September

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Policy Analysis on Ethiopia Interest Free Banking (IFB) Directive

By Zaineb Sefiani

Prepared for Mercy Corps

 Table of Contents
LIST OF ACRONYMS 3

EXECUTIVE SUMMARY 4

I - DIAGNOSIS 5
STATEMENT OF PURPOSE 5
REVIEW OF CURRENT POLICY 6
LEGAL FRAMEWORK 6
WHY SHOULD NBE REVISE THE EXISTING IFB DIRECTIVE? 10

II - ANALYSIS 12

III - RECOMMENDATIONS AND COURSE OF ACTION 18

IV – IMPLEMENTATION 21

APPENDIX 22
APPENDIX 1: BENCHMARK OF RELEVANT COUNTRIES 22
1.1 PAKISTAN 22
1.2 SOUTH AFRICA 23
1.3 KENYA 24
1.4 EGYPT 25
1.5 SUDAN 27
1.6 INDONESIA 28
1.7 OMAN 29
APPENDIX 2: INTERNATIONAL REGULATING BODIES 30
2.1 INTERNATIONAL FINANCIAL SERVICES BOARD (IFSB) 30
2.2 ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL INSTITUTIONS (AAOIFI) 31
APPENDIX 3: SAMPLE OF IFB CURRICULUM FOR BUILDING CAPACITY OF TRAINERS IN ETHIOPIA32
APPENDIX 4: ZAKAT 33

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 List of Acronyms

AAOIFI Accounting and Auditing Organisation for Islamic financial Institutions

ADIBE Abu Dhabi Islamic Bank Egypt
AGFUND Arab Gulf Programme for Development
BCO Banking Companies Ordinance
BMI Bank Muamalat Indonesia
CIDA Canadian International Development Agency
CIMA Chartered Institute for Management Accountants
CISI Chartered Institute for Securities and Investments
CBO Central Bank of Oman
FNB First National Bank
GCC Gulf Cooperation Council
IFB Interest Free Banking
IFSB Islamic Financial Services Board
IIF Innovation and Investment Fund
IRB Islamic Rural Banks
MCMO Mudaraba Companies and Mudarabas Ordinance
NBE National Bank of Ethiopia
OIB Oromia International Bank
PRIME Pastoralist Areas Resilience Improvement through Market Expansion
SSB Sharia Supervisory Board
UB United Bank
UNICEF United Nations Children's Fund
USAID US Agency for International Development
VAT Value Added Tax

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 Executive summary

In 2013, the World Bank estimated Ethiopia’s total population at 94.1 million 1 of
which 35% to 40% are Muslims. Up until 2011, no banking products were available
to service the Muslim community. Although the National Bank of Ethiopia (NBE) has
launched an Interest Free Banking (IFB) directive, there is still a need to develop an
adequate legal framework to effectively grow and capitalise on a prosperous IFB
sector. The central premise of this paper is to identify the gaps and challenges of the
current directive. Out in-depth diagnosis shows that despite efforts to develop the IFB
offering, the lack of an adequate legal framework, the scarcity of skilled Islamic
banking professionals and the limited awareness of Islamic finance products have
been hindering progress in this field. To address these problems, the NBE has rolled
out an initial basic directive for IFB. Mercy Corps has sponsored three capacity
building initiatives in Ethiopia, Sudan and the UAE and no actions have been
undertaken to increase the public’s awareness of IFB products.

The objective of this paper is to recommend strategies for:

1. Strengthening the existing directive by suggesting a clear set of products and

services that IFB windows could offer with a particular emphasis on using
internationally recognised standards
2. Defining a training plan to develop skills amongst bankers, lawyers, and other
professionals
3. Increasing awareness of IFB through marketing campaigns

The application of these recommendations will lead to capturing a large part of the
population especially in the untapped pastoralist areas, which are predominantly
Muslim communities.

1
Source World Bank (http://data.worldbank.org/)

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 I - Diagnosis
Statement of purpose

Pastoralist Areas Resilience Improvement through Market Expansion (PRIME) is a five-

year, $52 million USAID-funded initiative designed to support resilience among
pastoralist communities in Ethiopia. One part of the intervention areas of PRIME’s
Innovation and Investment Fund (IIF) is to support Financial Institutions through
technical assistance or grants.

As part of this program, PRIME has been working closely with the NBE and key industry
stakeholders to promote IFB, to build capacity of local financial institutions in order to
increase the volume of transactions, and to improve access to finance for businesses.
PRIME’s main areas of focus include:

1. Supporting NBE to improve the legislative framework for IFB

2. Building the capacity of NBE and other stakeholders along with raising public
awareness
3. Facilitating opportunities for increased investment

In 2008, the Ethiopian Banking Business Proclamation (592/2008) was amended to

include a provision for IFB. In 2011, the NBE issued a directive to authorise the business
of IFB (SSB/51/2011). However, there has been no concrete work conducted for a proper
roll out of these products.

Currently, the directive is very broad and does not provide any specificity in terms of
product lines, rules and regulations to ensure that the products developed by financial
institutions are truly in line with Sharia law. Hence, a review of current policy is needed
to provide viable alternatives to roll out IFB in Ethiopia.

This report will provide an analysis of the current IFB directive (Directive Number
SBB/51/2011). The analysis will also examine other factors, which are outside the legal
framework that need to be taken into consideration for the effective development of IFB
activities in Ethiopia.

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Review of current policy

In order to have a comprehensive understanding of the situation surrounding the current

IFB directive the analysis will include:
1. An assessment of the legal framework of IFB windows
2. An understanding of the level of knowledge and skills among Ethiopian banking
industry professional
3. An evaluation of the level of public awareness of IFB products within the
Ethiopian market

Legal framework

The current directive for IFB (SSB/51/2011) is a 3-page document and includes the
following points:
1. Only IFB windows are permitted, no fully-fledged interest free banks will be
authorised
2. IFB entities need to follow Sharia law
3. IFB windows need to follow the same regulations as the other banks except on the
interest rate, which does not apply

The directive is relatively simple thus leaving a lot of flexibility to the banks offering IFB
products. Given the high level of flexibility, there is no effective control, from a
regulatory perspective, as to what the banks are licensed to offer for an IFB window.

So far, three banks received licenses for IFB windows from NBE:
1. Oromia International Bank (OIB)
2. Commercial Bank of Ethiopia (CBE)
3. United Bank

Legal framework – current practices within IFB windows

Due to the inexistence of relevant legislation, each bank has adopted their own
methodology, models and benchmarks for launching IFB products with little coherence or
commonality in the market.

There are two international regulatory bodies in the Islamic finance industry, which have
been widely used as standard setting bodies and benchmarks for Islamic and IFB
products: the Accounting and Auditing Organisation for Islamic Financial Institutions
(AAOIFI) and International Financial Services Board (IFSB). Appendix 2, details the role
of these institutions and how they have been adopted in other countries.

In Ethiopia, OIB has opted to follow AAOIFI and both NBE and OIB have undertaken
discussions with the IFSB on the possibility of implementing their standards at a national
or institutional level. CBE looked into the UK, South African and Bahrain to develop
their IFB product offering whereas, United Bank has based their products on Pakistan and

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Saudi Arabia. The above shows that the directive seems to be simplistic and leaves too
much room for offering products that may not be aligned with the actual Ethiopian needs.

In their current state, IFB windows do not fully and effectively adhere to Islamic
principles. Article 2.2 of the Ethiopian IFB directive states that IFB business “refers to
banking business in which mobilizing or advancing funds is undertaken in a manner
consistent with Islamic finance principles […]”. Hence, in order to achieve Sharia
compliance, IFB windows need to have an extra layer of governance to ensure that the
principles outlined in the latter article are met.

In Ethiopia, NBE does not currently have internal experts to review and monitor IFB
windows to make sure that they comply with article 2.2.

On the institutional level, only OIB has opted for a Sharia Supervisory Board (SSB)
model. The later is composed of 3 scholars two of whom have been drawn from the
Ethiopian Islamic Affairs Supreme Council. In short, the Ethiopian Islamic Affairs
Supreme Council has sound knowledge in Sharia law but lacks depth in financial
expertise.

So far CBE and United Bank have not sought any Islamic expert advice to develop their
Interest Free product offerings, instead they have relied on Internet desk research. These
banks do not currently have any Sharia board or Sharia advisors. Nevertheless, United
Bank intends to have an advisory board for “Sharia compliance” that will be composed of
financial advisers rather than Sharia scholars, as it prefers to distance itself from the
Ethiopian Islamic Affairs Supreme Council, thus avoiding affiliation with a specific
stream of Islamic viewpoints. In time, these measures may reveal that relying purely on
Internet desk research along with independent financial advisers may conversely affect
their decision-making aptitudes in regards to Islamic finance frameworks. The lack of
regulatory framework on the Sharia compliance question means that the products are at
high risk of not complying with authentic Islamic principles.

Although, the access to Sharia expertise has been very limited, all 3 banks have already
started offering Islamic financial products including current and savings accounts.

Capacity building/Training (knowledge sharing)

Skilled professionals are in short supply in the Islamic finance industry especially in
Ethiopia. With IFB being relatively new, only a limited number of initiatives have been
undertaken. Amongst these Mercy Corps has sponsored exposure trips to Sudan and the
United Arab Emirates to help educate the industry players on IFB. There is a need for
sustainable and continuous capacity building initiatives, which allows the on-going
development of professionals in this sector. Capacity building is at the heart of the
successful implementation and outreach of IFB products. Currently circa 400 branches
offer IFB products. Assuming that at least 5 employees per branch need to have IFB

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expertise, there is a demand for about 2,000-banking officers to have adequate IFB skills
in the next 12 months.

Internally, no training strategy and quality assurance exists. All 3 banks use the same
training model. Senior management, who have gained knowledge through workshops and
readings from the Internet, train staff at local branches.

Furthermore, according to article 6.4 of the Ethiopian Licensing and Supervision of

banking/insurance/micro financing business directive: A bank should “give training to
directors at least once in a year on areas of financial analysis, corporate governance,
applicable laws, regulations and directives, risk management and internal control.” And
the bank “shall file certificate of training of directors with National Bank.” At the
moment, there is no mention of IFB training for those banks with an IFB window or any
reference to who should be allowed to deliver these courses (such as internationally
accredited institutes or locally recognised training companies).

Public awareness

No awareness programs exist to reach out to the Muslim communities in Ethiopia. Prior
to the launch of IFB, customers that did not want to receive interest on their savings
would sign a waiver to the banks because of their religious beliefs. The fact that monies
are deposited in accounts where clients waived their rights to receive interest does not
mean that their deposits were now Sharia-compliant. Since there was nothing to state their
funds were not used for financing projects on an interest basis and/or projects that
contradict with Islamic principles. For instance, the bank may use these monies to provide
loans on an interest basis for a project in the alcohol business.

All three banks with IFB windows stated that clients who have signed the waiver for their
conventional banking account have not yet asked the banks to switch their monies to an
IFB saving accounts. There is no data that explains why this might be the case. The IFB
windows believe that some clients may not be aware that these products exist. None of
the banks have formally informed their clients of the existence of IFB. And none of the 3
IFB windows have undertaken any campaigns to drive awareness among their current or
potential clients.

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 Oromia International Commercial Bank of United Bank (UB)
Bank (OIB) Ethiopia (CBE)

Branches 110 800 95

Branches with Interest 90 200 95

Free banking Services

Number of Interest 15,000 70,000* 1,000

Free banking accounts

Benchmark AAOIFI compliant Relying on AAOIFI Relying on internet

and internet only

Training Internal by own staff Internal by own staff Internal by own staff

Collateral More restricted as Same as conventional Same as conventional

conventional products products products

Technology Not decided yet Temenos Oracle flexcube

Sharia Supervisory Yes (3 scholars) No No

Board

Current Product -Current accounts: -Current accounts: - Current account:

offering Amanah Amanah Wadia
- Saving accounts: - Saving accounts: - Saving account
Wadia Mudaraba Wadia
- Export financing

Expected Product - Mudaraba based

offering investment products

Key challenges - Training and capacity - Training and - Training

building capacity building - Awareness
- Public awareness - Public awareness - Reporting to NBE
- Tax/VAT
- Land ownership
- 20% equity cap
- Zakat
- Takaful

* Data to be confirmed

Table: Data collected directly through interviews with the banks

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Why should NBE revise the existing IFB directive?

1. Growing demand for IFB products: Given the sizable Muslim population in
Ethiopia, there is a need for adequate banking products to serve this segment of
the population.

2. Lack of benchmark and framework for IFB products: The current IFB
directive does not refer to any benchmarks or frameworks that need to be adopted
by financial institutions offering IFB products. The main concern is that the lack
of convention for IFB products creates a risk that the products currently offered
by IFB windows do not comply with Islamic principles. Therefore, there is a need
to standardise the IFB activities and products offered in the Ethiopian market.

3. Lack of Sharia Supervisory board: Having an adequate Sharia Advisory board

guarantees a product is compliant with Sharia principles. In Ethiopia, no directive,
guidelines or authority supervises and authenticates the Sharia validity of an IFB
product. The lack of authority leaves the consumer at risk of not being offered
genuine Islamic financial products. Therefore there is a need to address how IFB
products can be controlled at the product development stage but also monitored
on a regular basis to ensure that they continuously comply with Sharia principles.

4. Issues with other legislations and directives: In some cases conventional

legislations and directives are in direct conflict with prospective IFB products
offerings. These conflicts may cause IFB products to be less competitive or in
some cases make it impossible for IFB windows to launch certain IFB products
unless revisions are made to cater for theses products.
a. Ownership: According to Article 3 of business directive SBB/12/1996,
“A bank may hold shares in a non-banking business only up to 20% of the
company’s share capital and total holdings in such business shall not
exceed 10%”. This article creates a conflict for issuing Musharaka or a
Mudaraba partnership agreement in which a bank could own up to 100%
of a business/transaction at the time of the signing of the contract.

b. VAT on commodities: Commodity Murabaha transactions require that

the bank buys and sells commodities for transactions. Intention behind the
purchase of the commodity is not to own and use the commodity. Instead,
the commodity is sold instantaneously in order to obtain cash. For
instance an IFB saving account may offer returns based on the selling of
commodities as an underlying asset transaction. In Ethiopia, the selling of
commodities is subject to VAT. Hence if launched, these IFB saving
products will be less competitive than conventional equivalent which
would not be subject to VAT.

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 c. Double taxation: In a Murabaha transaction, a product or an asset is
bought by the bank and sold back to the client at a mark-up price. This
poses a double taxation issue for these products or assets.

The above list is not exhaustive. There is a need to vet all the legislation and directives
that are directly or indirectly related to IFB in order to come up with a full list conflicts
that will arise when launching new product range for IFB.

5. Product line: Current legislation issues limit Sharia based products that are
feasible to offer to Muslim population.

6. Manuals and procedures: IFB is relatively new, there is a need to ensure that the
manual and procedure for implementing IFB products are designed in such a way
that they really comply with Sharia principles. Having reviewed some of the
manuals of existing IFB windows, there is a clear need for detailed vetting of these
documents.

7. Capacity Building: Currently, capacity building is mainly done on an individual

institution basis. The 3 banks have confirmed that the trainings are done internally
by staff members that mainly consisted of self-study to develop the material
presented to the branch level staff. The transfer of knowledge is currently limited to
the individual interpretation by these banks. Moreover there is no certainty that the
sources used for developing the internal training material are accurate and
complete. Because of the lack of Islamic financial expertise in Ethiopia there might
be a challenge to find adequate trainers with local knowledge and language skills.
Capacity building initiatives, education and trainings in Ethiopia can be developed
to ensure correct expertise and knowledge is disseminated into the Ethiopian
financial market.

8. Awareness: In the previous section we have identified that there is a lack of

awareness of IFB product among Muslim communities in Ethiopia. It is essential to
reach out and educate the community about IFB product and also to explain that
“IFB” does not mean, “free of charge”.
From a balance sheet perspective an increase of IFB customer base on the deposit
side means that the bank will have more funds available for financing IFB loans.

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 II - Analysis

Following the analysis of the main gaps, issues and challenges of IFB in Ethiopia, this
section presents viable options to the existing legal framework. We will be discussing the
pros and cons of each proposed option.

Legal framework

The introduction of IFB in Ethiopia needs to be supported by adequate legal and

regulatory framework. Overall, there are more or less two prototypes for IBF products,
the Middle Eastern system and the South East Asian system, which frequently is labelled
as the Malaysian system. From a legal perspective, the new policy can either follow the
GCC model or the Malaysian model or have its own model.

AAOIFI
The Accounting and Auditing Organisation for Islamic Financial Instituations (AAOIFI)
was established in Bahrain in 1991 with the objective of providing standards for the
Islamic finance industry. AAOIF protocols can be used as a support to issue standards for
IFB. AAOIFI has 88 standards including 48 Sharia standards, 26 Accounting standards, 5
Auditing standards, 7 Governance standards and 2 Ethics standards. These standards
could be used as a basis for putting together IFB policies in Ethiopia.
AAOIFI has over 200 members in more than 40 countries. Members include regulatory
and supervisory authorities, multilateral agencies, private sector entities, professional
firms and industry associations.
 Examples of countries adopting AAOIFI include: Bahrain, UAE, Jordan,
Lebanon, Qatar, Sudan and Syria.
 Examples of countries with guidelines based on AAOIFI include: Australia,
Indonesia, Malaysia, Pakistan, Saudi Arabia, South Africa and United Kingdom.

AAOIFI standards have introduced greater harmonisation among Islamic finance actors
across the world. The advantage of rolling out AAOIFI-compliant products is that they in
line with internationally recognized standards. The products launched have been
approved, tested and accepted by the Muslim community. AAOIFI standards seamlessly
blend with secular practices. No real disadvantage for complying with AAOIFI standards
have been identified at this stage. Several central banks and monetary agencies from
secular-based countries have heavily relied on AAOIFI standards to develop their IFB
industry.

NBE could also roll out IFB products based on the Malaysian model. This model is also
derived from AAOIFI standards, however their products take a more lenient approach
towards the interpretation of Sharia. Malaysia is one of the leading countries in Islamic
banking and finance; the country has one of the most advanced Islamic banking systems
in the world. The main disadvantage is that the products, which are approved in Malaysia,

12
are not widely acceptable outside South East Asia. Using Malaysia as a model for
developing IFB products in Ethiopia could raise questions from the Ethiopian
communities about whether these product are inherently Islamic.

The last option is to come up with a new set of rules, which are specifically designed for
the Ethiopian market. While this may have the advantage of customizing products to the
needs of Ethiopia, it will entail a heavy workload, without guarantee on how well these
products would be accepted. In this case, NBE could empower the banks by making
them communicate appropriately to the consumer the products’ Sharia compliant
features. This last model will also require a significant amount time and financing to
conduct research and feasibility studies on the specific needs of Ethiopia.

IFSB
The International Financial Services Board (IFSB) was launched in 2002 and serves as an
international standard setting body that provides prudential standards and guidelines for
regulatory and supervisory agencies to ensure soundness and stability of the Islamic
Financial industry including: retail banking, capital markets and Takaful (Islamic
insurance). The IFSB has 13 standards, 5 guide notes, 1 technical note.
As of September 2014, the IFSB comprises of 184 members from 41 jurisdictions,
including 32 members from the African continent. IFSB has 55 regulatory and
supervisory authorities, 8 international/intergovernmental organisations and 121 market
players, professional firms and industry associations. (Source: IFSB)

Several non-predominantly Muslim countries have adopted IFSB rulings including:

China, Hong Kong, Japan, Korea, Luxembourg, Singapore and Thailand.

IFSB Members from regulatory and supervisory authorities in Africa include:

 Djibouti: Banque Centrale de Djibouti
 Libya: Central bank of Libya
 Mauritius: Bank of Mauritius, Financial Services Commission Mauritius
 Morocco: Bank Al Maghrib
 Nigeria: Central bank of Nigeria, National Insurance Commission
 Senegal: Ministry of Economy and Finances Senegal, Banque Centrale Des Etats
de L'Afrique de L'ouest
 Sudan: Central Bank of Sudan, Khartoum Stock Exchange Sudan, The Insurance
Supervisory Authority Sudan
 Tunisia: Central Bank of Tunisia
 Zambia: Bank of Zambia

IFSB Members from private sector, professional firms and industry associations in Africa
include:
 Egypt: Al Baraka Bank Egypt, Faisal Islamic Bank
 Kenya: Chase Bank (Kenya) Limited

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  Nigeria: Ahmed Zakari & Co (Chartered Accountants), Lotus Capital Limited
 South Africa: Oasis Crescent Capital (PTY) Ltd.
 Sudan: Al Jazeera Sudanese Jordanian Bank, Al Salam Bank, Animal Resources
Bank, Bank of Khartoum, Byblos Bank Africa Ltd, Faisal Islamic Bank, Farmer's
Commercial Bank, Industrial Development Bank, Islamic Insurance Company,
Omdurman National Bank, Shiekan Insurance and Reinsurance Co. Ltd, Sudan
Financial Services Company, Sudanese French Bank, Tadamon Islamic Bank

IFSB standards are fully compatible with AAOIFI standards and allow to further enhance
the standardisation of the product offering. According to article 4 of Ethiopia IFB
directive: a bank wishing to carry IFB will need to provide several documents including a
“track record of adherence to prudential regulations, credit discipline, quality of customer
services”. IFSB is the sole international regulatory body offering prudential standards for
the Islamic banking industry.

Adopting AAOIFI and IFSB provides several advantages:

1) IFB windows in Ethiopia can use models of products of existing institutions
2) Consumers can more easily understand products and evaluate their risks and returns
3) Potential for fewer disputes regarding a product being Sharia compliant
4) Favourable tax treatment of products which would have otherwise had a double
taxation due to the nature of IFB products
5) Reduced risk of Sharia arbitrage

Sharia Supervisory Boards or Sharia Advisory board

Two elements should be considered for Sharia compliance:
 Board composition
 Nature of the regulatory framework around Sharia-compliance
The Sharia Supervisory Board usually includes three or more Sharia scholars. The SSB
issues informed legal opinions allowing institutions to provide financial services in a
Sharia-compliant way by reviewing:

1) Product concept description

2) Market conditions
3) Product development team’s views
4) Product development team’s proposal and issue proper legal opinion (Fatwa)

The advantage of a Sharia board is to have a religious expert opinion evaluating a

products’ compliance with Sharia. Moreover, in case of disputes regarding the Sharia
compliance of IFB product, the backing of a ruling from Sharia scholars gives credibility
and legitimacy to these products. However, scholars may be linked to a specific school of
thought, which may or may not be accepted in certain regions in Ethiopia.

The other way of ensuring Sharia compliance is to have a Sharia Advisory Board. It
would be composed of Islamic finance experts, which are not necessarily scholars, but
have gained sufficient Islamic finance expertise to provide expert opinions and

14
recommendations in structuring IFB products. The advantage of Sharia Advisors is that
they do not have any specific affiliation but on the other hand, they are not considered as
a religious authority.

Options would be as follow:

1) National Supervisory or Advisory Board + Supervisory or Advisory Board at the

institutional level (Example Malaysia, Pakistan, Bahrain, Oman, etc.)
2) Supervisory or Advisory Board at the institutional level only (UK, South Africa,
Kuwait, Qatar, etc.)

NBE should decide whether it would like to have a National Sharia Board or leave it at
the institutions level. This type of board at the National level helps preserve secrecy for
banks. Also, as a board it not financially rewarded by commercial entities, no conflicts of
interest can arise from such entities. Therefore having a national Sharia board at the NBE
level would harmonise the product offering. The disadvantage of having a board at the
national level is the potential affiliation with groups of Sharia scholars, which may be
unfavourably regarded by some communities.

Therefore an intermediary solution would be to have a National Advisory Board with an

Interest Free Advisory Firm sitting on the NBE board level.

If the NBE opts for no National Interest Free Advisory Board, the best way to ensure
institutions offer products that are genuinely Islamic is to require them to comply with
certain rules, such as ensuring advisors have experience in both Sharia law and Islamic
financial products, with a diverse board. The advantage of having a sharia board at an
institutional level is the non-affiliation of NBE with a specific group of Sharia Scholars,
while controlling the quality of the composition of these boards. This option, however
presents the danger of conflicts of interest between the Sharia experts and the financial
entities.

The last option is for the NBE not to interfere in the Sharia matters. This option leaves
financial institutions at risk of putting forward products that are non-compliant with
Islamic principles, because of the lack of a board that approves products and vets legal
document, manuals and procedures. It would also require additional scrutiny from NBE,
which will need at the time of launch to verify whether IFB products are Islamic or not.
The IFB windows will need to be more carefully vetted during monitoring and auditing
phases.

Capacity building/Training (knowledge sharing)

We have identified, in the previous section, a lack of skilled Islamic finance experts on a
global basis and this gap is even wider on a local basis in Ethiopia.

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Capacity building can be done in 2 phases. First build skills and knowledge of local
trainers then transfer knowledge from these trainers to the relevant staff members in
Amharic language.

In order to develop skills and knowledge of the trainers in Ethiopia the key is to find the
most appropriate way to provide these trainers with the right skills needed.

Accredited training
One avenue for building capacity is through accredited trainings. Chartered Institute for
Securities and Investments (CISI) has developed the most renowned Islamic Finance
accredited training program. The Islamic Finance Qualification is composed of 9 modules
and is an internationally recognised certification by CISI. Candidates will gain an
accredited qualification upon completion of a 2 hours examination. If trainers are
qualified by IFQ, it means they have reached a certain level of understanding of Islamic
financial products. Moreover the exam is relatively inexpensive compared to other
accredited programs. The registration to the exam costs less than £200. However, given
that the diploma is very broad it may not provide the technical skills needed by local
financial institutions in Ethiopia.

The Chartered Institute for Management Accountants (CIMA) also offers an accredited
Diploma in Islamic Finance, which is composed of 4 modules: Islamic commercial law,
Islamic banking & Takaful, Islamic capital markets and Islamic Accounting. For the
Ethiopian market only 3 certificates would be relevant: Islamic commercial law, Islamic
banking & Takaful, and Islamic Accounting. CIMA is more comprehensive than IFQ,
however the price of enrolling to CIMA course is quite high. Each module costs £275 for
self-study and even more for enrolling in a class.

In house training:
Another avenue for building knowledge and capacity is through in-house training and
exposure trips, which are specifically customised for the Ethiopian audience. These can
be designed by entering into partnerships with accredited training companies who can
guarantee that the content is accurate and tailored for the Ethiopian market. (Please find
in appendix 3 a proposed curriculum for IFB in Ethiopia).
NBE Institute for Financial Studies as well as local universities could consider including
curriculum on IFB.

Conferences & seminars

Aside from training capacity building, knowledge can also be gained through conferences
and seminars. Ethiopia can host an annual international Islamic finance seminar where it
would attract international experts to share their knowledge and expertise. Hosting these
sorts of events have worked effectively in Djibouti. The cost and logistics could be
handled directly by the event organizer with support of the NBE and other banks.

Knowledge portal:

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Another way to share knowledge is through the development of a portal, which would be
specifically designed for the Ethiopian market. The portal can contain key information
regarding the IFB legislation and directives as well as the product offering, IFB products,
definitions, information on upcoming trainings, etc. The portal can contain English and
Amharic. While the advantages seem numerous, there could be a significant cost involved
in developing the platform, gathering the content and putting the content in local
language.

Working group:
Last but not least is the idea of having a working group for IFB. The role of the working
group is to share knowledge and consolidate efforts towards the same goal. Given that the
current directive presents multiple hurdles to have a full IFB offering, it would help to
address these issues in a working group.

Public Awareness
One way to increase awareness among clientele, who have opted out of receiving
interest on their savings account, is to send them a notification that their account will
be moved to an Interest free account with the new terms and conditions of the IFB
saving account. The advantage of this approach is that Interest Free windows will
have immediate access to an additional source of funding for IFB loans.
We also identified in the previous section that there is very important reach out to new
customer and increase the number of users of IFB services. For instance in Australia,
surveys distributed at the exits of mosques to have a better understanding on how
much the local communities know about IFB. The results of these surveys have been
used to develop strategic marketing campaigns. These latter are needed in cities and in
rural areas to reach out to pastoralist communities in Ethiopia.

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 III - Recommendations and course of action

Interest-Free Banking in Ethiopia has some challenges mainly due to the lack of a
proper and strong policy along with a shortage of local qualified Islamic finance
experts and Scholars. In order for IFB to gain popularity in the Ethiopia, each of these
challenges need to be addressed adequately.

Legal framework

We recommend that the NBE bases the IFB directive on AAOIFI standards and
prudential standards on IFSB. Internationally recognised standards could also be used
for developing not only IFB products but also micro financing products, which
adheres to Islamic principles.

While we understand Ethiopia is a secular country and is not in position to assess

whether a particular practice is acceptable by a group of scholars and not by another
and hence would not like to take a specific position as to which school of thought is
most suitable. We recommend NBE provide some guidance to IFB windows on the
composition of the Interest Free Advisory board. The most suitable board composition
would be as follow:

a) 1 International renowned scholar or adviser who brings the international

expertise and experience
b) 1 Scholar from Islamic Affairs Supreme Council in Ethiopia who understands
the local factor
c) 1 junior Sharia Adviser/scholar in-house who addresses the day-to-day
questions in collaboration with a & b

At the NBE, there should be a group of experts that reviews, vets and authorises IFB
windows, as it might be too sensitive to have Sharia scholars sitting at the National
Board level.

Skills, capacity building and knowledge sharing

In terms of skills, capacity building and knowledge sharing, the starting point would
be to create a working group for IFB in Ethiopia, to consolidate efforts towards the
same goal. Given the current legislation and directive presents multiple hurdles to
have a full IFB offering, it would help to address these as a group. The working group
can be officially formed during the upcoming exposure trip to London (October
2014). The group should be composed by:
a) NBE (from the banking supervision and from microfinance supervision)
b) Ethiopian Institute for Financial Studies (Person in charge of the
curriculums and 1 to 2 lecturers)

18
 c) Ethiopian Islamic Affairs Supreme Council (2 to 3 scholars)
d) Commercial Banks (OIB, CBE and United Bank + other banks that
envisage to launch IFB Windows)
e) Microfinance Institutions (Somali Microfinance, Rays + other
microfinance institutions envisage to launch IFB services)
f) Ethiopia Bankers Association
g) Microfinance Association
h) PRIME
i) Technical advisor(s) (Islamic Finance Navigator ltd. or another Sharia
Advisory firm)
The working group should meet at least twice a year to address changes in the
directives, capacity-building, increase in awareness, etc.

The most efficient and cost effective way to develop skill and knowledge is to have a
“train the trainers” program. 2 or 3 employees of each of the members of the working
group will need to reach a high level of expertise in Islamic banking and finance. This
will facilitate the understanding and discussion of the working group and also it will
provide the skills needed to transfer knowledge locally. This group of about 40
individuals will need to gain an accredited training certificate in Islamic finance.
It is essential to develop course materials, which are specifically designed for the
Ethiopian market and can be used by this new breed of IFB expert for training staff at
local branches and staff working in microfinance institutions. The content can be
developed in coordination with an Accredited Training Provider. Given the lack of
accredited training providers in Ethiopia, the content will initially be developed in
English and then translated in Amharic language.

Public Awareness
In terms of public awareness of IFB products, we recommend the first step would be
to inform the client base which has opted out of receiving interest on the conventional
products, their new accounts terms and conditions. A clear explanation that their
monies will now be used to finance projects which are in compliance with Islamic
financial principles should be provided to these customers.
Obtaining feedback from existing and prospective IFB customers could be used as a
base for developing an adequate marketing strategy for IFB products. Further
marketing and communications strategies can be developed as regulations and
products are put in place. These strategies could be designed to target:
 Members of Ethiopia Bankers Association
 Members of Microfinance Association
 Universities
 Mosques
 Ethiopian Islamic Affairs Supreme Council

19
 Summary recommendations
Legal framework

 Develop IFB standards based on AAOIFI & IFSB

 Create an IFB advisory Board within NBE
 Provide guidance on IFB windows on setting up their own advisory board

Capacity building initiatives

 Setup IFB working group

 Train a new bread of IFB experts based on International accredited programs
 Develop adequate training programs for IFB in Ethiopia
 The new bread of IFB experts to transfer the skills to the local branches

Public awareness

 Design and plan public awareness programs for: existing clients, bankers and
microfinance associations, universities, mosques and Ethiopian Islamic Affairs
Supreme Council

20
 IV – Implementation

The below figure shows a potential timeline for implementing the recommended course of action.

1. The circles in green show the stages from the policy review all the way to the implementation of the revised policy.
2. The red square propose a course of action for building skills, knowledge and capacity
3. The yellow triangles are preliminary steps needed before awareness campaigns can be developed

Note that these are only suggestions and should be adopted depending on choices relating to strategies and capabilities.
 Appendix
Appendix 1: Benchmark of relevant countries
1.1 Pakistan
Population 182 million GDP per capita 1299$
Economy breakdown (Valued added % of GDP)
Agriculture 24% Industry 22% Services 54%
Legal system Common law & Interest Free Law
Banking Companies Ordinance (BCO), 1962
Mudaraba Companies and Mudarabas Ordinance (MCMO),
1980
Zakat Ordinance (ZO), 1980
Key Islamic
BCO Amendment, 1980
Finance
Banking and Financial Services Ordinance, 1984
Legislation
State bank of Pakistan Circular ,1984
ZO Amendment, 2000
Income Tax Ordinance (ITO) 2001
Microfinance Institutions Ordinance (MIO) 2001
Figure: Summary of Pakistan’s profile2

In 1980, Pakistan made legislation changes such as the enactment of MCMO, to

introduce Islamic finance. However, these changes had very limited success due to the
unavailability of adequate infrastructure, lack of trained human resources and a ruling
by Federal Sharia Court (November 1991) declaring the procedures adopted by banks
as un-Islamic.

In 2000-2001, Islamic banking was successfully re-launched gradually allowing

Islamic banks to operate in parallel with conventional banks. A comprehensive
Islamic law compliance framework was introduced to ensure Islamic banks operations
were in conformity with Islamic law principles. Experiencing yearly double digit
growth since 2003, Islamic banking constitutes presently around 10% of country’s
banking assets with 19 banks. Islamic microfinance has grown to 14 banking
institutions with 350 branches serving more than 500,000 clients with a broad range
of products like micro Takaful.

The growth of Islamic banking during the last decade has catalysed the development
of Islamic capital markets, mutual funds, Takaful companies and Islamic social
finance through Zakat. In 2012, Pakistan had 5 Takaful operators and approximately
30 Islamic mutual funds. In 2011, mobilization of Zakat is estimated to have grown
2
Population, GDP per capita are 2013 figures. Economy breakdown are 2012 figures. Source of all
figures is the world bank (http://data.worldbank.org/)
by 40% in Pakistan from 2008 to 105 million in 2011. Zakat is deducted from all bank
accounts (except current accounts) having a particular sum of money (announced
every year). Zakat is redistributed towards social welfare such as education (20-30 %)
and healthcare (10-20 %)3.

Pakistan’s new 5-year plan from 2014 to 2018 for Islamic banking, which Pakistan
aims to see increased from 10% to 15% of total financial sector assets by 2018,
prioritizes the broad based distribution of economic gains by using Zakat and Awqaf.
To promote greater economic equality, Pakistan’s 5-year Islamic banking plan
focuses on housing, SMEs, exports and agriculture.

1.2 South Africa

Population 53 million GDP per capita 6618$

Economy breakdown (Valued added % of GDP)
2
Agriculture % Industry 28% Services 70%
Mix of Dutch civil law, common law & African customary
Legal system law
Key Islamic
finance
legislation Income Tax Act 58 Amendment J24 2010
Figure: Summary of South Africa’s profile4

Although there is no legislation dedicated solely to Islamic banking, South Africa’s

banking regulators have taken various measures to develop and promote the Islamic
finance industry by creating an equitable playing field between interest based and
interest free finance. Tax laws (Section 24JA of the income tax act) were amended in
2010 to provide parity tax treatment between Interest free finance products and
conventional banking products. The amendments also define taxes for diminishing
Musharaka, Mudaraba, Murabaha and sukuk. Zakat institutions are governed under
Nonprofit Organizations Act of 1997 and zakat collection is on a voluntary basis.

The country currently has one Islamic bank; Al Baraka Bank launched in 1989. Other
banks such as First National Bank (FNB), Absa Bank and HBZ Bank house have
Islamic finance windows alongside their conventional banking services. Total Islamic
banking assets currently account for 1%-2% of total banking assets. In the insurance
market, only one Takaful company has set up operations in South Africa. Regarding
Zakat, South Africa

3
All figures for Zakat are from Islamic social finance report 2014, Thomson Reuters
4
Population, GDP per capita and Economy breakdown are 2013 World bank figures.
(http://data.worldbank.org/)

23
The Islamic finance industry in South Africa suffers from various challenges
including the lack of skilled labour and the absence of a complete framework for
Islamic finance products.

1.3 Kenya

Population 43 million GDP per capita 994$

Economy breakdown (Valued added % of GDP)
Agriculture 30% Industry 17% Services 53%
Legal system Common law & African Customary Law
Banking Act Sect 12 amendment (exempting on restrictions trading &
Key Islamic holding fixed assets) , 2006
finance
Legislation Banking Act Sect 16 amendment (introducing concept of return) , 2009

Finance Act Sect 45 amendment, 2010

Figure: Summary of Kenya’s profile5

Islamic banking emerged when Section 12 of the Banking Act restricting trading and
holding of fixed assets was amended in 2006 to exempt products from trading and
holding of fixed assets restrictions. Barclays launched Islamic banking products
during the same period.

First Community Bank, Kenya first Islamic bank opened in 2007 followed by Gulf
African Bank, in 2008. Later on, conventional banks such as Kenya Commercial
Bank and Standard Chartered Bank opened Islamic windows to offer Islamic finance
products.

In 2009, the Kenyan authorities amended Section 45 of the Central Bank of Kenya
Act to allow the Central Bank to recognize the payment of a return rather than interest
on government securities, to encourage interest free investments in the country. At the
end of 2013, Islamic banking represented 2 % of the total banking assets in Kenya. In
2014, Kenya's Capital Market Authority developed a separate regulatory framework
to promote interest free finance by focusing on corporate governance, information
disclosure, a policyholder compensation fund and responsible pricing .

In the insurance market, Takaful Insurance of Africa, the first Islamic insurance
company in the country, was launched in 2011 as an alternative to conventional
insurance aimed at increasing insurance penetration and improving the perception and
image of Insurance locally. The model was designed to serve people of all faiths and
backgrounds, despite reference to Islamic laws. The first interest free reinsurance
5
Population, GDP per capita are 2013 figures. Economy breakdown are 2012 figures. Source of all
figures is the world bank (http://data.worldbank.org/)

24
firm, Kenya reinsurance Corp is planning to open soon.

Finally, on the microfinance front, Islamic microfinance is still in its infancy with
Islamic Relief working with international agencies to introduce Islamic microfinance
in the country.

1.4 Egypt

Population 82 million GDP per capita 3314$

Economy breakdown (Valued added % of GDP)
Agriculture 39% Industry 15% Services 46%
Legal system Roman law & Islamic law
Law No. 48/1977 (creation of Faisal Islamic Bank of
Egypt)
Key Islamic
Law No. 43/1974 (creation of Islamic International Bank
finance
for
Legislation
Investment and Development)
Law No. 10/2013 (Sukuk law)

Figure: Summary of Egypt’s profile6

Egypt has many influential scholars who largely fuelled the debate on the prohibition
of interest, contributing to the creation and development of the modern Islamic
finance industry.
The Egyptian Islamic finance sector is made up of a few full-fledged Islamic banks,
and a number of conventional banks offering Interest free finance products. Three
banks currently dominate the sector: Faisal Islamic bank of Egypt established in 1977,
Egyptian Saudi Finance Bank, created in1988, United Bank, who acquired in 2006,
Islamic International Bank for Investment and Development, created in 1974. Some
conventional banks such as National Bank of Egypt and Ahli United Bank, have
Islamic finance windows. In 2012, Egypt had 14 Islamic banking licenses. The
industry had 200 branches and $20 billion of assets representing less than 1% of the
total assets of the banking industry in Egypt.

In 2013, Egypt passed Law No. 10/2013, allowing the government to issue Sukuk,
regulated by Egyptian Financial Supervisory Authority (EFSA) and a Sharia Board.

On the Islamic microfinance front, the sector is dominated Abu Dhabi Islamic bank
Egypt (ADIBE). ADIBE launched its Microfinance business in collaboration with US
AID, CIDA, UNICEF, and Ford Foundation in 1987. According to its website,
ADIBE has 44 microfinance branches across 18 governorates. The microfinance
program covers amounts from LE 1000 (140USD) to LE 50,000 (7000 USD) with
6
Population, GDP per capita and Economy breakdown are 2013 World Bank figures.
(http://data.worldbank.org/)

25
soft financing terms and without requirements of traditional conventional banking
collaterals. ADIB Egypt microfinance program offers a range of distinctive services to
the informal sector of micro-business namely financing, savings, and insurance,
through Murabaha and Musharaka programs.

26
1.5 Sudan
Population 38 million GDP per capita 1753$
Economy breakdown (Valued added % of GDP)
Agriculture 28% Industry 31% Services 41%
Legal system Common law & Islamic Law
Key Islamic finance Banking Business ( Organization) Act, 1991
Legislation Banking Business ( Organization) Act, 2003

Figure: Summary of Sudan’s profile7

The banking system in Sudan was dominated by conventional banks until 1977, when
the first Islamic bank was created. 5 more Islamic banks were launched before 1989,
when the government decided to change the whole banking system to an Islamic
Banking system. In 1991, the government enacted a new Banking Business
(Organization) Act, which decreed all banking finance transactions for all banks in
Sudan must be managed according to Islamic law. In 2013, there were 34 Islamic
banks in Sudan.

Sudan was the first nation to introduce Takaful in 1979. The Takaful model in Sudan
is the basic model of co-operative Islamic insurance, where policyholders pay
contributions into a fund where they share risks based on the principle of mutual co-
operation. Any surplus of the fund must be reserved or distributed. Takaful companies
in Sudan are founded as shareholding companies. Shareholders, in addition to
remuneration, received for running the company, only have the right to receive their
return on invested capital. The Sudanese Insurance market despite its historical
position as a pioneer of Takaful continues to face low penetration ratios and economic
challenges. Low income levels of the Sudanese, high inflation, lack of competent
underwriting, among other issues continue to plague the market.

The Sudanese government has supported development of a robust and vibrant Islamic
microfinance sector focused on community enterprises and shared assets.
Collaboration with Middle East development agencies established 2 new Islamic
microfinance institutions in 2012:

 IRADA was set up with $50 million in capital with backing from the Bank of
Khartoum and the Islamic Development Bank.

 Al-Ebda’a was set up in with $5 million in capital (25% The Islamic

Development Bank 40% Arab Gulf Program (AGFUND), 20% Sudanese
government, 15% private sector). It seeks to serve 80,000 clients with $23
million in credit by its fifth year

7
Population, GDP per capita are 2013 figures. Economy breakdown are 2012 figures. Source of all
figures is the world bank (http://data.worldbank.org/)

27
Due to the lack microfinance legislation, Sudan has relatively onerous collateral
requirements which have impeded the growth of the microfinance sector in the
country.

1.6 Indonesia
Population 250 million GDP per capita 3475$
Economy breakdown (Valued added % of GDP)
Agriculture 14% Industry 46% Services 40%
Legal system Common law & Islamic Law
Banking Act no 7, 1992
Banking Act no 10, 1998
Key Islamic finance Zakat Act, 1999
Legislation Central Bank Act no 23, 1999
Zakat Act, 2011

Figure: Summary of Indonesia’s profile8

In 1992, amending the Banking Act 14 (1967), the government enacted the Banking
Act 7, allowing the creation of a dual banking system, which includes Islamic banks.
The first Islamic bank, PT Bank Muamalat Indonesia (BMI), was launched that same
year in the capital. Some rural Islamic banks were also established in Java. BMI faced
several challenges on the liquidity front due to a lack of market instruments as the
central bank did not provide special central bank facilities complying with Islamic
principles such as discount windows or central bank credit facilities.

In 1998, to overcome these problems, the government amended the Banking Act (Act
10), improving the legal foundation for Islamic banking. Conventional banks were
permitted to open Islamic banking windows and in 1999, through the amendment of
Central Bank Act, the central bank allowed monetary control with instruments based
on Islamic principles. Since then, the central bank has worked along with the National
Sharia Board (Dewan Syariah Nasional), affiliated with the Indonesian Council of
Ulamas (Majelis Ulama Indonesia), in order to regulate and clarify the permissibility
of various financial products.

The government has actively promoted Islamic microfinance through the

development of Islamic rural banks (IRBs). In 2002, Bank Indonesia created a nine-
year plan for Islamic finance sector development, including support for IRBs.
Indonesia developed a supportive regulatory framework and licensed several new
local IRBs to offer banking services (loans and savings facilities, but no payments
services) per district area. Each IRB has a Sharia board to monitor the conformity of
8
Population, GDP per capita and Economy breakdown are 2013 World Bank figures.
(http://data.worldbank.org/)

28
products to Islamic principles. However, board rulings are inconsistent, and
consequently, Islamic microfinance products can vary widely depending on IRBs.
Bank Indonesia also focused on capacity building by establishing a centre in Medan
to offer training and certification on Islamic finance to IRBs staff, managers, and
directors.

The Zakat Act 2011 created zakat management institutions to improve the
management of Zakat services effectiveness and efficiency and the benefits of zakah
for poverty alleviation where Zakat is managed by a new independent body Badan
Amis Zakat Nasional (BAZNAS) who is responsible for planning, implementation,
controlling the collection process, distribution and utilization of zakah and reporting
the operational performance of zakah management.

1.7 Oman
Population 3.6 million GDP per capita 22181$
Legal system Common law & Islamic Law
Key Islamic finance
Legislation Royal Decree 69/2012 (Islamic Banking Law), 2012

Figure: Summary of Oman’s profile9

In December 2012, the Islamic banking law was enacted by Royal Decree 69/2012,
and some provisions of the Banking Law (Royal Decree 114/2000) were amended. 2
weeks later, the Central Bank of Oman (the “CBO”) issued a 589 page circular
detailing the Islamic Banking Framework of Royal Decree 69/2012.

The Islamic Banking Law and framework address critical structural elements such as
Islamic banking transactional base in the country, taxation, land law constraints and
Sharia boards at the level of the individual banks and at higher levels.

As the country does not have a history of formal Sharia-compliant banking, the
country biggest challenges are the education of the general public about Islamic
finance, the shortage of skilled resources and the shortage of available products for
banks to place their surplus liquidity.

Two new dedicated Islamic banks, Bank Nizwa and Alizz Islamic Bank, and Islamic
banking windows in seven conventional lenders have already launched or are in the
process of launching their operations in the country.

9
Population and GDP per capita are 2013 World Bank figures. (http://data.worldbank.org/)

29
Appendix 2: International Regulating Bodies
In addition to the country specific banking and IFB regulations and guidelines, there are a
couple of international Islamic finance agencies responsible for providing regulations,
standards and procedures for enforcing and regulating the soundness of Islamic banking
industry. This section will give an overview of these key bodies, their role and also the list
of countries which has adopted these standards either at the regulatory level or on a
financial institution's level to follow the best practices in Islamic banking and finance.

2.1 International Financial Services Board (IFSB)

IFSB was launched in 2002 in Kuala Lumpur and serves as an international standard
setting body that provides prudential standards and guidelines for regulatory and
supervisory agencies to ensure soundness and stability Islamic Financial industry
including: retail banking, capital markets and Takaful (Islamic insurance). The IFSB has:
 13 standards
 5 guidenotes
 1 technical note
As of September 2014, IFSB members comprise of 184 members from 41 jurisdictions,
including 32 members from the African continent. IFSB has 55 regulatory and
supervisory authorities, 8 international/intergovernmental organisations and 121 market
players, professional firms and industry associations. (source: IFSB)

Several non-predominantly Muslim countries have adopted IFSB rulings including:

China, Hong Kong, Japan, Korea, Luxembourg, Singapore and Thailand.

Members from regulatory and supervisory authorities in Africa include:

 Djibouti: Banque Centrale de Djibouti
 Libya: Central bank of Libya
 Mauritius: Bank of Mauritius, Financial Services Commission Mauritius
 Morocco: Bank Al Maghrib
 Nigeria: Central bank of Nigeria, National Insurance Commission
 Senegal: Ministry of Economy and Finances Senegal, Banque Centrale Des Etats
de L'afrique de L'ouest
 Sudan: Central Bank of Sudan, Khartoum Stock Exchange Sudan, The Insurance
Supervisory Authority Sudan
 Tunisia: Central Bank of Tunisia
 Zambia: Bank of Zambia

Members from market players, professional firms and industry associations in Africa
include:
 Egypt: Al Baraka Bank Egypt, Faisal Islamic Bank

30
  Kenya: Chase Bank (Kenya) Limited
 Nigeria: Ahmed Zakari & Co (Chartered Accountants), Lotus Capital Limited
 South Africa: Oasis Crescent Capital (PTY) Ltd.
 Sudan: Al Jazeera Sudanese Jordanian Bank, Al Salam Bank, Animal Resources
Bank, Bank of Khartoum, Byblos Bank Africa Ltd, Faisal Islamic Bank, Farmer's
Commercial Bank, Industrial Development Bank, Islamic Insurance Company,
Omdurman National Bank, Shiekan Insurance and Reinsurance Co. Ltd, Sudan
Financial Services Company, Sudanese French Bank, Tadamon Islamic Bank

2.2 Accounting and Auditing organization for Islamic financial

institutions (AAOIFI)

AAOIFI is responsible for developing and issuing standards for the Islamic finance
industry. AAOIFI has 88 standards including:
 48 Sharia
 26 Accounting
 5 Auditing
 7 Governance
 2 Ethics
AAOIFI has over 200 members in more than 40 countries. Members include regulatory
and supervisory authorities, international/intergovernmental organisations and market
players, professional firms and industry associations.
 Countries adopting AAOIFI include: Kingdom of Bahrain, Dubai International
Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria.
 Countries with guideline based on AAOIFI: Australia, Indonesia, Malaysia,
Pakistan, Kingdom of Saudi Arabia, South Africa and United Kingdom.
AAOIFI standards have introduced greater harmonisation among Islamic finance actors
across the world.

31
Appendix 3: Sample of IFB curriculum for building capacity
of trainers in Ethiopia

 Module 1: Introduction of IFB

 Module 2: Islamic commercial law

o Sources of Islamic commercial law

o Methodology of interpretation of Islamic commercial law
o Formation of contracts
o Classification of IFB contracts
o Comparison of classifications of contract
o Traditional Islamic contracts and Islamic finance
o Overview of IFB products
o Application of Islamic contacts in IFB windows
o Implementation of Sharia standards, policies and ruling in Islamic
finance
 Module 3: IFB

o Financial regulation & market standards

o Deposits and investment accounts
o IFB products and services
o Trade finance & treasure products
o The financial and operational risks of IFB windows
 Module 4: Accounting for IFB windows

o Framework of financial reporting for IFB windows

o Financial reporting of IFB windows
o Financial statements - balance sheet and statement of restricted
investments
o Financial statements - income statement & accounting policies on
income determination
o Equity investment accounts and profit distribution policy
o Accounting and reporting - Mudaraba and Musharaka financing
o Accounting and reporting - Murabaha financing
o Accounting and reporting - Ijara and Ijara muntahia bi tam leek
o Accounting and reporting - Salam and Istisna financing
o Auditing of IFB windows

32
Appendix 4: Zakat

Banks with an IFB window can play different roles in the management of the Zakat fund
and this has to clearly features in the annual report of the bank. IFB windows are
responsible for the Zakat payment on its own assets, or it can offer its services for the
calculation of Zakat, and in some cases propose a distribution channel to its clients. In
either case, the banks role in this matter should be clearly stated in its annual report.

33