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.
