,may 2018 p.24
8
Supra note 6
9
Mr. Muhammed Shafi.M.K , Dr. M. Ravindar Reddy ,ViabilityandPractices of Interest-Free Microfinance in the
State of Kerala: An Analytical Study Based on Customers’ Perceptions towards Products, Services and Operational
Methods, 15 July 2019 India p. 4 ,IIMB Management Review (2019), doi:https://doi.org/10.1016/j.iimb.2019.07.006
10
Supra note 6 and Abebe ambachew, Kassahun Mamo and JemalMohammed,Inclusive Financial Services in
Pastoral Areas of Southern Oromia, Afar, and Ethiopian Somali Regions: Opportunities, Implementation
Challenges, and Prospects ,Haramaya University, Haramaya University college of law, 2017, p. 143 cum Mohamed

2
regulate the activity. Interest free micro finance to accommodate growth opportunity as well as
to afford challenges face competing with the market requires legal and regulatory frame work
which is/ are in line with sharia frame work. The legal frame work may be recognized either by
adopting international standards and best practices or regulating a specific rule and
11
regulation . Micro finance business proclamation 626/2009 does not explicitly provide about
interest free micro financing. NBE which has a power to regulate directives regarding financial
activities has not yet issue a rule regulating interest free micro finance. So, there is a clear legal
lacuna which regulates interest free micro finance in Ethiopia.

To sum up, in default there is a practice of interest free finance to alleviate the financial problem
of the observant Islamic poor in Afar region. However, there is no or at least sufficient legal
frame work and regulatory system specified to interest free micro finance. This initiates me to
study the issue.

3. Literature Review
Micro finance institution is crucial to alleviate poverty and improving food security. Interest free
micro finance in its part plays a great role to eradicate the problem of Muslim poor society who
have not access and want to use conventional financial system due their religious affiliation.
When such financial institution (interest free) provide to the society significant legal frame work
should be regulated. This is to enable it effective and sustainable. In Ethiopia, though many
literatures exist on conventional Microfinance system, unfortunately there is no or scanty work in
interest free micro finance so far. Particularly in the sense of legal research the writer could not
find any literature. There are some literatures like Abebe Ambachew, Kassahun Mamo and Jemal
Mohammed, though the context aimed at micro finance institution in general 12. Still Ms. Rahma Hersi,in
association with HESPI Staff motivated by the chance of interest free micro finance in IGAD region
without investigating in detail articulate the legal vacuums in the region to effectively perform the
financial system. This article later tried to indicate scanty of legal frame work in general term13.

Rashid Abdikadir,micro finance institutions and women endowment: Somali micro finance institution, a theisis for
fulfilling MA in accounting and finance,college of business and economics ,Addis Ababa University, june 2018,p.2
11
Infra note 14 p.29
12
Abebe ambachew, Kassahun Mamo and JemalMohammed,Inclusive Financial Services in Pastoral Areas of
Southern Oromia, Afar, and Ethiopian Somali Regions: Opportunities, Implementation Challenges, and Prospects
,Haramaya University, Haramaya University college of law, 2017, pp. 143 -150
13
Rahma Hersi,in association with HESPI Staff,the prospects and challeges of Islamic micro finance in the IGAD
Region,may 2018 p.9,17,an 24

3
Internationally according to a literature written by Islamic Financial Services Board the prevailing legal
and regulatory system of a country determines the structure and type, as well as the means of
implementation, of its legal and regulatory framework for Islamic finance. Two distinct approaches have
been observed. One is setting up a comprehensive, separate legal and regulatory framework for Islamic
finance that is parallel to and compatible with the existing laws and regulations for conventional banking
and finance14. This implies that a country may choice regulating interest free micro finance separately
from conventional micro finances. The other is retaining the existing conventional financial framework
and taking incremental steps to accommodate the specificities of Islamic finance, which leads to a gradual
extension and differentiation of the legal and regulatory system over time 15. According to this approach a
country may declare a rule absolving both conventional and interest free micro finance and gradually
differentiate the regulation system. In the case of Ethiopia proclamation number 626/2009 does not
clearly imply which model it follows to regulate interest free micro finance. The body responsible to
manage financial business (National Bank of Ethiopia) has not yet issued a directive to rule the financial
business. Furthermore there is no literature in the country which assesses the issue in the present paper
consideration. This shows that the writer of the present paper will be tested by lack of related literature.

In general lack of specific legal frame work for interest free micro finance in Ethiopia can be
easily envisaged from the work of Ms. Rahma Hersi,in association with HESPI Staff. From this it is
possible to identify in Ethiopia there is a problem of specific legal frame work for interest free micro
finance, it is not clear how this financial system has regulated and supervised, what is the remedy for
financial dispute and challenges and prospects of interest free financial system is not studied in Ethiopia.
Therefore, this research is intended to fill these gaps and contribute for further researchers.

4. Objectives of the Study

4.1 General Objectives

The general objective of the study will be to assess the legal frame works of interest free micro
finance in Ethiopia and to explore law and the practice in the regional state of Afar.

4.2 Specific Objectives

.Hence, the precise objectives which specifically answer the general propose statements are
decomposed as follow:

14
Islamic Financial Services Board, PROSPECTS AND CHALLENGES IN THE DEVELOPMENT OF ISLAMIC FINANCE FOR
BANGLADESH, Kuala lumpur, Malasia, 2014, p. 31, www.ifsb.org.
15
Ibid

4
  Examine Ethiopian legal frameworks regulating interest free micro finance
 Investigate the sufficiency of legal frame works for interest free micro finance
 To portray the practice of interest free micro finance in the study area.
 To identify the practical challenges interest free micro finance
 To assess international trends regulating interest free micro finance to be a
lesson for Ethiopia.

5. Research Questions
5.1 general research Question
The main question of this study is what are the existing legal frameworks, the vacuum and
the practice for doing interest free micro finance and challenges and prospects
5.2 specific research questions
 what are legal frame works regulating interest free micro finance
 whether there is sufficient legal frame work
 how the existing micro finance institutions perform their activity
 what are/is the challenges and prospects of interest free micro finance
 Are there international experience regulating interest free micro finance
6. Scope of the study
The research aimed at examining the legal frame works available in Ethiopia to perform
interest free micro finance business. It also identifies the practices of the business. The
research needs the issue of legal framework interest free micro finance business. It does
not intend identify how interest free micro finance business serve the society and make
profit. To do so the research assess the practice of interest free micro finance business in
Afar region Awsi rasu (zone 1) Semera logiya , Dubti and Aysaita woredas in which the
prevalence of interest free micro finance business is relatively dense and suitable for the
researcher.
7. Relevance of the Study
In the first instance as far as the researcher is concerned this is the first study on the issue
it can be serve as stepping stone for conducting further research due on this issue. More
than any other, since this study will explore the practice and legal framework of interest
free micro finance business it help the existing interest free micro finance business to

5
 perform its activity transparently. It pressures the government of Ethiopia to regulate
specific rule and NBE to issue rule necessary to interest free micro finance for
sufficiently regulating and supervising it. However, the major beneficiary of the research
will be the researcher himself for that it is first experience which will pave the way for
him to transform in to a qualified researcher if it undertake in a qualified manner.
8. Research methodology
8.1. Design of the study

To cover the research objective and questions the research will employ both Qualitative and
quantitative methods. The research employs quantitative method to analyze books, journals,
articles, international statutory rules and standards, national policies and legal frame works. This
method also serves to use open and close ended questioners to some employees of interest free
micro finance institutions. To investigate deeply the practice of interest free micro finance the
research will employ qualitative method. In this method interview (standardized /
unstandardized) to officials and legal expert of interest free micro finance institutions, to
religious leaders of the region and if deemed necessary to officials of NBE will be employed.

8.2 participants of the study and sampling technique

Officials and some employees of interest free micro finance institutions in Semera logiya , Dubti
and Aysait woredas and employees of these institutions, the legal expert/s of the main interest
free micro finance institution and regional religious leaders of the region will be the participant
of the study. Also if the researcher opts necessary NBE officials will be participant.

The objective and questions of the research is not to generalize universally rather it requires deep
investigation and analysis about the legal framework and practice of interest free micro finance.
Therefore what will be the best sampling is non-random. The researcher will use this sampling
method intentionally for that qualitative method has applied. Purposive sampling is employed
since officials of interest free micro finance institutions, legal expert and regional religious
leaders who have special knowledge are included. Regarding on the sample size since the
research approach is qualitative, the size of qualitative sample is considered sufficient when the
criterion of redundancy is met.

6
8.3 data source and gathering method

The data collection depends on both primary and secondary sources. For collecting and gathering
primary data, interest free micro finance institutions officials, legal expert of the institution and
regional religious leaders will be investigated through structured, semi structured and
unstructured interview accordingly. It also is analyzed from laws. Secondary data will be
gathered from standards, principles, articles, internet sources, Books, journals and other
documents.

8.4 Data analysis

The collected and organized data will be analyzed through multiple steps of
analysis/quantitative, qualitative and mixed/ and interpreted in a deep way in order to give a
narrative understanding to the study. The research output will be presented in an explanatory
way. Since the research approach in this study is a qualitative approach, there will be no need
of to employ statistical data analysis methods.
9. Limitation of the Study
In conducting the research, the researcher may encounter the following challenges:
 Except of giving some information which is not deep, official or concerned leaders may
not give full information in what way the interest free micro finance implemented. i.e.
whether there is clear and sufficient legal frame work and regulation system.
 It will be difficult to access related studies particularly in Ethiopia.
 Shortage of time to exhaust all the interviewee and lack enough budget are expected.
 Individual on the area may not be willing to give information as they are exhausted of
similar interviews before on other issues.
 Lack of facing documented data on how the financial activity performed may be
challengeable.
10. Organization of the Study
This research paper will have five chapters. Chapter one deals about the introductory parts of
the research paper as to why and how the research is to be conducted. Accordingly,
introduction, background of the study, statement of the problem, objectives of the study,
research questions, scope of the study, significance of the study, and limitations of the study
will be included.

7
 Chapter two of the research paper deals about the conceptual framework of the title.
Accordingly, the notion and concept of interest free micro finance will cover in this chapter.
 Chapter three of the research will explore the modes, activities, performance and practice of
interest free micro finance based on experience from international perspectives focusing on
legal framework.
 Chapter four will provide critical analysis about the Ethiopian context of interest free micro
finance and its practical implementation in Afar with its challenges and prospects.
 The final chapter will draw conclusions and recommendations based on the outputs of the
research.
11. Axiological consideration

In any research study there should be a balance between pursuit of seeking research inputs and
the rights of those participants of stakeholders being interviewed. Hence, this research study tries
to make a compromise between these and peoples involved will be treated with respect.
Accordingly, the details of the research will be described to the participants and thereby their
informed consent will be gained. Thus, to conduct the research effectively, the researcher will
follow and try to achieve the following ethical considerations of an effective researcher.
 During the data collection procedure and after that confidentiality of the participants will
be kept and highly considered and anonymity will be secured.
 The researcher will inform the key respondents and officials about the objectives of the
study.
 The researcher ascertains that the research will be conducted with honesty and integrity.
As a result, data analysis and interpretation will not be artificially designed and
manipulated.
 The researcher will reflect his personal reflection without any bias particularly free from
his religious affiliation to draw useful conclusion.
 The researcher will give due credit for others ideas and words by proper use of citation.
So, the researcher will not plagiarize any work of others and respect the rules and
regulations of the university.
 The researcher will acknowledge the contributions of persons and institutions properly.

8
  The researcher assures that the information collected from participants will be based on
their free and full consent. Hence, the researcher will be told of their rights to join, not to
join, and to withdraw at any time of the research

BiBLIOGRAPHY

A. Legislations

1. A proclamation to provide for licensing and supervision of the business of micro

financing institutions, proclamation No. 40/1996, Federal Negarit Gazeta,2nd year No 30 ,
Addis Ababa 1996.

2. Micro Financing Business Proclamation, Proclamation No 626/2009, Federal Negarit

Gazeta, 15th Year No.33 Addis Ababa 12th May, 2009
3. National Bank of Ethiopia directive, Licensing and Supervision of Banking Business
Directive to Authorize the Business of Interest Free Banking, Directive No SBB/51/2011.
B. Journals, books And websites
1. Abebe ambachew, Kassahun Mamo and JemalMohammed,Inclusive Financial Services
in Pastoral Areas of Southern Oromia, Afar, and Ethiopian Somali Regions:
Opportunities, Implementation Challenges, and Prospects ,Haramaya University,
Haramaya University college of law, 2017
2. Islamic Financial Services Board, PROSPECTS AND CHALLENGES IN THE
DEVELOPMENT OF ISLAMIC FINANCE FOR BANGLADESH, Kuala lumpur,
Malasia, 2014, www.ifsb.org

3. Mohamed Rashid Abdikadir,micro finance institutions and women endowment: Somali

micro finance institution, a theisis for fulfilling MA in accounting and finance,college of
business and economics ,Addis Ababa University, june 2018
4. Mr. Muhammed Shafi.M.K , Dr. M. Ravindar Reddy ,ViabilityandPractices of Interest-
Free Microfinance in the State of Kerala: An Analytical Study Based on Customers’
Perceptions towards Products, Services and Operational Methods, 15 July 2019 India
,IIMB Management Review (2019), doi:https://doi.org/10.1016/j.iimb.2019.07.006
5. Rahma Hersi,in association with HESPI Staff,the prospects and challeges of Islamic
micro finance in the IGAD Region,may 2018

9
6. Santosh Kumar Karn Challenges and Opportunities of Microfinance in Nepal, University
Department of Commerce and Business Administration, T.M. Bhagalpur University,
Bhagalpur, India, www.ijssm.org/&http://nepjol.info/index.php/IJSSM/issue/archive
4. Thorsten Beck, Samuel Munzele Maimbo, Issa Faye, Thouraya Triki ,Financing Africa :
Through the crisis and Beyond, The International Bank for Reconstruction and
Development / The World Bank, 2011
5. Yayneshet Tesfay and Kelemework Tafere, Indigenous Range land resources and
Conflict Management by the North Afar Pastoral Groups in Ethiopia, A Pastoral Forum
Organized by the Drylands Coordination Group (DCG) in Ethiopia, Mekelle, Ethiopia,
2004
6. Yigrem Kassa, Regulation & Supervision of Microfinance Business in Ethiopia:
Achievements, Challenges & Prospect (To be presented at International Conference on
Microfinance Regulation, March 15-17, 2010,Bangladesh, Dhaka)

10