TREATMENT OF ISLAMIC BANKING IN ETHIOPIA: CRITICAL ANALYSIS OF LEGAL AND INSTITUTIONAL FRAME WORKS

Abstract

In Islamic economics, money is not things of value by itself. Its value is measured in relation to other things. Hence riba/interest has been prohibited in Islam. Due to this and other principled reasons Islamic finance in general and Islamic banking system in particular has developed. Since its scientific and organizational inception in 1970s, Islamic banking system has expanded in the world in both Islamic and non-Islamic states. Ethiopia has also, introduced interest free window in 2011 and fully-fledged Islamic banking system in 2019 stating that the demand of people is more than interest free windows provided in conventional banks. The aim of this research is to investigate legal and institutional frameworks necessary for operation and regulation of Islamic banking system in Ethiopia. Even if it cannot result in total hindrance for operation at starting stage, there are many gaps in Ethiopia’s legal and institutional frameworks for operation and regulation of Islamic banking system. By using doctrinal method of analyzing rules, this research has investigated and analyzed legal and institutional deficiencies. Author has found that, even if some products of Islamic banking system has governing provisions, products like musharaka, mudaraba, and salaam products have no governing laws as well as Ethiopian tax and investment laws have gaps in its application to Islamic banking system. There is also absence of institutions necessary for regulation of Islamic banking system. Therefore, author recommended that there shall be modifications in legal and institutional frameworks that may fit implementation of Islamic banking.