The potential critical success factors of full-fledged interest-free banks in Ethiopia

Abstract

Abstract. The role of interest-free banking (IFB) is vital to enhance the financial inclusion rate of a country like Ethiopia that has a substantial number of Muslims and unbanked population. Although IFB windows have been operating in Ethiopia since 2013, the country allowed a full-fledged IFBs recently. Accordingly, two banks have already fulfilled all the requirements and are expected to operate soon while another 2 – 4 banks are under formation. The aim of this paper is, therefore, to assess the potential critical factors that will determine the success or failure of the newly establishing full-fledged IFBs in Ethiopia based on globalexperiences and specific bank cases from more than 14 countries using the concept of Critical Success Factors (CSFs). The outcomes of our analysis indicate three things. First, every country has its unique success and failure factors, thus, benchmarking should consider these factors. Second, based on the current circumstances, the most important CSFs which can determine the fate of the full-fledged IFBs in Ethiopia in the near future will be an adequate legal, regulatory and institutional framework; management skills and capacity; good reputation and image; product innovation and investment alternatives; unconflicting Shariah verdicts and availability of central Shariah supervisory body; and entrepreneurial discipline and ethical values. Third, full-fledged IFBs in Ethiopia will confront severe competition from the existing window banks that has big potential, better experience, and flexible Shariah controls.The study suggests that the government’s regulatory intervention to introduce guidelines and banking regulations specific to the full-fledged IFBs.

Keywords. Interest-free bank, Shariah compliance, Critical success factors, Ethiopia.

JEL. G21, G41, Z12.