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CHAPTER ONE 1 Introduction11 BACKGROUND Essay

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CHAPTER ONE 1. Introduction1.1 BACKGROUND OF THE STUDYInterest free banking is a banking system that is consistent with the Sharia’a (Islamic law) Now a day Islamic banking business is growing at a faster rate because of the interest free system and money developed countries have started to look at it as the alternative from their conventional banking system (Abduljelil and Khalilur 2014).Islamic bank is an institution that mobilizes financial resources and invests them in an attempt to achieve predetermined Islamic ally-acceptable social and financial objectives.

In addition to this Islamic banking is a system that mobilizes savings on the basis of profit /loss sharing that is considered to be fairer and more conducive to investment and development (Hassen & Lewis, 2007). Each bank competes to attract the customers by providing various types of services to retain those potential customers and attract the new ones to work with them. These competitions lead the existing banks as well as new entrants innovative to provide new type of services to the public.

The main reason to do this is attract and meet the resource they lack liquid funds to their basic requirements.Besides the conventional banking service there is an interest to establish a full- fledged Islamic banking service to play an important role in pooling savings and channeling them into productive investments with the intent of partnership and profit sharing based on Islamic law shariah, but the national bank, the supervisory body of all banks in Ethiopia levied to do interest free banking business in one window with conventional banking as per the licensing and supervision of banking business Directives Number SBB/51/2011 Recently Islamic banking services come into existence in Ethiopia to play an important intermediary role in attracting savings, especially from customers, and channel the collected fund into productive investments. The banking service mainly focuses on financing primarily based on profit-and-loss sharing, trading, leasing. Both mobilization and investment of funds should be conducted in accordance with the principles of Islamic Shari’a” (www.albarakah.com, 2014).In Islamic banking service unlike conventional banking service, they are not allowed to charge interest by lending money to their customers, because, under Islamic commercial law, making money from money is strictly prohibited (Chintaman, 2014 p. 5).In contrast to this the conventional banking business charges an interest from the loans made to customers and pay interest to the deposits made by customersџ.In order to attract and retain the specific needs of the Islamic banking service of the market some commercial banks start the Islamic banking service in one segregate window with the conventional banking service as per the requirement of the NBE directive. There are more than 18 private and government owned banks operate in the country. Among these Commercial bank of Ethiopia, United bank S.C and Oromia international bank S.C. start Islamic banking service as per the requirement. (www.nbe.gov.et)Due to the challenging international financial environment in several major economies of the world, IFB services have become an alternative to the conventional system 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, United Bank has based their products on Pakistan and 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 2013, the World Bank estimated Ethiopia’s total population at 94.1 million of which 35% to 40% are Muslims. Up until 2011, no banking products were available to service the Muslim community. Unlike Ethiopia, Kenya, with a much smaller Muslim population, has 3 Islamic banks, as well as an Islamic insurance company. Moreover, five conventional banks offer sharia-compliant products through dedicated Islamic windows. Ethiopian Muslim population is almost very practicing and strictly observes Sharia principles. The society believes that conventional banking is against Sharia laws so that a good number of potential customers are not banking with the conventional banks. (Ahbabu, 2018)However, Interest free banking are facing challenges, i.e. Lack of manpower for the service provision and sharia advisory members who have both religious as well as business knowledge (Mohammed, 2013).What is found missing is the manpower specializing both in economics and Islamic jurisprudence. This has resulted in a lack of an interdisciplinary focus. Only a few institutions are presently offering courses in IFB and finance.(Ismaeil, 2010) Islamic financial system in perspective It posits that awareness, manpower, legal framework, societal belief, cash requirements as some of the challenges while economic growth, attraction of investors, and fostering of egalitarian. Islamic finance faces a number of challenges. For example, despite the efforts of Islamic finance standard setters, in many countries the industry is governed by a regulatory and supervisory framework developed for conventional finance. Therefore, it does not fully take account of the special nature of Islamic finance (Al-Maraj, 2014). The industry is still largely a emerging one, lacking economies of scale, and operating in an environment where legal and tax rules, financial infrastructure, and access to financial safety nets and central bank liquidity are either absent or, if available, do not appropriately take into account the special characteristics of Islamic finance (Askari etal 2010; Ernst and Young, 2014). This research attempts the gaps between challenges of Interest free banking for resource mobilizations and prospects by using the case of 8 commercial banks operating in Jimma town. 1.2 STATEMENT OF THE PROBLEMBanking is an important financial institution in the present global economic system. Despite touching each and every part of our lives, conventional banks have still been viewed solely as financial institutions, which should concern themselves with only financial matters. Ethics and morality has not entered the equation. Interest which is the backbone of the conventional banking systems not allowed in four major religions of the world Hinduism, Judaism, Christianity, and Islam: This need is fulfilled by the evolution of Islamic banking or participatory banking interest free banking. Islamic banking permits transactions on the basis of sharing of profit and loss; and prohibits the collection of interest. Contrary to the popular belief, IFB is not just for Muslims. Currently Islamic banking is present is more than 78 countries worldwide. Globally, Islamic banking assets reached $1.8 trillion ([NR 110 trillion) in 2013 and are said to be growing twice as fast as conventional banking assets.( ALIGARH,2013).Islam forbids lending or borrowing of money at a pre-determined rate (interest or riba). The approaches of IFB are distinctly different from the ones of conventional banks. Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to avoid this problem. The basic technique to avoid the prohibition is the sharing of profit and loss, via terms such as profit sharing Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), bonds and leasing (Ijara), supplying industrial products to clients order (istisna),insurance (Takaful) (Deehani, 1999) and (K han,2007).According to Haque (2009) customer perception about Islamic banking is being influenced significantly by quality of services, confidence in bank, social and religious perspective and availability of services. On the other hand the ways in which Islamic banks can and do mobilize funds are all non- conventional and in some ways new to the regulators. Several issues and questions arise in the minds of regulators confronted with the task of supervising and regulating IFB. Some methods for mobilizing funds, for example, would require asset management. Although the banks start this type of IFB services there is lack of confidence in the business community about the service. This is because they mainly focus on the deposit accepting motives from those who do not want interest only. The Ethiopian banking institutions starting these IFB banking services and as based on the above facts face many challenges in their operational activity of resource mobilization. In Ethiopia, IFB is a recent phenomenon. As a result, there is little empirical literature on the area. The studies conducted so far include the following: Among these studies Mohammed in (2012) has studied the Prospects, Opportunities and Challenges of Islamic Banking in Ethiopiaџ in his work discuses the potential challenges as: lack of awareness, regulatory, supervisory and institutional challenges, lack of support, gap in research and development in Islamic studies, lack of qualified human resource as well as wrongful association with specific religion and the global terrorism but This study was conducted before the practical introduction of the IFB in Ethiopia. And also Teferi’s (2015), study is about Contribution of IFB to economic development and its prospect in Ethiopiaџ. The contribution of the study includes assessing the Muslim population in to the banking (financial system) to the economic development and GDP growth. This study has a gap of taking the realities of other countries. Debebe (2015) in his study entitled as Factors Affecting Customers’ to Use Interest Free Banking in Ethiopia showed that perceived relative advantage, perceived compatibility, customers’ level of awareness and subjective norm have a significant positive impact on the attitude towards interest free banking in commercial bank of Ethiopia. Ali Mohammed’s (2016) study which is about Challenges on Interest Free Banking Services The study discuses the challenge faced by service providers and users of IFB products and scope of service provided by Ethiopian banking through IFB including whether there is unmet demand of users, awareness of customers and capacity of bank .the study doesn’t addressed the opportunities of interest free banking as a new business strategy in Ethiopia. This, study, therefore, attempts to fill the above research gap by investigating the challenge and opportunity of interest free banking from the service provider’s view. Kerima (2016) investigated Challenges on Interest Free Banking Services: The Case of Commercial Bank of Ethiopia. Empirical result show that lack of commitment of the bank, lack of Shariah advisor, lack of supportive regulatory directives , Problem related to Ethiopian Commodity Exchange (ECX) law, lack of capacity to deliver IFB product at full rage, lack of awareness of customer about IFB products, lack of trust and confidence of customers, inadequate marketing and promotion, double taxation, nature of IFB products, unavailability of IFB products in all of its branches and the IFB being delivered in a Window model are the major obstacles for the operation of IFB for the bank.Another important study conducted by Jemal Nasir (2018) in his study entitled as Practices and Challenges of Interest Free Banking Windows of Commercial Banks in Ethiopia showed that The major challenges are lack of supervision by National Bank of Ethiopia, lack of confidence and trust of clients, lack of legal support from government, lack of qualified human resource, lack of cooperation among conventional banks Islamic windows, lack of infrastructure suitable for Interest free banking operation, Inadequate training and education facilities, Inadequate knowledge and understanding of IFB by NBE, lack of top management and organization commitment, and doubt of clients. Beyond this there is also growth prospect. This, study, therefore, attempts to fill this research gap by investigating the challenge faced by service providers and users of IFB products and scope of service provided by Ethiopian banking through IFB including whether there is un meet demand of users, awareness of customers and capacity of bank as these have been identified in the literature as challenges, and 8 Commercial bank of Ethiopia operating in Jimma town is taken as a case study 1.3 Research Questions1. What are services & products obtainable in IFB selected Ethiopian commercial banks?2. Interest free banking (IFB) services are consistency with Islamic law (sharia)?3. How Interest free banking (IFB) will have an effect on resource mobilization pains of the bank? 4. What are the essential challenges the commercial banks face by starting Interest free banking (IFB) service?5. What are the prospects(opportunity) of Interest free banking (IFB), to create a center of attention potential customers and having a potential to grow up and contribute in the economy of Ethiopia 1.4 Objectives of the Study1.4.1General objectiveThe main objective of this study is to examine the challenges and prospects of Interest free banking in resource mobilization case of commercial banks in Jimma Town, Oromia, Ethiopia. 1.4.2 Specific ObjectivesThis study has the following specific objectives To show up concepts and various terms connected to IFB in broad terms and talk about the different IFB products and services To examine the level of conformity with shariah requirements for conventional banks adopting interest free banking To identify the effects of starting Interest free banking service within resource mobilization efforts of the banks. To analyze and recognize the challenges come across by commercial banks when starting Interest free banking service. To look at the opportunities and growth prospects of Interest free banking service in resource mobilization & contribute in the economy of Ethiopia 1.5 Significance of the studyThe investigator thought that the output of the study would mainly contribute to enhancing knowledge about the IFB useful as theoretical and practical contributions. This study tries to give an investment tip to both current as well as possible investors to target this untouched market. Theoretically, the findings of this study contributes by filling an important gap to serve as a reference material to the obtainable body of the literature and initiate other interested researchers. lying on the practical side, this study provides an opportunity to gain knowledge and practical experience for the researcher, but also to bank managers (both governmental and private banks), bank policy and decision makers to identify and understand the challenges and prospects of Interest free banking services. Moreover, the outcome of the study would contribute by providing crate specific evidences on the feasible condition faced by Ethiopian banks that are offering interest free banking services. Finally, the indicator will in addition provide the means by which internal IFB operations may be examination on their functional efficiency and allow the giving inside of appropriate corrective or else regulatory measures 1.6 Scope of the StudyIn order to conduct the study in deepness given the time and resources available, this study focused only on purposively selected sample Banks on 8 commercial banks in Jimma out of 14 banks currently IFB operating in the jimma. (Oromia international bank S.C, Commercial Bank of Ethiopia , United bank S.C, Dashen bank S.C, Wegagen bank S.C, Nib international bank, cooprative bank of oromia and bank of Absniya S.c). The selection based on banks operation and availability of data in banking industry of jimma town. Additionally the data were collected from employees, managers, and supervisors of the eight banks on these big branches and the potential area branches selected by the banks. The findings have a foremost importance if more banks are included but only these eight banks set up the service currently. 1.7 Limitation of the Study The study may not possibly to cover every aspect of banking with regards to the challenges and prospects of IFB for resource mobilization model across the country. This study was enclosed by using employees (customer officers, CSM, RO of IFB, IFB head, managers) considering (Oromia international bank S.C, Commercial Bank of Ethiopia and United bank S.C, Dashen bank, Wegagan Bank, NIB, Cooprative bank of oromia and bank of Absniya) the study limited in jmma town and employees working in the branches and districts. The other limitation is, study was conducted on Commercial Banks which have Interest free banking windows only. 1.8 Organization of the StudyThis paper is organized in to five broad grouping (chapters), the first chapter deals about the introduction of the study that is background, statement of the problem, objective, significance, and the research questions. The second chapter discusses the theoretical and empirical literatures about IFB. The third chapter is about the methodology of the research that is the research design, sampling technique, method of data collection, data collection instruments, method of data analysis and so on. The fourth chapter of the paper presents the findings as well as the quantitative and qualitative facts analysis. As a final point the fifth chapter deals with the summary, conclusion in addition to recommendations.

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CHAPTER ONE 1 Introduction11 BACKGROUND. (2019, Aug 20). Retrieved from https://studymoose.com/chapter-one-1-introduction11-background-essay

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